COVID-19 investment update: How do retirees recover?

Our resident canine friend Jasper provides an enthusiastic welcome as Kyle Lidbury, Head of Investment Research at Perpetual Private opens his door and gives us a glimpse into his home; what the lockdown measures mean for him; and how he starts his workday. Kyle also provides insight into the economic impact of the coronavirus (COVID-19) pandemic and what it means for assets such as bonds, shares, gold and property. Given the significant drawdown in markets, he suggests that pre-retiree and retirees should review their investment portfolios at this time to ensure they mitigate risks and preserve their retirement nest egg.

As lockdown measures ease in Australia, attention shifts to the economic crisis

Chart 1: Total number of confirmed cases in each state and territory

^{Source: COVID-19 Data Australia, https://www.covid19data.com.au/states-and-territories accessed on 27 May 2020}

The attention is now moving from the virus/health crisis to the economic crisis. We know that the economy has effectively been put into hibernation during the lockdown periods, with business and the economy put on hold over the period.

A recession is all but assured, with the question now being what the depth and duration of this downturn will be. The effectiveness of the government’s fiscal and stimulus measures are now being determined and what impact it will have in terms of getting business activity, unemployment, consumer confidence and spending to bounce back.

Have we seen the bottom of the market yet?

We've seen a strong rally in markets over April and May 2020; much stronger than most people would have predicted, and markets in the United States have staged a particularly strong come back.

Sectors of the market, such as healthcare and technology stocks, are back to trading at all-time highs. This ‘bear-market rally’ is not an uncommon phenomenon, however it is not certain whether this could mean we’ve seen the bottom in markets, or whether a subsequent drop could test new lows.

Historically speaking, if we look at the Dow Jones since 1890, there's been only two out of 13 crises (a drop in markets of 25% or more), where the initial bear market rally was the turning point in the recovery. On 11 other occasions, subsequent falls saw the markets reach a new bottom – with the worst being the 1929-1932 Great Depression, where the market rallied strongly eight times before an eventual bottom was reached.

Whether this current market rally is the turning point or whether we’ll see a new bottom is yet to be determined. Making high conviction investment decisions on one way or the other is fraught with risk, and generally the best approach is to retain discipline, stay invested and ensure that portfolios are rebalanced in order to maintain portfolio diversification and balance.

Australia’s unemployment rate will likely remain high for some time

The need for stimulus will continue beyond the next quarter

Investing in gold may not be a strong long-term strategy

It is true that in the short-term gold can outperform markets, particularly in times of crisis. However, over the longer-term traditional asset classes such as bonds and equities do tend to perform better. As long-term investors, it’s difficult to advocate investing in gold; chart 2 below shows that over the longer term, once dividends are included, gold has underperformed relative to other income-producing assets. Chart 2: Total return stock index vs gold and silver Note: Past performance is not a reliable indicator of future performance Source: Longtermtrends, https://www.longtermtrends.net/stocks-vs-gold-comparison/, as at 22 May 2020

Portfolio management through COVID-19: Four considerations for investors in or approaching retirement

Retirement planning through COVID-19 is an area that requires attention. We advocate that pre-retirees and retirees:

1. Consider ‘sequencing risk’
   Exposure to markets is highest when investors enter pre-retirement and early retirement – this is generally when people’s asset levels are at their highest. Before-hand, portfolios should be positioned in order to preserve capital and take into account near terms spending needs. After a crisis where there’s been a significant market drawdown, retirees and pre-retirees should review their spending needs and lifestyle goals; with a focus on possible deferment of spending in order to maintain the sustainability of their retirement savings. For more information about how to manage sequencing risk, read ‘Protect your retirement savings’.

 

2. Avoid locking-in losses
   We have seen a turnaround in markets over the past month which points to the potential for retirement portfolios to recover through this crisis. If pre-retirees and retirees can reduce withdrawals and stay invested, they may be able to mitigate the impact on their retirement portfolio.

 

 

3. Expect a reduction in dividend income
   The recent bank reporting season saw a cut back or delay in some dividends. The reduction of dividend payments, particularly for Australian companies, may have a large impact on portfolio income, however overall portfolio returns may not drop as much. Taking a total return approach and understanding that both capital growth and income returns can be used to fund spending needs can limit the impact from cuts in dividends. To find out more about the cuts in dividend payments, read ‘Worried about dividends?’.

 

 

4. Take advantage of the superannuation taxation environment
   You may wish to consider suspending your pension withdrawal plans from your super. By keeping more money inside super and exposed to the market, portfolio values can have more time to recover as markets eventually resume their normal upward trend. This may not be possible for all investors, see ‘Should retires consider reducing their pension payments through COVID-19’ for more insights.

Looking forward to the Federal Budget and beyond

The Federal Budget has been delayed to October 6 this year. We know that a deficit is on the cards and could amount to around 10% of Australia’s Gross Domestic Product (GDP) just this year. We expect the government to take stock of the significant measures that have been made to boost the economy as well as evaluate the deficit and the debt that will eventually need to be repaid.

The October Federal Budget would have been through the June to September quarters; a critical timeframe for much of the stimulus. This will give the government the opportunity to assess the effectiveness of its fiscal policy measures and determine whether it needs to:

• be more targeted in its approach;
• maintain certain programs; and/or
• add further stimulus.

Many are expecting a reformist agenda with the government looking to address certain inefficiencies in the budget – particularly regarding the taxation system. The government is likely to be looking to what changes they may need to make (from both a spending and tax/revenue perspective) to manage the fiscal deficit and pay it down over future years.