The COVID-19 pandemic resulted in a marked slowdown in global economic activity, with many countries entering a recession last year. While some economies seem to be healing from the impacts of the health crisis, the significant disruption and ongoing uncertainty resulting from the pandemic could mean that it’ll be some time yet before many countries return to sustainable levels of growth.
What will this mean for your super? To answer this, let’s look at how financial markets have reacted to economic changes in the past.
As economies enter a recession, it typically follows that:
- unemployment rises;
- equities fall in value;
- bonds increase in value;
- the US dollar appreciates; and
- defensive companies outperform more economically-sensitive companies.
The above trends have occurred during almost every major recession in history and the COVID-led recession was no different except that the above scenarios played out over a matter of weeks rather than months.
Conversely, as economies recover from a recession, the opposite tends to happen:
- unemployment falls;
- equities increase in value;
- bonds fall in value;
- the US dollar depreciates; and
- economically-sensitive companies outperform defensive companies.
Due to the scale of government stimulus implemented in the immediate aftermath of the March 2020 downturn, global economies started to show signs of recovery towards the end of last year. Equities remarkably improved, the level of unemployment trended down and the US dollar depreciated against most major currencies including the euro, the yen and the Australian dollar.
Additionally, the rising value of share markets suggest that investors are optimistic about the future even though many economies are still affected by the pandemic. These expectations are being priced into share markets.
While global economies have faced a typical downturn, a typical recovery hasn’t followed, given the trends described earlier have not fully materialised. As outlined in the table below, bond yields have not reached their pre-COVID levels and economically-sensitive stocks have continued to underperform despite a broad improvement in the equity market.¹Overseas companies often borrow funds in US dollars. As the value of the US dollar appreciates, it becomes more expensive for companies to repay the debt, which in turn, makes them less profitable and more likely to default on borrowings.
²Defensive companies sell goods and services that consumers continue to buy through all types of business cycles, including during a recession. Examples of these goods and services include food and medical services.
³Economically-sensitive companies sell discretionary goods and services that consumers purchase more of in a stronger economy but spend less on during a recession. Examples of these goods include new cars and travel.
|Pre-COVID (before February 2020)||Immediately following virus outbreak (mid Feb to end of Mar 2020)||Current situation (up to 11 January 2021)|
|Index value of Australian equities||7,200||4,546 (-36.5% relative to pre-COVID value)||6,697 (-7.0%) relative to pre-COVID value)|
|Index value of US Equities||3,386||2,252 (-33.9% relative to
|3,799 (+12.2% relative to pre-COVID value)|
|US 10-yr bond yield||1.55%||0.54%||1.14%|
|AUD/USD exchange rate||0.66 cents||0.57 cents||0.77 cents|
|Value of economically-sensitive
relative to defensive companies measured from mid-February 2020
companies underperformed relative to defensive companies by 6.7%.
companies underperformed relative defensive companies by 14.1%.
Opportunities presented by a successful COVID-19 vaccine
The average time to market for new vaccinations is typically around 10 years. However, the coordinated efforts of pharmaceutical companies, universities and government-backed research centres across the world have seen the first COVID-19 vaccine delivered to a 90-year-old woman in the UK within a year of the outbreak. This was quickly followed by a global rollout of approximately 29 million doses worldwide.
Whilst it will take some time before the efficacy of the vaccine is proven, the speed at which it has been developed and declared safe for humans has been encouraging. Assuming there are no adverse reactions to the vaccine and organisations have the capability to manufacture as well as distribute the billions of doses required worldwide, it is possible that some semblance of normality may return earlier than initially anticipated.
Confirmation of an effective vaccine and consequent economic recovery could bode well for economically-sensitive companies. This is because many economically-sensitive companies are directly linked to the reopening of industries including travel and leisure businesses, which are poised to perform well if a successful vaccine becomes widely available.
How Australian Catholic Super is managing your super
We have taken all of the above factors into account within the context of the Fund’s long-term investment strategy, which seeks to grow our members’ super in the safest possible way. Because equity markets were cheaper in mid-2020, we increased the Fund’s exposure to economically-sensitive companies as they offered good value. At the same time we reduced exposure to more defensive companies and government bonds, which are unlikely to perform as well in the event of an economic recovery.