March Newsletter
In this edition
Office movements
Taking care of each other and ourselves
Market commentary from Vanguard
Centrelink & age pension eligibility
Cash flow management
Call to reduce minimum pension drawdown
As another week filled with updates about COVID-19 comes to a close, I am continually amazed by the actions of some people in response to this incident.
The actions of people bring to my mind a great quote by Henry James:
“What is character but the determination of incident?
What is incident but the illustration of character?”
I think it sums up some of what we are experiencing today.
When I look at people who are fighting in the aisles to get toilet paper; or even worse, those who are selling these items at double their price to panicked people, the thought that goes through my mind is this quote. These incidents tell me a great deal about the character of these people.
Our younger generation will be impacted, possibly for life, by the reactions to COVID-19 (when over) and so the first part of the quote will be true for them – what is character but the determinant of incident?
We saw this during the global financial crisis, as analysts have noted a change in the behaviour of certain young adults as a result of the GFC.
I think this comes down to us setting a clear example of appropriate behaviour (not brawling in the supermarket!) that I would like my children to recall when they go through other life incidents.
Taking Care of Business... and Ourselves
I think we need to do several things at the moment:
Protect our health
If you are in an at-risk category, it is not unreasonable for you to self-isolate until this is over. If this means you would like us to conduct your meeting online via Zoom software (or over the phone) let us show you how easily this can be done.
If you don't have family or friends nearby to help you with groceries and other necessities, please let us know and we will help in any way we can. I cannot guarantee that the groceries will be on the shelves – but I can shop for whatever is there.
Help our Neighbours and Friends
This is a time when we should look out for each other. Orange and Bathurst have already had their first confirmed cases of Coronavirus, bringing this very close to home.
Bathurst has had its first confirmed coronavirus case with a man in his 30s at home in self-isolation. Health authorities said another COVID-19 case has been confirmed in Orange, this was for a male who is also in his 30s.
This brings the total number of cases in the Western NSW Local Health District to five after three other Orange cases were diagnosed recently. A WNSWLHD spokeswoman said both new cases were confirmed on Wednesday and the Bathurst man had recently returned from overseas and was isolated on commencement of symptoms. Dubbo also had its first case of a person flying into Dubbo and out again on 10th March 2020 who has now been confirmed with Coronavirus.
Do Not Panic
Actions taken in panic are almost always the wrong ones. I am sure that in a few months, the toilet paper industry will be in disarray as we stop buying toilet paper to use up any surplus we have at home. Fear often makes us take illogical actions.
What has been amazing is that at this time, not one client has sold down. So a big thank you to you all – as you obviously trust and believe in our messages to you and there is no bigger compliment.
Many of you have heard me say that the clients I always feel guilty about are the ones that do sell in times of market uncertainty such as this, as I know they would have had a better outcome if they had remained invested.
I have included some recent commentary from Vanguard, as well as a small section around what we think you should be considering at this time.
Please take the time to read that section even if you skip the Vanguard piece.
Download Vanguard Commentary as a PDF
Market Commentary from Vanguard
I thought you may be interested in Vanguard’s view of the economic and market impact of the Coronavirus.
Vanguard introduced its first retail index fund in the US in 1976. Vanguard has since become one of the world's largest and most experienced indexing specialists managing more than US$3 trillion worldwide.
Vanguard now has a global presence with offices in the US, Australia, Paris, Amsterdam, Tokyo, London, Canada, Hong Kong, and Singapore. In Australia, they have been helping professional and personal investors invest for 20 years.
Key messages
Vanguard believes the markets are watching for the crest of global coronavirus infections so they can price in the potential impact with confidence. Only when valid health data make it clear that we’ve reached the peak in new cases of COVID-19 (the disease that the coronavirus causes) can the markets determine whether they’ve reacted appropriately to the crisis or overreacted.
The next several weeks will be crucial in determining the full effect that the coronavirus might have on the global economy. Vanguard believes that if cases outside of China crest by April - a timetable similar to China’s for reaching the peak of infections - the United States and Australia can avoid recession. Vanguard now views the odds of a US and Australian recession in 2020 at 60/40.
The global financial system’s underlying structures are strong; a recession wouldn’t be the next coming of the global financial crisis.
A plunge in oil prices complicates the picture for financial markets.
The epidemic’s economic consequences this year will be driven by three factors— (1) the virus’s reach and duration; (2) fear, which inhibits travel, consumer spending, manufacturing, and trade; and (3) government actions both to arrest the virus and stimulate faster growth. The net effects won’t become clear for at least several months.
Australia
Federal Government announcing an almost A$18 billion (~1.0% of GDP) stimulus package (not including the A$2.4bn and additional spending used to support the public healthcare system) to cushion the economy from the effects of the virus. The fiscal relief will be targeted in nature.
We believe the ultimate net effect on the economy will still be contingent on how much confidence businesses and households have regarding the outlook.
Merely providing payments to businesses and households might not prove to be enough. Recipients will need to have the confidence to spend their payments on goods and services, rather than add to precautionary savings or debt repayment.
The Australian economy was already in a rather fragile position post the recent bushfires, which we estimated to have shaved off around 0.2 per cent of GDP.
We are now expecting a sharper slowdown in Australia's economy, as the indirect spillovers from lower Chinese demand are potentially compounded by direct negative effects on domestic demand from an increase in cases within Australia.
Should the number of cases peak by April, a scenario we place a 60% probability on, Australia has a better chance of escaping a technical recession. However, if things deteriorate for the worse, and if government's containment efforts become even more aggressive, we see a real risk of Australia entering into its first recession in over 20 years. In this scenario, the negative impacts will not only be felt in tourism, education and trade-oriented sectors, but could reverberate throughout the domestic economy.
Portfolios
As ever, we hold to our principles for investing success: to hold a diversified portfolio of assets, to remain disciplined by avoiding impulsive decisions based on fear and uncertainty, and to stay focused on long-term goals and their plan for achieving them.
We did not make any adjustments to our Strategic Asset Allocation in the lead up to or during the GFC. This demonstrates the merit of having defined goals, appropriate asset allocation, and exercising discipline throughout periods of volatility.
We note that remaining invested in the market will give the best outcomes. Below we compared being 100% invested in Shares (light green) and 50% Shares and Bonds with going to 100% Cash and/or 100% Bonds during the Global Financial Crisis.
The outcome is that you were better off remaining with your original strategy.
It is also the time to strongly consider rebalancing. Rebalancing regularly forces the “right” behaviour, in that you are forced to buy when markets are low and forced to sell when markets are high (that is you buy low and sell high).
We know this is correct when said in the cool logic of the day – why do we change when times get tough?
Final Thoughts
Many of you have heard me say that what is important now is how we react to market events, and so here we have been thinking of what we should be focusing on for you, our client.
If you think of anything additional let us know!
Cash Flow Management
It has become obvious that those who manage cash flow well during this time will recover the best at the end.
Cash Flow Management has not been an area that we have focused on for our clients in the past, as we felt that generally you have done this well yourselves. However, we do feel that this will be important for all people (not only businesses) during this time.
If you would like a cash flow management tool, or would like to work with us on how to decide what costs are most important and what costs should be reviewed, please let us know.
Pension Drawdowns from Superannuation (Watch This Space!)
The SMSF Association (SMSFA) has written to the federal government asking it to reduce the minimum pension drawdown requirements for superannuation members following a downturn in financial markets due to the coronavirus health crisis. If approved, this will apply to all Superannuation Pensions.
In a letter addressed to Treasurer Josh Frydenberg, association chief executive John Maroney said the degree of volatility and sizeable falls in global financial markets had raised concerns that minimum pension drawdown requirements might outstrip the ability of markets to replenish investment savings.
“The current minimum withdrawal rates require superannuation members to withdraw money from their superannuation fund faster than desired because the minimum payment amount is based on the account balance at the beginning of the financial year before asset prices had fallen significantly,” Maroney said.