2020 turned out far better for diversified investors than feared when the pandemic hit, triggering plunging share markets and deep recessions. Average balanced growth superannuation funds look like they’ve returned around 3%, which followed around 15% last year. Balanced growth super funds returns averaged around 7% p.a. over the last five years, which is well above inflation and bank deposit returns.
But can returns hold up?
Here’s a summary of key insights and views on the investment outlook in simple point form.
6 reasons why 2020 was better for investors
Despite the pandemic, recession and a 35% plunge in shares into March, 2020 was better than feared for investors as:
The first four points contributed to economies bouncing back faster than expected through the second half – even though we are still far from a full recovery and coronavirus continued to wreak havoc. The anticipation of recovery and ultra-low interest rates drove a rebound in many investment markets.
5 lessons from 2020
3 positive longer-term impacts from the pandemic
The longer-term negatives from the pandemic in terms of:
are well known and have been covered to death.
But there are 3 key longer-term positives:
1. Increased productivity – the disruption caused by the pandemic massively accelerated the adoption and efficient use of new technology whether that be in relation to virtual meetings, e-commerce and use of the cloud that can cut costs and boost output.
2. A more balanced lifestyle and more affordable housing – with the pandemic showing it’s possible for many to work from home more, this can lead to a more balanced and less stressful lifestyle and allow more disperse living, taking pressure off expensive city property prices.
3. The benefits of science and relying on expert advice – the rapid development of vaccines highlighted what science can achieve and the better management of the virus in some countries like Australia with minimal loss of life highlights the benefits of relying on expert advice. Both serve as a rebuke to ignorant populist politicians and offer hope for better management of other issues – like climate change.
4 reasons for optimism for 2021
The first two should support a solid rebound in global growth and profits (beyond near term COVID-19 lockdowns). At a time of significant spare capacity, it should be accompanied by still low inflation and hence interest rates, meaning that we are still in the “sweet spot” of the investment cycle.
Key views on markets for 2021
After having run up so hard since early November, shares are vulnerable to a decent short-term pull back (say 5 to 15%) and 2021 is likely to see a few rough patches along the way (much like we saw in 2010 after the recovery from the GFC), but looking through the inevitable short-term noise, the combination of improving global growth and low interest rates augurs well for growth assets generally in 2021.
We are likely to see a continuing shift in performance away from investments that benefitted from the pandemic and lockdowns - like US shares, technology and health care stocks & bonds - to investments that benefit from recovery - resources, industrials, tourism stocks and financials.
Global shares are expected to return around 8%, but expect a rotation away from tech heavy US shares to more cyclical markets in Europe, Japan and emerging countries.
Australian shares are also likely to be relative outperformers returning around 12% helped by better virus control, enabling a stronger recovery in the near term, stronger stimulus, sectors like resources, industrials and financials benefitting from the rebound in growth and as investors continue to drive a search for yield benefitting the share market as dividends are increased.
Ultra-low yields & a capital loss from a 0.5 to 0.75% or so rise in yields are likely to result in negative returns from bonds.
Unlisted commercial property and infrastructure are ultimately likely to benefit from a resumption of the search for yield but the hit to space demand and hence rents from the virus will continue to weigh on near term returns.
Australian home prices are likely to rise 5% or so this year being boosted by record low mortgage rates, government home buyer incentives, income support measures and bank payment holidays but the stop to immigration and weak rental markets will likely weigh on inner city areas and units in Melbourne and Sydney. Outer suburbs, houses, smaller cities and regional areas will see stronger gains in 2021.
Cash and bank deposits are likely to provide very poor returns, given the ultra-low cash rate of just 0.1%.
The $A is vulnerable to uncertainty around coronavirus and China tensions and RBA bond buying will keep it lower than otherwise, but expect it to rise to around $US0.80 helped by rising commodity prices and a cyclical decline in the $US.
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