By Callum Stewart, Investment Consultant at Hymans Robertson
The story so far…
At the time of writing there have been more than 89,000 confirmed cases of the Coronavirus across 58 countries including the United Kingdom, with more than 3,000 deaths.
The rapid spread of the Coronavirus has already weakened China’s GDP growth sharply in the short-term, causing disruption to supply chains and causing other wider issues for the rest of the world. Global growth is forecast to slow meaningfully as a result over the next 3 and 12 months.
Confirmation of cases spreading to the western world negatively impacted equity markets last week. World equity markets lost around 11% in value over the week (around 9% to Sterling investors).
Putting this into context..
Last week’s fall in markets were significant. In fact, this was the most significant fall in equity markets since the Global Financial Crisis in 2008. However, it’s important to put the falls into context for individual DC members as long-term savers. The following table summarises returns over periods to 27 February 2020:
Despite last week’s fall, global equity returns over longer time periods have been strong against inflation. This has been largely driven by continued optimism from investors, backed by relatively strong economic growth globally. Our current view is that last week’s experience served to remove some of the optimism that has been baked into markets but that uncertainty remains. And markets don’t like uncertainty.
What is the impact on individual members?
In overall terms, equity returns have surpassed expectations over longer periods. This means that those exposed to equity markets for longer periods are still likely to be better off than those with less exposure to the asset class, despite the recent falls.
Indeed, strategies investing 100% of members’ assets in global equities in the growth phase, which we support, are expected to have performed strongly in recent years. The short-term market fall offers buying opportunities for investors investing regular contributions - such as younger DC savers. This is when Pound cost averaging really works.
The market fall will be of most concern to members closer to retirement, where preserving the value of their fund is more important, and for those drawing on their fund. Those adopting a diversified investment approach are likely to have limited the extent of market falls – with bonds and other asset types bucking the downward trend. Our analysis indicates that diversified approaches are likely to have fallen by only around by 2-5%, depending on the strategy and use of tactical management.
And from a forward-looking perspective, we still expect global equities to be the best performing asset class to long term investors.
What actions should be taken?
As long-term savers, it’s important that DC members do not react in a knee-jerk manner to the recent developments. Some trustees and governance committees may want to issue a communication to their members to stress the importance of their investment and retirement choices, and the benefits of investing contributions regularly. However, others will prefer to take a hands-off approach and only react if members ask questions. It’s probably a good idea in any case to ask your pensions administrator what messaging they are giving to any members who call in with concerns over their investments. And if markets continue to fall, leading to lower values year-on-year to the end of the scheme’s reporting year, some consideration should be given to a communication around the time of the annual benefit statement.
We also suggest that trustees and governance committees monitor member engagement levels. This can determine if the recent (well documented) market falls are leading to action from members (e.g. to change investment approach, contribution levels or withdrawal money).
If planning changes to your investment approach in the near future, the timing of these should also be reviewed.
What does the future hold?
At this stage, it’s impossible to determine how Coronavirus, and its impact on markets, will progress. First and foremost, our hope is that the spread of the virus will subside, and disruption will be minimised as far as possible.
In reality, we expect some turbulence in markets in the coming months as the situation develops, and the longer-term impact on markets is fully understood. Whilst the risk of further falls is sizable, there is also potential for a rebound as activity returns to normal. Timing these falls and rebounds is impossible. A long-term focus, remaining invested in the market and continuing to invest contributions appears to be the most sensible strategy at this time.
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