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the new school of super podcast series

Episode 34

Financial market update - is the COVID-19 volatility behind us?

January 2021

Don’t miss Chief Economist Brian Parker in conversation with Anne Fuchs, Head of Advice and Retirement, as they discuss the year in review for financial market performance, the potential economic impacts of ongoing COVID infection rates and other world events, the outlook for 2021, and Sunsuper's investment performance.

Hello, and thanks for tuning in. Welcome to the New School of Super, Sunsuper's podcast series and webinars covering investment markets, money matters and making sure that you achieve your retirement dreams. For those of you who don't know me, my name is Anne Fuchs and I head up Advice and Retirement at Sunsuper. The team and I love helping our members to plan to live their best possible retirement through great quality financial advice. With me today is my partner in crime—he needs no introduction—Brian Parker, our chief economist, who knows everything about investment markets and the economy. Brian, welcome; it's great to see you.

It's good to see you too, Anne; happy New Year, and happy New Year to all our listeners.

Yes, indeed. We've got much to talk about in terms of investment markets. It's been, I guess, a hell of a ride. But, before we do that, we have to do the usual disclaimer, don't we?

Yes, we do. I do want to start the New Year by saying, 'Why do I always have to read this out?'

Because it's fair.

Before we start, everything we talk about today is just general advice; none of this takes into account your personal circumstances. We strongly recommend that, if you want to act on anything that you hear today, you seek financial advice. You should consider your personal circumstances before you do anything. You can get a copy of our product disclosure statement from our website, or you can call us on 131184.

Brian, that was beautiful. I haven't seen you, like, forever. It's wonderful to see you on the screen, looking sort of bronzed after the Christmas holidays and with a brand new haircut. You wouldn't know it, but here I am in Queensland; I'm not looking overly bronze, but I am SunSmart. I was just reflecting on one of my favourite songs in high school—I'm showing my age here, being a Kylie Minogue fan—which is Step Back in Time. If we were to step back to this time last year and then through the subsequent months, knowing what was going to happen, we wouldn't have believed it. Brian, can you recap on where we were and what has happened, if we were to take that step back in time?

This really has been an extraordinary year, Anne. I've been in this industry for about 30 years and I cannot recall a more challenging year than the one we've just passed. But, if you and I were talking, say, at the end of March last year and I'd said to you or our members, 'Look, there's a light at the end of the tunnel, so don't worry; the returns for 2020 are going to be positive,' I don't think anyone would have believed me. Really, the extent to which markets rebounded and the speed of that rebound caught a lot of people by surprise; we've really seen this extraordinary surge in global share markets since the end of March. That's not to say that the world has been a wonderful place, but a lot of people have commented on the fact that share markets staged this amazing recovery at the same time that this massive global pandemic and the biggest recession in living memory were still to play out; it really was an extraordinary year.

We had members calling us, I remember, after waking up to Forty-five Minutes, panicking, particularly older members, thinking that their retirement savings were going to vanish overnight. Could you explain to them the key underlying factors as to why there was that big bounce back, because it's probably worth reminding people about that.

Yes. There's a whole bunch of factors at play here and in no particular order. Firstly, there's the speed and size of the policy response in just how quickly governments and central banks stepped up. Governments particularly, around the world, stepped up quickly with massive fiscal support, this huge amount of money thrown at the economy, in order to try to get people through the worst of the pandemic and, in particular, the worst of the lockdowns. One of the interesting challenges I think is this. Often in presentations to members and customers, I've said that this is not your father's or grandfather's recession; it's not even your great-grandfather's recession. Most of the time, when you have a recession, it happens by accident because a bunch of pressures or imbalances build up over time and end up causing a recession. This is a recession that happened by design. This is a recession that was deliberately engineered to deal with a health emergency, and that makes it really, really different. But it also means that effectively, if governments are to tell people, 'We need to have a recession and a large number of you are not going to be able to work while we deal with this health emergency,' they'll need to stump up with a lot of financial support, and in most cases that is exactly what governments did. So the size of the government support, I think, gave markets a good deal of confidence. The second thing is that share markets tend to be more forward looking than any of us. Share markets are looking ahead and looking at a light at the end of the tunnel. As long as that light is not an oncoming train, you can see share markets recover before the economy does, and we certainly saw that. I think the third factor at play is probably, if I look at the 'what was driving share markets in particular', for a large part of the year, it wasn't the share market overall that did well; it was actually a relatively narrow collection of stocks, a relatively narrow collection of companies, particularly in the United States, and it's really those big technology companies that drove a big part of the share market gains during 2020. Why? Because, in many cases, those companies were the winners out of this. That was because we all started doing these calls online and we all started shopping online, and so a whole range of companies that actually benefited from those trends really got a massive surge during 2020. I think also there is the fact that, once we started to see infection rates begin to come under control, at least after that first wave of infections, markets once again were able to look at this and say, 'Do you know what? While there are bound to be setbacks along the way, by and large, we kind of think the world has got this.' That is, they could at least look through the kinds of setbacks that we saw, for example, in the UK and Europe and closer to home in Victoria, for example; the markets were able to look through that and actually see the recovery coming in 2021. So a whole range of factors have underpinned it. There certainly have been setbacks along the way and it's been a very volatile time, but the good news is, yes, we have had a recovery and returns for the year have been positive, which has been a great relief to all our members, I'm sure.

I agree and I think it's a reminder, with how you talk about how the markets are kind of one step ahead. When I think about those days, which were really quite dark days, in March and we were doing those webinars to try to get information to people because they were panicking, one thing—I know that I'm biased; that's a declaration—was that those members who had financial advice weren't the ones calling, because they knew that they had an investment strategy and they understood that they were to sit tight. Brian, perhaps you can talk to us about what you think is going to happen this year and maybe the importance of advice to sit tight. We've got a vaccine and we've got a new president. There's much for us to talk about, so where should we start?

There's a whole list of things there to unpack. Firstly, I just want to make sure that I reinforce your point about advice. Overwhelmingly, those members who were getting financial advice ended up staying the course and ended up actually being better off; they've actually enjoyed the recovery in markets that we've seen really since March of last year, and that is really pleasing. The other really pleasing thing is that those members can now 'default option'. Those members in the life cycle strategy, especially those who were approaching retirement, were much less likely to panic and to move money out of their growth assets into cash because they were already taking less risk, as our default option already does that for them; we already take risk gradually off the table for those members as they approach retirement. So one of the pleasing things is that our default life cycle option was very much acting in the best interests of our members. It meant that those members in that 'default' were much less likely to really make poor investment choices during the worst of the crisis, and I think that's also a really pleasing thing. Now, as for the year ahead, there's a lot going on. We're recording this literally less than a day before the inauguration of a new president and vice president. We expect that that's going to result in more of a boost to the US economy; and that's great news, given the dominance of the US economy in terms of the global outlook. So we will see far more aggressive steps to really support people through this pandemic. The vaccine news is a clear positive; the fact that we will end up with a choice of vaccines that can be rolled out is a clear positive for the outlook. It means that markets really can look at that light at the end of the tunnel and know that it is not an oncoming train and there is a genuine light at the end of the tunnel. But the vaccine rollout is going to take time; it's going to take many months for this to be rolled out over a range of countries. So, while we're waiting for that successful rollout, are we going to see more setbacks? Undoubtedly, we'll see more setbacks along the way. So we are still in for some economic disruption but, make no mistake: I think that vaccine news does trump everything else—excuse the pun. I do think that vaccine news should be viewed as a clear positive for the medium to longer term outlook for the world economy. There is that and the fact that there is an awful lot of pent-up demand out there. A lot of people went through a massive amount of economic pain and certainly we saw so many people lose work or lose their job during 2020. But those jobs are coming back. We're actually seeing a recovery in the labour market, particularly here in Australia. As that recovery continues, I think that's great news. But a lot of those people who, by and large, kept their jobs and maintained their income during the worst of the pandemic are now sitting on a substantial build-up in saving and a substantial build-up in cash in the bank. When that money starts to be put to work over the coming year, that's also going to provide a more meaningful boost to the economy. I think the economic outlook, from me, does look really very positive for 2021 and beyond.

Can I play devil's advocate?

Please do.

I was thinking about it. I saw the news last night and there was talk that, although the vaccine is going to be a huge boost, there's not going to be any international travel; that will be the last thing to happen. I can't remember who said it, but that's the last thing that's going to happen as part of this recovery. So that's potentially years away, and Australia is very much reliant upon international students, foreign tourists and, obviously, also domestic tourism. Whilst there is this uncertainty around borders and JobKeeper closing or shutting down on 31 March, there would be many people listening to your optimism and saying, 'Well, hold on; what about all of those head winds?' What do you say to that, Brian?

I'm not saying that they are not problems, but I am saying that there is a recovery underway. Certainly some sectors are going to lag in that recovery, and you rightly point out international travel and tourism; that's absolutely true. But the other lion's share of the economy can still enjoy a recovery, even if those particular sectors lag behind. I'm talking about, really, the economy overall. But you're quite right: international travel is going to be very much last cab off the rank. Also, I think the recovery is going to be very gradual. I think you'll see, slowly but surely, travel bubbles start to open up between particular countries. I think that's how international travel will open up. I don't think we'll get to the stage where, 'Right, on the first of the month next year, everyone can fly wherever they want to.' It's going to be this gradual drawn-out process, and I think that was always going to be on the cards. But I suppose my main message is that the bulk of the economy that is not international travel and tourism and is not international students can still enjoy a recovery, even though some sectors clearly are going to lag behind.

They are going to be in a lot of pain. There are two other things that I'd love to cover off with you. The first is probably just continuing on around the US and any predictions with Biden and Harris and trade wars with China and the like; and then the second is probably just getting into our Sunsuper portfolios. But can we start with what you think? Obviously, the Trump administration created an enormous amount of tension, volatility and currency flow-on effects with the trade wars. Are you prepared to make any predictions about how that could impact Australia with China and the new administration?

Yes, I'd say a few things there. Again, no­one has any great clarity on how all this is going to pan out, but I'm going to make a few comments. Firstly, if there's one thing that Trump did that actually does have bipartisan support in the United States United States it's taking on China. There is this view in US politics, and it crosses the aisle, that China has not behaved well in a whole range of areas in the world economy, particularly in terms of technology transfer and intellectual property and in trade more generally. I think there's this view that the world needs to stand up to China and take China on. Those tensions are not going to go away, and they actually did have bipartisan support. You're more likely to see a Biden administration approach it a bit smarter. The reason I say that is that Trump kind of very much went it alone in taking on China. One of the first things he did when he came into the White House was to say that he wasn't going to participate in the Trans-Pacific Partnership, for example. So he was going to go it alone, and he has very much gone it alone in foreign policy; whereas a Biden administration is more likely to work with—


friends and allies and trading partners and to present a more united front in negotiating and dealing with China. I'm not saying that that's actually going to make things any easier or more successful, but at least I think you can have a better chance of success if you actually work with your trading partners and friends. So the tensions won't go away, but they may be handled in a bit of a smarter way by a Biden White House. As far as Australia­China trade tensions are concerned, I don't think they'll go away soon either. I would note though that, by and large, the industries that have faced the most challenge from China are not those that are most strategically important to China. As much as what China has done for our wine industry, for example, and for barley and sections of beef, yes, it's a negative for us but, by and large, it's not a killer punch for our economy and it's not strategically important to China. Let me take the opposite case. If China were to basically say, 'We're going to cut back massively on our imports of Australian iron ore, that would be strategically very, very damaging for China, which is why they probably wouldn't do it. But, if they were to do that, that would be a big, big strategic hit to Australia's economy. It would be massive—

So they're signalling to us, really.

given that the size of our iron ore exports is massive compared to wine or barley or anything else.

It's just a signal, yes.

Also we're not alone here. China is in dispute with a whole range of countries in the region and globally; we are not on our Pat Malone here.

Which is comforting.

In many ways, by taking on Australia, China is sending a signal to other countries in the region and saying, 'Don't take us on, because look at what's happening to Australia.'

So what does all of this mean? Maybe we can start with listed assets and how each of them has performed over the year and, again, what role you think listed versus unlisted assets will play in terms of performance this year; what should members be looking for?

I think there are a few things here. Firstly, because we still maintain substantial allocations to listed assets, we have certainly shared in the upswing that we've seen in global and Australian shares; and that's certainly benefited Sunsuper's performance over the course of the year. I think the balanced option, for example, did just a little bit better than three per cent—a positive three per cent.

over the year to December, which is probably a little behind the median fund but ahead of the median fund or the typical competitor in the back half of the year, so that's pleasing. What's also important to note is that, while we did actually mark down the value of our unlisted assets when the crisis hit, we needed to do that because we wanted to make sure that the value of the unlisted assets that are on our books is a true reflection of their true underlying market value, which is what we could sell them for if we needed to. We also needed to make sure that the unit prices we offered to our members were a fair unit price on a daily basis, so we did mark down the value of those unlisted assets. Most notably, assets like airports clearly took a very substantial hit. But other assets in the portfolio have actually fared quite well. To give you an example, we had a significant allocation to investments in data centres. I made the point earlier about some technology companies being big winners out of this; they have needed data capacity, so those data centres have done really well. Industrial property: industrial warehouse space has been in big demand, especially with things like distribution centres for online shopping, so those assets have done really, really well. We run a very diversified portfolio of unlisted assets. While a lot of those assets did take a hit early in the crisis, some of those assets have been clear winners from this. More importantly, perhaps, some of the hardest hit assets have started to see a bit of a recovery, and that's pleasing. We think that they can continue to benefit from the overall recovery in the economy, eventual recovery in international travel and also continued improvement in domestic travel volumes. So we think we're pretty well placed here with our listed portfolios; but also the unlisted assets, we think, are particularly well placed to benefit from an ongoing recovery in the world economy.

Because there was a lot of noise last year about unlisted assets and liquidity of super funds. That's certainly proven not to be the case. Certainly, as a fund that paid out our fair share of early release.


it certainly was not an issue for us, and we were pleased to be able to help our members in a time of need.

Absolutely. The good thing is that the demands for liquidity were very, very intense—there's no point in sugar coating this—certainly initially from some of our members, a relatively small number of our members to be sure, moving a sizable amount of money into cash and then with the government's early release scheme from super. I think Sunsuper, from memory, Anne, was the second largest payer nationally under that scheme.

I think you are right on that.

But we were able to meet those demands for liquidity because the amount of liquidity we needed to raise was well within the limits that we've long stress tested for. So, in many ways, this was not our first radio*. We had a well-established rule book and play book, if you like, to deal with this, so we certainly weren't forced into any kind of fire-sale situation with any of our unlisted assets. We were able to maintain our unlisted exposure, we were able to provide liquidity to members when they needed it and we were also able to capture some opportunities that arose during the worst of the crisis. That's what we get paid to do. Our systems and our processes were tested, and I'm pleased to say that they passed with flying colours.

Do you have any final messages? If our listeners or viewers listening to you want one important take away for financial markets for 2021, what should they remember?

I would say, firstly, we don't base our investment decisions—we don't believe anybody should base their investment decisions—on our forecasts or anybody's forecasts for what's going to happen in the next six to 12 months because, as much as we have some idea of what might happen, we can never tell with certainty what will happen. The second thing I'd say is: make sure that the investment strategy that you're in, the Sunsuper option that you have, is the right one for you and that it suits your phase of life, your appetite for risk and your financial goals. That's really crucial. That's far more important than worrying about what is going to happen this month, next month or in the next six months. Also, if you need help to make that decision, please, please, please get in contact with us. Call us on 131184 and speak to one of our advisers; we are more than willing to help get you through this.

Thank you, Brian. I might finish by reminding our members that we have an app that's really easy to use and we have a website. Brian has spoken about our not knowing what's ahead of us and that there could be lots of volatility such as we experienced last year; and there are many ways to get in touch with us, with digital being a great way to do that. For those members who have their own financial adviser: you know where they are; give them a call. They know all about Sunsuper's investment strategy and the like. Certainly we do have financial advisers as well who can help you over the phone about your Sunsuper account only. Brian, it's been a pleasure. One day we'll be together in person again. When we do, we'll have to have a glass of champagne to celebrate. Has it been over a year now? I think it has.

It has, and it's been a very dry old argument, so a glass of champagne sounds like a nice thing.

It has been. To finish with Kylie Minogue, 'I should be so lucky' when that day comes along. It's been a pleasure, Brian, and I look forward to seeing you on the next New School of Super.

Thanks, Anne.

Thank you to our viewers and listeners for watching and listening. We'll see you again next time.

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