Despite a global health crisis as a result of COVID-19, investment returns for the 2020 calendar year were generally favourable. The returns from all of our investment options were positive and some were reasonably strong. The Balanced growth option for our super members returned 6.21%.
Large policy stimulus in response to pandemic
Governments and central banks played a large role in supporting the global economy and markets. The restrictions imposed to reduce the transmission of COVID-19 resulted in large adverse impacts on the income of households and corporates. Governments generally reacted quickly in boosting income through extremely large stimulus packages. In many cases, these packages were much larger than those employed during the Global Financial Crisis (GFC). In addition to these measures, central banks lowered interest rates to extremely low levels and signalled that they will keep interest rates low for an extended period. Many central banks also used quantitative easing to help improve economic growth.
Most economies have rebounded strongly from their March 2020 lows, especially China. Generally, those countries that have handled the pandemic better have also rebounded more strongly economically. While global activity has been recovering, it remains materially lower than the level at the start of 2020. The continued global recovery is heavily dependent on enough stimulus by governments and central banks, as well as the virus becoming less of an issue, as a result of the benefits of vaccines. In the United States, Democratic control of both houses provides increased potential for significant stimulus in the short term.
While the Australian economy has been adversely impacted by the impact of COVID-19, it has fared better than most economies. This has in part reflected better management of measures aimed at supressing the virus, which was aided by the management of external borders being easier for an island country. While Australia fared better than most countries, it did experience a recession in the first half of the year, with GDP growth of -7.0% in the June quarter 2020.
The consensus view is that vaccines will allow global activity to move progressively back towards its potential level through less restrictions being required to supress the virus, which will support equity markets. It will take several months before some of the benefits of vaccinations are evident. This is because the proportion of the world’s population that has been vaccinated is currently less than 1% and deployment takes time.
While vaccines are a very positive development, there are risks. A key risk is that the virus mutates in a manner that materially reduces the effectiveness of vaccines. Another risk is that the immunity conferred by the vaccines wears off in a relatively short time period (a year or two). We expect that virus and vaccine developments, including second generation vaccines, will be an important influence on markets in 2021. Advances in treatment of severe cases of COVID-19 have lagged progress with vaccines. Progress towards effective treatments for severe cases will also likely influence markets this year.
Investment returns over the post-GFC period have been exceptionally strong, supported by falling interest rates. We anticipate that returns will be lower over the medium to longer term versus recent years, as there is limited capacity for further falls in cash rates and bond yields to boost returns. In addition, potential growth over the medium-term is declining as a result of high debt levels and deteriorating demographics, which is likely to restrain future returns.