Omicron and your super
Here we’ll give an update on how Omicron is impacting financial markets and what we’re doing to safeguard your super going forward.
What is Omicron?
Omicron is a new COVID-19 variant. It was dubbed a ’variant of concern’ by the World Health Organisation (WHO) last week. This variant was first detected in South Africa, and the WHO has stated that it doesn’t know yet if Omicron is more virulent or contagious than previous variants.
While understanding the severity of Omicron is expected to take several weeks, many governments, including Australia, reacted immediately by closing their borders to several South African countries.
Immediate market response
News of the spread of Omicron had a negative impact on market sentiment, particularly across Asian markets and Europe, where the Eurostoxx 50 was down 4.74% last Friday.
The Australian and US markets were less severely affected but were still down 1.73% and 2.27%, respectively. Government bond yields declined across all markets while cyclical currencies, such as the Australian dollar, depreciated as investors fled to the haven of the US dollar.
Understanding the long-term economic impact
We won’t know the long-term economic impact of Omicron until scientific analysis determines whether this strain is more virulent and/or more resistant to vaccines compared to the Delta variant. This may take weeks to determine.
Preliminary data from South Africa is also hard to extrapolate, given the country has a much lower vaccination rate (24.1% fully vaccinated) than most other parts of the world.
Our response to Omicron
Our goal is to grow and protect your super over the long-term. As such, we’re taking a cautious approach to the news of this new variant and aren’t making any knee-jerk reaction changes to the portfolio at this stage. This is because:
- Broader economic trends are positive — economic data released just before the identification of Omicron pointed to a continuation of recent economic growth. Last week, the November Purchasing Managers’ Indexes — a key economic predictor — reported month-on-month increases across a number of countries, including Australia. Australian retail results were also significantly higher, although any new lockdowns would inevitably unwind those gains.
- We expect and plan for market volatility — short-term volatility across financial markets is normal and expected. Our strategic asset allocation is designed to minimise the impacts of short-term losses and to put us in a strong position when markets recover. We expected some volatility when markets began to encounter their first headwind, given growth assets have performed so well – the Australian and US equity markets are up 8.72% and 24.16%, respectively, since the start of the year.
- We’re well-positioned to guard against volatility — as long-term investors, we generally don’t react retrospectively to market fears. However, given recent volatility, we’ve made proactive moves to slightly de-risk the fund and position the portfolio to mitigate losses. This includes:
- conducting liquidity stress testing to ensure the fund is well-positioned for a potential drawdown
- reducing our exposure to the cyclical Australian dollar
- reducing our exposure to listed property by just under 1% and moving these funds to cash
- maintaining a bias towards high-quality unlisted properties with long weighted-average lease expiries and top-tier tenants.
After the announcement of the Delta variant, stock market returns demonstrate that over-reacting to such news can be costly. Delta was named a ’variant of concern’ by the World Health Organisation on 11 May. Across 10-12 May, the US equity market declined by approximately 4% but subsequently rallied up 13% across the following six months.
We’ll closely monitor developments and, where required, adjust the portfolio as needed to minimise any negative impact on your retirement savings.
What should I do?
Market volatility can be stressful for investors. While now might be a good time to re-evaluate your investment options, it’s important to carefully consider your circumstances and long-term investment goals and avoid making impulsive decisions.
It’s also good to know your investment options.
We offer a range of investment options, each with different investment strategies and levels of expected risk and return. Which option you should be in often depends on your age, retirement goals, and overall risk tolerance.
For younger members with time on your side, you have more time for a market recovery, so staying in a higher risk option might work for you in the long run. And because you’re consistently contributing to super, you’ll also be investing at lower prices right after a market fall.
For those closer to retirement, there’s less chance that a large downturn will be reversed, so it’s important to review the level of risk in your super option. You may wish to consider choosing a lower-risk option if a major fall could hurt your standard of living when you retire, and this risk makes you uncomfortable.
When deciding how to invest your super, keep in mind that super is a long-term investment. If you’re invested in a high-return/high-risk investment option, you’re likely to experience negative investment returns every few years, but you don’t need to panic when this happens. This type of strategy might not suit everyone, so it’s important to consider your own circumstances before making a decision.
So, just remember
Markets rise and fall. Diversification and a long-term approach are key to reaching your retirement goals. You should also make sure that your current level of risk is appropriate for your stage of life – before the markets have a rough day.