Coronavirus (COVID -19): what should you be doing, if anything?

COVID-19 is both a medical and an economic “Black Swan” event; an extremely rare event with quite severe consequences. Black Swan events cannot be predicted beforehand but can result in health crises and can cause material damage to the economy.

The simple truth is no one, including medical and scientific experts, currently knows how long it will take to contain COVID-19 and how widespread and dangerous it will become. I won’t attempt to answer that question, except to note that already an enormous effort is being made globally to contain the spread, deal with those who become infected and to come up with a vaccine that will hopefully reduce the incidence in the future.

From a health perspective, there is plenty of expert advice out there as to what you individually can and should do so I will focus on the economic impacts and how you should respond when thinking about your Superannuation and other investments.

The longer COVID-19 persists and the more widespread it becomes, the more material the negative impact on global growth, and therefore the greater the risk of an Australian and a global recession.

Central banks around the world, like the RBA and the US Federal Reserve, are acting to support global growth but with interest rates already so low, monetary stimulus is unlikely to help much during a global health pandemic. Expect governments to announce stimulation measures, such as targeted spending and tax cuts, and this should help stabilise things to a degree if they reduce fear and help control emotions.

In this environment there are as many forecasts as there are forecasters, so don’t put too much faith in my views or anyone else’s views as to the length or severity of this crisis; that is unanswerable.  That was true of the drought and the bushfires and is certainly the case with coronavirus. What we can say is that buying up toilet rolls in bulk and selling investments indiscriminately is based more on fear than any rational response to developments.

With share markets down around 20% from their recent all-time peaks, there is understandable fear that things could get worse, and they could. I would argue that the value of most businesses has not suddenly reduced by 20% as coronavirus is unlikely to fundamentally change life as we know it and decimate solid companies. Even if we have a global recession, things will recover as they always do. Think about the very positive decade for share and property markets since the global financial crisis ended in 2009.

Focus on whether your investment strategy is right for the medium to longer-term and try not to over-react. It is normally bad for your economic wellbeing to panic and sell things after prices have already had a significant correction. I’m not saying (guessing) that we are at the bottom but note that after President Trump, not unexpectedly, moved today to curb widening fear by announcing that he would work with Congress to bolster the economy through tax cuts and other measures, the Australian market rebounded from significantly down to up.

No-one knows whether we will be up or down tomorrow but intrinsic value wins out in the medium-term, so my advice is not to simply act on emotion.

ATO Guidance on SMSF Investment Strategy

The ATO recently released some guidance as to what they expect Self-Managed Superannuation Fund Trustees to consider when documenting the investment strategy for their Fund. This is useful guidance even for people who don’t have SMSF’s.

https://www.ato.gov.au/super/self-managed-super-funds/investing/your-investment-strategy/

This newsletter contains general advice. It does not take into account your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision.

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