Market update - January 2021
The start of a New year is a time to plan and reflect for many. Over the holiday period, no doubt many Kiwis were happy to put 2020 behind them and hope for a better 2021. As the New Year gets underway, there are still plenty of challenges, but also widespread optimism that the development and roll out of COVID-19 vaccines are a key part of an eventual return to normality after the pandemic. The economy starts the year on much firmer footing than we imagined when the severity of the pandemic became apparent early last year.
Despite the challenges, 2020 was actually quite a good year overall for many investments. Related to this, there are some lessons about investing that we think are worth remembering, and the investment returns for 2020 provide some good examples. Looking first at KiwiSaver, beyond another year of low returns from the NZ Cash Fund (+0.61%), the ASB KiwiSaver Scheme fund returns were pleasing when looking at the full calendar year's performance. The fund returns to investors for 2020 ranged from 4.13% for the Conservative Fund through to 10.18% for the Positive Impact Fund (after tax and fees). Those returns come on the back of very strong performance in 2019, which was the strongest year on record for ASB's KiwiSaver Scheme. The ASB Superannuation Master Trust and ASB Investment Funds showed the same picture of positive annual returns over 2020, despite the market drop investors endured back in March. One exception to the positive results was global listed property. Although the local residential property market is booming, there has been a lot of pressure on many types of commercial property around the world, and that has weighed on the returns from global listed property over 2020.
You can find the most recent returns here:
Although the returns from many of the funds look good when we reflect on the full year, financial market volatility tested the nerves of investors in early 2020. For example, some six percent of ASB KiwiSaver Scheme members switched to lower risk Cash and Conservative funds in March as COVID-19 saw sharemarkets and in turn investors' balances plunge. Many of those investors who switched unfortunately missed the recovery that occurred from April onwards. Compared with previous major financial crises such as the 2008 Global Financial Crisis, the early 2020 volatility abated quickly. Sharemarkets dropped 30 percent or more over February and March, but recovered rapidly and reached new highs over the later stages of 2020. The initial experience of the market drop may have convinced some customers that higher risk funds are not for them. But many others who made this change, have not made a decision about what to do next, and are still on the side lines in the Cash or Conservative funds, wondering what to do now. Whenever an investor is uncertain, the answer is usually that it's a good time to get some guidance or advice.
The year was clearly a reminder of the perils of trying to time the markets with investments. For some investors, it may have been the first experience of severe market volatility; for others, it will have been the first significant event since the Financial Crisis. But even for seasoned investors, it's understandable to be unsettled by watching balances drop significantly like they did in March. However, the subsequent recovery demonstrates the importance of customers being clear about their investment goals and timeframes, and sticking to them.
Over the course of early 2020 some people also stopped saving for a variety of reasons, or held back on making investment decisions. At the start of 2021 they might now be confused about what to do. We believe that regardless of market movements, it's important for savers to maintain their regular savings contributions both when markets are going up and down. It is the combination of regular contributions as well as being in the right fund for the customers' goals and timeframe that will ultimately determine how much they have in their KiwiSaver account for retirement. The same belief applies to regular savings into the ASB Superannuation Master Trust and ASB Investment Funds.
Voluntary lump sum contributions to the ASB KiwiSaver Scheme also dropped significantly during March and haven't yet returned to pre-COVID levels. The value of lump sum contributions dropped by two thirds initially, and is still down by a third on the value prior to the market volatility. It's understandable if people stop saving to manage cashflow in times like 2020, but for those that can afford it, it's useful to think about getting more for your money when prices are low. So, another key lesson from the past year has been that keeping regular contributions and lump sum investments going means customers benefit even more when markets recover.
Over the past year the return on term deposits got even lower, continuing a theme that has been in play for years now. The return on the popular term deposits (terms up to a year) all ended the year below 1%. We don't think this low term deposit rate environment is going to change any time soon, and the risk is rates could still get lower. These low returns have been a catalyst for people seeking out advice, and we expect this will continue over the year ahead. If they are impacting you, get in touch with us to see if your money is in the right place.
Hand in hand with the low term deposit rates are low mortgage borrowing rates - both are the lowest on our records going back to the mid-1960s. The impact of low borrowing costs is clear to see in a booming property market, but low rates are also supporting businesses, and are a key factor behind the record high set in the New Zealand sharemarket (and elsewhere) recently.
The management of the pandemic will remain a key challenge to economic growth over the year ahead, and ASB's investments will continue to respond to the related opportunities and threats that influence the financial markets we invest in. Extremely supportive actions from governments and central banks here and abroad remain a critical part of the recovery, and an important backdrop for investments over 2021.
With all of the above in mind, the new year should be a time to check in how you are tracking towards your goal - whether that's a first home, building your savings towards retirement, or some other goal. For ASB KiwiSaver Scheme members, if you haven't already, log in to FastNet classic internet banking and check out the new online features; make sure the fund you are in is still correct, and what tweaks to your contributions could help towards your KiwiSaver goal.
Written by: Chris Tennent-Brown, ASB Senior Wealth Economist
This content does not have regard to the financial situation or needs of any reader. As individual circumstances differ, you should seek appropriate professional advice.
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