COVID-19 and the Financial Market – some common questions answered

We are acutely aware of the amount of information everyone is receiving both through the media, direct email and social media platforms regarding COVID-19 and the resulting turmoil in the financial markets. With each day we are all confronted with new information and increasing degrees of severity of the current situation.

When investors experience market turmoil like that of the last couple of weeks, it can be hard to keep focused on the long term potential of investing in shares, even in spite of the evidence that staying the course is in your best interests. We understand the volatile nature of the stock market is unnerving for you. In this uncertain environment, we want to help you make sense of this period and equip you with some answers to commonly asked questions.

1. What is happening in the market?

Equity markets have suffered their steepest falls since 2008 – prompting comparisons with the global financial crisis: the event that defined the past 12 years. The 2008 crisis was related to the financial system itself, not a response to an external threat. For all its potential impact, the coronavirus pandemic is a much more conventional crisis. However, volatility seems likely to continue.

2. Why has the market fallen so sharply?

Investors hate uncertainty. This rapidly changing situation is one of the most uncertain situation investors have ever faced. As a result, some investors have panicked and sold anything they deem to be too risky. This has included equities and in many cases bonds issued by companies. The money generated has been invested in assets such as government bonds, which are often popular during times of uncertainty due to the comparatively reliable income they provide. Many investors are also keeping the sales of assets in cash.

3. Is now the time to withdraw investments?

Given the recent and very sharp falls in markets, we don’t think that there is likely to be much benefit for investors in selling investments now. The correction has been the most marked since 2008 and may well have already factored in much of the economic damage that the coronavirus outbreak will do. So investors who sell out now risk crystallising losses rather than avoiding further falls. As ever, portfolios should be appropriately diversified and the securities owned within them should be placed to come through an economic downturn in good shape – however long that downturn lasts. However, having said that, if you feel increasingly uncomfortable holding your investment please get in touch and we can discuss your options.

4. Is now the time to add to my investments?

Although tactical flexibility is important, it’s important not to get sucked into attempting to ‘time the market’. Calling the bottom of a bear market is notoriously difficult. There is a famous investment saying, along the lines that “It is time in the market, not timing the market” that matters. Spreading investment across both time and across assets remains the best advice – contact us if you wish to discuss this further.

To stimulate the economy the Federal Government has released two financial packages. We have summarised the key points relating to our clients below.

1. Income stream drawdown rates

There will be a temporary reduction in the minimum annual amount that you’re required to withdraw from your superannuation income stream. The reduction in the minimum drawdown rates will apply for the duration of this financial year and for the 2020/21 financial year.

2. Social security

$750 cash payments

Two payments of $750 each will be paid to eligible income support recipients and concession card holders. The first tax-free payment will be available to people who were eligible income support recipients as at 12 March 2020 and is expected to be automatically paid to those people from 31 March 2020. The second payment will be automatically paid from 13 July 2020.

3. Reduction in deeming rates

A further reduction in deeming rates was announced on 22 March. The deeming rates will reduce as follows:

The deeming thresholds are unchanged at $51,800 (single) and $86,200 (couple) which are generally indexed on 1 July each year. The rates will take effect from 1 May 2020, and any additional entitlement will be paid from 1 May 2020.

During this period of uncertainty, our aim is to keep you updated on our thoughts and insights, and to answer any questions you might have about your investments. Our team, as always, is available to take your call and happy to talk you through any concerns you may have.