How the pandemic impacted investments

The COVID-19 pandemic has affected several investment asset classes and sectors and delivered periods of uncertainty and volatility for investors and their returns, according to an analysis by Jukka Viljanmaa, Head of Investment Management at TPT Wealth.

According to data from Monash University, March 13 2020 was the worst day on the Australian Securities Exchange (ASX) since the Global Financial Crisis in 2008, after the value of the exchange plummeted more than seven per cent in the first 15 minutes of trading.

However, the Australian exchange and economy rebounded in June 2021 when it rose to a record high after the COVID-induced slump.

The property market was also hit by ongoing economic effects of COVID-19, as houses in the majority of Australian capital cities were driven down. But a fast recovery similar to that with the exchange led houses prices to rise to a level that exceeded all predictions for a no-COVID scenario.

“Low interest rates played a major role in the strong performance of these two relatively risky asset classes,” Viljanmaa said.

“Many investors saw an opportunity to get into equities while prices were relatively low, and low mortgage rates encouraged people to buy property.”

Looking ahead for 2022, Viljanmaa said longer-term bond rates are now moving higher, as the market prices expected for the future rise to the cash rate.

“There will be potential for investors to move into assets with a higher fixed interest rate. This is on the back of the increases in inflation that we’re seeing now,” he said.

“We’re also seeing an increase in credit spreads due to changes to the RBA and APRA Committed Liquidity Facility, and the extra premium added to a base interest rate as markets begin to factor in a higher cash rate target.

“Together, these changes are opening up ways for investors to generate higher returns than are likely with term deposits.”

Viljanmaa also said this time of lower rates is perfect for investors to explore a diversified portfolio with little exposure to fixed rates.

“Floating rate notes, for example, can be linked to interest rates so they reset as rates change. That makes them attractive in a rising rate environment,” he said.

“Residential mortgage-backed securities with a variable margin also reset rates every three months. Direct variable rate mortgages can also be repriced in line with higher rates.

“I expect as inflation and official rates increase, managed investment schemes and diversified cash and fixed interest funds will become more popular.”