A steep rise in market volatility and a drop in equity prices are causing a flight to safety as risk aversion is on the rise. Evidence of due diligence and positive word of mouth will be paramount to entice Australian investors back into riskier investment products in order to combat falling fee income.
COVID-19 is having a major impact on the Australian economy, which directly affects the country’s retail savings and investment market. Data from our Retail Savings and Investments Analytics shows that retail holdings were poised to expand by 5.5% in 2020 before COVID-19 sent financial markets plunging. However, due to ongoing disruptions to economic activity and resulting uncertainty GlobalData had to revise its forecast, and we now expect the market to contract by 1.1% during the year.
Already in pessimistic territory due to the economic effects of the recent bushfires, Australia’s consumer confidence index dived 3.6 points in March 2020 compared to the previous month, reaching an over five-year low of 91.9. This trend is unlikely to reverse in the near future as the pandemic has thrust the economy into a deep freeze, which will continue for at least a couple of months. The resulting flight to safety will drive demand for deposit products, which are forecast to be the only assets class in the retail mix to experience higher growth in our revised forecast. Given the lack of returns from the asset class in the current low interest environment, this will have a negative effect on overall wealth generation.
In addition, this will have a direct and negative effect on wealth managers’ fee income. The S&P/ASX 200 VIX index, which measures the 30-day implied volatility of the Australian stock market, reached a 10-year high in March 2020 as equity prices experienced large declines, leaving investors worried. As a result, we expect equities as a proportion of total retail holdings to decline by 4.3 percentage points over the course of the year, falling from 42.6% at the end of 2019 to 38.3%. On the flipside, the proportion of deposits is forecast increase by 5.2 percentage points to 56.6%.
Investors’ more careful stance will have a lasting effect on Australia’s retail savings and investment market. While the flight to safety is expected to subside as the economy recovers over the forecast period, the onus will be on wealth managers to entice clients back into riskier growth investments. The effects will be particularly pronounced in the private banking market given higher exposure to risk assets and correspondingly greater losses. Our surveying during and after the 2008 global financial crisis clearly highlighted that risk aversion among Australian HNW investors rose significantly in the aftermath of the crisis – more so than among any other country surveyed.
To restore investor confidence, increased due diligence will be paramount. Data from our 2010 Global Wealth Managers Survey shows that providing evidence of due diligence by advisers on behalf of clients was among the top factors to encourage clients back into riskier corners of financial markets in Australia.
The only other factor equally important, according to our surveying, was encouragement from other HNW individuals, meaning the creation of positive word of mouth will be critical. Adviser recommendations and bullish reports about forecast future returns, on the other hand, proved to be of little effect. Consequently, it will be advisers who invest the time – and can show they thought about their clients’ interests and conducted the necessary research – who will win clients over again.