Last week we concluded our weekly commentary with the line that (as at the end of May) "by itself, a fall on the ASX of only 12% YTD, given the "R" word... is extraordinary." As at the time of putting Hedge Clippings together only a week later and the ASX is in almost exactly the same position, but having both risen and then fallen 400 points over the week.

As anticipated by a few old hands, the steam seems to have well and truly gone out of the post-COVID rally, with volatility and risk well and truly back on the table. Whether that's a reflection of too fast, too hard, the realisation of the economic damage facing the global economy, or a reaction to recent civil unrest, is hard to tell. Maybe a combination of all three, plus others. However, it is a reminder that diversification, particularly into assets and funds with a low correlation to the market and each other, is a cornerstone of risk mitigation.

The other re-appearance over the past week has been some good old political opportunism with oppositions of all persuasions grasping for (or should that be gasping?) airtime in the COVID saturated media. As we've mentioned before, given there was no playbook for the crisis that's unfolded over the past four months, we think that both the Federal and State governments have steered through the potential social, health and economic carnage pretty well. By global standards, both Australia and New Zealand have shown the world (with the exception of Taiwan) how to handle, or not handle as the case may be, a crisis.

Now as we exit lockdown, those same governments have possibly come to the difficult part of the exercise, with a combination of community impatience and frustration building up. Taking away the handouts that so many people have received (including some who saw it as a free bonus given they didn't need it in the first place) is the difficult part of any welfare process.

Hereafter, and for years or decades to come, Australians will be footing the bill for the essential life support the economy has been put on. That will take some real management, and we hope the government (or governments) will take the opportunity to reform certain key areas. One amongst them that Hedge Clippings has long banged on about is the current superannuation regime.

Where do we start given limited time and space available?

Well for a start, make it simpler! What should be straightforward has been overcomplicated by rules and regulations to the extent most of the population can't fathom out the detail and just leave it for others.

Secondly, what's the point of forcing the workforce to save for 40 years or more by (they or their employers) contributing almost 10% (yes, we do think it should be higher!) of their salary, only to allow them to take a lump sum at retirement or aged 65, and be able to potentially blow the lot rather than earning a pension, even though they have another 20 years or so to go before "moving on"?

And finally, and probably most importantly, given the economic need to kick start the economy with long term infrastructure projects, why not force - or incentivise - all superannuation funds to invest a percentage of their assets in approved infrastructure "bonds". As of the most recent APRA data, there's now $2.7 trillion in superannuation, almost 35% of which is in a combination of fixed income or cash. That's almost a trillion dollars earning not very much (over 13% is in cash, so not very much is actually almost nothing) and which is there for the long-term (up to 45 years).

Meanwhile, infrastructure, and the country, has the need for funding, has a similar investment term, and can provide steady returns (certainly more than cash in the bank).

And finally, that $2.7 trillion is forecast to grow to over $7 trillion before yours truly (if he's lucky) is currently scheduled by the actuaries to shuffle off to another place. So that is around $2 trillion in cash and fixed income which could, with the benefit of some governmental initiative and taxation reform, be helping to build the nation, and helping to stabilise the returns of all superannuation fund members.

OK, off the soapbox! Australian Fund Monitors is delighted to announce the addition of Damen Purcell to the position of COO. Damen has over 20 years of experience in the financial services sector and will bring added depth to the management, marketing and operations of AFM. Yours truly might even be able to hand over the reins of Hedge Clippings in the not too distant future, and return to his prior habit of enjoying lunch each Friday. (Question mark deliberately excluded!)

Now there's an idea worth chasing!

Recession confirmed. Surprise, Surprise!

Hedge Clippings understands that for politicians the "R" word is a double-edged sword. Oppositions love to taunt governments, and governments love to remind the opposition of their own "R" record when in power, while pointing to their own prowess in avoiding them.

Of course, the fact that Australia hasn't experienced a recession in close to 30 years makes the Treasurer's acceptance/admission that we're now in one - while we're still in the June quarter, let alone before we have the numbers that won't be released until September - all the more a confirmation that we're living in extraordinary times.

However, this week's premature acceptance, or capitulation, or however one wants to describe it, was probably a first. Hardly the "recession we had to have" under former Treasurer Keating (self-described as the "world's best" at the time), more one that no government could have avoided under the circumstances, in spite of the efforts they're making, and the billions they're spending, to mitigate its effects.

What is surprising is how long it has taken to accept the inevitability of the "R" fact (or perhaps how long it has taken a journalist to ask the question), given that you don't need to be a student of the science of economics, or the dark art of political speak, to have known the answer.

The real question, which no one knows, is how long the recession is going to last, how deep it will be, how large the deficit will become, and how long - or should that be, how many generations - before the "S" word (surplus) is considered remotely possible. There are millions of Australians who only know of recessions via the classroom or through the media. Going forward, there are millions more who sadly won't live to see another surplus.

None of this should be taken as criticism of the measures that the Federal government, and the State governments of all persuasions, have taken to protect Australians against both the physical and economic effects of the global COVID-19 pandemic. Inevitably there are sections of the community and workforce which have been affected - or benefitted - more or less than others.

That happens. However, taken as a whole, it is difficult not to be thankful (if we weren't already) that we live in Australia, rather than in the US, Europe, or in fact anywhere else in the world. That would include NZ, but understand there may be more than one opinion on that depending on which side of the Tasman one is on.

More importantly, as we're only three months into this disaster (probably more correctly described as a debacle in the US or UK), how we come out of it and how the government manages to wean the country off COVID Welfare, bring us out of the recession, and put us back onto the path to growth, will be key to our collective future prosperity. And don't fall into the trap of thinking that a quarterly bounce in GDP in Q2 or Q4 means we're out of the woods. Getting back to where we were is not going to be an easy task.

Which brings us to the markets and the performance of managed funds. To the end of May, the ASX200 Accumulation Index rose 4.36%, still down -12.7% from December 31, and -6.7% over 12 months. Early days yet, but based on 20% of performances received to date, Australia/NZ managed funds rose by 9.55% in May for an outperformance over the month of +5.19%, and are down just -2% YTD. Over 12 months they are up +4.33%, outperforming the Index by over 10% both YTD and over 12 months.

By itself, a fall on the ASX of only 12% YTD, given the "R" word that is now part of the vocabulary of 30 and 40-year-olds for the first time in their lives, is extraordinary.