Financial markets continue to experience a rise in volatility
Movements in share markets can make us feel concerned about how this might affect the value of our superannuation. The recent falls in global share markets, including the Australian market, are an example of this.
Share markets have fallen over the past two months as a reaction to two key themes: (1) concerns interest rates in the US may rise faster than anticipated; and (2) announcements by the US Trump administration relating to raising trade tariffs with China.
Early signs of a pick-up in wages growth in the US (which is normal at this point in the economic cycle when unemployment falls to a very low level) was the catalyst for heightened share market volatility. This triggered increasing concerns about higher inflation and the potential for the US Federal Reserve to raise interest rates more than was previously anticipated. However, company earnings have been growing strongly and with consumer and business sentiment improving, expectations are for a continuation of stronger economic growth, which remains the most likely outcome at this point.
Then in March 2018, share markets again showed heightened volatility as a result of recent decisions by the US administration to impose additional tariffs (tax) on USD $60 billon of Chinese imports. China in turn responded by announcing retaliatory tariffs affecting USD$3 billion of US imports. Although these tariffs are relatively small in the context of the large trading relationship between the two countries, global investors have become more anxious that these measures are the beginning of a deeper decline in global trading relations, which could slow growth.
Market volatility has been low for some time so it is easy for investors to forget that returns can be unpredictable. It’s quite normal for equity markets to have corrections of between 10% to 15% during the economic cycle, so this recent sell-off over the past couple of months can be put into this category given other indicators suggest the economy and financial conditions remain supportive for asset prices. Returns when measured over the long-term are likely to be positive, but possibly much lower than investors have experienced in recent years.
Super SA’s investment manager, Funds SA, constantly monitors and reviews the appropriateness of the investment strategies and managers. Changes to the strategy are made to achieve the best outcome for members.
Investment options remain well diversified
Notwithstanding this short-term volatility, members’ investment options remain well diversified, as it has been a strategic objective to build portfolios that have less exposure to share markets to help safely navigate through such turbulent times. Although portfolios are not immune to the volatility stemming from share markets, Super SA’s asset mix, including high quality bonds, property, private equity and other unlisted assets, have helped to lessen the gyrations and deliver a smoother return profile for members.
Focus on the longer term
Whilst it is necessary to remind members that investment returns can be volatile in the short-term, an important discipline is to remain focussed on the long-term.
The best long run guide to the investment outcomes of the Super SA options is their investment objectives. For example, the Balanced option is targeting a return averaging 3.5% above the inflation rate when measured over long-term periods (of at least 7 years).
Superannuation remains a long term strategy but with a well-diversified portfolio, investment goals may be achieved with greater certainty.
Funds SA Disclaimer
The information within this article has been prepared in good faith by Funds SA. However, Funds SA does not warrant the accuracy of the information and to the extent permitted by law, disclaims responsibility for any loss or damage of any nature whatsoever which may be suffered by any person directly or indirectly through relying upon it whether that loss or damage is caused by any fault or negligence of Funds SA or otherwise. The information is not intended to constitute advice and persons should seek professional advice before relying on the information.