Financial markets experience a rise in volatility
6 December 2018
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 are an example of this.
Share markets around the world have experienced heightened volatility over the last few months, with the Australian share market falling approximately 6.8% and global share markets falling approximately 1.1% since the commencement of the new financial year to the end of November 2018.
What has caused the volatility?
Share markets have fallen over the past few months as a reaction to three key themes:
- Concerns over rising interest rates in the US
- Warnings of lower Australian and global growth forecasts; and
- Continued concerns around US and Chinese trade negotiations.
These themes are not new to the market – recall that during February and March 2018 financial markets also experienced heightened volatility as a reaction to these themes.
The US Federal Reserve has been raising interest rates as the economy strengthens, to prevent a rise in inflation. Currently, US Treasury yields are at more than seven-year highs, rising three times this calendar year. However, company earnings have also been growing strongly, and with consumer and business sentiment improving, expectations are for a continuation of stronger US economic growth, which remains the most likely outcome at this point.
Escalating fears over US-China and US-Europe trade relations has seen a reduction in the IMF’s 2019 economic growth forecasts as the effects of recent tariffs will be largely felt next calendar year. The US growth forecast fell to 2.5% from the previous 2.7% and China’s growth forecast fell to 6.2% from earlier estimated 6.4%. Global investors have become more anxious these measures are the beginning of a deeper decline in global trading relations that could slow future growth forecasts. Concerns over the depth of falling Australian house prices has also weighed on the local stock market.
With the exception of the first couple of months this calendar year, market volatility has been low for some time. Over the course of market cycles returns can be unpredictable; it is quite normal for equity markets to have corrections of between 10% to 15%. Returns when measured over the long-term are likely to be positive, but potentially much lower than experienced in recent years.
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 our investors.
Investment options remain well diversified
Notwithstanding this short-term volatility, members’ investment options remain well diversified; it has been a strategic objective to build portfolios that have less exposure to share markets, to help safely navigate through turbulent periods. 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.