The first few months of 2022 have seen substantial volatility in the financial markets driven by a number of headwinds, including the ongoing effects of the pandemic, the geopolitical tensions and conflict in Ukraine and locally natural disasters such as bushfires, hail, and major floods.
If you are watching your super regularly, then you may have noticed some of this volatility reflected in daily unit prices. While this can be disconcerting, it’s most important to remember that superannuation is a long-term investment. AvSuper is able to utilise its investment managers and their broad research, to actively monitor this volatility and manage both opportunities and risks to your investments.
The Russian invasion of Ukraine is the biggest European conflict since 1945. There have been a tranche of sanctions announced against Russia with the likelihood of more to come, and continued economic and market uncertainty as the war unfolds.
While AvSuper has very little direct exposure to Russia and Ukraine, some of the broader economic challenges for markets remain a concern.
On top of sanctions, the rise in oil prices to over $100 a barrel, and the rapidly increasing price of natural gas as a result of the disruption of Russia’s supply of natural gas to the EU will both impact the world economy. These higher energy prices are what economists call a supply shock, which drives inflation and dampens economic growth.
The US is also showing signs of the potential for recession later this year or early next year with inflation at a 40 year high. Stagflation is a real concern in the US with high inflation and high unemployment possible. U.S. manufacturing activity slowed to a one-year low in December on the back of constraints on supply chains arising from the pandemic.
AvSuper has been consulting with its investment managers to understand the potential forecasts ahead, with interest rate rises clearly on the FED and RBA agenda for 2022. Expectations are that at least 1-2 rate rises will occur this year in Australia as the target band of inflation (2-3%) is exceeded.
AvSuper remains focussed on decisions in the best interest of members during any crisis, including long-term strategies and outcomes. In times of uncertainty, member and investor overreaction frequently create market anomalies with temporary stress often compelling investors to make uninformed buy/sell decisions, creating investment opportunities.
We understand that members will have concern for the Russian invasion and how that affects share market volatility and the balance of your superannuation and income stream accounts. At this point markets will already have assessed the current crisis and priced that into expectations.
It’s important to note, that during the recent Covid 19 lockdowns and during the Global Financial Crisis (GFC), any members who switched into cash, were typically worse off in the longer term as losses were locked in and the market uplift to follow was not foreseen.
The following chart shows the possible effect of switching to Cash after a market fall – the GFC in this case. It is based on an average member with a starting balance of $50,000, invested in a median balanced/growth fund and receiving 9.5% SG contributions thereafter*:
|Descriptor||Behaviour||Balance after 10 years|
|Stressed||moves to Cash and never returns to the default option||$126,893|
|Anxious||moves to Cash option and returns to the default option after 2 years||$189,065|
|Timer||moves to Cash then returns to the
default option after 1 year
|Trusting (green)||remains in the default option||$207,463|
* Assumptions for the table and chart provided by Frontier Advisors Pty Ltd are as follows:
– starting salary of $50,000, increased 2.5% pa for inflation
– starting balance of $50,000
– SG contributions from employer at 9.5% of salary
– returns at SR50 Balanced
– it is a historical calculation so the chart is not necessarily in inflation adjusted dollars
Therefore, before making a switch, it’s important to consider the reason, and does it fit with your long-term goals.
Whilst there is the potential for more short-term losses and the possibility of negative returns, we note that in any crisis, there will be buying opportunities.
Investment markets globally have had small declines in response to the Russian invasion. The US equity market (S&P 500) produced positive returns since the start of the invasion. However, the very large corrections to date have been confined to the direct parties, Russian and Ukrainian equities, bonds, and currency.
- Russia constituted less than 0.5% of the World equity market, and less than 3% of the emerging markets equity index.
- Russian and Ukrainian bonds represented less than 4% of the emerging markets bonds index.
Although different on each occasion, the recent experience on investment markets of major geopolitical events has been that after the initial negative reaction, equity markets after six months had generally recovered and in some cases produced strong positive returns.
It is tough to make a high conviction call on the direction of investment markets from here. At the moment it is very difficult to design investment strategy to the possible outcomes from the conflict, however we are confident that the portfolio is significantly diversified to weather this volatility. We will continue to position AvSuper’s portfolio prudently to perform across a range of scenarios, rather than making a heroic call on the outcome.
Call us for personalised financial advice on your AvSuper investment option if you think you need to.
If you have an AvSuper accumulation or income stream account, you can choose how your super is invested, allowing you to influence your investment risk to suit your needs and situation. There are nine investment options to choose from (including Cash as one of three specific asset class options), and you can choose more than one investment option for your money. You can invest your current balance differently to any future contributions.
The best option for you depends on your investment objectives, investment timeframe, age, attitude to investment risk and personal circumstances. Please note that past performance is not always indicative of future performance.
Note: The AvSuper Growth (MySuper) option was assessed as underperforming in the 2021 YFYS Annual Performance Assessment (APA). Click here to read more.