Volatility in share markets is a natural part of the market cycle and occurs for many reasons, such as a response to economic data, political events or company announcements. It’s a normal part of the investing cycle. Most super fund members are in a diversified fund, which usually includes investments in a range of investment types including Australian and/or international shares, so volatility in share markets will impact your super balance and the returns you receive from time to time. Your annual statement can help you understand how your super is invested, so take the time to check it.
It’s been a volatile financial year for financial markets with global events causing significant movements. The result being major share markets finished the year in mixed fashion, being relatively flat for Australia and the US, however broadly negative across Europe and Asia.
The Australian sharemarket fell 13% between July 2015 and February 2016, but went on to recover most of these losses – ending the year slightly negative. The story was the same in the US, where the sharemarket lost 11% before bouncing back. Emerging markets, including Asia, finished the year mixed – with some economies benefiting from falling commodity prices, while others came under pressure with their currencies and future growth prospects. Europe has also experienced a difficult year mainly due to concerns over the Greek debt negotiations, US interest rate rises, Chinese currency depreciation, collapsing oil prices, and the aftermath of the Brexit referendum.
As we ended the financial year, while some new risks had emerged, pleasingly others had eased somewhat. Even with the European market turmoil experienced over the last weeks of June, we have seen positives, such as a change of government priorities in China that has strengthened the economy, the easing of monetary policy outside the US through lower interest rates, as well as an increase in government spending for Europe, Japan and China.
Many economists believe that interest rates globally will remain ‘lower for longer’, which not only has an effect on returns from traditional bonds and cash investments, but means investment managers need to constantly look out for investment opportunities that provide ‘better than cash’ returns for an acceptable level of risk.
It’s expected that world economies and markets will continue to be impacted by the uncertainty created by various events such as the changing political landscape within Europe, the results of elections in Australia, Spain, the US and Japan and the potential for interest rate rises from the US Federal Reserve.
While concerns over the outcome of the Brexit vote dominated markets as the financial year closed, ultimately we expect that the situation will be clarified and policy makers will respond to mitigate some of the economic consequences. It is important to remember that global economies and financial sectors have strengthened since the financial crisis, and this provides a good foundation for global markets to cope with these risks.
Continued volatility in share markets is expected in the short term as a result of the potential uncertainties posed by key political events in the second half of 2016. Longer term, however, we believe shares and property continue to present the best opportunities for growth, particularly given the continuing low returns on offer from cash and bonds.
While returns over the last 12 months may be flat or negative given the volatile market environment, it’s important to remember that super is a long-term investment.
Taking a look at the long-term picture – over the last 10 years, a typical ‘Balanced’ super fund in Australia has returned, on average, 6.2% per annum net of fees and tax. And since the introduction of compulsory super in 1993, a typical ‘Balanced’ fund has returned just over 7% per annum, and only experienced negative returns in 4 financial years over that 23 year period to June 2015^.
^Source: Mercer, to 30 June 2015
You should keep the following things in mind when looking at your super and what’s happening in investment markets:
Try not to over-react
Over time, the value of your super investment will go up and down, depending on market conditions. Reacting to short term market conditions may mean missing out on subsequent market improvements.
Most members in superannuation funds (including MySuper) are invested in a variety of asset classes, not just the share market. Different asset classes perform differently over time which helps to offset market volatility in a particular asset class.
Long term investing
Superannuation is a long term investment, with many investment objectives being over 10 years. It is expected that there will be periods of volatility but over the longer term markets typically recover from short term movements.
Stick to your plan
It makes sense to understand your investment risk profile and build this into your financial plan. You should regularly review your investment profile and financial plan to make sure it still reflects your current position. Like most plans, it makes sense to stick with the long term objectives.
If you need assistance with determining your risk profile or financial plan, seek the advice of a financial planner. With a well formulated plan you are better placed to withstand periods of volatility.
You can find more information on super returns and market volatility, Fund Fact Sheets that show how your super is invested, as well as a range of other useful resources online at bt.com.au/UnderstandYourSuper
What does volatility in markets mean for my super?
The value of your super changes daily depending on the asset allocation of your chosen investment option(s). The value and performance of each investment option is linked to the underlying asset classes (types of investments e.g. shares, property, fixed interest etc.) it invests in and these fluctuate in line with the performance of these assets and the market.
So if your super has an allocation to investments in the Australian and/or international share markets, movements in those markets will impact your super balance.
The number of units you own will remain the same unless you are making additional contributions, or withdrawing/rolling over part or all of your superannuation investment or making investment switches between super portfolios/investment options within your super investment.
Depending on your investment choice and long term strategy, your super is invested into one or more asset classes (typically Australian and international shares, property, bonds and cash). Long term growth assets such as shares and property tend to fluctuate with greater volatility in the short term, but over the long term generally produce higher returns than other asset classes.
Our investment management teams focus on managing your super in line with the investment objectives of your chosen super investment option.
What should I do during periods of investment market volatility?
Super is a long term investment. Changing your asset allocation as a reaction to short term market fluctuations is an important decision and depends on a number of factors including your age, life stage and risk appetite. You should seek advice before changing your long term investment strategy.
If you’re still accumulating super and not intending to retire for a number of years you might want to consider staying with your current investment strategy instead of trying to ‘time the market’. It’s important to remember that the performance of your super often depends on your 'time in the market' which can be disrupted if you try and ‘time the market’ e.g. by switching out of a growth asset class when its performance is falling and switching back in again when markets and unit prices are rising. It’s difficult to pick the top of the market and the bottom, but sticking to your strategy over the long term will likely mean you are better placed to capitalise on growth and minimise losses.
Alternatively, if you’re approaching, or are in, retirement it’s important to stay focused on your long-term investment strategy.
It’s also important to remember the importance of diversification (investing in different asset classes) when determining an appropriate investment strategy. Diversification helps to manage risk and soften the impact in the event of a significant market fall.
Before making any changes to your super or if you want more information please call us on 132 135. We’re here to help.
Things you should know:
Past performance is not a reliable indicator of future performance. The information on this page has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs.
This information is current as at 1 July 2016.
The information shown on this site is general information only, it does not constitute any recommendation or advice; it has been prepared without taking into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. Any taxation position described is a general statement and should only be used as a guide. It does not constitute tax advice and is based on current tax laws and our interpretation. Your individual situation may differ and you should seek independent professional tax advice. You should also consider obtaining personalised advice from a professional financial adviser before making any financial decisions in relation to the matters discussed hereto.
© BT Financial Group - A Division of Westpac Banking Corporation.