Investment market update

There has been a swing in share market behaviour in 2022 compared to 2021. Investor confidence in the share market has taken a hit, driven by factors such as:

• High and rising inflation following spikes in energy, food, and other commodity prices
• Rising bond yields, and expected increases in cash rates
• The war in the Ukraine and rising political tensions between the US, Russia, and China
• A large drop in sentiment around technology companies and their growth prospects

This calendar year to 31 May 2022, we have seen US share markets fall with the S&P 500 index down about 13%, and the technology heavy NASDAQ falling by more than 20%^¹. Emerging markets are also down about -11% in Australian Dollar terms. 

Fixed interest markets (e.g. Government bond) are also at a level not seen for some time with returns at -9% to 31 May 2022 in response to anticipated interest rate rises. 

The Australian share market (ASX 200 index) has outperformed the world over this period.  It is down less than 8%^² this calendar year due to its higher allocation to mining, energy and banking stocks, which tend to do better in periods of high inflation.

Military conflicts such as the war in the Ukraine can have multiple impacts on financial markets, the largest of these impacts though is the movement in commodity prices.

• We have seen a large increase in oil prices, which flows through to prices at the petrol pump, as well as natural gas prices (particularly important for Europe during the winter months).
• Grains and other food products have also increased in price, which makes it harder for households to make their budgets work, and particularly impacts those in emerging economies.
• The US Dollar has increased in price against other major currencies, making it more expensive to import US manufactured goods and services.

Rising political tensions between the United States and Russia have spilled over into rising tensions between the United States and China – there is increasing concern that China may contemplate similar action against Taiwan and what that could mean for Chinese share prices.

Uncertainty about these events usually has a negative impact on investor sentiment, reducing their desire to own higher risk assets such as shares. If many investors sell shares at the same time, we can see a drop in share prices and markets.

High inflation (the highest in a generation) and a strong economy (the lowest unemployment rate in 50 years) have large implications for financial markets and for the production of goods and services. Their most immediate impact is on the official cash rate, which is the primary tool central banks use to control the long-term rate of inflation.

Central banks have started to increase official cash rates for the first time in more than a decade. The Reserve Bank of Australia (RBA) raised rates in May and early June with the Official Cash Rate now 0.85%. The RBA is expected to raise rates by 1.5% in the next 12 months, and these increases will quickly flow through to variable home loan rates. 

By raising the official cash rate, the RBA is looking to slow the economy down over time by just enough that inflation will also ease back from its current high levels (e.g. 5% p.a. here in Australia, and 8.5% p.a. in the United States).

For superannuation fund investors, high inflation will also eat into the value of your savings over the long term, meaning that it is more important than ever to ensure that you are invested in the right option or set of options for your personal circumstances.

Rising interest rates mean that borrowing money will cost more in the future. For companies that use lots of debt, that will have an impact on their profit margins, and therefore make it harder for them to grow their profits at the same rate as they do today. 

At the same time, rising interest rates tend to put downward pressure on the value of shares. This combination of slower earnings growth and lower perceived value means that it will be harder for shares to rise over time.

But perhaps the larger impact will be on the housing sector, where homeowners might borrow up to 80% of the purchase price of a house. If interest rates rise by 2.5% p.a., then a typical homeowner might see their repayments double in size in the next two years. That will stretch household budgets.

A benefit of rising interest rates is that returns for cash will rise over time. Banks are offering term deposit rates now that exceed 2.25% for a one year term deposit, and even transaction accounts will earn some level of interest as cash rates rise.

Australian elections usually have a modest impact on share and property markets in Australia, although the impact for individual companies and sectors can be meaningful. The impact on super fund returns because of an election are usually quite limited.

It is unfortunately impossible to eliminate the ups and downs that we see in financial markets, so to help manage risks during such difficult times we maintain a diverse portfolio of investments within our pre-mixed options. This diversification is designed to help provide some cushioning of downturns in times of volatility.

A mix of property, infrastructure, and agricultural assets, along with our share, cash, and bond portfolios, can help to smooth out returns. It also means our portfolios have a mix of factors driving returns and aren’t reliant on just one type of asset to generate returns for members. 

BUSSQ also makes use of active management across our portfolio which means we closely follow the market situation and buy, sell, or hold stock where suitable in our members’ best interests. 

The range of investment options we offer members have a longer-term strategy built upon sound investment principles, the foundation of which is the importance of a long-time horizon for investment decision making. For example, the recommended timeframe for investing in our Balanced Growth Option is at least five years, whereas the Cash Option would be suitable for investors with a one year investment horizon. 

Periods such as this, where returns are negative, are painful to experience and we understand the stress and tension that such returns can create. 

A danger during such periods is losing confidence in a solid, long-term investment strategy, and making a change to hold an asset that may feel safer, such as cash. Even a 65-year-old member, with an average life expectancy of 15-20 years³, is still a long-term investor. 

Holding cash over such long time periods is less likely to lead to successful retirement outcomes compared to taking a diversified approach to your investments.

Market downturns like this do happen, with the most recent following the outbreak of COVID-19 in March 2020. On each occasion, markets eventually recover their losses and go on to achieve new highs. 

But if you aren’t invested when those recoveries occur, then you might end up bearing the pain of the losses without any of the benefits of the eventual recovery, whenever that might occur. 

Timing these events is extremely difficult, even for investment professionals.

Everyone has different personal circumstances and the impact of a market downturn is different for each of our members. 

If you have questions about your current investment strategy or if you’re thinking about switching investment options due to market volatility, we encourage you to talk to us before doing so. 

Seeking personal advice from a Financial Advisor is also a sound approach and can be a source of comfort and strength during stressful times. As a BUSSQ member you have access to personal financial advice on investment choice at no extra cost*. Call us on 1800 692 877.