Investment market update
12 June 2022
After a positive start to the 2021-22 financial year, with our Balanced Growth Super option delivering a return of 4.13% to 31 December 2021, investment markets have taken a downward turn in recent months.
Both share markets and bond markets fell sharply in the first few months of the calendar year, then remained relatively stable during May. Returns across all super funds have been impacted by this.
It is difficult to see your super balance fall during a market downturn, but negative returns in investments happen from time to time. After each downturn, such as the last one we experienced near the start of the COVID pandemic in March 2020, markets do eventually stabilise and then recover.
Our Balanced Growth Super option and Balanced Growth Income account option returns for the 2021-22 financial year to 31 May 2022 are -2.23% and -0.73% respectively. This is down from the start of the calendar year, but the Balanced Growth option has delivered strong returns for members over the medium to long term.
At 31 May 2022 our Balanced Growth Super option had returned 6.06% p.a. over 5 years, 8.34% p.a. over 10 years, and 9.39% p.a. since its inception in 1985^. The Balanced Growth Income account at the same date, had returned 6.5% p.a. over 5 years and 9.06% p.a. over 10 years, with these slightly higher returns due to the fact Income account holders pay tax on their investment earnings at a 0% rate.
To see our latest investment returns, visit our monthly investment performance page.
To help provide you with more information our Chief Investment Officer Troy Rieck has answered some common questions below.
If you have any further questions about your Super or Income account, please give us a call on 1800 692 877. As a BUSSQ member you also have access to personal financial advice on investment choice at no extra cost*.
What has caused the recent market downturn?
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.
What impact has the war between Ukraine and Russia had on investment markets?
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.
What does high inflation mean?
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.
What will rising interest rates in Australian mean for investment markets?
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.
We have a change in Government, could this impact my super?
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.
What is BUSSQ doing during this period of market volatility?
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.
What does the market volatility mean for you?
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.
How can we help you?
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.
1. New York Stock Exchange 2. Australian Stock Exchange 3. abs.gov.au/statistics/people/population/lifetables/latest release
^Average return is after tax on investment earnings and indirect costs and based on the performance of the Balanced Growth option since inception in 1985 calculated at 31 May 2022. Past performance is not a reliable indicator of future performance. Returns are after tax on investment earnings, where applicable, and indirect costs.
*Personal advice is limited to BUSSQ products and is advice on insurance, investment choice, contributions, and retirement. The cost of this advice is included in the BUSSQ administration fees and costs, and this advice is provided by Link Advice Pty Ltd (ABN 36 105 811 836, AFSL 258145).
This article provides general information only and does not take into account your personal financial situation or needs. Before acting, you should review the Product Disclosure Statement (PDS) to ensure you have all the information about the relevant BUSSQ product and how it works and consider the appropriateness of the information to your needs or obtain financial advice tailored for your personal circumstances. You can download BUSSQ's PDSs and Target Market Determinations or call us to request a copy. Prepared by BUSS(Queensland) Pty Ltd ABN 15 065 081 281, AFSL 237860, Trustee of Building Unions Superannuation Scheme (Queensland) (BUSSQ) ABN 85 571 332 201.