Last week was a tumultuous one for world share markets, with the S&P 500 Index in the US and Australian S&P/ASX 300 Index dropping by 7.2% and the FTSE 100 in the UK falling by 9.5%.
Markets in Australia and overseas remain volatile at the date of this news item, reflecting investors’ continued nervousness about government debt issues and the economic outlook for Europe and the United States.
What’s been happening in Europe?
A key trigger of last week’s volatility in share markets was the sharp increase in the intensity and scope of the European debt crisis. The debt levels of Greece, Ireland, Portugal, Italy and Spain are unsustainably high, with increasing interest rates on borrowings and poor economic activity exacerbating the situation.
Greece has already undergone a partial restructuring of its debt and investors believe that other indebted European nations could follow. Financial institutions that have been lending to these countries are unlikely to be paid back in full, which could result in large write-downs. These losses are likely to have a substantial impact on the solvency and earnings of European banks, particularly those that are poorly capitalised.
The European Central Bank recently purchased Italian and Spanish bonds so that both these countries can continue to borrow in financial markets. However, investors fear that Italy and Spain may require further assistance with their debts in the near future. Share markets have largely anticipated further write-downs of banks’ loans, which has resulted in wide scale selling and falls in the value of bank shares.
What about the US?
Recent political debate in the US has demonstrated a lack of co-ordination in policy-maker plans to address the country’s debt issue, which has undermined investor confidence. After weeks of negotiating, the Obama Administration and Congress agreed to lift the debt ceiling and cut spending by more than $2 trillion over ten years.
Over the weekend ratings agency Standard & Poor’s downgraded its rating on US long-term credit from AAA to AA+, reflecting its lack of confidence in the latest fiscal consolidation plan. Despite this downgrading, the US still holds a AAA rating from the two other ratings agencies: Moody’s and Fitch.
These developments come at a time when the US is struggling to reignite its economy as it recovers from recession. Economic activity slowed in the first half of the year and forecasters are now revising down their growth forecasts given the prospect of further spending cuts in 2012. With dimming hopes of a pick-up in growth investors have decided to take profits from the strong gains made over the last year by selling shares.
Investors are now awaiting a long-term plan on how the US will reduce its debt to sustainable levels, grow its economy and ultimately restore market confidence.
How has this impacted Australia?
While the Australian share market has also been volatile in response to world markets, our economy is in fundamentally better condition than those of many other economies around the world. Continued growth in Asia and a boom in mining investment are contributing to our strong economy. Australia also has much lower debt levels than many other countries.
What does this mean for my super?
Most members’ super is affected by any short-term fluctuations in share markets, because most members have their super invested at least partially in shares.
Share prices can rise and fall very quickly but despite short-term falls, when held for a number of years shares have provided the best return to investors of all the different types of investments. So while members’ super accounts can go down over the short term when shares lose value, they gain value when markets go up again.
How is AustralianSuper responding to the falls on the share markets?
AustralianSuper Chief Investment Officer Mark Delaney said: “Our investment decisions are based on a medium to long-term outlook for the economy and markets, which remains broadly positive. We believe the reasons for the current economic soft patch are temporary and expect the global economy to slowly resume its recovery from the global financial crisis. But it will take time and there may be some hiccups along the way.”
“We are closely monitoring the situation in Europe and the US and will review our allocations to new investments in international and Australian shares if this view changes. During the global financial crisis we predominantly held our investments in shares, property and infrastructure and invested any incoming cash inflows in cash. This enabled the Fund to benefit from reinvesting that cash in the market as share prices rose again.”
Should I switch my super to a more conservative investment option?
We encourage you to take a long-term perspective with your super. One of the risks of switching out of shares and other types of investments when they are performing poorly is that you will not be invested in them when they eventually regain their value. This means you would be at risk of ‘locking in a loss’.
Over the short-term, share markets tend to be driven by investor sentiment, which can change quite quickly and dramatically. Investing over longer time periods, and diversifying both across and within asset classes, can help to smooth out the highs and lows and pave the way for long-term growth. This is a strategy we adopt in our diversified investment options.
Despite the continued volatility markets have been experiencing during their recovery from the global financial crisis, AustralianSuper’s investment options have continued to deliver strong long-term returns. Our Balanced option has returned an average of 9.64% per year since its inception in 1985 to 30 June 2011. It has also been ranked in the top 25% of balanced fund performances in 10 out of the last 13 years, which is more frequently than any other fund.*
Where can I get advice on this?
We understand that everyone’s situation is unique and if your personal situation has changed or if you have a short timeframe for your investment, we urge you to seek advice from a licensed adviser about the best investment strategy for your situation.
If you have questions about the investment of your super, call us on 1300 300 273 and ask to speak to an adviser from the Financial Education and Advice Team – they can provide over-the-phone financial advice at no cost.
*SR50 Balanced fund SuperRatings Crediting Rate Survey, June 2011