In what seems a coincidence October has sometimes been a bad month for share markets with some of the worst market sell-offs in history occurring in the month.
This October has been a rocky road for Australian and international share market investors. Markets have experienced some very large single day falls, which can be nerve-racking when you see it splashed across the daily news.
The recent falls have come after the US share market reached
record highs and the Australian share market hit its highest levels in ten
years. For the financial year to 31 October 2018, Australian shares are down 4.7% and international shares -2.5% (in local dollars)‡. While
this has impacted the Balanced option, its return has fallen less (-1.1% for the financial year to 31 October 2018) due to its broad diversification across a range of asset classes.
What’s different about the recent falls to those of 1929, 1987 and 2008 is that the global economy is still in pretty good shape despite the increase in investor concerns.
What’s been driving the volatility?
It’s a similar list of concerns to those we wrote about in our April update.
- Higher US interest rates – the Federal Reserve
has raised US interest rates eight times since March 2015. This is part of
strategy to gradually unwind the emergency measures that were put in place
during the global financial crisis and bring rates back to normal or ‘neutral’
The US economy is performing well with annual economic growth above 4% and historically low unemployment. There are currently more job ads than people looking for jobs. This has some investors thinking the Fed will lift interest rates too quickly and cause an economic downturn.
- US/China trade wars – tensions have escalated in
recent months with the US imposing tariffs on US$250 billion of Chinese imports,
and China responding with tariffs worth $110 billion on US imports. There are
also concerns about the impact this will have on technology stocks with
computers and computer parts likely to be the hardest hit by the tariffs. While
we don’t think tariffs are a good thing for global economic trade, we estimate
these tariffs will only reduce global GDP by around 0.2%.
Lower Australian house prices – falling house
prices in Australia have led to concerns of a housing collapse. The main reason
housing prices have fallen has been due to government restrictions and
disincentives to foreign property buyers and local investors who use interest
only loans. While housing affordability for owner-occupiers is an issue, interest
rates remain at historically low levels and unemployment is also low.
A realistic perspective on investment returns
The recent volatility is a timely reminder that fluctuations in share markets are to be expected, and that shorter term returns can be negative. For example, for our Balanced option we expect a negative return about one year in every four to five and yet we’ve just clocked over our ninth year in a row of positive returns.
While returns can fluctuate from year to year, staying focused on the long term gives you a more realistic perspective on investment returns. Over the last 20 years, the Balanced option has returned an average annual return of 7.95%. It’s consistently been one of the better performing funds, ranking in the top three funds over the 1, 3, 5 and 20 years to 30 June 2018*.
To put this in perspective, the investment returns of the Balanced option have increased members’ retirement savings by more than four and a half times over the last 20 years – every $100 invested at the beginning of the 1998 financial year would be worth over $460 at 30 June 2018†.
‡ Australian Shares: S&P/ASX 300 Index, International Shares: MSCI AC World ex AU (Loc)
* Compared to funds in the SuperRatings SR50 Median Balanced Survey – 30 June 2018.
† Investment returns from 1 July 1998 to 30 June 2018. Investment returns are net of investment fees, costs and taxes, but do not include the impact of administration fees and insurance fees that are deducted from member’s account balances.
Returns from equivalent investment options of ARF and STA are used in calculating returns for periods that begin before 1 July 2006. Refer to the AustralianSuper website to view returns for all AustralianSuper investment options. Investment returns are not guaranteed as all investments carry some risk. Past performance is not a reliable indicator of future returns.
This information may be general financial advice which doesn’t take into account your personal objectives, situation or needs.