If you’re approaching retirement, you could be forgiven for being a little nervous about your super balance.
- More Australians using alternative investments, such as switching money to cash
- Signs of inflation in the US and fears of a global trade war spooked markets
- US corporate earnings season may provide some boost to share prices
Financial markets have been knocked sideways by several major shocks this year, among them the prospect of higher global interest rates, and a looming trade war between China and the United States.
Chances are your super balance has already taken a hit, with average returns dropping into the red early this year, down from a very healthy 10 per cent just last year.
Superannuation research firm Chant West said more Australians have started using alternative investments, such as switching their money into cash.
Senior investment manager Mano Mohankuma said the recent market skittishness has led to the rise of what are called alternative asset classes, which fly under the volatility radar.
Brisbane-based retiree David Warner manages his own superannuation.
He moved a large chunk of his retirement savings into cash, which he said helped him sleep at night.
“I don’t want to be concerned about a short-term volatility,” he said.
Mr Warner was riding high last year as the markets broke records on a weekly basis.
But now, following several market shocks, he just wants peace of mind.
“I’ve settled my mind because I’ve generated a level of cash which I believe would support us without the need to sell any further investments for up to two years — that removes any immediate concerns,” he said.
If Mr Warner had kept most of his retirement savings in shares, he would have lost a significant amount of his nest egg.
Why did superannuation get hit?
The hit to superannuation stems from two major global economic events.
Earlier this year markets were spooked by signs of inflation in the US which point to higher interest rates, which is negative for share prices.
In recent weeks attention has turned to the possibility of a global trade war, initially between the world’s two biggest economies — China and the United States.
Shane Oliver, who heads up investment strategy at one of Australia’s biggest managers of superannuation, AMP, said at the start of the year they took money “off the table”.
He said that was a challenge because if one of the threats was higher inflation in the US and higher interest rates, that could then push up bond yields, leading to a lower return from government bonds.
Mr Oliver described it as a bit like a juggling act, trying to work out the best place to invest money where it would be safe from market volatility.
“There’s no indications suggesting we’re going to have a major bear market or global recession or anything like that, so therefore it’s really a case of fine tuning.”
So where to now?
Part of TD Securities senior strategist Mitul Kotecha’s job is to anticipate the next major market move, but even he conceded that markets were in a bit of a fog.
“There’s clearly a lot more uncertainty, things aren’t as easy to predict as perhaps they would have been [in the past],” he said.
“If you look at the way things have moved as well, last year there was an expectation of strong US growth, higher Fed [interest] rates, the [US] dollar would strengthen — clearly that didn’t happen.
“The [US] dollar weakened for most of last year.”
Mr Kotecha said the initial nervousness present in the market after the election of President Donald Trump was short-lived.
“Equity markets rallied significantly over last year,” he said.
“What had been expected is not what actually occurred in markets, and I think that’s added to this amount of uncertainty.”
Trade war ‘the wild card’
There is one event though that could help pivot global markets back onto a more positive path.
On Friday, JP Morgan Chase will be among the first big US corporations to report first-quarter earnings.
Given the tax cut tailwind currently behind corporate America, there is a chance the results season could deliver a return to record-breaking share prices.
But TD Securities has warned the results would have to be especially good to trigger a major market revival.
In the meantime, Mr Kotecha provided some sobering advice for those obsessing over their super.
“I think the key risk is something that we’re hearing now almost on a daily basis, there’s going to be the potential for protectionism,” he said.
Mr Kotecha said, in that situation, the global economy would come under “significant downward pressure”, which would hurt earnings and asset returns.
“That’s something that I think markets will still have not yet at least fully anticipated or priced,” he said.
“That is the wild card.”
For the younger generation wondering where to get the biggest bang for their buck in terms of super, Chant West reported industry super funds have continued to outperform retail funds on a regular basis.