Investment markets, money matters, your super and planning for retirement. Don’t miss our New School of Super investment and super podcast series. We provide information, tips and strategies that could help you make the most of your super and achieve your best retirement.

June 2022 Market volatility and your super

What’s causing the recent share market volatility and what does it mean for your super balance? Our Chief Economist Brian Parker and Head of Advice Anne Fuchs discuss in the latest New School of Super podcast and webcast episode. From the war in Ukraine to rising interest rates, they explain recent share market volatility, how it’s impacting super fund investment returns, what you can expect to see next, and what it all could mean for your super and retirement planning.

Hello and welcome. Welcome to the inaugural New School of Super podcast series, brought to you proudly by Australian Retirement Trust. Wow, wow, we're in the studio. Look, before we begin, I just want to acknowledge today that we are here on Turrbal and Jagera country, and I'd like to pay my respects to Elders, past, present and emerging. Now, we know that the New School of Super was something that happened at Sunsuper. It feels like a lifetime ago, Brian, and we're so excited that the New School of Super, this education series that's accessible for all of our members, to help them make the best possible choices about their retirement, is back on the air. We are back on the air, Brian. Can you believe it?

I know, it's great to see you, Anne, it's been so long.

Well, you know, New School of Super is all about the economy, investments, strategies, and today, we're going to be talking the economy, but before we do that, for some of our new members who maybe aren't familiar with us at Australian Retirement Trust, we've been off the airways for a bit, working very hard on the merger between Sunsuper and QSuper, and here we are. My name is Anne Fuchs. I'm Head of Advice at Australian Retirement Trust, and look, the team and I come together every day. We work hard, providing personal advice to members to make sure that they can make the best possible choices about their retirement savings so they can put their legs up at the end of their working life. And, you know, I've been in the industry 25 years, in financial advice. You know, you wouldn't know it, being the young woman that I am.

Until you joined us at about age five or six or so, yeah.

Yes, five, that's right. I have been in financial advice and superannuation my whole working career. I have a husband, three teenage children, and a very handsome doll called Larry, who is as happy as Larry. That's a bit about me, and you, Brian Parker, our Chief Economist extraordinaire, raconteur, who brings the show business into economics, you are a Queensland Gold Coast boy, educated University of Queensland.

Correct.

Now living in Sydney.

Correct.

You've worked at Reserve Bank, Rothschild and that, but you've been with us since 2015. I remember the day you joined. It was so exciting. You have two grown-up children and a wife.

I do, wife, two children, both at university.

A dog?

And a dog, Max, so I have a diabetic Cavoodle, who needs two insulin shots a day.

Yeah, there we go, we all love our pets, and look, we won't be talking pets today. We'll be talking about the economy, and it's been a bit of a crazy time, but before we do that, we know what we need to do. The General Advice Warning.

We do.

Over to you.

Thank you very much. Thanks very much, Anne. Now, before we start, I need to let everyone know that what we're going to talk about today is general information only. Any advice doesn't take into account your personal situation. You should consider your circumstances and think about getting personal advice before acting on anything we discuss. You can also get a copy of our product disclosure statement from our website, www.australianretirementtrust.com.au, or you can call us on 13-11-84 if you are a Super Savings account holder, or 1300-360-750 if you have a QSuper account.

That is excellent. That's the first General Advice Warning for Australian Retirement Trust.

Absolutely.

For our 2,000,000+ members all around this great country. So, it's been a hell of a year, like, it really has, and so I'm not quite sure where to start. We've had lots and lots of members calling the contact centre, calling their financial advisors, really nervous about what's happening with investment markets, and I guess, you know, probably, are you able to start with where are we right now in terms of the economic cycle and what's been happening the last couple of months, Brian?

It's interesting, Anne, if we were having this conversation, say, four or five months ago, I'd be painting a broadly optimistic picture about the world economy and about the Australian economy for 2022. I'd be telling you things like, you know, what we are learning, you know, we are learning how to manage our way through this pandemic in an economic sense. We're rolling out vaccines, we're rolling out boosters. In short, there was a light at the end of the tunnel, and it wasn't a train, it was genuinely the end of the tunnel, but what we've seen so far in 2022 is a few things really driving markets. Obviously, the war in Ukraine, which clearly shocked everybody, and yes, that's going to remain a source of volatility for markets for some time. No one has any idea how that conflict is going to play out, but in an economic sense, the issue really has been around inflation and interest rates. In particular, a lot of the sort of surge we saw in inflation during that COVID recovery has proven to be more persistent than we thought. Part of that is due to what's happening in Ukraine, but it's broader than that. So, we're actually seeing inflation continue to surprise on the upside, if you like, and it's not just here in Australia, it's in the United States, it's in Europe, the UK, and elsewhere, and so a lot of these inflation pressures are proving to be more persistent than people thought. What that's meant also is that interest rates are going up, not just market interest rates, but clearly, the world's major central banks have got a fight on their hands to make sure that inflation comes back down to a more reasonable level. We've seen the Federal Reserve, among others, raising interest rates. The Reserve Bank of Australia here has now raised interest rates twice, and the key worry for markets is, really, how high will interest rates need to go in order to bring inflation under control, and more worryingly perhaps, the risk that central banks overdo it, the risk that central banks raise interest rates too aggressively and drive the economy into a recession at some point in the next year or two. That's really been what's unsettling the markets.

And it really is such a global phenomenon. I think about my husband, Frank, is from Düsseldorf, as you know, and his father, Helmer, called on the weekend, panicking about what was happening with the interest rates in Germany, and inflation and cost of living going up, and how's, you know, his family here in Australia coping with that 'cause they actually had heard over in Germany, too, that interest rates had gone up. So, it really is this global phenomenon that we're experiencing that has to, surely, impact members' retirement savings here with Australian Retirement Trust. We have so much money invested overseas, and do we have money invested in Russia?

No.

Okay.

And before the war in Ukraine, it's important to bear in mind that any exposure we had to Russia and Ukraine was pretty minimal, and when the war started, anything we had left over, we instructed our managers to get out of as quickly as they could. They got out of quite a lot. We were left with very, very tiny residual exposure, which was basically written down to zero. Pleasingly, the QSuper portfolios had even less to begin with, and so the exposure has been pretty minimal, and the reason for that is that even though Russia is, you know, it's a major military power, it's a country of 140-odd million people, but in an economic and market sense, it's very, very small here. So, the Russian markets, relative to the size of world markets, are actually pretty small, so no Australian super funds were going to have a large direct exposure anyway.

So, what you're saying is that members shouldn't be worried that there's, you know, there's concentrated money there that's going to impact performance directly?

Not in Russia, it's more broad. Really, what we're seeing is, we're seeing a war in Ukraine, but it has global implications. It's driving up commodity prices. It's driving up energy prices. Energy prices and commodity prices were already on the rise during the sort of post-COVID period. The war in Ukraine has given this further upward momentum, and this could persist for some time, and so these cost of living pressures, in the short term, are not likely to go away. Now, over time, should we expect to see the price of oil, the price of a whole range of commodities start to come off and return to perhaps more normal levels? Yes, I think that's a fair assumption, but it certainly could take time, and so the pressures on, you know, household cashflow, for example, are not really going to go away in the short term, and that is going to cause some stress for people, understandably. I suppose the other thing to bear in mind is that, you know, we clearly have seen all of this play out in terms of superannuation fund returns, not just here at Australian Retirement Trust, but, in fact, across the whole industry, you've seen superannuation returns affected. So, returns for the calendar year to date, depending on the option you're invested in, are almost certainly negative. The good news is that even though share markets have fallen very sharply, you've not seen superannuation balances fall as far, and the reason for that is diversification.

Well, 'cause that's where I was going to go, actually. We've, in the past New School of Super episodes, we would talk a lot about asset allocation and the role of unlisted assets, and so what's yours, I guess, your reflections for members around diversification and the different asset classes and how they're geared to protect members in a time like this?

Oh, that's a really, really good question, Anne. I mean, the key message for members is that most members have their money invested in some kind of a diversified option, which means, yes, we are invested in government bonds and corporate bonds and shares, both here in Australia and globally, and the returns from those traditional asset classes have been negative so far this year, but what we also do is diversify away from those traditional asset classes, and this applies whether you're a QSuper member or a Super Savings member. The diversified options you're invested in invest quite significantly in unlisted assets, or we call them alternative asset classes, but particularly things like private credit, private equity, infrastructure, property. These sorts of assets actually hold their value much better during times of market turmoil, and that's exactly what we've seen to date. Now, if we were to see a major economic shakeout as a result of what's happening in the world, would these assets be affected? Yes, they would, but historically, the evidence is pretty clear that these assets do tend to hold their value to a much greater extent during major market downturns than, say, shares do. And so, the falls we've seen in members' balances have been nowhere near as pronounced as the kind of falls we've seen on share markets.

So, really smooths the ride.

It helps to smooth the ride, that's a good way of describing it, and I think that's really important. Diversification, it's putting lots of eggs in lots of different baskets, making sure we're invested in a whole range of assets, a whole range of companies, economies, industries, both here in Australia and globally, so that at a time like this, you're not going to be as exposed to what I would describe as the lunatics who run stock markets on a daily basis.

And, you know, I think this is why members should feel really fortunate to be with a fund like ours, because, you know, these high quality investments obviously don't have the liquidity of the share market, with the lunatics running the share market, but when you're with a fund like ours, that is just growing so much and that strong cash flow, doesn't that just create enormous opportunity?

Oh, it does, it means that we can afford to hold a higher exposure to unlisted assets than perhaps other competing funds, and also to build really well-diversified portfolios of these assets. So, for example, in the property portfolio, we're not talking about a couple of hotels and a few office blocks, we're talking about, you know, hundreds of individual property assets. We're talking about, you know, dozens and dozens of infrastructure assets. We're talking about thousands of companies in the private equity space. So, it's a very, very well-diversified strategy, and that's the benefits of scale, that we can afford to invest in these assets because we have that strong liquidity position, but also, we use our scale to make sure we're building very well-diversified portfolios of these assets.

Reflections, so speaking of asset allocation and fixed interest, you know, interest rates are going up. What does this mean for our portfolios? And I know, particularly our retired members really look to the term deposits and those more secure types of investments because it helps them sleep at night. What are your reflections around fixed interest, Brian?

Yeah, and sleeping at night can never be overrated, just quietly.

No.

And firstly, you know, for investments in things like cash and term deposits, interest rates are going up, and so the future returns that we're getting from those sort of assets are clearly going to be higher. So, after a period where cash was giving you virtually nothing and term deposits were giving you a little bit more than nothing, those rates are now somewhat more attractive. More broadly, the fact that we've seen a rise in market interest rates, or bond yields, looking through the rear-view mirror, that's actually caused some capital losses for fixed income investors. So, it's been a very, very challenging time for investors that are heavily reliant on government bonds in their portfolio, but what it also means is that looking forward, the yields on offer today are actually a lot more attractive than they were. That means that future returns from these assets are probably going to be better than we've seen in the last year or so, where, obviously, government bonds have performed badly. Now, in terms of Australian Retirement Trust, you know, we actively manage our portfolios and make sure that they're very, very well diversified so that we're not as dependent on government bonds for defensiveness, if you like, in the portfolio. What we find is that in this kind of environment, especially during an environment of rising interest rates and inflation pressures, we need to make sure we're investing in a wide range of assets that are capable of delivering the sort of long-term, real returns that our members need, and the unlisted assets have a key role to play here. Are we still finding opportunities in property and in infrastructure and in private equity that are capable of delivering the strong, real returns that members need? And the short answer is absolutely, yes.

Brian, you've spoken, well, you speak much, really, about the geopolitical risk in portfolios, and I know many of our pre-retired, people who are planning for retirement or who are in retirement, who don't have that length of time to worry, particularly about China and what could happen in this region, and just the overall stability of the economy, do you have any sort of words of wisdom?

I'm not sure I've got words of wisdom, but let me give it a go. Look, geopolitical risk is a reality, and it's going to stay a reality. It's a very, very uncertain world out there, and it's not just what's happening in Ukraine. You're quite right, I mean, you know, China's, you know, if you've been watching the news for the last two years, you may have noticed that our major trading partner doesn't like us very much, and frankly, China is in some form of dispute with a whole range of countries in our region. Those tensions are not going to go away. We have no way of knowing in advance how those factors are going to play out. One thing we do know is that whether it's worries about interest rates or inflation, or whether it's worries about a recession or geopolitics, every crisis, every downturn, every bear market, every recession comes to an end, bar none, that at the end of the day, there is always a light at the end of the tunnel. We don't know how long the tunnel is, but there is a light at the end of the tunnel, and it's our job as investors, especially given that, you know, we invest long-term money. Superannuation is the longest-term asset, the longest-term investment that any of us will ever have, and so we need to be investing for the longer term. Now, I often say that, look, if you're someone in your 20s, for example, you're just starting out, and you're starting your superannuation journey, it's highly likely that over your working life, you're going to have maybe five, six, or seven major market events that are going to potentially-

But what's the 10-year return for it, yeah.

Exactly. In a way, if you're prepared to ride out periods like this, the reward for riding out periods like this is higher, long-term returns, that you ultimately get rewarded for taking risk, and again, you mentioned those people who are approaching and then into retirement. That becomes more problematic. Now, for those of our members, and again, this applies whether you're a Super Savings member or a QSuper member, if you're in one of our default options, you have already had the risk in your portfolio reduced as you've approached retirement, and that's really, really sensible because you don't want the risk of a major market event, such as we're seeing now, ruining your long-term retirement prospects. If you're not in one of our defaults, and if you are, I think it's important at a time like this, too, if you are worried, if you're losing sleep about what's happening with your retirement balance, that may be kind of your body telling you something, your body telling you, perhaps you're taking too much risk.

Too much risk, or you need financial advice, 'cause I do feel sad.

Oh, absolutely.

I'll never forget, in March 2020, when, you know, everything just started getting quite scary, when COVID hit us, and the number of members that switched to cash without financial advice and, you know, crystallising that loss then and there at the lowest possible point of the cycle, and it really was that missed opportunity, and holding the nerve was well and truly worth it, wasn't it?

Oh, it was, absolutely, and I think, as a defence against members making poor investment choices, having a well-designed default that actually manages that risk as people go through life, but also having access to quality financial advice, those two things are actually really, really important in terms of, you know, delivering better outcomes for members.

It's been lovely sitting on the couch with you in a studio, like we used to.

I know, out and about rather than actually on a screen.

I know, and if I think about what's happened over the last couple of months, and with the merger too, many of our members wouldn't know that when that merger, well, you know, Q and Sunsuper got, as I like to say, got married on that weekend, we actually had the floods in Brisbane, and then there was the war started. So many extraordinary things have happened, but our members' money remains safe, and again, I just would encourage any and all of our members, if you're having a life event or, as Brian said, you're losing sleep at night, to pick up the phone and call us, and we have a team of people here that are able to guide you and make the right decision for you.

Absolutely.

So, Brian.

Thank you, Anne, great to be with you again.

It's been fun. So, thanks to our viewers and listeners. Welcome to the new and improved New School of Super, brought to you by Australian Retirement Trust. Thank you.

This podcast is brought to you by Australian Retirement Trust Pty Ltd (ABN 88 010 720 840, AFSL 228975) the trustee for Australian Retirement Trust (ABN 60 905 115 063) (the Fund).