Market Update – markets flat but inflation rages on
During periods of high inflation there is an increase in the cost of living due to a rise in the cost of groceries, petrol and commodities. The recent spike in commodity prices has led to an increase in the value of Australian dollar, as our local currency tends to move in sync with commodity prices.
In markets this week
Equity and Fixed Income markets take a breath
Volatility across equity markets over the last week was the lowest since Russia’s invasion of Ukraine. In the US, the S&P 500 index was flat for the week (return of plus 0.06%), rounding out a gain of approximately 3.6% across the month of March. Despite gaining ground across the last month, the US market still declined by nearly 5.0% across the first quarter of the year – its largest quarterly decline since early 2020 when the pandemic began.
The equity market performance was more positive in Australia, with the S&P/ASX 300 recording a gain of 1.24% across the week. European equity markets also continued their recovery, with a return of plus 1.1%.
Fixed Income markets were also reasonably benign, as there was less change in the market’s pricing of future interest rates compared with previous weeks. The global Fixed Income index had a slightly positive weekly return of plus 0.39%, but the Australian Fixed Income index returned minus 0.41%.
The muted level of volatility across financial markets over the last week has led to the returns across all of Spirit Super’s investment options fluctuating less than recent weeks.
Global inflation continues to be the key economic theme causing concern in financial markets.
Consumer prices in Europe rose by 7.5% in March, partly due to the spike in energy prices caused by the war in Ukraine. However, energy alone is not causing the increases being observed in prices. The person consumption expenditures price index, which excludes food and energy prices, increased to 5.4% in the US this week. This is its highest level since 1983.
Rising global inflation is placing increased pressure on central banks to lift interest rates and prevent economies from over-heating. However, central banks need to carefully walk a tightrope and ensure they do not increase interest rates too quickly and push the economy into recession. Higher interest rates leave less money in consumers’ pockets for discretionary purchases, while also increasing the cost for businesses to borrow money for growth.
Signs emerged across the last week that markets are beginning to become concerned about the potential for a recession. For the first time since 2019, the US yield curve ‘inverted’ this week. An inverted yield curve means the 2-year interest rate on government bonds rose above the interest rate on 10-year government bonds. Investors typically demand a higher yield for committing their money for a longer period. Longer-term yields only fall below shorter-term yields where there is an expectation that the long-term economic outlook is poor.
While an inverted yield curve has historically proven to be an accurate recession indicator, financial markets are uncertain, and no single economic predictor is perfect. Several investment banks have stated the inverted yield curve is misleading, because it is partly caused by the large amount of long-term bonds held by the US Federal Reserve through its quantitative-easing asset purchases. US corporate earnings forecasts across the last three quarters of 2022 have also recently been revised upwards – indicating that Wall Street analysts believe the immediate economic future is bright.
Spirit Super’s Investment Team continually monitors economic data, including the yield curve, and tilts towards or away from risky assets ahead of large market movements. While financial market outcomes can never be predicted with certainty, we incorporate our economic outlook into investment decision-making to help achieve strong long-term financial outcomes for our members.
Oil, commodities and the Australian dollar
The price of U.S. crude oil fell below $100 per barrel after a one-week fall of approximately 13%. While the price of oil has been highly volatile in recent weeks, one factor that caused this decline was President Biden’s announcement that it would release 180 million barrels of oil from its strategic reserve across the next six months. This release will partially offset the scarcity of supply bought on by the conflict between Russia and Ukraine, causing prices to ease.
Across the last month, there has been a spike in the prices of global commodities that can substitute for oil and gas as a source of energy, such as coal. The Newcastle coal futures price, a common reference price for Australian coal exports, was flat across the week at around $250 per tonne, well below its peak from mid-March, but still considerably higher than the long-term average of $92 per tonne. On Friday it was announced that the Australian commodity price index increased by 40.9% in the year to March.
A large share of Australian exports are commodities (such as iron ore, natural gas and coal). Higher commodity export prices mean more Australian dollars are required to purchase the same amount of Australia’s export commodities. Increases in commodity prices therefore tend to be associated with an appreciation in the Australian dollar.
Since the start of March, the Australian dollar has appreciated by 5.4% against its trade-weighted basket of currencies, and 2.99% against the US dollar.
Australians tend to see the positives in an appreciating dollar, as it reduces the price of imported goods and international holidays. However, an appreciation in the Australian dollar can have an adverse impact on the value of your superannuation. Spirit Super invests its members’ funds globally to reduce the risk of being impacted by a downturn in any one market, and to gain access to a wider range of investment opportunities. When the Australian dollar appreciates, the value of these foreign currency-denominated assets falls (and vice-versa).
Spirit Super reduces its members’ exposure to foreign currency volatility through its risk management processes, however all pre-mixed investment choice options still have some exposure to foreign currency fluctuations.
Volatility and your super
Volatility is part of having money invested in super. Heightened volatility can cause your superannuation balance to increase or decrease across a short period of time. However, your superannuation is managed to achieve the best financial outcome across the long-term.
Spirit Super has continued to deliver on its return targets. As the end of March 2022, all of our pre-mixed investment choice options have outperformed their return objectives across their minimum investment horizons. For example, the Balanced Option has returned an average of 7.14% per annum across its minimum suggested time horizon of 7 years (7.85% per annum for Pension members).1
Another important point to note about volatility and superannuation is that the middle of a highly volatility periods is rarely the right time to de-risk portfolios, as this often results in losses being “locked in”.
Spirit Super’s Investment Team applies a forward-looking risk management approach and seeks to re-position the portfolio before such developments. This is exactly what we did across the second half of 2021 and early 2022, where our pre-mixed portfolios were shifted from a slightly “risk-on” posture to a slightly more defensive one.
It is natural to consider switching investment options during periods of elevated market volatility. However, always remember that superannuation is a long-term investment. Changing your investment option(s) in response to short-term volatility is an important decision and should take into account a number of factors such as how long you are investing, your personal risk tolerance, and what part superannuation plays in your overall retirement planning goals.
We recommend members carefully consider any superannuation investment decisions and to get appropriate advice before making a decision.
Get the right advice for your situation
It's natural to feel concerned about heightened volatility and how it affects your retirement savings.
That's why we're here to help.
If you're thinking about switching investment options or are unsure which option is best for you, please get in touch.
You can also book a one-on-one chat with one of our expert Superannuation Advisers. They can offer helpful, straightforward advice to ensure your super is working for your situation.
1 Past performance isn’t a reliable indicator of future performance. The value of investments can rise or fall, and investment returns can be positive or negative.
This article is for general information only and doesn’t take into account your objectives, financial situation or needs. You should assess your financial position, personal objectives and needs before making a decision based on this information.