Posted: 28 February 2022
We have recently received a number of questions from members about the fall and volatility in sharemarkets.
Before considering the potential impacts from an investments perspective, the armed conflict in Ukraine is a difficult and upsetting time for many, and the direct impact of the conflict on human life is forefront in our thoughts.
We acknowledge that the current market volatility and restrictions on transactions will be concerning to some members. This post seeks to explain some of the drivers of market volatility and how these might affect our diversified investment options, and to explain the rationale for the limited services period. The information provided below is general information only and doesn’t take into account your individual objectives, financial situation or needs.
You should consider the relevant product disclosure statements or member booklets before making any decisions.
There have been two significant drivers of the market volatility over recent months, initially rising inflation leading to the prospect of higher interest rates and more recently the threat of armed conflict in Ukraine.
The first concern about rising inflation was likely the biggest driver of falls in bond prices and sharemarkets in January 2022 as markets reassessed and factored in interest rate hikes from central banks in order to curb inflation concerns. Australian and US sharemarkets fell but recovered in part through the end of January 2022 and into February 2022.
Secondly, on Thursday 24 February 2022 concerns about imminent military action by Russia against Ukraine were realised. The invasion of Ukraine has prompted volatility in sharemarkets in Australia and around the world. With falls seen in some sharemarkets on Thursday 24 February 2022 but a rally in the US and a positive day on Australian sharemarkets on Friday 25 February. Conversely to the market falls, bond markets rallied marginally over that time, dampened by inflationary expectations.
Financial markets don’t like uncertainty. The armed conflict in Eastern Europe threatens some economic impact from the effects of sanctions on Russia, disruption to energy supplies, and some risk from potential escalation or expansion of the conflict in the region. This is likely to exacerbate inflationary concerns with the risk of energy prices rising further and causing supply chain inflation. However, this could also cause central banks to temper interest rate rises, which drove the market concern in January 2022.
In terms of the economic impact on Australia, commentators have pointed out that Australia’s direct economic links to Eastern Europe and Russia are limited so the sharemarket fall is likely driven by concern about the broader global economic impact including rising energy prices and how that may affect the Australian economy.
How markets will react to all of this is unclear.
Superannuation fund members may be considering what impact the conflict will have on their account balance.
The first point to make is that we don’t know what will happen in the future. The second important point is that for most members, superannuation remains a long-term investment.
At Group Super, we are strong believers in diversification. Our Conservative, Moderate, Balanced and Growth options are well diversified across and within assets classes and strategies; they are designed to soften the impact of market volatility for our members.
Timing the market based on short-term predictions is highly difficult, even for the professionals.
We understand that some members will be frustrated that they are unable to perform an investment switch at this time. We recognise that there is never going to be a perfect time to undertake a transition, which limits the services available to members.
So, why can’t members transact during this transition? As we migrate the significant amount of member data to the new administrator it takes time for them load this and test the data to ensure the integrity of the outcome. If transactions occurred during this time, the administrator would not be able to accurately reflect the transactions’ effect on the asset base of the fund and would therefore not be able to establish an accurate unit price during the transition period, which could disadvantage members who did not transact during this time. One of the key protections trustees must give to their superannuation fund members is to have regard to the impact of any action on all members.
We maintain a belief that our portfolios are well diversified, and that with the long-term nature of superannuation, the benefits of our move to new administrators is in the best financial interest of members.