Market volatility – it’s part of the market cycle

Published and current at: 11 Oct 2018

Share market wobbles always cause concern for some investors. Our Investment Team answers some common questions members have had over the recent share market volatility.

What happened and why?

US interest rates have been rising steadily in recent times as the economic backdrop in the US continues to improve, however it spiked significantly higher on Friday 5 October following the release of strong wage growth data.

Strong wages contribute to rising inflation, which in turn means that the US Federal Reserve will have to continue to keep raising interest rates to keep inflation in check.

Worsening US trade relations with China – originally thought to be a short-term issue – now appears to be a more long-term prospect. Higher tariffs imposed by the US on Chinese imports are expected to drive up prices, further lifting inflation and, in turn, interest rates.

Investors in share markets look at the impact of rising interest rates on the value of their shares, as rising interest rates typically drive down the value.

Rising yields on bonds also make bonds more attractive for investors seeking income from their investments, encouraging these investors to switch from equities to bonds.

On Wednesday 10 October 2018, the International Monetary Fund (IMF) also warned that rising interest rates and the worsening trade relations with China would affect economic growth, downgrading its outlook for economic growth for the first time in a number of years.

This contributed to further uncertainty and market volatility, particularly in relation to the impact tariffs will have on Chinese economic growth.

At the close of US markets on Wednesday evening, the broad-based S&P500 had fallen over 3% and the Nasdaq had fallen over 4%. (At the time of writing, the Australian ASX200 is down 2%.)

Shares in tech companies have been hardest hit by the share market decline on Wednesday evening. The FAANG companies – Facebook, Amazon, Apple, Netflix and Google – collectively lost $US172 billion in value.

It must be remembered that these have all performed exceptionally well in recent times and a correction in their share price is not unexpected.

How does this situation affect my super?

As with any investment, your super will be exposed to many market cycles. How the market volatility affects your superannuation largely depends on which investments or options you are exposed to, and when you intend to access your super.

Super is by nature a long-term investment that’s designed to withstand short-term volatility. It’s not meant to react to endless share market ups and downs.

Energy Super is relatively defensively placed with regard to equities in our diversified investment options such as the Balanced option. It’s been our view that equities have been overvalued for some time and so were positioned accordingly.

If you’re in a single asset class option like Australian Shares or International Shares, it’s important to remember that Energy Super works closely with specialist investment managers. They’re reviewing the opportunities and risks in the markets all the time.

How does Energy Super manage its investments?

Our Investment Committee meets monthly to review the latest data and receives advice from both its investment consultant external managers and internal investment team, making adjustments to assets the Fund is invested in, including asset allocation (i.e. shares versus cash) and investment manager changes where required.

The Committee operates under strong governance principles that are based on expected long and shorter term risk and returns. Its aim is to get the most from your investment over the long term, and it’s this long-term focus that provides the discipline for investing during volatile times like we’re experiencing now.

I’m still worried about volatility, what should I do?

We understand that when share markets fall, it’s only natural to want to do something to protect your investment.

If you don’t intend to access your super any time soon, there should be no need to react. Knee-jerk reactions can lead to poorer results.

Perhaps it’s helpful to think about it another way: would you sell your home if the property prices suddenly dropped? While it can be difficult, you need to remember to take a longer-term view.

Ultimately, you need to be comfortable with your level of risk. If you’re in a diversified investment option (which invests in many different asset classes) like Balanced or My Super, the effect will be lessened.

That’s why we have diversified options, so that poor performance in one asset class doesn’t affect your entire investment. Because while share markets are experiencing some falls now, you still have your super in other assets that are performing well.

Want to talk about it?

If you’re not comfortable with your level of risk or you’re close to retirement, it might be a good idea to speak with one of our financial advisers. They can speak to you about the appropriateness of your investment strategy and may help you feel more comfortable with the current situation.

To talk to an adviser about your Energy Super investment strategy and whether it’s still right for you, contact us.