Market Turbulence – what’s causing the volatility?
The Australian (and global) stock markets are experiencing turbulence. If you’ve been anywhere near the news, you’ve more than likely seen or heard headlines of “inflation skyrocketing”, “interest rates set to soar”, “market falls” and “volatility in investment markets”.
You may have also seen the implications of this volatility on the short-term performance of your investment and superannuation portfolios.
So what creates volatility?
There are several contributing factors that can cause volatility in investment markets. These can include:
- Economic or global events
- Industry or sector-specific news.
- Company-specific news and reporting:
- Investor sentiment and reactions,
- and, of course, the media.
World events, environmental disasters, elections and changes in Government and legislation, rising interest rates, and changes to unemployment can all impact.
When these events happen, investors respond differently depending on the news. Often the combination of economic/global events with industry/company events will directly impact an investor’s perception of the value of investments. Company announcements regarding management, performance or profitability can also impact their value and perceived value as an investable asset.
The media also plays an influential role in increasing the fear and anxiety of investors with sensational headlines. These triggers can encourage investors to make impulsive decisions driven by fear or greed.
We know that moments of market turbulence can feel particularly unstable. We want to help explain what might be happening and, most importantly, help you answer that important personal question of “should I be worried?”.
What’s been happening in the Australian share market?
Firstly, let’s put things into perspective. As of 1 November 2022, the ASX 200 – the index of Australia’s top 200 companies – was roughly trading at 6,995.70, which is back to where it was at the end of January 2022.
Source: Yahoo Finance
Whilst the decline in markets this year has been sharp, as the graph above illustrates, it’s not unusual for the market to respond to major crises with a drop, followed by a bounce back.
Perspective is very important when thinking about long-term investing, and the longer the perspective, the better. Superannuation is designed as an investment with a time frame of years and even decades. The roller-coaster ride may feel uncomfortable in the short term, but these bumps tend to smooth out over the long run, as long as you have the stomach to stay on the ride (invested).
This graph below illustrates the same index over a 5-year period, considering the last 12 months’ volatility over a longer time frame. You will note the significant fall in 2020 and the subsequent recovery with an overall positive trend over the time period.
Source: Yahoo Finance
What were the themes causing instability these last 12 months??
Conflict between Russia & Ukraine
Whilst Verve Super has no direct investment in Russia, global investment markets have felt the fallout of the war. The ramifications of the war in Ukraine and the financial repercussions are still unfolding for Australian investors. There has been a lot of concern about the potential and future impact of rising gas and oil prices due to this conflict.
In Australia, consumer prices have been increasing (the September 2022 quarter was the largest quarterly and annual rise since the introduction of the goods and services tax (GST). You may have noticed costs increasing for electricity and other utilities, at the petrol bowser and the supermarket.
Inflation is rising for several reasons, including supply chain issues with manufacturing, construction and even retail around the world that are pushing up prices. This has impacted everything from car parts to building materials and even global food distribution, pushing prices for goods and services up, as supply cannot keep pace with demand. Wage growth due to lower workforce participation (because of COVID and travel restrictions) is also causing prices to rise. Pent-up consumer demand post-COVID is also adding fuel to the fire. And of course, interest rates have been very low, which can also fuel growth and price increases.
This means that interest rates are rising (globally).
To keep inflation (and rising living costs) under control, Governments globally are raising interest rates. And we’re talking big increases (keeping in mind rates have been very low – close to zero across much of the globe – in recent years).
Whilst the rise in interest rates is significant, It’s important to understand that the current rate of 2.85% in Australia (as at 30 November, 2022) is below the long-term average. Interest rates in Australia averaged 3.88 percent from 1990 until 2022, reaching an all-time high of 17.50 percent in January 1990 and a record low of 0.10 percent in November of 2020.
What does this mean for your super?
Volatility in global investment markets is likely to impact investment returns. And Verve Super’s investment return has also been impacted in the short term.
The important thing to remember is that our investment strategy factors market volatility risk into account as part of constructing a well-diversified investment portfolio intended to manage the market’s ups and downs and take advantage of opportunities as they arise. If you check out Verve’s Product Disclosure Statement, you’ll see that we plan for these moments – we expect some level of annual loss to occur between four to less than six years in any 20 year period. In other words, as crazy and unusual as these periods can feel, they’re nothing out of the usual!
History continues to show us that markets rebound and trend upward. Often the greatest losses are incurred by investors who get concerned and pull their money out when the market is at its lowest, missing the cycle when it swings back up.
It is important to stay focused on the long term. If you’re second-guessing things, it can be helpful to revisit your goals. Ask yourself: Has my investment time frame changed? Is my financial situation different from when I started investing? If the only thing that’s changed is the market, try to look past the short-term loss and focus on the long-term prospects.
Remember, your super is invested in a diversified portfolio. Diversification can help to spread the volatility risk. Verve’s portfolio is spread across various asset classes, countries, industry sectors and stocks. Meaning that not all your eggs are in the same basket. You can view the full list of assets here.
Finally, try to remain informed (not influenced) by the news. During these market falls and volatility periods, sensational news headlines can be a great source of stress and anxiety. Remember, media and news reports can be informative and beneficial, but they shouldn’t be a driving force in your decision-making, particularly your long-term financial decisions.
If you’re feeling particularly nervous, we recommend speaking with a financial professional who can add far greater value than taking advice from the news headlines.
At Verve, our Investment Manager continues to seek out positive investment opportunities for the long term. Regarding investing in your super, we’ve set our sights on the next five years, ten years, and twenty years.
Our team is here to support all Verve Super members. If you have any questions, or just want to check-in, you can get in touch via firstname.lastname@example.org.
This blog is published by Verve Superannuation Pty Ltd (ABN 65 628 675 169, AFS Representative No. 001268903), which is a Corporate Authorised Representative of True Oak Investments Ltd (ABN 81 002 558 956, AFSL 238184), as the Sub-Promoter of Verve Super.
Verve Superannuation Pty Ltd and True Oak Investments Ltd are not licensed to provide personal financial advice. The information contained in this blog, including any financial guidance, is general in nature. You should consider seeking independent legal, financial, taxation or other advice to ensure that your financial decisions are suited to your unique circumstances.
You should read the Product Disclosure Statement, Additional Information Booklet, Insurance Guide, Target Market Determination and Financial Services Guide before making a decision to acquire, hold or continue to hold an interest in Verve Super. When considering financial returns, past performance is not indicative of future performance.