Market Turbulence – what’s causing the volatility?
by Verve Super
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”, and “recession likely”.
As usual, the media are playing an influential role in increasing the fear and anxiety of investors with these sensational headlines, however, there is some truth in that markets have been volatile and impacted significantly by events on our own soil and around the world.
If you’ve been in Verve’s member hub recently to check on your Verve Super account balance, you may have noticed some movement in your balance and you may be wondering why?
We know that these moments of market turbulence can feel particularly unstable. We want to help explain what might be going on, 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 20 June 2022, the ASX 200 – the index of Australia’s top 200 companies – is roughly trading at 6,474.80 which is back to where it was in the middle of November 2020.
Source: Google finance
Whilst the decline in markets in recent weeks has been sharp, as the graph 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 we’re 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).
What is causing this instability?
Firstly, the War in Ukraine. Whilst Verve Super has no direct investment in Russia, the fallout of the war is being felt by investment markets globally. The ramifications of the war in Ukraine and the financial repercussions are still unfolding for Australian investors and will continue to as the world places more sanctions on Russia in a bid to reduce trade with them and withdraw unintended financial support of their invasion. There remain many unknowns at the moment, including exactly how sanctions on Russia will impact the US, European and global business and what the potential future impact of rising gas and oil prices will be.
Interestingly, we are currently seeing in Europe that a number of companies are speeding up the delivery of renewable energy projects to more rapidly wean themselves from Russian oil and gas.
Inflation has been rising (globally)
In Australia, consumer prices have been increasing (the March 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 at the petrol bowser and the supermarket.
Inflation is rising for a number of reasons including supply chain issues with manufacturing, construction and even retail around the world that is 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 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)
In a bid 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).
The Reserve Bank of Australia raised the cash rate to 0.85% during its June 2022 meeting. The second rate rise this financial year.
The Federal Reserve raised rates on Wednesday 15th June by 0.75%, their biggest interest rate rise in nearly 30 years. The UK, Brazil and Canada have also raised their rates this financial year in response to rising living costs.
Whilst the rise in interest rates is significant, It’s important to understand that the current rate of 0.85% in Australia is far 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.
How does raising interest rates curb inflation?
The best way to explain this is to give you a crash course in how Australia’s monetary policy is supposed to work in a nutshell. Here’s the run down:
If the cost of goods and services (living costs) in Australia are getting too expensive, the Government will try to control this by raising interest rates as a way to increase the cost of living (i.e. you’re paying more for your borrowed funds). Because your living costs are more expensive, this typically reduces the amount of money you have to spend on other goods and services.
This reduced spending flows on to effectively reduce demand for products and services in the economy. And with decreased consumer demand it puts pressure on businesses, sellers and manufacturers to become more competitive in order to increase demand for their products, which usually means they have to lower their prices. Ultimately lower prices of goods and services = lowering of inflation. Phew!
But as a result of the reduced spending and lower costs, it means that many businesses have a reduction in production and profits which causes the earnings to fall and share prices to drop.
Why does raising interest rates often cause volatility in investment markets?
In anticipation of this, investors (shareholders) often respond negatively to an announcement of an increase in interest rates as they forecast the flow-on effect to business profitability.
In some cases, this reaction may be warranted, but in many cases, it is a future projection driven by fear about what could happen or may happen in the future – and that’s where investor sentiment can play a very influential role in the volatility of markets.
What does this mean for your super?
All of this volatility in global investment markets is likely to impact Verve Super’s investment returns 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 which is intended to manage the ups and downs of the market, and to take advantage of opportunities as they arise. If you check Verve’s Product Disclosure Statement, you’ll see that we plan for these moments – we expect some level of annual loss to occur at least six years in any 20-year period. In other words, as crazy and unusual as these periods can feel, they’re actually nothing out of the usual!
What about Ethical Funds?
The last few months have seen many ethically-invested funds experience greater fluctuations and losses than non-ethically invested funds.
A significant reason for this is that the war in Ukraine has caused gas and oil prices to skyrocket (as Russia is a leading supplier of these commodities). This sky-rocketing in fossil fuel prices, and the value of many oil and gas companies, has to a large extent tempered losses for super funds that invest in these stocks.
At Verve we don’t invest in fossil fuels, and we’re proud that we’re not investing in any gas or oil companies linked to Russia.
We also continue to take the view that in the long run, it’s a better investment strategy not to be invested in these assets. We can see already that the impact of the war in Ukraine and short-term price hikes in oil and gas, have resulted in countries gearing towards speeding up their transition towards renewables. Just this week there have been announcements in Australia to speed up the transition as well as in Europe.
A few points to remember
History continues to show us that markets rebound and trend upwards. 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 a range of 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 periods of market falls and volatility, the 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 then we would recommend speaking with a financial professional who can add far greater value than taking advice from the news headlines for advice.
At Verve our Investment Managers are continuing to seek out positive investment opportunities for the long term. When it comes to investing in your super, we’ve got our sights set 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.Interests in Verve Super are issued by Diversa Trustees Limited (ABN 49 006 421 638; AFSL 235153; RSE Licence L0000635) as trustee of the Future Super Fund (ABN 45 960 194 277; RSE Registration R1072914). Verve Super is a sub-plan of the Fund. 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.