Superannuation has turned down in 2022 because of rising interest rates and the effects of Russia’s vicious invasion of Ukraine.
But super has fared better than many feared because of its diversified investments and Australia’s unique economy.
While there is widespread panic caused by the war share markets have actually recovered somewhat from January lows despite fears unleashed by the Russian invasion.
“In terms of Australian equities we’re holding up better than some other markets,” said David Bassanese, chief economist with BetaShares.
The Australian market has “relatively low technology exposure, a sector hardest hit by inflationary pressures, and we have more exposure to energy and resources which are benefiting from the war”, Mr Bassanese said.
Australia’s ASX 200 index lost 9.9 per cent from its January 4 highs to its January 27 lows, but has actually recovered to be down 5.8 per cent despite Vladimir Putin’s move on Ukraine.
Meanwhile the US S&P 500 broad index is still down 11 per cent, just off lows of 12.4 per cent. The NASDAQ’s tech rich index is down 18 per cent, up from lows of 22 per cent.
January saw Chant West’s index of balanced superannuation funds (those with between 61 and 80 per cent of growth assets) lose 2.2 per cent on the back of inflationary concerns, and perhaps the rising prospect of war.
But the decline has slowed despite the Russian advance, with Chant West estimating February’s decline could be as little as 1 per cent.
That figure could change as more data comes to hand, but it demonstrates that the falls have slowed.
If we take that 1 per cent figure and add it to the January decline we could say that the average balanced super fund, where over 80 per cent of Australians have their retirement savings, was likely to be down 3.2 per cent by the end of February.
That is by no means a disaster, with the average fund for various age groups between 24 and 65 losing between $190 and $5632 depending on age and balance.
For a better-off retiree with super savings of $700,000 the loss is about $23,000.
Even if share markets fall further in these jittery times, diversification in superannuation investments will help protect member balances.
“The average share holding for a growth [balanced] fund is around 55 per cent today,” said Chant West researcher Mano Mohankumar.
That makes shares, he says, the main driver of super balances, “but it still means there is another 45 per cent spread across a wide range of asset classes”, Mr Mohankumar said.
During January Australian shares fell 6.5 per cent in value while overseas share prices, hedged for exchange rate movements, lost 4.9 per cent.
Bonds also lost over 2 per cent – it is unusual for both asset classes to move in the same direction – so in coming months bonds are likely to be a bulwark against further share price falls.
And in January and February, while bonds fell in price, their decline was slower that shares, meaning they acted as a break on weak markets, Mr Mohankumar said.
Of course there is more to the effects of war than simply short term moves in the stock market.
And some of those may actually benefit the Australian economy as energy and food prices rise due to shortages created by export blocks from Ukraine and Russia.
“While Australia is an oil importer we are a net exporter of thermal coal and liquid natural gas,” said independent economist Saul Eslake.
While these export commodities are increasingly foreign owned, increases in their prices will bring a rise in state government royalties and federal company taxes, Mr Eslake said.
The federal tax receipts for coal and LNG exports are lower than they could be “because of the very generous depreciation provisions LNG exporters are able to take advantage of,” Mr Eslake said.
Higher food prices
Wheat and canola prices are also rising because Russia and Ukraine are such big exporters of the commodities.
That will mean higher food prices for Australians but larger export revenues for farmers and grain traders.
Consumers will feel rising food and energy prices.
“Overall it should be a positive for national income, but there will be a redistribution of that income from households to corporates and governments,” Mr Eslake said.
Workers will only be able to make up for that redistribution if they can force wages higher, which is more difficult than in previous inflationary periods in the 1970s and 1980s because wage fixing arrangements have changed.
People on benefits will be dependent on governments to keep up with price rises.
While those price rises will effect economies globally “it won’t be felt so much in Australia because of our unusual position [in being resource rich]”, Mr Eslake said.
That means Australian superannuation funds, with their exposure to the energy and food sectors, should perform relatively well into the future.
The rises in energy and food prices should continue for some time, Mr Bassanese said.
“The only way the sanctions are going to be removed is if the Russians withdraw so prices look like being higher for longer.”
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