Super Funds Feeling the Pinch as Middle East Conflict Rattles Markets
The escalating conflict in the Middle East is casting a long shadow over Australian superannuation funds, with recent market volatility impacting investment returns. The ongoing geopolitical tensions have sent ripples through global financial markets, primarily driven by concerns over the potential economic fallout from spiralling oil prices.
Since late February, when the United States and Israel initiated strikes against Iran, global sharemarkets have experienced a downturn of over 5 per cent. This downturn is directly affecting the performance of typical super funds, a significant portion of which is invested in Australian and international equities.
Impact on Superannuation Returns
Data from research house Chant West indicates that the median “growth” investment option has seen a decline of approximately 3 per cent in March alone. This has brought the year-to-date returns for the financial year to around 3.3 per cent. Similarly, Super Ratings data reveals a 2.85 per cent drop in a “balanced” portfolio since the conflict intensified.
While the market’s reaction to the current conflict and its impact on superannuation is less pronounced than the “Liberation Day” market panic observed in April of the previous year – which was triggered by the US unveiling broad tariffs – a significant degree of uncertainty persists. The future trajectory of the conflict and its economic ramifications, particularly the surge in oil prices, remain key concerns.
Australia’s own sharemarket has witnessed declines for three consecutive weeks, with futures markets signalling a potential further dip of 1.8 per cent. This follows a slump on Wall Street in the preceding Friday (US time).
Expert Advice: Don’t Panic, Think Long-Term
Amidst signs of increased member anxiety, financial experts are urging caution against impulsive decisions. Switching to more conservative investment options during periods of market volatility can inadvertently lock in losses and diminish the potential to benefit from a market rebound.
Jody Fitzgerald, General Manager of Defensive and Liquid Assets and Portfolio Intelligence at Australian Retirement Trust (ART), emphasised that market volatility is an inherent characteristic of investing. She highlighted that super funds also hold investments in unlisted assets like property and infrastructure, which tend to maintain their value more effectively during turbulent times.
“It’s crucial for members to grasp that their superannuation represents the longest-term asset they will likely ever possess,” Fitzgerald stated. “They should be contemplating their investments in terms of decades, not weeks or months, especially when these events unfold.”
Fitzgerald elaborated on the tendency for individuals to seek reduced investment risk during volatile periods. However, she warned that this could lead to the realisation of investment losses while simultaneously missing out on potential market recovery.
“If you de-risk, you achieve lower levels of exposure to volatility because you have reduced your allocation to growth assets, which are inherently more volatile. Conversely, you also lessen your exposure to the potential upside once the markets recover and we navigate through this challenging period,” she explained.
A spokesperson for ART reported a one-third increase in member calls related to balances and investments since the conflict began. However, the number of members seeking to switch their investment options remained unchanged.
Fitzgerald stressed the importance of seeking professional advice before making any adjustments to the risk level within one’s superannuation. She also pointed out that large super funds like ART are strategically positioned to capitalise on market volatility. They can leverage these periods to acquire assets such as shares or equities at reduced prices.
Diversification and Proactive Planning
Debby Blakey, Chief Executive of super giant HESTA, echoed the sentiment of proactive preparedness. She noted that HESTA anticipates and plans for a broad spectrum of market conditions, underscoring the advantages of a diversified investment portfolio during times of uncertainty.
“We commenced the year with a cautious outlook, maintaining a lower-than-target exposure to stock markets due to geopolitical risks and stretched valuations,” Blakey commented.
“Financial markets are still assessing the potential ramifications of a prolonged conflict, which is fuelling the current uncertainty. We are meticulously monitoring developments and continuously updating our scenario planning to ensure our ongoing strategies effectively manage emerging risks while also capitalising on new opportunities,” she added.
HESTA’s balanced growth fund, its most popular investment option, has delivered a positive return of 3.44 per cent for the financial year to date.
Mano Mohankumar, Head of Super Investment at Chant West, observed that the recent market dip follows three consecutive years of strong performance for superannuation. The previous financial year saw returns of 10.4 per cent, with more than 9 per cent recorded in each of the two preceding financial years.
“It’s during times like these that we encourage members to adopt a long-term perspective. Superannuation is a long-term investment, and periods of volatility are an inevitable part of the journey,” Mohankumar advised.
