Guard your savings

WHAT CAN AUSSIES EXPECT FROM THEIR SUPER FUNDS NEXT YEAR IN TERMS OF VOLATILITY AND RETURNS?

ver the year to June 30, 2017 strong returns boosted the balances of many superannuation accounts. However, a more challenging investment environment characterised by subdued returns and increased volatility is expected to impact super returns over the next year.

The average balanced fund (funds with an allocation to growth assets ranging from 60% to 76%) achieved a return of 10.4% in 2017. The trend towards overseas shares was a key contributor to returns due to buoyant international equity markets. The top performers also tended to have higher exposures to unlisted assets such as direct property and infrastructure. The top-performing balanced fund for 2017 was Hostplus Balanced, delivering 13.2%.

Over the next 12 months the main factors that will shape the performance and volatility of investment markets are global and domestic economic conditions and political uncertainty. The current low-interest-rate environment is not sustainable, with further yet gradual increases in the US Federal Reserve’s interest rate on the horizon. Improved economic growth and employment levels paint a positive outlook for Australia, with interest rate hikes expected once the Australian dollar stabilises.

Rising interest rates tend to have a dampening effect on stock prices, and therefore superannuation returns, as the costs of borrowing hit the bottom line of businesses and discretionary spending by consumers. Asset values that have risen on the back of cheap credit also pose a risk to both domestic and international markets if a pricing correction occurs.

We are also amid a subdued inflation environment and rising inflation would result in lower asset valuations as future cash flows are discounted more heavily, negatively impacting funds with high exposures to unlisted assets.

Geopolitical risks such as North Korea and Donald Trump’s reign continue to foster global uncertainty and market volatility.

While we have enjoyed strong performance over the past year it is important that superannuation members remain realistic and recognise that conditions may not always be this rosy. Ensuring your super provides a return commensurate with the level of risk that you find acceptable is important, as well as tracking your super’s long-term performance and your projected retirement balance.