What to expect from your super as rates rise and banks collapse

The horror year of 2022 is behind us and investment performance has been better in recent months. But superannuation account holders are still hearing about interest rates, inflation, war, threats of recession and crisis in banking. So what’s happening and how may your super be affected?

Investments

Since October 2022, investment markets have picked up, reaching a peak in early February 2023, making up for much of the loss in 2022. But the volatile days may not be over.

In mid-March, Silicon Valley Bank collapsed in the US, raising panic among customers of a potential cash crisis. Fears of contagion across the banking system spread, with New York-based Signature Bank also collapsing. That situation calmed when the US government stepped in to guarantee depositors of those banks.

These events in the US were quickly followed by some unravelling in Europe. There, global bank Credit Suisse admitted financial reporting weaknesses, which severely undermined confidence in the bank, sending its share price plummeting. As it is based in Switzerland, the government there arranged for the nation’s biggest bank, UBS Group, to buy Credit Suisse, to avoid further panic. About a week later concerns mounted over Deutsche Bank, Germany’s largest bank, with its share price dropping almost 10% before rebounding.

It is uncertain if these banking crises could continue. But already, they have extended the recent broader sharemarket decline, which began in early February.

Inflation

The even more critical issue for Australian and global economies right now is inflation and the rise in rates to combat it. This is the greatest issue affecting the prices of goods and services, the value of property, and returns on your investments.

In Australia the cash rate is now set at 3.6% – a steep rise from 0.1% last year. In the world’s biggest economy, the United States, a similar rise means the federal funds rate is now at 4.75% to 5% – that’s up more than 3% since June 2022. As banks increase their interest rates in turn, it’s consumers that are feeling the pinch.

While it appears inflation has peaked in Australia (now down to 6.8% for the 12 months to February), that may not be the case globally.

Both here and overseas, central banks have stated they expect further rate increases will be necessary to bring inflation down – that expectation may change if it becomes more evident inflation is falling.

In Australia, the Reserve Bank says inflation must be brought down to 2% to 3%.

In the US, the Federal Reserve Bank is committed to return inflation to 2% (from 6% recorded in the 12 months to the end of February).

The big concern in financial markets is that the steep rate increases up to now, and the likelihood of a few more, may push economies into recession. There are particular fears this may happen globally, though Australia seems more likely to avoid recession. If this happens it’s likely central banks would stop increasing rates and may even lower them to limit the impact of a potential recession.

We saw the effect of these rapid rate increases last year, with alarmed investors selling assets due to the fear of potential recession. It was a year of volatile performance across many markets, with almost all superannuation investment options recording negative growth.

Investors and markets remain spooked, uncertain about the impact of rate rises and what it will take for inflation to come down, itself fueled in part by impossible-to-control issues such as the Russia-Ukraine war. The banking crisis in March is just another factor in this uncertainty.

This means we can’t be sure about what returns superannuation can expect this year. Our position is to be more cautious on shares and focus more on alternative assets and cash, to stabilise our investment portfolio.

What we are sure about is that superannuation is, and has always been, a long-term investment. And in the long term it performs well. Just take a look at our investment returns to see the positive long-term results over 10 and seven years from our options. And, to make the point even clearer, take a look at the performance of the Australian sharemarket over the past 20 years

The graph above is full of ups and downs, a few notable ones such as the global financial crisis in 2008 and more recently the impact of Covid-19 in early 2020. But the overall upward rise is unmissable. While no one can see the future and guarantee that performance will continue, it’s the best guide we’ve got.

Ed Tomlinson is chief investment officer at smartMonday