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MARKET UPDATE

Given the extreme volatility in listed markets in recent weeks it is important to emphasize to members that retirement savings and investments are about the long term. Financial markets have declined for a number of reasons. Whilst some of those reasons have been known for some time, it is nonetheless important for individual investors to put these reasons into context and to focus on their long-term strategy. The major causes of the recent turmoil are:

  • The financial crisis triggered by the sub-prime debt defaults in the U.S.; banks holding this debt have been forced to register significant losses as they reduce the value of the debt on their books;
  • Deteriorating conditions in the U.S. housing market that are leading to record inventories of homes for sale and tumbling home prices;
  • The uncertainty a potential U.S. recession will have on the world economy and on the rate of growth in China and other developing markets;
  • Significant technical selling of stocks due to forced selling to cover margin calls, where investors have used gearing to fund investments.

Members of most superannuation funds have enjoyed returns in the mid to high teens over the past five years; the domestic equities markets in particular having provided stellar returns (e.g., the All Ordinaries Index reached a record high of 6828.7 points on 1 November 2007 up from the cyclical low of 2673 in March 2003). Those funds with large exposures to listed equities performed best over that period. However, from the high in November to the lows of this week, listed markets around the world have shed as much as 25% of their value returning to the levels which were last seen in October 2006. Therefore, funds with higher exposure to listed investments are feeling the full brunt of market losses.

The MilitarySuper’s Growth (Default) Option has, over the past 18 months, systematically reduced its exposure to listed assets in all equity markets, as well as entirely eliminating its exposure to listed property trusts. The Fund also has a very limited exposure to structured credit as part of its focus on preserving capital.

As it has reduced its exposure to listed equities the Fund has replaced those exposures with investments in alternative asset classes, such as private equity and infrastructure, whose return characteristics are not closely aligned to those of listed markets. Whilst the fund still has a significant exposure to listed markets, the increased exposure to alternatives will act to mitigate some of the negative effects from the recent correction over the short to medium term.

Although in early trading today we saw some recovery in the local market, MilitarySuper’s expectation is for continuing volatility to persist for some time. Whilst there are solid reasons behind the recent correction, this in time will create buying opportunities within these markets. MilitarySuper has an absolute return focus which provides it with flexibility to take advantage of these opportunities as they arise in the coming months.