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How do volatile markets affect your investments?

20 January 2016

Damian Graham

Volatile markets always make for dramatic headlines in newspapers and share market indices have started 2016 on a roller coaster ride. So how concerned should you be about your investments? We talk to StatePlus Chief Investment Officer Damian Graham about what’s happening in markets around the world and how StatePlus investment options are different.

Damian, so what’s happening in the markets?

Over the last 12 months we’ve seen increased volatility in markets due to a number of developments and events around the world.  The key issues have been:

  • the ongoing transitioning of the Chinese economy from a manufacturing-based economy to a services-focused economy that’s expected to grow more slowly than in the recent decade
  • a flow-on from slower Chinese economic growth to the demand for commodities, which is seeing lower than desired price growth and negative impacts to the resources sector
  • the eventual change in policy direction for the US Federal Reserve (the Fed), with the start of raising official interest rates in December 2015 
  • an expectation that developing economies may see increased difficulty from higher US interest rates and lower commodity prices.

All this has been occurring against a backdrop of reasonably full valuations for asset markets, in particular bonds and equities.

Can you explain what's causing the volatility?

Following a period of strong market returns, valuations of assets can be elevated. This can lead to investors being more inclined to sell and ‘lock in’ recent profits when uncertainty about the future increases.

Through the last 12 months we’ve seen this type of response by investors happening more frequently. January 2016 is a good example, as was August last year. This is despite the fact that the economic fundamentals have not changed materially over the last few months, with the US economy growing solidly, Europe continuing to slowly improve and Chinese growth moderating but as expected.

In our view the recent weakness in global share markets is not a harbinger of the next financial crisis, but reflects a more normal ‘pause and pull-back’ following a period of above-average returns.

How is this affecting your investment decisions?

As a long-term investor we know to expect periods of volatility in markets. Our response to such events is to ensure the StatePlus investment options are appropriately diversified across both growth and defensive assets. 

By planning ahead and including investments which can reduce the impact of share market losses we can be better positioned for both the risks and the potential opportunities when they occur.

We also seek to take opportunities to rebalance investment options when we see assets becoming attractively priced. What’s also important is capital preservation. But we balance this with the view that markets can occasionally become over-sold, which offers opportunities for long-term investors.

What impact does the market volatility have on my investments?

Most of our clients hold well-diversified investment portfolios such as the Capital Stable and Balanced options, so the returns of these options won’t just mirror the returns from shares.

For example, in August 2015, we saw Australian shares returning -7.7% (ASX 300 Accumulation Index). Our Capital Stable and Balanced options fell by less than the ASX 300 index. Our Capital Stable option was down -0.4% and our Balanced option, down -2.0%.

This year, in the first half of January, indicative returns for the Australian share market was -7.5%, and the StatePlus investment options have again been similarly defensive.

Graph showing performance of StatePlus options vs ASX 300

*Source: StatePlus

As well as holding these diversified options, most of our clients’ portfolios are structured in a way that ensures some of their assets are in stable investments that don’t experience market volatility. This helps them to ride through short-term volatility without having to fund their lifestyle by selling their growth assets at depressed prices.

What advice do you have for clients in times like these?

We recommend that clients do not overreact to short-term market volatility. So if you have concerns about your investment strategy, it’s really important to contact and meet with your financial planner.

Aware Super Pty Ltd ABN 11 118 202 672, AFSL 293340, the trustee of Aware Super ABN 53 226 460 365. Financial planning services are provided by our wholly owned financial planning business Aware Financial Services Australia Limited, ABN 86 003 742 756, AFSL No. 238430.

This information is of a general nature only and is not specific to your personal objectives, personal situation or needs. Before making any decisions based on this information you should consider its appropriateness to you. Every effort has been made to ensure the information is accurate. We strongly recommend that you consult a financial planner before taking action and review the relevant Product Disclosure Statement.

Past performance is not an indicator of future performance and future performance is not guaranteed.

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