Russian President Putin has ordered the invasion of Ukraine, unleashing Russian air power and sending troops into the country on 24 February 2022.
Prior to these developments, global economic uncertainty had already been elevated. Fears of higher inflation and higher official interest rates had resulted in falling share prices and higher bond yields. With the outbreak of hostilities, share prices have fallen further and investors have sought the safety of gold and government bonds, driving bond prices sharply higher and yields lower. In addition, oil prices have risen sharply on fears that Russia, the world’s second largest oil producer, would either restrict supply or be locked out of an already tight world oil market.
The United States and the European Union have clearly stated that they will not deploy troops into the Ukraine. They have, however, provided (and continue to provide) military aid and levied extensive sanctions against Russia and its leadership, the Russian central bank and sovereign wealth fund, as well as a number of prominent oligarchs.
So far, sanctions have been designed to minimise economic and financial disruption to the US, Europe, and other countries. Most significantly, these sanctions have yet to significantly affect Russian energy exports, a development that could cause a recession in Europe, but the risk of further action remains very high.
How are share markets being affected?
Share prices declined this year across much of the globe, initially on inflation and interest rate fears and then in response to the Russian invasion of Ukraine.
However, after falling sharply in the days following the invasion, share prices across much of the developed world have recovered to their pre-invasion levels. In contrast, shares in the emerging markets have not recovered as strongly, partly reflecting concerns around the economic impact of China’s COVID restrictions. Shares in Australia have performed relatively well during the weeks following the invasion, benefitting from Australia’s ability to supply a range of industrial and agricultural commodities that typically come from Russia and Ukraine.
More recently, however, inflation and interest rate concerns have again become the major cause of market volatility.
What does it mean for our investment portfolios?
Australian Retirement Trust’s portfolios are very well diversified across different asset classes, regions, countries, industries, individual assets and securities. Our direct exposure to investments in Russia has been minimal.
On Tuesday 1 March, we instructed our investment managers to sell any remaining debt and equity listed investments and not to make any new investments in either Russia or Belarus, which entered the conflict alongside Russia. In some cases, that proved challenging, given that some key markets remained effectively closed or difficult to access. While our instructions were acted upon very quickly, we retain some minimal exposure despite the best endeavours of our managers. In the past week, we have taken the decision to write down the residual value of those assets to zero, given the high likelihood that markets for those assets may not function – either effectively or at all – for some time.
Even so, the portfolios’ exposures were very limited prior to the onset of the crisis. For example, Russian shares accounted for less than 0.2 per cent of the Australian Retirement Trust Super Savings account assets. Our debt exposure was even smaller, at less than 0.1 per cent.
And we cannot rule out the likelihood that some of the companies Australian Retirement Trust invests in may have some exposure to assets in the affected countries. We certainly expect those companies to manage their businesses in accordance with all relevant sanctions.
How has Australian Retirement Trust’s investment team responded?
Crucially, we do not expect this conflict to widen beyond Russia and Ukraine. However, events are evolving rapidly, and we have no way of predicting how the crisis will develop with any certainty. We do not design portfolios based on our own or anyone else’s short-term economic, market or geopolitical forecasts.
We also have no way of knowing with any certainty how long it will take for inflation and interest rate fears to subside. It may be that much of the supply chain disruption across the globe, as well as the commodity price pressures we have been experiencing, ease over the coming months. This will in turn, ease the inflation fears that have been troubling central banks and financial markets. But we simply cannot be sure of that.
However, our investment team and our external investment managers do seek to capitalise on opportunities that inevitably emerge during times of crisis. So, as well as seeking to eliminate any remaining share and bond exposures in the affected countries, we have also increased our exposure to world share markets and reduced our exposure to bonds after share prices declined and bond prices rose sharply. And volatile market conditions are likely to provide further opportunities to make adjustments to our portfolio positioning.
What should members do?
For most members, the answer to what should you do with your super now may be to do nothing. Every crisis, every downturn, and every recession comes to an end, bar none.
Trying to time when these challenging periods will begin and end is extremely difficult. Before they end, they often provide opportunities for investment managers to acquire high-quality assets at attractive prices. That is what we pay our investment managers to do.
If you have 15, 25, years or more until you retire, you will probably experience many of these periods during your working life. The compensation for accepting this kind of short-term market turmoil is higher long-term returns.
What if you’re close to or in retirement?
If you’re close to retirement or already retired and in our default option or invested in a reasonably conservative portfolio, you may not need to do anything at all in response to the current market volatility.
However, if you feel you may be over-exposed to shares and are very worried about the effect of this downturn on your retirement, you may need to consider moving to a more conservative strategy. However, there are two key things to remember:
- Moving to a more conservative strategy after markets have declined often ‘locks in’ a loss of capital.
- A more conservative strategy by its nature delivers lower long-term returns and is not likely to capture the full benefit when share markets eventually (and inevitably) recover.
Help choose your investments
Australian Retirement Trust offers a number of investment options that give exposure to a diversified range of asset classes, including both public market and unlisted investments which members can tailor to their needs.
We will endeavour to keep members as informed as possible, while acknowledging this is a rapidly evolving environment. We would strongly encourage members to seek financial advice before making significant changes to their investment strategy, and our advisers are here to help.
If you want more information or advice to decide which investment option or group of options best meets your needs, please give us a call on 13 11 84.
Australian Retirement Trust employees provide advice as representatives of Sunsuper Financial Services Pty Ltd (ABN 50 087 154 818 AFSL No. 227867) (SFS), wholly owned by the Australian Retirement Trust. Our phone based qualified financial advisers provide simple advice about your Australian Retirement Trust Super Savings account at no additional cost. More comprehensive advice may incur a fee.