July Economic Update

By Craig Turnbull, Active Super Chief Investment Officer
July 2022

The past 12 months have proven to be a difficult year for financial markets – rising interest rates, inflation, COVID-19 and the war in Ukraine have all worked to unnerve investors and spark a significant sell off in shares and bonds.

The emergence of global inflation, combined with an aggressive round of interest rate rises and fears of a recession, upended the traditional safe-haven approach of holding bonds to offset equity market volatility.

Raising interest rates to fight inflation is impacting equities and eroding returns on fixed income, which has also led to a fall in property prices and rattled investor confidence. 

The S&P/ASX200 index ended the 2021-22 financial year down 10.2 percent and the Australian government bond index fell 11 percent, although the first two weeks of the new financial year have seen the stock market remain relatively steady.

Taming inflation

Growth, balanced and conservative super funds have suffered as higher interest rates pushed up bond yields, resulting in negative returns (bonds fall in value when yields rise). 

In the US, the broad S&P 500 index slipped into a bear market, falling around 20 percent in six months since peaking in January 2022. US stocks and bonds have also sold off as inflation and rising interest rates have hurt consumer confidence and corporate profitability.

In an effort to tame domestic inflation, the Reserve Bank of Australia (RBA) hiked rates by a further 50 basis points in July, taking the cash rate to 1.35 percent.

Despite the increase in borrowing costs, RBA Governor Philip Lowe has said interest rates remain “very low”, adding that people should be prepared for further tightening as the central bank attempts to quell inflation.

Higher rates put a lid on business expansion, staff hires and debt repayments, which in turn slow the economy. They also weaken demand and ease the pressure on prices which should help fight inflation. 

Dr Lowe last month predicted inflation, currently at 5.1 percent, would peak at 7 percent and likely stay above the 2 to 3 percent target band for some time. 

Long-term view

While financial markets remain unsettled as the era of ultra-low interest rates has come to an end, it is important to remember that superannuation is a long-term proposition.

As part of our strategy to manage the long-term performance of your super, Active Super invests in a range of asset classes to help reduce the impact of market volatility on your portfolio. Diversification has an important part to play during times of uncertainty and is one of the major advantages of managed investments like superannuation. For instance, direct property and infrastructure were able to produce a substantially positive return for the year.

Members will receive further updates on their super when annual member statements are distributed in September.