Market Update, December 2023

When markets are volatile, stay calm and focus on long‑term growth

By Mark Rider, Chief Investment Officer, Brighter Super

7 December 2023

Global markets experienced a slight downturn in the last quarter (July to September 2023) as inflation, interest rate rises, and geopolitical tensions dampened the recovery momentum.

During these uncertain times, I like to remind everyone to stay calm and focused on the long term. Volatility is a normal part of investing. More on that later.

Economic and market volatility

The global economy was volatile over the last quarter, with a mix of positive and challenging trends. On the positive side, several major economies experienced robust growth led by the US, which has been driven by increased consumer spending and a rebound in manufacturing output.

However, while many global supply chain disruptions have eased, central bank attention has turned to tight labour markets and strong wages growth which is underpinning higher services inflation.

Geopolitical tensions, trade uncertainties, and regional conflicts have also impacted investor confidence.

Economic resilience despite central bank tightening

Despite the rapid and large increase in interest rates in the US, Europe and Australia, economic activity has remained surprisingly resilient.  Consumer spending in particular has remained robust with the unemployment rate remaining close to recent lows.

Much of this spending may be due to the lagged impact of financial stimulus handed out by governments during the COVID-19 pandemic. This stimulus has been acting as a cash buffer, although this will eventually be exhausted as governments’ recovery measures end.

Many economists were expecting a recession by now. They have had to readjust their forecasts due to the current economic resilience.

Equities down, bond yields up

Following a strong rally in the first half of 2023, stock markets worldwide experienced a slight downturn in the July to September 2023 quarter.

While the US economy grew over the last quarter, US equity markets were weaker, with the S&P500 declining by 3.3%.

In Asia, Chinese equities experienced a downturn, largely attributable to the property sector's challenges, and the MSCI China Index fell by 1.9% over the quarter. Conversely, Japan demonstrated resilience, marking a return of 1.8% over the quarter, with the ongoing depreciation of the Japanese Yen providing support for exporters. Most other developed markets posted negative performance over the quarter, except for Denmark and Norway.

During the quarter, global government bond yields continued to rise as expectations of higher for longer central bank interest rates took hold on the back of resilient growth. US 10-year treasury bond yields, a key global interest rate, reached 4.6% during the quarter, their highest level since 2008. The Australian bond yield reached 4.5% during the quarter.

Technology and innovation sectors remained pivotal, with advancements in artificial intelligence, renewable energy, and digital infrastructure shaping economic landscapes. The ‘Magnificent 7’ stocks (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla) continue to contribute heavily to US market growth.

Brighter Super’s investment option performance

The last quarter gave us mixed results. July was a strong month for returns. August was flat, and September was down about 2%.

Overall, our diversified options declined for the quarter, with MySuper posting a 0.74% negative return¹. However, for the 12 months to 30 September 2023, the diversified options had positive investment performance, which included MySuper posting a 9.88% return.

The tables below show the performance of diversified options for Accumulation and Pension accounts for the quarter and 12 months ending 30 September 2023.

Table 1: Brighter Super and Optimiser Accumulation diversified options

Table 2: Brighter Super and Optimiser Pension diversified options

Note: Optimiser investment options are only available to former SPSL members who now have Brighter Super Optimiser accounts. Optimiser options are not available to other members.

Volatility is normal

For growth-oriented investment options such as MySuper, market volatility is normal.

While past performance is not a reliable indicator of future performance, history shows that markets recover from downturns. For example, if we look at the last four years of pandemic-related volatility, each time there was a downturn, there has been a recovery.

Here is a screenshot taken from our interactive performance graph on our website. This example charts the growth of $10,000 in a Brighter Super account invested in our MySuper option from 1 July 2017 to 30 September 2023.

After the COVID-driven market collapse in early 2020, option returns rebounded and were strong until late 2021. The ups and downs continued throughout 2022 and 2023.

However, every time there has been a downturn, there has been a quick recovery. And if you look at the whole four-year period, MySuper returns have steadily increased.

This just shows that market volatility is a normal part of investing.

Challenges ahead

Looking ahead, I see some challenges, especially with the recent increase in bond yields.

I expect to see continued volatility ahead, but the height and frequency of the ups and downs is hard to predict. This is summed up in remarks by the US Federal Reserve Chair Jerome Powell in August 2023, “We are navigating by the stars under cloudy skies”.

Some of the challenges I see ahead include:

• Interest rates could stay higher for longer – the recent rapid rise in bond yields has tightened financial conditions and poses risks for economic growth and employment in the year ahead.
• Consumer spending – as the COVID-19 stimulus dries up, many households will start to exhaust their savings, and this is likely to hit consumption.
• Tough times ahead in corporate refinancing – many companies benefited from lower interest rates during the pandemic, so it’s going to be hard for those that need to refinance next year. Many companies could face tougher borrowing conditions and uncertainty.

My team and I continue to monitor our portfolio on an ongoing basis.

Over the last six months we have taken the opportunity to trim some of our equity positions. While international shares have been delivered over 20 percent returns in the 12 months up to 30 September 2023, we don’t expect them to remain at that level moving forward.

Stay focused on the long-term

The impacts of geopolitical tensions and market volatility are being felt worldwide. Negative news headlines can make us feel uncomfortable, but it is important to avoid snap decisions during times of uncertainty.

The risk of switching investment options during a market downturn is it can solidify losses and potentially cause you to miss out on the eventual recovery. For most people, super is a long-term investment. Staying invested in a diversified portfolio can spread and minimise the risk, helping to reduce the impact of market volatility.

As before, while past performance is not a reliable indicator of future performance, markets grow over the long term. A rushed decision to switch investment could impact your super’s long-term growth. It is important to keep your investment timeline in mind and to stay the course when markets are volatile.

If you are feeling uncertain or considering making a change, talking to a financial adviser can often be helpful.

If you already have a financial adviser, they can help you make informed decisions about your super.

If you do not have a financial adviser, Brighter Super’s in-house team of financial advisers is here to help you². Types of financial advice include intra-fund advice, scaled advice for retirement planning, and comprehensive advice. To find out more, visit brightersuper.com.au/advice.