Volatility on global share markets
30 Sep 2008
World financial markets continue to reel in the wake of the US financial crisis, with unprecedented volatility over recent weeks forcing governments and regulatory authorities to intervene.
Superannuation investments like all managed funds have not escaped the market downturn, with returns significantly impacted by share market performance. The market volatility driven by recent events is further evidence that trying to time the market is virtually impossible.
Thirteen months of turmoil
Just over a year ago, markets across the globe felt the first signs of a looming collapse with the US stock market returning -3.2% for July 2007, following a decline of 1.8% in June (S&P500). After several years of healthy returns experts were expecting a correction, but no-one foresaw the extent to which a declining US housing market would impact the global investment community.
A drop in US housing prices (the largest fall in 25 years) combined with wide scale mortgage defaults, left financial institutions encumbered with billions of dollars of mortgage assets that were worth less than the loans provided to buy the properties – resulting in widespread losses for the lenders. What has become known as the ‘credit squeeze’ ensued.
Banks became increasingly apprehensive about lending to each other, as it was unknown how exposed individual financial institutions were to the devalued mortgage assets. This meant that there was a scarcity of available credit and the funding that was on offer became extremely expensive. Financial institutions that did not have access to sustainable long term funding soon found that credit dried up and they were no longer able to refinance their short term debts.
The turmoil of the past 13 months and increasingly high levels of bad mortgage debts have destabilised the banking system, leading to a period of unprecedented market volatility in recent weeks.
As President George W Bush said in trying to calm the market ahead of government intervention, “We must address the root cause behind much of the instability in our markets – the mortgage assets that have lost value during the housing decline are now restricting the flow of credit.”
The latest highlights & lowlights
- 15 September – Lehman Brothers file for one of the biggest bankruptcies in history and Bank of America buys out Merrill Lynch - fuelling concerns about the stability of the financial system in the US.
- 17 September – the US Government bails out American International Group (AIG) with a US$85b loan. Wall Street drops 4.7% amid continuing fears about investment risk within the financial sector.
- 18 September – in Australia, the S&P/ASX 200 falls 2.4% to 4,606 points - the lowest level since 2005. Six central banks (Bank of Canada, Bank of England, the European Central Bank, US Federal Reserve, Bank of Japan and the Swiss National Bank) announce a coordinated effort to inject US$180b in short term funding to credit markets to unlock frozen money markets.
- 19 September – US stocks post the largest two-day rise since 1987, following the announcement of a US Government US$700b rescue proposal to buy mortgage debt from banks. The UK experiences the highest ever one-day increase in the history of its market (FTSE 8.8%), and in Australia the S&P/ASX 200 rises 4.3%.
- 25 September - the US Federal Deposit Insurance Corp. seizes the assets of Washington Mutual, the nation's largest savings and loan, and brokers the sale of the company to JPMorgan Chase. The collapse of Washington Mutual is the largest bank failure in US history.
- 29 September – the US House of Representatives reject the $700 billion (AUD$840 billion) bailout plan formulated by Congress. Wall Street stocks plunge with the US stock market (Dow Jones) suffering its biggest one day fall on record dropping 6.9% (777 points).
The graphs below show how recent events impacted markets: from severe drops on Monday 15 September as one of the biggest bankruptcies in history is filed; to the highs of Friday 19 September when the US Treasury announced its intention to launch a rescue plan to take pressure off the banks, and allow them to resume lending and kick start the US financial system; and finally the reaction of the market to the defeat in Congress of the rescue plan.
All Ordinaries Index
Dow Jones Industrial Average
In Australia
“We have been advised by APRA that Australian deposit-taking institutions and insurance companies supervised by APRA are well capitalised, profitable and well regulated and they are weathering this storm pretty well," Federal Treasurer, Wayne Swan.
While Australian banks have been impacted by the crisis as they source much of their funding overseas (much of which has become more expensive or has dried up completely), the general consensus is that Australian financial institutions are far better positioned than those in the US, and Australia’s largest four banks are among only 12 of the world’s top 100 banks with a credit rating of AA or higher.
Despite this confidence, Australian bank stocks have declined in value and the mortgage rates of the individual have been impacted. Put simply, in Australia banks fund a large proportion of mortgage loans they provide to the public with credit obtained from overseas wholesale lenders. Banks borrow funds from overseas lenders at a lower price than they lend to the public. So when the overseas funding becomes more expensive, this increase is passed onto the individual by the bank through an increase in mortgage rate.
Although the Reserve Bank of Australia (RBA) is not facing the extent of financial system instability in Australia that the US Federal Reserve is facing in the US, the RBA is still under pressure to alleviate credit shortages in Australia. In response, the RBA injected $11b into the Australian money market recently in an attempt to improve credit availability in the market.
There is further concern that slower global growth will lead to reduced demand for Australian resources and commodities, which will impact the performance and share prices of Australian companies such as Rio Tinto and BHP Billiton. This is of particular concern given that the resources sector was one of only two domestic sectors to produce an annual positive return to 30 June 2008.
Impact on your super
Superannuation investments, like managed funds, have not escaped the market downturn. While it is hard to accept negative returns, they are a regular and expected feature of the investment cycle and like all funds, Telstra Super’s returns have been significantly impacted by market performance.
Over the past 30 years a dramatic fall in the value of share markets has occurred at least once in every decade – as a result of the oil crisis in 1974, the 1987 stock market crash, the war in Iraq (1990), the US recession (1992), the September 11, 2001 terrorist attacks and now the US sub-prime crisis. Despite these short term set backs, markets have rebounded each time and continued an upward growth trend over the period.
Invest on strategy not sentiment
A fall in share markets is not unusual. What is a little different for Australians this time around is that through our continuing investment in super, more of us have a stake in investment markets than ever before. But unlike other types of investments, super is truly a long term investment. Even if you are about to retire, your money will be invested for a further 15-25 years to fund your retirement.
So the message here is to keep your timeframe in mind. Given recent market turbulence it can’t hurt to re-assess your investment strategy, but seek advice before swapping out of a growth strategy and into a conservative one. It has been a black year on the investment front and despite signs that we may be close to the bottom, not even the experts can predict when the expected upswing will occur. And recent events are further evidence that trying to time the market is virtually impossible. If you swap into a conservative strategy now and miss the recovery, your retirement balance will be worse off.
Our investment basics pages take you through the things you should consider when determining your long term investment strategy. If you need expert help, consider making an appointment with Telstra Super Financial Planning.
Investing with diligence and care
Over the past few years, the majority of our members have enjoyed extraordinary growth through double digit returns.
While Telstra Super investment options with exposure to share markets and property have experienced significant declines in returns this year on the back of the poor performances in these asset classes globally, we feel we are well positioned to take advantage of a market recovery.
Telstra Super takes a prudent approach to investing:
- our investment approach is diversified both in asset allocation and managers
- we are conservative in our approach to risk
- we follow strict due diligence and governance structures.
The next few months…
The investment record shows that despite unforeseen market drops and periods of prolonged turbulence, rebounds can also occur very quickly. Telstra Super will be maintaining a long term strategic focus to deliver the best possible returns for our members, and making the most of opportunities as they arise.
The volatility is likely to continue, providing investors with risks and opportunities as the central banks and regulators work together to support investment markets and maintain investor confidence. While governments around the globe work on strategies to boost their own economies, the world continues to wait on the ultimate outcome of the US Government intervention and its progress through the US Congress.
Telstra Super will continue to keep our members up-to-date on market changes impacting their super. At any time, daily unit prices are available to monitor performance, and Telstra Super also provides a monthly Investment e-newsletter that provides a detailed review of the performance of your chosen investment option. Subscribing to our e-newsletter is easy, all you need is your member number.