Holly Morgan
4 minutes reading time
Reading time: 4 minutes
By all – or at least many – accounts, Australia’s short-term economic future looks grim. All working generations will already be feeling the pain fiscally. But let’s not envy retirees, or those nearing retirement, who have some heady financial decisions to make about their immediate futures.
BetaShares recently commissioned a survey of over 5000 Australians about their biggest concerns on the road to financial security in retirement.
Unsurprisingly, the most common responses revolved around navigating the current economic climate. Learning more about where to put their money now to ensure a better future was also high on the list. So too, the financial outlook for 2022 and the years ahead.
We asked our Chief Economist, David Bassanese, for his responses to five of the most common questions that came up in the survey.
What is your outlook on markets for the remainder of the year?
The nearer-term outlook for equity markets appears challenging, given the backdrop of slowing global growth and still stubbornly high inflation. My concern is that earnings growth expectations need to be cut further and equity valuations have moved back to elevated levels. The major upside risk, however, is a quick decline in inflation – perhaps due to an expansion in global oil supplies and lower energy prices.
Can you please share your thoughts on portfolio construction for a retiree looking to preserve their capital given the market conditions?
The key thought is that timing markets is especially difficult. Arguably the single best strategy is for investors to have a mix of growth and defensive assets. This will help to provide an overall level of expected return and short-run volatility. Being able to ‘sleep at night’ reduces the risk of panicky moves in the face of market volatility. It also reduces the risk of getting carried away in frothy markets, and taking on too much risk.
That said, the good news for retirees looking to preserve capital is that central bank interest rate increases over the past year have improved the prospective returns from usually low volatility fixed-income markets. Government bonds are currently offering healthier positive yields compared to near-zero yields only a year ago.
Are exchange-traded funds (ETFs) useful in today’s volatile markets?
ETFs are not necessarily designed to produce better returns in volatile markets, when compared to other investment vehicles. They typically seek to provide cost-effective and easy access to major asset classes and investment themes.
One major advantage of ETFs in periods of market volatility – especially compared to listed investment companies (LICs) – is that investors may sell down their investments at near ‘net asset value’ (or the market value of the underlying securities held by the ETF). In the case of LICs, during periods of market volatility, investors may often be forced to sell at prices well below net asset value.
Compared to many actively managed funds – and more expensive hedge funds – ETFs also offer good transparency. Investors can see at any point in time exactly what securities are held within the fund. ETFs also tend to invest in very liquid markets – such as equities and bonds. So, investors should be able to buy into and sell out of ETFs in large numbers over time without much trouble.
As the assets of an ETF are held separately to that of the ETF provider, in the unlikely event the ETF provider gets into financial difficulty, investors’ assets within an ETF are not affected and continue to be available to investors.
How do you think bonds fit into an investor’s SMSF portfolio in the current financial circumstances?
Notwithstanding the unusual sell-off in bonds so far this year, they still have a part to play in any well-diversified portfolio. Over time, returns on most types of bonds have tended to be less volatile than equity returns and usually – but not always – are negatively correlated with equity returns. Periods of rising interest rates (which hurt bonds) have generally tended to be good periods for economic growth and share market returns, and vice versa.
The past year has been unusual in that we had a strong unexpected upturn in inflation. This caused central banks to raise interest rates quickly from low levels, at a time when equity markets valuations were also elevated. The sharp rise in interest rates therefore hurt both bond and equity returns at the same time.
Going forward, and as economic growth slows over the coming year, we may see weaker returns from equities but stronger returns from bonds. This means bonds could return to exhibiting the negative correlation with equity returns.
Will defensive stocks still be the way to invest for the remainder of 2022 into 2023?
On the expectation that equity markets will remain under pressure over the next three to six months at least, defensive stocks – such as healthcare, consumer staples and utility companies – could hold up relatively better than growth stocks.
