AAA rating a key asset for Australia

What a difference just a week has made to the 2015-16 financial year superannuation fund returns.

 

The Brexit leave decision came as a complete surprise to world sharemarkets with the resulting uncertainty about the implications for Britain and Europe causing them to fall sharply.

 

Hardest hit were the European and British markets, which are now down in Australian dollar terms about 15 per cent for the financial year. Even the US market has let Australian investors down by not generating positive returns this year.

 

The local market has fallen modestly and even after allowing for dividend income received, unlike in previous years, it has not helped super fund returns. Coming on top of a proposed severe cutback to superannuation tax concessions, these poor super investment returns will add to

investors' unease.

 

Financial commentators are arguing the leave decision is not as big a shock as the collapse of Lehmann Brothers, which triggered the global financial crisis. Even so, the uncertainty and prospect of recession in Britain doesn't inspire confidence.

 

Like Australia, Britain has a large budget deficit and a balance of payments deficit. Despite the Bank of England's commitment to help stabilise the economy, the country is still reliant on the confidence and support of international investors to fund its deficits.

 

Our banking system is much stronger because it survived the GFC without government bailouts. However, the big four banks helped by our AAA credit rating and historically low world interest rates rely on short-term international borrowings for up to 40 per cent of their funds. Protecting this rating is now even more important to the stability of our banking system and returns to bank investors.

 

The depreciation in the value of the British pound highlights how quickly markets react to unexpected unfavourable developments.

 

There's a clear message in the unexpected disappearance of last year's super fund returns. Having an investment risk profile consistent with your personal financial situation and need for liquidity is crucial.

 

The investors worst affected by the GFC were those forced or choosing to sell when prices were depressed. If they had held on, they would have recouped their losses and benefited from the subsequent recovery in investment returns.

 

Being willing and able to see through periods of market volatility is an essential requirement for higher risk balanced and growth portfolios. Diversification of investment categories including overseas holdings can also help minimise portfolio volatility.