Greek default starts to hit super fund returns

Coming just before June 30, the now almost inevitable Greek debt default has dragged down this financial year's superannuation fund returns by as much as 3 per cent. More importantly, investors are concerned about whether the impact will spread beyond the European Union member countries making up the eurozone.

As far as Australia is concerned, a much more important issue is whether China's latest effort to boost its equity markets by reducing interest rates succeeds in maintaining a growing economy. For Greece to have a significant impact on our growth prospects, Europe's problems would need to substantially reduce growth of the world economy. The consensus of financial markets is that, unlike the collapse of Lehman Brothers in the GFC, there is no serious threat to the stability of the world's banking systems even if Greek banking collapses.

Private investors have wisely managed to reduce their exposure to Greece, selling their debt holdings to the European member countries who have bankrolled the bailout to date. Even if some additional temporary support for the Greek banking system is provided over coming weeks, the losses from a Greek default will be borne in large part by member countries via the European Central Bank.

The ECB can fund these losses via monetary easing and thereby cushion the economic impact on member countries. Of more concern is the question whether a Greek exit will ultimately force a similar exit by other weaker economies and lead to the demise of the euro. Fortunately, there are no indications that a domino effect will follow the exit of Greece from the eurozone.

Overall, investors with a higher risk profile including balanced and growth superannuation funds have at this stage no reason to rush for the exit door. Portfolios overweight with European assets have most reason for concern because this is where the biggest impact of a Greek default will be felt. This latest development is another reason why it is unrealistic to expect the excellent returns of super funds after the huge GFC losses to continue.

Returns in the new financial year are likely to fall to lower and more realistic levels. Portfolios with a high weighting in the United States are likely to benefit as international investors transfer funds from Europe. The latest Greek developments also emphasise the need for investors to ensure that their risk profiles are consistent with their needs for cash for pension payments or other withdrawals. Asset prices are now lower than they were at the end of May.

What a difference a month makes, especially when the possibility of a Greek default was realistic even then.

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Daryl Dixon

Executive Chairman

Daryl Dixon is one of Australia’s foremost investment experts and a well known writer and consultant. He has provided trusted advice to thousands of personal clients over more than 25 years and is an acknowledged expert in the areas of tax, superannuation (including public sector superannuation), social security and investments.

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