Super charged returns fade as investors ride dollar's fortunes

With the share market virtually unchanged over the first quarter of 2014, the returns from balanced and growth superannuation funds for the same period have dropped substantially. 

Everything looked on track for a repeat of the excellent returns of the previous two financial years up till the end of February but then our share market retreated in March.

Overseas markets were stronger over the whole quarter and the best performing funds have been those with higher weightings to major overseas share markets investments as well as to local listed real estate trusts, which also performed well.

How the remaining June quarter of the 2013-14 financial year will turn out for superannuation investors remains to be seen. The hoped for quick resolution of the Russian intervention in Ukraine has not eventuated, raising concerns that the Russian economy will be adversely affected by further Western sanctions.

At the same time, the prospects of Brazil, an emerging country, are deteriorating. This increases the importance to the strength of the world economy of continuing recovery in the US and of stronger European growth.

Speaking in Hong Kong last week, Reserve Bank governor Glenn Stevens appeared relaxed about the prospects for the world economy presumably because of continuing improvement in the US and European economies.

If this is an accurate assessment, and continuing world growth helps maintain commodity prices, our strengthening retail and property sectors augur well for further growth in our economy.

The strong company earnings reports in February also reduce the risks of a pull-back in the share market even if it does not rise above current levels.

The only obvious concern at the moment is the appreciation in the Australian dollar, which, if sustained, could reduce the future earnings and prospects of our commodity and other exports. The rise in the value of the dollar is being attributed to speculation that rising property prices will force the Reserve Bank to raise official interest rates sooner than expected.

It may also be partly explained by the relative attractions of the Australian economy compared to the uncertain prospects of emerging markets. If the dollar remains at or above current levels for an extended period, this will reduce the earnings prospects of our major resource companies and result in another slow quarter in the share market.

Overall it is unrealistic, for the above reasons, to expect that balanced and growth super fund returns will remain at last year's level in 2013-14. Even if the returns are lower because of the recent slowdown in earnings growth, higher risk superannuation portfolios are still on track to provide very respectable double-digit
returns well above the inflation rate and the modest returns on fixed interest investments

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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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