The Russia-Ukraine crisis

Impacts to the markets, economy and your super balance.

As the Russia-Ukraine crisis continues, we unpack the latest economic and market impacts, as well as what they mean for your super.

 

A note of condolence

We are extremely saddened to learn about the current Russia-Ukraine crisis and the devastating humanitarian impact. Our thoughts are with the millions of Ukrainian people currently affected as well as any members who may have friends and family in the region.

Mercer Super intends to divest our remaining Russian assets. We've requested that our investment managers consider options to do so as market conditions allow.

Economic impact

As the Russian invasion of Ukraine continues we see volatility in global markets with European markets particularly impacted. This has weakened the short-term outlook and consequently global growth has been revised downward in 2022.  

One of the main implications for the global economy is higher commodity prices, and in particular the price of oil, affecting the cost of a broad range of goods and thus leading to higher inflation.  This has placed further pressure on global supply chains that are facing prolonged drag through the pandemic period. We are however hopeful that impacts to global supply chains and its knock-on effects will ease in the coming period. 

Investment market impact

Over the course of this period, we have seen significant volatility in global investment markets, in conjunction with tighter monetary policy from central banks in an attempt to tame already fast rising inflation.  This has led to increased demand for assets typically considered ‘safe’, including government bonds, gold and the US dollar, as investors became cautious. 

Commodity prices have moved abruptly with oil prices reaching high of over $US120 before settling below $US100. Wheat prices also saw a significant increase, pushing up the cost of grain and other soft commodities.

Learning from past events

The last 100 years or so have seen numerous events involving geopolitical crises that have negatively impacted investment markets, such as what we’re seeing now. However, over time as history has shown, equity markets have recovered and continue to grow over the long  term .1

Super is a long-term game

Mercer’s diversified portfolios are specifically designed to help generate steady returns over the longer term and perform through different market cycles. When constructing portfolios they are put through rigorous stress-testing to ensure that they can stand up to various scenarios and periods of market volatility as part of our active risk management process. We are continuing to monitor the Russia-Ukraine situation closely as part of our investment strategy and asset allocation decision-making.

We appreciate that members have concerns about what this crisis could mean for their super, and may instinctively look to switch to a more conservative investment strategy during this period of uncertainty. Given that super is a long-term investment we recommend members always look beyond short-term economic disruptions such as this when considering whether to alter their investment strategy. 

While such events do have an impact in the shorter term, in hindsight as markets adjust and rebalance, the long term benefits of staying fully invested outweigh any potential short term gains.  For members nearing retirement, we expertly manage our conservative investment options to ensure there’s limited exposure to higher growth assets, reducing the potential for significant balance fluctuations.

Staying the course 

Although it may seem counterintuitive, usually the best action you can take so that your super can recover is no action at all.

By switching to a more conservative option such as Cash during a period where markets have declined and not yet recovered can result in the “crystallisation of losses”.

By switching out of your current investment option, we are required to sell your units at the current unit price, which may be at a low point. If you then switched your funds back to your original investment option once markets had recovered, this would likely be at a higher unit price. You would then have less units in that investment option than you started with, and your account would have less overall value than if you hadn’t originally switched.

  • Example

    A member has a super balance of $120,000 invested in Investment Option A at a unit price of $1.20, meaning they hold 100,000 units. Following a drop in the markets the unit price drops to $1.00. As they hold 100,000 units, their super balance is now $100,000.

    If the member wanted to switch their $100,000 balance to a more conservative investment option prior to markets recovering and the unit price for Investment Option A was at $1.00, this would require they sell all 100,000 units – crystallising their loss.

    If after the markets recovered they chose to switch back into Investment Option A, which now has a unit price of $1.40, their $100,000 would purchase them approximately only 71,428 units – nearly 30,000 units less than what they originally had.

    Whereas, if that same member had chosen to leave their $100,000 invested in Investment Option A at the time of markets declining, by the time markets had recovered and the unit price had reached $1.40 their balance would be $140,000. Although they had originally suffered a “loss on paper”, as they didn’t sell down their units, when the markets recovered so would their balance.2

Want more information? 

For more information, please download the February 2022 Monthly Investment Report

1.It should be acknowledged that in the real world, market movements are seldom driven by just one event (including the Russia-Ukraine crisis), especially over longer periods. These events should be seen in this context; each sell-off may be attributable a specific event to varying degrees.

2.This example has been simplified and is for illustrative purposes only. Unit price fluctuations are not often as precise or significant. Other factors may play a role in balance fluctuations in addition to market movement such as additional contributions, withdrawals fees and insurance premiums.

Disclaimer: This content has been prepared and sent on behalf of Mercer Superannuation (Australia) Limited (‘Mercer Super’), ABN 79 004 717 533, Australian Financial Services Licence #235906, the trustee of the Mercer Super Trust ABN 19 905 422 981. Any advice contained in this content is of a general nature only, and does not take into account the personal needs and circumstances of any particular individual. Prior to acting on any information contained in this content, you need to take into account your own financial circumstances. Please consider the Product Disclosure Statement, Product Guide, Insurance Guide, and Financial Services Guide before making a decision about the product, or seek professional advice from a licensed, or appropriately authorised financial adviser if you are unsure of what action to take. 'MERCER' is a registered trademark of Mercer (Australia) Pty Ltd ABN 32 005 315 917. Copyright 2022 Mercer LLC. All rights reserved.