From an investment perspective, the main theme of 2022 was much higher than expected inflation, resulting in interest rates rising sharply from very low levels. High inflation caused both share market and bond market prices to experience substantial falls. These falls followed large share market gains in 2021.
The difficult investment environment in 2022 adversely impacted the performance of superannuation funds with many MySuper investment options generating a negative return. Vision Super’s Balanced Growth super option returned -5.3% in 2022. Vision Super’s other super investment options generated negative returns, except for the following options: Cash; Infrastructure; and Property. The defined benefit LASF plan returned -4.9% and its VBI estimate as of 31 December 2022 was 101.7%.
Covid-19
While the Covid-19 pandemic continued in 2022, its impact moderated over the year. The Omicron variant was the dominant strain, and even though it is more infectious than previous strains, it tended to cause less severe illness. With most Australians vaccinated, Covid restrictions eased materially. Most capital cities’ weekend foot traffic has broadly recovered to pre-pandemic levels. However, the office occupancy rate in cities remains below these levels.
Inflation
Inflation in many countries reached the highest level in several decades. For example, Australian inflation achieved its highest level since the 1990s, with the Consumer Price Index (CPI) increasing by 7.3% over the year to the September quarter 2022. High global inflation reflects factors such as the lagged impact of very stimulatory policies in 2021, restrictions because of Covid and the war in Ukraine.
Interest Rate Rises
While central banks were initially slow to respond to higher inflation, they have recently increased interest rates relatively quickly. The Reserve Bank of Australia (RBA) has an inflation target of 2% to 3%. In response to the high inflation, the RBA has raised its cash rate from 0.1% to a current level of 3.1%. The higher borrowing cost will likely dampen both consumer and business demand, which can lower inflation.
Higher interest rates have negatively impacted investment returns, with both the share and bond markets performing poorly. The revaluations were especially severe for assets with very long-term cash flows, as they are more sensitive to interest rate changes. The Australian share market performed better than most share markets, which helped to moderate the adverse impact of weak share markets on superannuation fund performance.
Australian house prices recorded a rapid decline in 2022, falling 8.2% from the peak in May 2022 until December 2022, according to data from CoreLogic. The decline followed the exceptional rise of 28.9% from September 2020 to May 2022. This means most house prices are still well above their pre-pandemic levels. However, with more rate rises ahead, we expect prices to decline further.
Outlook
As is always the case, a wide range of scenarios may transpire in 2023. US core inflation appears to have peaked, which has been a positive for equity markets recently. However, we continue to expect that the ultimate trough in equity markets has yet to be realised, with that likely to occur in 2023. This is because the peak impact of higher interest rates on earnings is expected to be near the end of 2023, with the equity market pricing several months before it occurs.
The key upside risk to our central case is US inflation subsides to a benign level relatively quickly, and the US does not experience a recession. The key downside risk is that US inflation remains elevated and requires interest rates much higher than in our central case.
While 2022 was a challenging year for investment markets, an important positive aspect is that valuations across a wide range of asset classes have fallen materially. This may help to underpin favourable returns over the medium term.
*Investment returns are not guaranteed. Past performance is not a reliable indicator of future returns.
This information is general advice which does not take into account your personal financial objectives, situation or needs. Before making a decision about Vision Super, you should think about your financial requirements and consider the relevant Product Disclosure Statement and Target Market Determination issued by Vision Super Pty Ltd ABN 50 082 924 561 AFSL 225054