In this article, Shannon Rivkin delves into the dynamic landscape of SMSF investments. Examining market volatility, interest rates, and inflation trends over the past four years, Rivkin forecasts the investment outlook for 2024. Discover how SMSFs offer flexibility for alternative investments, such as private credit and property, amidst changing economic conditions.
If one were to look at a chart of the stock market for the last four years, one would be forgiven for feeling a little motion sick. It can be said with confidence that this time- period has provided the most volatility in many generations. While the stock market is not, and has never been, a perfect reflection of the broader economy, the peaks and troughs since 2020 have been characterised by the following themes:
- The COVID shock, where the world as we knew was upended almost overnight.
- The response by governments and central banks saw unprecedented stimulus thrown at companies and populations in the form of fiscal handouts and interest rates at all-time lows (as well as quantitative easing, not seen since the GFC).
- The success of COVID vaccines, accompanied by the realisation that the world will in fact return to normal.
- The sudden emergence of the highest inflation in generations prompted an unprecedented rate rise cycle from central banks.
- Finally, the phase we find ourselves in now – inflation is heading back to the target range, and investors are pricing in interest rate cuts to a more neutral stance.
Following that last bullet point, we have seen a near-perfect negative correlation between long-term interest rates and asset prices (or a positive correlation between long-dated bonds and asset prices). That isn’t typical, but we have rarely seen such dramatic moves. And a dramatic change in narrative, understandably, has contributed to wild swings in asset prices. So, it stands to reason that any sudden changes in the environment (such as, for example, resurgent inflation) will once again signal the next U-turn for asset prices. Furthermore, it seems a fair assumption that as underlying economic conditions return to normal – that is, the wild swings in long-term interest rates disappear – that we will begin to see the correlation between interest rates and asset prices decouple.
So, with inflation heading back to the 2-3% range and expectations of rate cuts around the corner, we have seen all risk assets rally over the last four months or so. Services inflation has remained frustratingly sticky, so it’s too soon to say the war against inflation is behind us, but the narrative, for now, is that central banks have been able to engineer the desired result of a ‘soft landing’. Having said that, I don’t think even the most optimistic economist would have predicted such a sudden fall in inflation, while unemployment levels remain at record lows and economic growth remains resilient. So, in that context, the rally in asset prices seems well-justified.
When discussing the benefits of a self-managed super fund (SMSF), perhaps the first characteristic I typically mention is flexibility. Given the huge size of the industry funds, it is understandable that they target key qualities such as liquidity (hence the large weightings to the stock market), and nimble moves between asset classes just aren’t possible. When investing through an SMSF, however, one can be as nimble as one wants, if the environment might prompt a change in view.
There is no such thing as certainty in investing, and the best one can do is tilt the odds in one’s favour. With global stock markets at all-time highs (with the ASX 200 up over 15% since October), the odds that we are closer to a pullback are higher than only a few months ago. And while the stock market could continue to provide the best returns in the short term from here, investors should be making decisions based on expected risk-adjusted returns, not just expected returns.
With a whole world of alternative asset classes available to SMSF investors, swings in expected risk-adjusted returns can offer the option of adjusting weightings between asset classes. So, while one may have been fully invested in equities during this market rally, the time is right to now consider whether taking some profits would be wise, and shifting part of the portfolio into other asset classes that offer superior expected risk-adjusted returns. Specifically, private credit and listed hybrids are two such examples of uncorrelated asset classes that, in our view, provide excellent risk-adjusted returns in the current environment. Not only that, but they provide diversification with limited correlation, an important feature that SMSF investors should be targeting so that long-term return targets can be met with as little volatility as possible.
If you would like to know more about investing in property through your SMSF, click here to watch our latest webinar focusing on borrowing to purchase property through your SMSF.
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Rivkin does not ever provide personal financial advice. Please consider your own circumstances before purchasing any of our products or acting on our general advice, for any Rivkin product or recommendation.
Past performance is not a guarantee of future performance. Investing and trading carry financial risk, when judging performance please consider the different types of investments and levels of risk associated.
