Donald Trump-induced market chaos won't shred your super balance
First, it's a question of sheer size. The US is simply too big to ignore, and our funds are too big to stay in Australia. The US makes up more than half the world's equity markets by value, so other markets would simply be unable to absorb all the capital if people wanted to move. Australian super funds are also bursting with cash they need to deploy thanks to compulsory super contributions, and they already own more than a quarter of the local sharemarket.
But size isn't the only reason the US will probably remain a magnet for super funds.
'The US do probably a better job of turning GDP growth into earnings per share growth, which ultimately is what our members invest in, than most countries around the world.' Cbus chief investment officer Leigh Gavin
Another drawcard for big super is US leadership on technology and innovation, including in artificial intelligence, notwithstanding growing competition from China. This is reflected in the eye-popping share prices of the 'magnificent seven' – the giant US tech stocks that have posted huge returns in recent years, even including a more bumpy ride lately.
Cbus chief investment officer Leigh Gavin says that even though the US outlook over the next decade is riskier than it was a year ago, he still views the US as 'an amazingly dynamic country with amazingly dynamic and innovative companies'.
'The US do probably a better job of turning GDP growth into earnings per share growth, which ultimately is what our members invest in, than most countries around the world,' Gavin says.
This doesn't mean the US will remain quite as dominant in the investment world as it has been. Indeed, there are signs that big investors are keen to spread their bets more widely, including into other regions such as Europe, and other currencies outside the greenback.
But throughout the past six months of volatility, there have been few signs super funds are ditching the US in any dramatic way.
MLC Asset Management chief investment officer Dan Farmer for example says the fund has been diversifying into Europe because it believes the continent represents better value, but not because the fund believes US exceptionalism is over.
'We spent a bit of time thinking about that question of US exceptionalism because it is a large part of our portfolio and most portfolios,' Farmer says. 'And we've arrived at the conclusion that the US is still an exceptional market for a few reasons – the quality of the businesses in the US. The tech stocks are expensive, yes, but still high-quality businesses.'
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One thing, Farmer says, that would make the fund really take notice would be a weakening in US institutions such as the Federal Reserve. But although Trump has repeatedly taken potshots at the central bank, Farmer believes its independence is 'still very much intact'.
What about geopolitical risk? Are the super giants worried that the many flashpoints in the world – the latest being the Middle East – will have disastrous consequences for markets?
Again, big funds are betting that over the long term, geopolitical crises are unlikely to cause lasting damage to markets, unless they inflict a major hit on the world economy. The muted reaction on global markets to the US bombing of Iran is a case in point.
Gavin says geopolitical shocks in the past have typically knocked 2 to 10 per cent off share markets (unless they spark a recession). In many cases, markets rebound soon after the initial shock.
All of this underlines perhaps the most important lesson from a wild year on markets: staying the course has paid off.
Every time there is a market plunge, super funds brace for jittery members to move their money to a safer option such as cash. Given the frequency of scary headlines, it's easy to see why many people get spooked.
But the well-known risk of doing this is that you could lock in losses, and miss out on the rebound – which this year was powerful, and took place when Trump paused his tariff plan. With the benefit of hindsight, we now know switching to cash during the 'Liberation Day' chaos would have been a costly mistake.
As Trump is still early in his second term, that's worth remembering because it's highly likely his presidency will bring more episodes of volatility for investors.
Ross Gittins is on leave.
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