News Archive

The “Sub-Prime Crisis”

There has been a significant amount of coverage in the media over recent months in relation to the sub-prime mortgage market concerns in the US, the move by most Australian financial institutions to increase interest rates, the collapse of the Australian Centro Properties Group and general doom and gloom about the prospects for financial markets in general.

The combination of all these factors has lead to an increase in uncertainty about the economic future of Australia and of the world economy in general.  This uncertainty is played out in the listed stock markets.  The Australian markets have been through major swings up and down over the last six months, reaching an all time high on 1 November 2007, and dropping by almost 15% by the middle of January 2008.  In the jargon of the investment world this is called volatility.

The catalyst for this increased volatility was the US sub-prime lending market.  (Sub-prime loans are loans to borrowers that do not qualify for the best interest rates available as a result of a poor credit history).  There has been a marked rise in the number of defaults and delinquencies in the sub-prime market, (i.e. borrowers that can’t meet their repayments), and with a total of US $1.3 trillion of outstanding sub-prime loans, there is concern that those parties invested in the sub-prime market will lose money on those investments.  The outflow of these concerns has been a drive to increase the profitability on other loans and a need to pass on the increased cost of funding, by increasing interest rates, or to sell out of the loan packages and cut the potential losses.  The US based financial institutions that invest in these sub-prime loans therefore have significantly reduced profit expectations.  This is all against a backdrop of increasing concerns of an economic slowdown in the US.

The US market is the largest market in the world and any significant moves on that market ripple out to other markets around the world.  So the Australian market has turned down on the back of the US jitters, even though the sub-prime issue does not appear to be a major concern to Australian financial institutions.

Markets in General

The stock market can be a very emotional place to invest, which leads to over selling or over buying.  A piece of news can be interpreted in many different ways, some investors may decide to ride this negativity through and so hold the share, others may decide that it is time to sell.  What can happen is if enough parties want to sell the price of a share will go down, those that originally intended to hold their shares may then reassess that decision and so also sell, so forcing the price further down.  This can then lead to the price of that particular share spiraling down to a price that is lower than what it is “truly” worth.

Over a large period of time these “cycles” become evident:

• October 1987 saw a significant loss on the Australian and world stock markets;
• 1999 saw a huge boom in markets on the back of the “tech boom”;
• 2002 and 2003 saw an unwinding of the tech boom;
• The financial years ended 30 June 2004 through to 30 June 2007 saw very strong returns on the share markets;
• We are now giving back some of these recent gains.

Prime Super like the vast majority of superannuation funds invests in the local stock market, and international stock markets as well.  So when these markets rise or fall so does the return on your superannuation investment.

Things to Remember

History shows that the stock markets rise and fall, sometimes dramatically.  It is very important not to become emotional when investing.  For example, those investors that stayed fully invested during the stock market crash of 1987 recovered all funds that were lost and benefited from the subsequent recovery, whilst those that sold out got none of the recovery.

Therefore you must remember:

• Superannuation is a long term investment;
• Volatility is something that is expected on the share market;
• We have just had four consecutive years of very strong returns on the share markets;
• History shows that markets tend to over estimate the real impact of information;
• If you can wait out the downturn history shows that you will recover these losses in the long term;
• In the long term markets recover, we just don’t know how long that will take.

Nearing Retirement?

Such large adverse movements in the market are not what you need if you are nearing retirement.  Cashing out your benefits now may not be the best thing to do. There are other alternatives, such as an allocated pension.

Rather than cashing your benefit out now, it may be better to remain fully invested, and transfer your benefit to an allocated pension.  By so doing you allow your funds to remain fully invested, and benefit from future recoveries in the share market.  If you are considering any such change it is important to seek independent financial advice.

If you need any further information on the Prime Super allocated Pension product please call us on 1800 675 839.

If you would like to speak to a financial planner you can call our financial planning service on 1800 022 365.

Disclaimer
This notice provides general information only and may not be relied on as legal or financial advice. Prime Super (ABN 60 562 335 823) is a Regulated Superannuation Fund issued by Farm Plan Limited (ABN 81 067 241 016, AFSL 219723). A Product Disclosure Statement can be obtained from the issuer and should be considered before deciding whether to acquire, hold or dispose of an interest in Prime Super.