How will the outcome of the US election affect your super fund and investments?
By financial adviser, Brenton Tong (photo: Gage Skidmore)
While world events have turned many people’s lives upside down, some old truths are still worth relying upon. One that’s clearly evident, is that we’re still living in a global economy.
While we can shelter on our massive island and lock the borders, we still have to trade with the rest of the world. So it goes without saying, how the rest of the world is doing economically is going to impact us one way or another.
One of the oldest sayings about the global economy, is that when the US sneezes, Australia catches a cold. With the US being the world’s largest economy, as well as a major trading partner, their fortunes have delivered ours for many years. However, since the early 2000s, things have changed as Australia has become more reliant on China as a trading partner and the United States global status as waned.
Despite the United States not being the superpower that it once was, all eyes are state side as the world watches the circus that is the US Election. Previously, many of us followed US elections with passing interest, thinking that one president is relatively similar to another. Never has the situation been more polarising as with the current US Election. Amid a global pandemic which has created massive upheaval, whomever either takes or maintains the reins to the world’s largest economy is going to have a material effect on people worldwide.
Biden and Trump hold differing views on how the US should be responding to the pandemic, as well as on how the economy should be run. You would assume that Trump’s previous business and political history would dictate large spending, lots of debt and big economic plans. However, researchers have unwrapped the layers of the economic plans of both the Republicans and Democrats and Biden is heavily tipped to create the greatest economic uplift. His plans for social and infrastructure spending through raising taxes and massive levels of government debt is likely to create more jobs in the medium term.
So does that mean a Biden win will be better for the investment markets and your super fund? The market is a fickle beast and it’s always difficult to predict which way it will go. While the US Election will certainly have a material impact on the fortunes of the investment markets, several other factors will also come into play.
A lot of money has been pumped into the stockmarket over the past 12 months because the earnings potential is greater there than anywhere else in the current economic environment. With interest rates around the world at record lows, investors have been seeking out returns with a higher appetite – or at times total disregard – for risk.
The Reserve Bank of Australia has commented in its board notes that lowering interest rates may have little effect on unemployment and economic stimulus and that the role of government spending – fiscal policy – has to do the heavy lifting from now on. If the US and governments globally are successful in lifting their economies out of the COVID-19 recession, it will bring stability to investment markets and clear direction. While this may not lift returns remarkably, it will decrease the wild swings and volatility that we’re currently seeing. This, in turn, will allow interest rates to return to more normal levels, albeit still at much lower levels than average. The odd effect of this may be lower returns in the medium term as other viable avenues for steady returns start to appear.
Superannuation balances are going to be affected by market movements more than any other investment asset class, as super funds, on average, have more than half their money invested into shares. While share markets have weathered the COVID-19 storm much better than predicted, it’s not a clear sign by any measure that the worst is behind us. When government spending slows and interest rates increase, it will have the effect of the smoke clearing and we’ll then have a clearer understanding of what the future may hold.
Brenton Tong is the Senior Financial Adviser at Financial Spectrum