Stocks rally boosts superannuation returns but volatility ahead

A tech-fuelled stocks rally drove a median super return of almost 10 per cent in 2023, but experts expect 2024 will not be a smooth ride.

A strong year for superannuation returns is no certainty in the year ahead, industry analysts say, with sharemarket volatility threatening the Goldilocks scenario expected by investors.

A tech-fuelled stocks rally, particularly in international equities, was the main driver of an almost 10 per cent median return in 2023 for the superannuation funds where most Australians have their super invested.

The median return for growth funds was 9.9 per cent for 2023, according to research house Chant West.

Chant West senior investment research manager Mano Mohankumar said the strong result easily erased 2022’s 4.6 per cent loss.

“International shares was the standout asset class with a tremendous 23 per cent return over the year, led by the tech sector which benefited from advancements in AI,” he said.

“While Australian shares didn’t reach the same level, it still delivered a healthy 12.1 per cent over the same period.”

GSFM investment strategist Stephen Miller said the performance of equity markets was a big tailwind for super returns last year.

“But I’d be very wary of relying on a continuance of that equity beta to provide the same tailwinds in 2024.”

Mr Miller said the consensus view in markets was for a Goldilocks scenario, where central banks had finished raising interest rates, inflation was coming down and rate cuts were ahead in 2024.

In that scenario, bonds would rally and the falling yields provided a tailwind for equities that led to “a set of fairly solid returns in super funds for 2024”.

“But that’s arguably already reflected in markets, and I think there are a number of ways that that scenario could go wrong,” he said.

Mr Miller said sticky inflation could mean interest rates stayed much higher than markets believed and equities did not perform well, while on the other hand if there was a recession equity markets would still not respond well if earnings were crunched.

“I think there is a lot of volatility ahead overall, and what that means is even if the Goldilocks scenario is right, at various stages investor sentiment is going to be tested,” he said.

“Even if it does end up that say from December 31, 2023 to December 31, 2024 looks like Goldilocks, there’s a lot of hills and dales to travel in the interim.”

The 9.9 per cent return for median growth funds, with 61 to 80 per cent of the portfolio invested in growth assets, was below 2021’s 13.5 per cent. But Chant West noted it exceeded the typical long-term return objective of just over 6 per cent.

Mr Mohankumar said while super funds had “a terrific 2023”, that level of return should not be thought of as normal.

Research house SuperRatings executive director Kirby Rappell said super funds had a strong result in 2023 amid market volatility throughout the year, bouncing back from losses in 2022.

But he said it was far from a smooth ride, with returns swinging from positive to negative throughout the year, and negative monthly returns in five out of the 12 months.

“It is not expected to be a smooth ride in 2024,” he added.

“You’re going to have a pretty tough skin in super for the next five or 10 years, for people with super accounts, because I think you’re going to see more volatility.”

He said the period since the 2007-2009 global financial crisis had seen pretty strong super returns most years. “But you can just feel that there’s a lot more volatility coming back through returns month to month.”

SuperRatings put the 2023 return for median balanced options – with 60 to 76 per cent in growth assets – at 9.7 per cent, which Mr Rappell said was a strong rebound from 2022’s 4.8 per cent loss.

“Global markets accounted for the majority of 2023’s gains driven by rising technology shares in the US and supported by strong returns from Australian shares and rising cash returns, off the back of central banks raising rates.”

Mr Rappell expected global events would drive any shocks for superannuation in 2024, highlighting the geopolitical landscape, the US election and the resilience of consumers to elevated interest rates.

CommSec chief economist Craig James noted markets were currently in a holding pattern with central banks more or less at the top of the rate hike cycle but rate cuts still likely some way off.

“In terms of the sharemarket, we’re going to see this volatility over particularly the first half of the year, with some investors getting a little excited and go a bit too early and then some pulling back.”

CommSec expected the benchmark S&P/ASX 200, which closed at 7346.50 points on Thursday, to be in the range of 7300 to 7600 points by mid-year and a little higher around 7400-7700 by the end of the year.

“It’s not going to go gangbusters but we think as it evolves over the first half and as we move into the second half and interest rates are on their way down, investors can start looking at more sectors rather than individual stocks,” he said.

Mr Mohankumar said as sharemarkets performed so well in 2023, the better performing funds were generally those that had higher allocations to shares, particularly international stocks.

Mine Super, the $12.5bn industry fund for mining workers, came out on top with an 11.8 per cent return for its growth option, according to Chant West.

The top 10 performing growth funds all delivered returns of 10 per cent or more in 2023, led by Mine Super, Vision Super’s balanced growth option (11.7 per cent), IOOF Balanced Investor Trust (11.2 per cent) and Aware Super’s balanced option (11 per cent).

Originally published as Stocks rally boosts superannuation returns but volatility ahead