Super returns were poised for powerful returns but the Iran crisis raises doubts

Just as super returns were set to deliver another bumper year, the conflict in Iran could be the catalyst for a sell-off in investment markets.

The escalation of the Middle East conflict is set to jeopardise super returns. Just as we were heading towards “an astonishing” set of numbers for the year ending June 30, risk in the markets is now at dangerously high levels.

Investors have recently enjoyed a powerful surge on sharemarkets - share returns for the financial year had been heading above 10 per cent and the average super fund balanced return was hovering at 9 per cent: those numbers may now fade if investors lose their nerve.

As always, financial advisers will say there is no need for investors to make rash decisions.

However, for retirement-age investors, sharemarket setbacks are particularly concerning as they can negatively affect super payments for many years. Inside the industry, it’s known as “sequential risk” where sharply negative returns in early retirement can hit harder than if the losses come later.

Similarly, investors already well into retirement have a heavy emphasis on fixed income where any deterioration of financial conditions may undermine their estimated income.

The immediate issue for all ­investors is the price of oil – as supply gets trapped in Iran, ­ inflation may bounce higher.

The deeper issue is the risk of dwindling confidence across the market, initially concerning the imposition of tariffs and now including the additional threat of higher oil prices.

No two military conflicts are the same, but we do have some historical references to the impact of war in the Middle East: even though two-thirds of global oil supply comes from the region, oil shocks in recent times have been muted. Even the last major escalation in the Middle East – the Second Gulf War of 2003 – had minimal sustained impact on ­prices.

According to a new Wilson Advisory report on the unfolding crisis in Iran: “As the situation escalates, investors face growing uncertainty around oil supply, ­inflation, and broader financial stability.”

Shane Oliver, chief economist at AMP, points out that going back to World War II, US shares have fallen on average by 6 per cent in response to geopolitical events but have risen by 9 per cent six months later. Oliver also ­suggests that longer-term, higher oil prices could ultimately cool major economies through acting as a “tax on spending”.

For now, the response of share­markets to the Iran crisis is restrained – oil prices have moved broadly higher since June 10 but the key sharemarket indices have been little changed, with Wall Street prices and US Treasury yields steady in the first phase of the new conflict.

The ASX 200 barely moved on Monday as it looked for new leads from Wall Street.

Of course, sentiment in the sharemarket could change quickly: investors are not being complacent, they have moved quickly to traditional safe havens such as gold and the US dollar.

With only a limited number of market sessions to go before the end of the financial year, Mano Mohankumar of Chant West recently described the outlook for investment returns in the year to June 30 as “astonishing”.

This week, he says: “It’s very hard to say from here but the sharemarket is only one feature of super investing.”

With investment returns seemingly poised to return above-average performance for the year to June 30, let’s hope the most “astonishing” dimension will be a sharemarket resistance to any sell-off.

James Kirby hosts the twice-weekly Money Puzzle podcast