Market meltdown: Should KiwiSavers just grin & bear it?

By now, nearly three million people should have received their annual KiwiSaver statements. For some, it will be a useful reminder they are gradually building up a nest egg for their retirement. Others will be heeding the advice of various financial commentators that, for the sake of their mental wellbeing, it’s best not to look right now.

Major disruptions, including the Covid pandemic and the war in Ukraine, are wreaking havoc on international financial markets, where most KiwiSaver funds are invested. In the middle of June, one of the United States’ best-known indices, the S&P 500, officially entered bear territory, which means it was down at least 20% from its most recent peak.

The last time we had a lengthy bear market was during the global financial crisis (it lasted 517 days), and before that was the Dotcom crash in the early 2000s (929 days). It’s been fewer than 200 days since the S&P 500 last peaked, so it’s entirely possible things could get worse before they get better.

Rocketing prices of everything from gas to groceries are complicating the picture. In New Zealand, inflation has hit a painful 6.9%, but in the US it has already hit 8.6%, and in the UK it is predicted to hit 11% by October. The World Bank has even raised the spectre of stagflation - a nasty combination of low growth, high prices and high unemployment. What does that feel like? Just ask anyone over 60.

In the 1970s, petrol prices were kept sky-high by Arab oil states after a series of regional wars. Financial markets were spooked so badly that the Dow-Jones index, adjusted for inflation, remained stagnant for more than a decade.

Kiwis who lived through that time remember compulsory carless days, a wage and price freeze, and double-digit mortgage rates as the government desperately tried to stay in control. Could we see history repeat? Grant Spencer, an adjunct professor of economics at Te Herenga Waka Victoria University of Wellington, was the Reserve Bank’s deputy governor and head of financial stability for 10 years. Spencer says although Covid-19 and the war are pushing up prices, it’s the war’s effect on financial markets that’s now the key worry.

In New Zealand’s favour is the fact that we began cranking up interest rates before other countries, he says, although even we may have waited too long. Higher rates are intended to choke inflation by slowing the economy. Although this could lead to what is known as a “soft landing”, more people who work in the finance sector are still expecting a recession within the next year, says Spencer.

The big test, he says, is how households will cope with higher mortgage rates.

KiwiSaver fund managers have been urging investors not to panic. Some have also stressed that market meltdowns can be a good opportunity to pick up some bargains. In a recent client newsletter, Milford Asset Management urged its investors to hold their nerve. “Now is a bad time for investors to sell,” said Philip Morgan Rees, head of private wealth and advice. “We understand this can test you over the short term, but experienced investors will recognise that down legs in markets offer buying opportunities.”