In today’s uncertain economic climate, many people are understandably concerned about how a potential global recession might impact their investments, particularly their superannuation accounts. However, it’s important to recognise that the relationship between a country’s economic performance and its share market returns is often less direct than one might think.
While it might seem logical that a strong economy would lead to a booming share market and vice versa, the reality is more nuanced. Here are a few reasons why:
- Forward-Looking Nature of Markets: Share markets are forward-looking, meaning they reflect investors’ expectations about the future rather than the current state of the economy. Even if economic indicators are weak, if investors believe that the future holds promise, share prices can remain buoyant.
- Global Diversification: Many companies listed on the Australian Securities Exchange (ASX) operate globally. Their performance is influenced by international markets and economies, not just the Australian economy. This diversification can help buffer against local economic downturns.
- Sector Performance: Different sectors of the economy can perform differently at various stages of the economic cycle. For example, during a recession, defensive sectors like healthcare and utilities often perform better than cyclical sectors like consumer discretionary and industrials.
- Monetary and Fiscal Policies: Central banks and governments often implement policies to stimulate the economy during downturns. These measures can boost investor confidence and support share market performance, even when economic conditions are challenging.
Historically, there have been periods where the share market has performed well despite economic recessions. For instance, during the Global Financial Crisis (GFC) of 2008-2009, while the global economy was in turmoil, the share market began to recover well before the economy showed signs of improvement. This recovery was driven by investor optimism about future growth and the impact of stimulus measures.
While economic downturns can be concerning, it’s important to remember that the share market operates on different dynamics. The low correlation between a country’s economy and its share market performance means that your investments not necessarily at risk of going backwards during a recession. By focusing on long-term goals and maintaining a diversified investment strategy, you can navigate through economic uncertainties with confidence.
