To avoid making costly mistakes it’s worth understanding how and why KiwiSaver balances wobble when they do. To do so, it’s important to understand the link between businesses and KiwiSaver funds. The funds hold assets, which are mostly shares, bonds, property, and cash. The price of all of these can be affected by a range of factors such as recession, inflation, trade wars, government policy and even artificial intelligence. If they go down, so too do KiwiSaver balances.
I asked Craigs Investment Partners investment director Mark Lister to give his thoughts on how recessions, inflation, trade wars and new technology affect KiwiSaver balances.
Recession: In a recession, the economy is shrinking rather than growing, said Lister. “Recessions usually go hand-in-hand with lower spending, higher unemployment, and lower company profits,” Lister said. “So that means businesses are making less money and that their share prices will fall during those periods. Sometimes other investments within the fund such as bonds may go up at these times.” Even the fear of recession can affect prices of shares, property, and some other holdings in KiwiSaver.
Inflation: We’ve all been affected by inflation over the past few years. So too are the companies that KiwiSaver funds invest in, and that affects their share prices. “The main way we keep inflation in control is by using interest rates,” said Lister. “So when inflation is too high, the central bank [Reserve Bank of New Zealand] will increase the OCR [official cash rate] to try and reduce spending, lower confidence, and discourage borrowing.” Those rates make it harder for businesses to make money, which can lead to their share prices falling, and KiwiSaver balances going down with them.
Trade wars: The threat of tariffs from the US at the beginning of the month spooked share markets, which was reflected in lower KiwiSaver balances. “Tariffs are like a tax on imports [and] are a bad thing for growth,” said Lister. “They tend to dent global growth and be inflationary because they make stuff cost more.” That in turn affects businesses’ profitability and their share prices. “At the moment, tariffs are causing a lot of concern amongst investors and people are thinking, ‘well, if they push it too far, it could push parts of the world into recession’.” That in turn hits balances.
Government policy: Decisions made by the Government regarding tax, retirement policies, and other regulations can have an effect on KiwiSaver balances. “Your KiwiSaver balance is going to be a function of the success of the businesses that are in your fund,” said Lister. “And the success of those businesses is dependent on a whole range of things. The strength of your economy, what those businesses are doing themselves, who they’re selling to, and whether they’re coming up with really new and innovative products.” Policy settings are important, said Lister. Tax changes, for example, can make businesses more or less profitable and their share prices rise or fall, which in turn flows into KiwiSaver balances. On the positive side, if minimum investment is increased by Government, or KiwiSaver made compulsory, people’s balances will increase thanks to them investing more.
Artificial intelligence [AI]: AI is being seen as the big bogey by many people. But it also benefits many businesses, making them more efficient and therefore profitable. “I would say that in all likelihood, you have already benefited immensely from the advent of AI,” said Lister. “You’ve probably enjoyed some extremely strong returns over the last few years on the back of that. My view is glass half full. I think it will do much more good than bad. I think it will improve productivity. It will create jobs. It will allow us to do more with less.”
As a closing note, it’s best to make KiwiSaver fund choices in the good times, not as a knee-jerk reaction. If you couldn’t stomach these falls this time, take advice and move to a fund more suited to your risk tolerance.
