One of the government's more controversial policies for helping Australians through the coronavirus crisis has been the permission for some eligible individuals to withdraw funds from superannuation.
Whilst other policy measures like JobKeeper have attracted widespread support, letting Australians draw on their super funds has attracted a mixed response. Superannuation is designed as a compound interest-fuelled retirement solution after all, and nothing causes more havoc to compound interest than drawing down capital.
Nevertheless, the policy has gone ahead and Australians were allowed to take out up to $10,000 from their super from this week. Another $10,000 is permitted in the 2021 financial year.
But could these moves prove detrimental to the share market? After all, most Aussies' super is invested in growth assets like ASX shares. And when one withdraws capital from their super, these shareholdings need to be liquidated and sold.
If enough people do this, it can add significant selling pressure to the markets.
This week, the S&P/ASX 200 Index (ASX: XJO) has dropped significantly in value. It's down 4.3% (at the time of writing) from its open on Monday.
This follows a 4-week streak of weekly gains for the ASX 200. Coincidence? Perhaps. Sure, there have been other factors like the price of WTI crude oil going negative on Monday.
But if I were to bet on it, probably not.
Super selldown?
Data from the Australian Taxation Office shows that $3.8 billion was approved for withdrawal from superannuation funds this week – spread amongst 456,000 people. That's not an insignificant amount, but it's not massive. If it were repeated next week, and the week after, the snowball might turn into an avalanche. But that's only one possible outcome.
What I'm more worried about is the turn in sentiment it could spark. Yes, the ASX has stabilised after the market carnage that we saw in March. But I'm not willing to say investors are supremely confident just yet. We're far from being out of the woods in terms of the coronavirus. It will still take some time before we know the full extent of the economic damage we will see from this virus.
Further large drawdowns from super could spark market pessimism, leading to further selling.
I'm not saying this is likely, but I do think it's certainly possible.
Foolish takeaway
If I sound overly pessimistic here, my apologies. I do hope that the markets recover further from here. But I think good ASX investors should be ready for anything, and this is something that I think is worth keeping an eye on.
