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Overview
Risk assets staged a spectacular rally in the June quarter with sharemarkets recording, in many cases, the fastest recovery since 1983. The speed and magnitude of the market rebound was underpinned by the sheer scale and speed of central bank and government stimulus, and the reopening of many economies from the COVID-19 shutdowns, which saw many market participants look through the immediate short term economic weakness and price in expectations for a rapid (or “V-shaped”) economic recovery.
With this optimistic view dominating sentiment, global listed property and listed infrastructure also recorded strong gains; while other cyclical assets such as commodities also gained, most notably, crude oil and iron ore prices recorded stellar gains. Defensive assets, such as cash and bonds were laggard performers, but still managed small gains.
Asset class recap of June quarter 2020
Global shares
- Global sharemarkets rebounded from losses to record an impressive gain for the quarter, led by the U.S sharemarket which recorded the best quarter in more than two decades. There was a wide disparity in returns across global sectors, with the IT sector being the standout performer, delivering over 30% (in local currency). By contrast the defensive sectors, such as utilities and consumer staples, lagged with returns below 10%.
- Currency impact: The Australian dollar (AUD) strengthened against the U.S. dollar (USD) and other currencies, which weighed on unhedged international equity returns. Global shares rose by 18% in local currency terms, and by a smaller 6% in unhedged Australian dollar terms.
Australian shares
- The Australian sharemarket staged an impressive rebound in the June quarter that saw the ASX 200 post a gain of 16.5%, which was the largest quarterly increase since 2009. This rally was fuelled by an unprecedented $150bn government injection and aggressive monetary stimulus by the Reserve Bank of Australian to bolster the COVID-19 hit economy. However, it was not smooth sailing for the sharemarket and performance was choppy throughout the period as sentiment waxed and waned about the prospects of a return to ‘normal’ conditions for the global economy.
- Although all sectors recorded gains for the quarter, there was a meaningful divergence in sector performance, with defensive sectors being the laggards as healthcare, utilities, consumer staples all returned less than 8%; by contrast, the IT sector soared by more than 48% and consumer discretionary gained 30%.
Bonds
- Global and Australian bond markets were not immune to gyrations through the quarter but did manage to end modestly stronger. These gains were led by corporate bonds, which outperformed government bonds, as spreads on investment grade credit and high yield bonds narrowed, which was consistent with the broader market rally in riskier assets.
- In Australia, the yield curve steepened as 10-year government bond yields ended the quarter higher at 0.88%, to be above the U.S 10-year government bond yield for the first time since 2018, ie. a positive interest rate differential emerged.
Global Property and Global listed Infrastructure
- Global listed property and global listed infrastructure recorded strong gains for the quarter, increasing by over 8% and 10% respectively, supported by the rally in equities, continued low interest rates and a willingness to look beyond the short-term economic downturn.
Australian dollar
The Australian dollar rose spectacularly against the United States dollar (USD) and against a basket of currencies. This currency strength was driven by a multitude of drivers, chief amongst them being the broad-based weakness of the USD. Indeed, the US dollar declined to its lowest level on a trade-weighted basis since March, reflecting the surge in US dollar liquidity created by the U.S Federal Reserve’s stimulatory policies. Over the past three months the Fed has injected $US3 trillion ($4.3 trillion) into the US financial system. Stimulus from the U.S has surpassed other regions, further driving relative USD weakness versus other currencies. Also driving gains in the AUD has been the improved appetite for risk taking by investors, rising commodity prices (including iron ore and oil); and interest rate differentials modestly in Australia’s favour.
Commentary for Fiscal Year ended 30 June 2020
Investment market turbulence in the latter part of the fiscal year
2020 has shaped up to be an unforgettable year. The global health pandemic and the tragic loss of life saw governments around the world lockdown their economies and the movement of people, including in Australia. The speed and magnitude of the policy response from governments and central banks to support economies through this difficult time has been unprecedented. In Australia, policy measures have included government spending packages to help households and businesses; and the Reserve Bank of Australia cutting official interest rates to a record low and putting in place other measures (ie. quantitative easing) to bolster liquidity and credit within the financial system. For those experiencing financial hardship, the government also allowed individuals early access to their super.
While global equity markets experienced sharp and rapid losses in the March quarter 2020, there was an exceptional rebound in the last 3 months of the fiscal year, which saw earlier losses being partially recovered. However, there was meaningful divergence in performance across equity markets, as global equity markets returned a small positive for the full fiscal year, while the Australian sharemarket recorded a loss of more than -7%. The underperformance of the Australian market for 2019/20 represents a reversal from the previous fiscal year when it was one of the best performing markets. This serves as a useful reminder that investment markets are ever changing and that it is unhelpful to assume that last year’s winner or loser will be next years. This is ultimately unknowable and can't be predicted with any great accuracy. Investment decisions should be founded on what is knowable and important. With this, your portfolios are built and managed with a focus on valuations (or what an asset is really worth) and what is driving those valuations.
For global listed property and global listed infrastructure, it was a year of two halves. The first half of the fiscal year was characterised by strong performance, however, the onset of the COVID-19 shutdowns saw returns for both asset classes tumble, and this swamped gains from earlier in the year. For global listed property, the sharp decline in global demand for travel and leisure resulted in an immediate negative impact and the asset class overall fell by –17% for the fiscal year. Similarly, global listed infrastructure recorded a loss of approximately -16% for the year.
Bond markets ended the year higher, reflecting reductions in official interest rates in Australia and globally. The Australian dollar spent most of the period declining against the United States dollar and other key currencies over the year, and this helped to boost the unhedged returns from global investment markets for Australian investors. A late surge in the Australian dollar against the United States dollar in the final months of the year saw the currency pair end the year close to where it started.
Portfolio Performance
For the financial year ended 30 June 2020, REI Super’s Balanced Option delivered an investment return of -2.1% (net of investment fees and taxes), which was the first negative return for the Balanced option after 10 consecutive years of positive returns. This weaker return reflected the turbulence in key global investment markets through February and March 2020 stemming from the COVID-19 pandemic-led global lockdowns.
The allocation to Australian shares caused a drag on performance owing to market movements, as did global listed property and infrastructure. Acting as a partial offset, most of the international share managers contributed positively to performance, while bond investments also delivered positive returns.
While negative investment returns can feel uncomfortable, they are normal and can be expected during any economic cycle. It is important for members to focus on long-term returns and whether an investment strategy is achieving its long -term objectives, and to regard superannuation as a long-term savings plan. The REI Super Balanced Option has achieved its long-term performance objective of returning at least inflation plus 3% per annum over 10 years.
Positioning and outlook
While we continue to position the portfolio away from the most expensive assets, such as U.S shares, especially U.S technology shares, we have found that the recent period of heightened market volatility has accentuated large valuation differences and opportunities across global and U.S equity sectors. This has created the opportunity to invest in beaten up assets that have attractive long term expected returns. These include specific U.S diversified energy companies and U.S banks that we believe are trading at prices below what they are worth, and with this, we have added them to the portfolio at cheap prices.
Looking ahead, it remains unclear how the COVID-19 pandemic will unfold. Indeed, we live in a challenging period, arguably with higher uncertainty than any period since World War II. For example, we have demand shocks to contend with—including everything from suppressed household spending to a lack of corporate investment. We have supply chain issues too, which would all be exacerbated if we saw another spike in coronavirus cases.
The speed and magnitude of the spectacular share market rebound in the final quarter of the fiscal year should serve to demonstrate how quickly sentiment and momentum can turn around, and that attempting to time the top or bottom of the market is difficult, if not impossible. We anchor our investment decisions on valuations, or what an asset is really worth, and by doing so, we reduce the likelihood of falling into behavioural investment traps. The dispersion in share performance has created interesting valuation opportunities for active investors such as Morningstar, as we have taken advantage of pricing dislocations that market volatility and behavioural biases, such as fear of loss, can bring. The fear of loss can lead investors to switch out of an investment strategy into cash because it feels ‘safe’ when markets are falling, however, it may mean missing out on the rebound.
Uncertainty abounds, and in many cases, investment markets are factoring in little room for error. We believe the portfolios are well positioned to benefit from sharemarket gains, as we took the opportunity to add to good quality equity investments when prices were low. However, the Balanced portfolio still has healthy cash and domestic fixed income holdings which will offer a buffer should equity markets decline. The portfolio remains biased to attractively priced opportunities, which we think will help to grow wealth for REI Super’s members over the longer term.
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The information contained in this article does not constitute financial product advice. However, to the extent that the information may be considered to be general financial product advice, REI Super advises that REI Super has not considered any individual person’s objectives, financial situation or particular needs. Individuals need to consider whether the advice is appropriate in light of their goals, objectives and current situation. Members should obtain and read the Product Disclosure Statement for REI Super before making any decisions. REI Superannuation Fund Pty Ltd ABN 68 056 044 770 AFSL 240569. RSE L 0000314 REI Super ABN 76 641 658 449 RSE R1000412 MySuper unique identifier 76641658449129 April
The information contained in this article does not constitute financial product advice. REI Super does not give any warranty to the accuracy, completeness or currency of the information provided. Although REI Super makes every reasonable effort to maintain current and accurate information, you should be aware that there is still the possibility of inadvertent errors and technical inaccuracies. REI Superannuation Fund Pty Ltd ABN 68 056 044 770, AFSL 240569, RSE L0000314 Trustee of REI Super (ABN 76 641 658 449), SPIN REI0001AU, RSE R1000412. MySuper unique identifier 76641658449129.