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Overview
COVID-19 continues to dominate sentiment with investors attempting to balance concerns around the health and economic cost of the virus against hopes of a vaccine and ongoing government and central bank support which may see a return to some form of “normal” in the foreseeable future.
Global shares
- The positive momentum among global sharemarkets in the second quarter continued into the third, with most key markets delivering a strong return, in local currency terms. This, in turn, sees 12-month returns for global sharemarkets turn positive, in aggregate, which is an extraordinary achievement when you consider the speed and magnitude of losses incurred in Q1 2020, amid the initial period of COVID-19 uncertainty.
- However, a deeper look shows significant divergence among returns by both country and sector. The U.S. sharemarket, for instance, has done very well, indeed achieving an all-time high during the quarter. The U.K sharemarket, by contrast, already suffering poor sentiment from Brexit uncertainty before COVID-19 struck, remains down around 20% year-to-date. Similarly, the information technology sector has been a standout (underpinned by the strong performance of a handful of dominant U.S. companies such as, Microsoft, Apple and Amazon), while sectors more sensitive to the outlook for economic growth, notably energy and financials, remain under pressure.
- The performance of the Australian dollar (versus the U.S. dollar) over the quarter was relatively benign, compared to the volatile start to the year, grinding its way to finish the quarter slightly higher at USD0.7162. Underpinning this, is weakness in the U.S. dollar, given the scale of U.S. stimulus, while an improvement in sentiment generally sees the Australian dollar more in favour. At this level, it is now marginally ahead of where it finished 2019, notwithstanding that the currency has been on a roller coaster ride between those two dates. The strength in the currency slightly hampered unhedged international equity returns, with global shares delivering around 7%, in local currency terms, versus ~4% in Australian dollar terms.
Australian shares
- After a volatile first half of 2020 (which saw sharp losses in the first quarter, followed by an impressive rebound in the second), the S&P/ASX 200 delivered much more muted returns in the third quarter, finishing down 0.4%. This brings rolling 12-month returns to -10.2%, with Australian shares continuing to meaningfully underperform global peers (in local currency terms), over this period.
- Global themes heavily influenced the local market, with the I.T. and consumer discretionary sectors leading the way (notwithstanding that the former is a relatively small component of the local market), while sectors sensitive to the economic outlook, for example, energy and index heavy-weight, financials, remained under pressure this quarter, given worries around global growth.
Bonds
- Bond markets saw modest gains over the quarter, with longer-dated bonds benefitting from the “lower for longer” view of domestic interest rates, in particular, and expectations that we will see further stimulus to soften the economic blow of COVID-19.
Global property & infrastructure
- Returns from property and infrastructure were generally flat for the quarter, with the exception being Australian listed property which saw gains on hopes of a further relaxation in social distancing requirements that may bring us closer to a return to some form of “normal”. Nonetheless, returns from this asset class, in general, remain well underwater 2020-to-date.
Changes to the Balanced Portfolio over the September quarter
- The fund fully divested from alternative assets during the quarter. Assets were rotated into Australian Bonds to take advantage of the steeper yield curve. Australian equities were also added as the Australian market continues to lag the broader market in the recovery
- The hedge ratio was marginally reduced as the Australian dollar reached a 2 year high during the quarter. Currency provides significant diversification benefits to the portfolio as the AUD is typically a risk off trade during periods of market stress. The lower exposure to the Australian dollar should provide diversification benefits to members.
- We slightly reduced the portfolios exposure to deep cyclical names in the face of continued economic uncertainty.
Positioning & 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, the market and economic environment remains uncertain. The vaccine waiting game continues, while in the political scene we have the upcoming U.S. Presidential election, not to mention, Brexit and trade wars, which have been bubbling away for a while.
Recent gains mean that popular sharemarkets are becoming increasingly expensive. However, we can still find a range of investments that continue to appeal, and which we think will be key to contributing to your portfolio returns over the longer term.
Importantly, the Balanced portfolio still has healthy cash holdings which will continue to offer a buffer against further equity market weakness while providing us with the opportunity to further buy beaten up assets, with attractive long term expected returns.
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