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Overview
The final quarter of 2020 proved to be an extremely eventful period in financial markets. Notwithstanding a recent wave of COVID-19 infections, 2020 appears to have closed amid hope, with multiple COVID-19 vaccines coming to fruition (and in various stages of rollout), bringing confidence that economic activity may return to more normal levels in the foreseeable future. Elsewhere, we have further clarity around other potential areas of investor concern, with the U.S. Presidential election now done and dusted, while the U.K. passed an important milestone in December, formally ending its union with Europe.
Global shares
- Global sharemarkets surged in the final quarter of 2020 (with many key regions up in excess of 10%, in local currency terms), with a notable improvement in sentiment toward those economically sensitive sharemarket sectors, such as energy and financials. Indeed, energy and financials were the best performing sectors in Q4 2020 recording gains of more than 20%! Nonetheless, returns from these sectors finished down on a calendar year view, materially so in the case of energy.
- Shares in emerging market companies outperformed developed market peers, during the fourth quarter and on a 12-month view. This sector was buoyed by renewed confidence in the outlook for global growth and low U.S. interest rates.
- The information technology and consumer discretionary sectors each posted a strong quarter to finish the year as the top two sectors on a 12-month view (with the IT sector buoyed by the strong performance of a handful of dominant U.S. companies such as, Microsoft, Apple and Amazon).
- The Australian dollar also enjoyed greater support, consistent with the “risk on” trade, rallying to finish the year strongly at USD 0.7694. In this regard, while global sharemarket returns were reasonable, they were dampened somewhat for unhedged investors.
Australian shares
- The S&P/ASX 200 finished 2020 with a flurry, recording a quarterly return of almost 14%. This increase helped turn rolling 12-month returns positive (+1.4%), although Australian shares meaningfully underperformed global peers (in local currency terms), over this period.
- The previously out-of-favour energy and financials sector (the latter of which dominates the Australian market), posted a strong rally. Indeed, the energy sector was the best performing sector in Q4, delivering returns in excess of 26%, while financials posted gains of almost 23%. Nonetheless, returns from these sectors finished underwater for the year, materially so in the case of energy, which fell 27.5%.
- While a small component of the Australian market, the information technology sector enjoyed a strong Q4 (up around 23%) to end the year as the best-performing sector (+52.4%), in part reflecting positive global sentiment toward the sector. The resources sector rallied to finish the year as the second-best performing sector (+19%), with key constituents, BHP, Rio Tinto and Fortescue leveraged to the surging iron ore price.
Bonds
- Bond market returns were quite muted this quarter, with longer-dated bonds bond yields lifting slightly with renewed confidence around the outlook for global growth. That said, 12-month returns remained relatively robust, reflecting what has been a period of generally softening interest rate and inflation expectations, buoyed by the range of stimulus measures that have been delivered to help soften the economic blow of COVID-19.
Global property & infrastructure
- Returns from property and infrastructure were generally very strong this quarter, particularly for those assets leveraged to the outlook for global growth, like retail REITS, hotels and ports and airports. Nonetheless, returns from Australian and global listed property and infrastructure asset classes all remain negative, on a 12-month view.
Changes to the Balanced Portfolio over the December quarter
The portfolio is currently in transition to the new strategic asset allocation, in addition we are seeking to move around 30% of the portfolio to passive investments. This is expected to be completed by the end of quarter one 2021.
Positioning & Outlook
With such gains being seen recently in share markets, it is very normal to then ask the question “Is now the time to add more cash to market?”. It is understandable what might prompt that question. Many of the key risks that were front of investor minds throughout 2020 have passed or, at the very least, appear to be better understood and more under control, making this feel like a more comfortable time to invest. In actual fact, this is a behavioural bias that we must keep in check. Indeed, the time to invest is typically when fear and panic grips investors, leading them to make irrational investment decisions. We saw this back in March when markets heavily sold off amid COVID-19 uncertainty. Thankfully, we were able to identify attractive opportunities and invested significantly at that time, which continues to benefit the portfolio today.
Of course, in our view, the way to approach this extraordinary environment is the same way as we normally would, which is to understand how much value, or how good a deal, we are getting in financial markets. In this regard, we continue to position the portfolio away from the most expensive assets, such as U.S shares, (and especially U.S technology shares), preferring instead to invest in more attractively priced companies in the U.K., Japan and parts of Europe and Emerging Markets. At a sector level, shares in energy and financials companies continue to appeal, even accounting for their recent rally. The outlook for bond markets appears a bit more challenging although we can see some pockets of value, notably in Emerging Market debt, while the portfolio doesn’t hold as many longer dated bonds as we otherwise might (because the yields on offer here are quite low by historical standards).
Importantly, the Balanced portfolio still has healthy cash holdings which will continue to offer a buffer should we see share market weakness while providing us with the opportunity to buy attractively priced assets. With this, we continue to believe that the portfolio is appropriately positioned to achieve its longer-term objectives.
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