Your quarterly investment update - to 31 March 2021

This article is brought to you by Morningstar.

Overview

What a difference a few months makes. Indeed, an improving economic outlook, following enormous stimulus from global governments and central banks has buoyed investor sentiment. This has been further sustained by encouraging news on corporate profitability, with recent company reporting broadly exceeding expectations.

The main catalyst has been the COVID-vaccine rollout. While it hasn’t necessarily been smooth sailing, there is nonetheless an expectation that a significant percentage of the world’s population will have the opportunity to be vaccinated over the course of this year, raising hopes that we may be able to return to some version of “normal” in the foreseeable future.  

REI Super Balanced option - net investment returns as at 31 March 2021

REI Super Growth option - net investment returns as at 31 March 2021

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Past returns are no guarantee of future performance, and investment returns of less than one year should not be relied upon as any guide to future performance. 

The story behind key assets over the quarter 

• Global stock markets continued to charge upward in the first quarter, driven by vaccine distribution efforts in major markets and improving economic and corporate fundamental data.  
• World markets in aggregate advanced about 6% in the first quarter, led by Europe's 8% increase¹.
• The energy and financials sectors continued to lead; these global sectors posted quarterly returns of 18.6% and 12.7%, respectively, clawing back a portion of the longer-term outperformance of information technology and consumer discretionary¹.  
• Value stocks topped growth for the second quarter in a row, with global value outperforming by more than 8 percentage points¹.
• Most stock markets in Asia-Pacific continued to rally in the first quarter as vaccine rollouts began and the economic picture brightened. One-year returns show some outsized figures as the pandemic-led crash in March 2020 rolled off the books. Thailand, Taiwan, India, and Korea have now all posted one-year returns in excess of 70%¹.

Australian shares

• The S&P/ASX 200 continued its positive run into the first quarter of 2021, rising by 4.3% over the period. Rolling 12-month returns improved to 37.5%, however, Australian shares still lag their global peers (in local currency terms) over that period¹.
• Despite the positive return from the S&P/ASX 200 index, the market did sell off from its intra-quarter highs in February. Bond yields increased as investors started to price in the prospect for higher inflation and whether central banks will begin raising cash rates.
• Telecommunication services, financials, and consumer discretionary sectors were stand-out performers over the quarter, gaining 13.8%, 12.1%, and 8.9%, respectively. Financials’ performance was buoyed by domestic housing prices which surged by over 2.5% month over month in March (according to CoreLogic data), the fastest pace of growth since 1988¹.
• Strong consumer discretionary performance coincided with rebounds in consumer confidence in each of January, February, and March, as measured by NAB’s business conditions surveys. Performance otherwise in the domestic market was mixed; industrials were the next best performer (3.4%), followed by energy (3.3%), and materials (2.7%), while consumer staples were broadly flat (0.1%). Utilities, healthcare, and information technology lost 1.8%, 2.1%, and 10.3%, respectively¹.

Bonds

• In bond markets, dormant expectations for inflation began to emerge, leading to losses across interest-rate-sensitive sectors in the first quarter. The sell-off hit government bonds the hardest, followed by safer core and corporate bonds. Only high-yield bonds managed to end the quarter just in positive territory.
• The yield curve (which looks at the effective interest rate for governments across maturity dates) steepened severely from three months ago on expectations for stronger economic growth. The 10-year U.S. Treasury yield rose 1.04 points over a year ago, reaching pre-pandemic levels near the end of the first quarter. Government bonds lost 6.2% globally in the quarter¹.

Global property & infrastructure

• With continuing confidence in the economic recovery, returns from property and infrastructure were generally strong this quarter.

Positioning & Outlook

With an improving outlook for global growth comes a renewed focus on inflation (which can best be described as the tendency for the prices of goods and services to go up, over time). Having been starved of signs of noteworthy inflation for so long, rising inflation expectations may well come as a relief for central bankers, partly because it would enable a return to more traditional tools (such as lifting interest rates) to help keep things under control but, more importantly, because it means that deflationary fears that rose to prominence when entire economies were plunged into COVID-induced lockdowns, have now generally receded (prices typically fall during periods of deflation, all things being equal, presenting a very challenging situation for central banks to manage). In truth, like many macroeconomic factors, inflation remains difficult to predict. But, in our view, the risk of an uptick in inflation expectations was unappreciated by most investors. This has profound implications for portfolio construction, particularly with regard to interest-rate sensitive assets, and goes some way to explaining some of the moves in asset prices that we have seen in recent months. 

All in all, portfolio returns appear strong, with rolling 12-month numbers as high as they have been for a number of years – but we must apply a note of caution in assessing over such a short time frame. While returns associated with this recovery are gratefully received, now is not the time to drop our guard when managing our behaviour. With this in mind, we continue to draw on the insight from our valuation framework in order to identify attractively priced assets that we think will help deliver longer term returns to the portfolio. 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. Elsewhere, the outlook for bond markets has improved, with more attractive yields on offer as part of this reflationary theme that has swept through financial markets.

Are you invested in the right investment option?

Before reviewing and changing your investments, you should figure out what your risk profile is. Why? If you don’t know what level of risk you’re comfortable with, how much you are willing to put your finances at risk or what your financial goals are, then you’re heading down a risky path with your money. Establishing your risk profile before investing, will help you determine your investment strategy and help you achieve your financial goals.

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• How much do I need in retirement?

Need advice on investments

Now that you have an idea of your risk profile and how much you need to save for retirement, call our member services helpline to help choose the right investments for you. Our advice on contributions, investments and insurance within your REI Super account is free. There are low fixed fees to set up or review transition to retirement strategies or to obtain comprehensive advice. Call us today 1300 13 44 33.

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¹ Net Returns.

This article is brought to you by Morningstar. This information does not take into account your situation and you should consider if these products are appropriate for you.

The products or services being advertised are provided by third parties, not REI Super and therefore will not be the responsibility of REI Super. REI Super may invest in these third parties but does not receive any payments or commissions from these organisations as a result of members using the products and services. Members should make their own assessment and seek professional advice as to the suitability of such products or services for their individual needs.

Past returns are no guarantee of future performance, and investment returns of less than one year should not be relied upon as any guide to future performance.

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 2021.