Investment markets and your super
- Investor sentiment continued to deteriorate in the face of global central banks significant and ongoing interest rate rises and monetary tightening.
Fears of a global recession continue, and this has pushed with the U.S. dollar reaching new highs versus a basket of global currencies
However, the volatility in markets has meant that, stock and bond valuations continue to improve, sowing the seeds for future returns.
New unlisted infrastructure investments - including airports, train lines, toll roads, energy pipelines, utilities and seaports - will provide members with exposure to long term, consistent income producing assets whose underlying valuations are not subject to the same short-term volatility as global equity markets.
The MSCI World Ex-Australia NR Index retreated -4.5% over the quarter in local currency terms, reducing the 12 month return to -15.7%. In Australian dollar terms, quarterly returns were 0.3% due to the falling Australian dollar, reflected also in the 12 month return of -9.8%.
Energy is still the standout positive performer over the year, returning 35.4% in local currency terms over the last 12 months and producing another positive quarter at 1.3%. Losses were largest in Communication Services (which include large US interactive media companies such as Meta, Alphabet and Netflix) and Information Technology (such as Apple and Microsoft) returning -36.1% and -23.8% in local currency terms, respectively.
Besides Consumer Discretionary returning positive for the quarter at 2.1%, all remaining sectors were down. Communication Services (-11.9%), Real Estate (-10.6%), Utilities (-6.4%), Information Technology (-5.6%), Health Care (-5.4%), Consumer Staples (-4.5%), Materials (-4.2%), Industrials (-3.1%), Financials (-3.5%), all measured in local currency terms.
U.S. shares ended the quarter returning -4.9% in local currency terms. The Federal Reserve again noted the strength of several economic activity indicators in the U.S., with labour market conditions improving, though implications from Russia’s invasion of Ukraine remain uncertain. Over 12 months, U.S. shares returned -15.5%. Europe ex-UK and the U.K. returned -4.5% and -2.9% in local currency terms, respectively.
Australian shares had a positive quarter, outperforming major global indices, with the ASX200 index returning 0.4%. While most sectors produced negative returns, Utilities, A-REITS and Industrials were hit the hardest and returned -12.5%, -6.9% and -4.3% respectively.
Key stats (ASX 200) (12-month returns in brackets): 0.4% (-7.7%).
Bond yields increased over the quarter (the U.S. 10-year bond yield finished around 3.8%), with inflation in the U.S. continuing its upward trajectory. This saw declines in the global benchmark index.
Key stats in local currency terms, (12-month returns in brackets): Australia: -7.3% (-1.24%); Global: -3.4% (-11.4%).
Global property & infrastructure
Domestic and global listed property & infrastructure sold off alongside global equities, albeit less severely.
Key stats (in AUD terms) (12-month returns in brackets): Australian listed property: -6.9% (-21.1%); Global listed property: -10.6 (-19.7%); Global listed infrastructure: -7.3% (-1.2%).
The U.S. dollar appreciated against most major currencies given the continuing sharp rises in the Federal Funds rate, with the Australian dollar finishing the quarter at 64 US cents, down from 68 US cents at the start of quarter however is stronger than many other currencies.
The MSCI/Mercer Australia Core Wholesale Monthly Property Fund Index rose by 1.7% over the quarter. Capital returns moderated to flat to slightly positive gains as property valuers start to factor in higher debt funding costs in cap rate valuation assumptions. The positive capital return result for unlisted property groups (not unexpectedly) lags listed property counterparts, which fell more significantly over the quarter as markets factored in rising interest rate concerns. Within unlisted property, industrial property assets continue to experience strong rental demand, while office assets continue to experience higher vacancy levels. Major financial institutions continue to reduce office space as staff continue to favour working from home. Within retail, suburban retail assets continue to experience stronger trading conditions compared to CBD retail assets.
The MSCI Australia Quarterly Private Infrastructure Index (Unfrozen) rose by 1.9% over the quarter. This performance was underpinned by continued positive performance in transport, regulated utilities and energy transition sectors with strong revenues supporting asset valuations. With COVID-19 likely moving from a pandemic to an epidemic stage and many countries continuing to ease travel restrictions, the volume of aviation and toll road traffic continued to recover over the quarter with the latter recovering to 2019 levels due to increasing office commute and leisure trips due to the lifting of restrictions.
Changes to the Balanced Portfolio over the September quarter
The portfolio remained slightly underweight risk assets over the quarter.
In international equities, we continued adding to the U.S. equity allocation and reducing the long-standing underweight to the region. Specifically, we added to technology stocks (via the communication sector) and to financials (both commercial and investment banks), both of which were already held in the portfolio. Funding these positions were some profits taken in U.S. consumer stapes, Mexico and Japan.
We continued to allocate funds to unlisted infrastructure, investing funds in the First Sentier Global Diversified Infrastructure Fund and the IFM International Infrastructure Wholesale Fund. These new infrastructure investments - including airports, train lines, toll roads, energy pipelines, utilities and seaports - will provide members with exposure to long term, consistent income producing assets whose underlying valuations are not subject to the same short-term volatility as global equity markets. It also means that members’ money is helping fund vital infrastructure for the benefit of current and future generations.
As always, we are seeking to remain opportunistic and focus on market segments with embedded value whilst being considerate of valuations in several developed markets that are expensive relative to history.
For the sixth consecutive month, the RBA followed the lead of other global central banks by increasing the cash rate from 2.35% to 2.6% to combat the threat of rising inflation, a smaller rate rise than generally expected. Investors’ nerves continue to grow, with asset prices remaining under pressure. Stocks have now fallen for three quarters in a row, while bonds too have seen record losses.
Generally, the REI portfolio has held up relatively well through these volatile times. Notwithstanding this, the portfolios continue to be monitored carefully. The portfolio’s weighting to growth and defensive assets continues to be broadly in line with its target long term asset allocation, with the current environment providing opportunities for nimble, long-term focused investors.
The recent volatility has seen two schools of thought emerging on the directions of markets from here. One is that the setback has created a healthy reset—improving valuations and opportunities for higher future returns. The other distinct theme is that we’re in the middle of a new post-stimulus world with harder realities ahead which will likely see increased volatility across all asset classes.
To this point 2022 has been a testing year for investors across the risk spectrum. . Exuberance has given way to pessimism, driven by weakening fundamentals, concerns about slowing consumer demand, tightening liquidity, and the potential for recession as the central banks intensify their commitment to bring inflation down. This has resulted in a significant downturn in investor sentiment seeing expectations lowered and assets, in some instances, oversold. This in combination with the more attractive valuations across many assets presents us with an opportunity to selectively buy assets that are likely to deliver better outcomes than what we have seen for some time.
Broad index returns over the last 12 months were as follows:
- Australian equities -7.7%
- Global equities (local currency) -15.7%
- Chinese equities -33.9%
- Australian bonds -11.4%
- Global listed property -19.7%
- Global listed infrastructure -1.2%
Recent market moves also show that sometimes market ‘rules of thumb’—such as bonds providing diversification benefit to investors in times of market stress —are a sign that a broader definition of diversification may be needed, with portfolio robustness a key focal point. Our role is to construct portfolios that help investors reach their long-term goals. Accepting volatility is a prerequisite for long term positive returns in any market, and today’s market arguably requires greater care than usual. As advocates of valuation investing, we strive to target the best priced assets with careful sizing and diversification. Consequently, as valuations become more attractive, we continue to look to broaden the portfolios exposures across the most attractive asset classes, regions, and sectors identified by our process.
Are you invested in the right investment option?
Before reviewing and changing your investments, you should see how much risk you can tolerate. Why? It’s important to understand what level of risk you’re comfortable with. Understanding your risk profile will help you with planning your investment strategy and assist you with your financial goals.
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 on 1300 13 44 33.
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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.
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