Investment markets and your super
Overview
- Stocks and bonds both fell considerably over the year, despite a fourth quarter recovery. On many measures, it was one of the most challenging environments for investors.
- Sparking the selloff, central banks became increasingly serious about bringing down inflation, causing investor sentiment to deteriorate.
- The selloff has been broad-based, with the exception of energy-related assets, which had one of their best years on record.
- U.S. dollar strength has been a feature of 2022, rising to its highest levels in two decades at one point in the year.
- On a positive note, valuations of stocks and bonds improved, sowing the seeds for future returns.
Global shares
The MSCI World Ex-Australia NR Index returned 7.4% over the quarter in local currency terms, reducing the 12-month return to -16.4%. In Australian dollar terms, quarterly returns were 3.9% due to the falling Australian dollar, reflected also in the 12-month return of -12.5%.
Energy is still the standout positive performer over the year, returning 51.5% in local currency terms over the last 12 months and producing another positive quarter at 17.1%. While most sectors achieved positive returns, losses were largest in Consumer Discretionary (which include large US companies such as Amazon and Tesla) and Communication Services, returning -4.7% and -1.2% in local currency terms, respectively.
All remaining sectors attempted to claw back losses made throughout the year throughout Q4. Real Estate (3.9%), Information Technology (4.1%), Utilities (8.4%), Consumer Staples (8.5%), Health Care (10.9%), Financials (13.0%), Materials (13.1%), Industrials (14.1%), all measured in local currency terms.
U.S. shares ended the quarter returning 7.6% 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. Although implications from Russia’s invasion of Ukraine remain uncertain. Over 12 months, U.S. shares returned -18.1%. Europe ex-UK and the U.K. returned -12.9% and 7.2% in local currency terms, respectively.
Australian shares
Australian shares had a positive quarter, outperforming major global indices, with the S&P/ASX200 index returning 9.4%. While all sectors in the S&P/ASX 300 produced a positive return, Utilities, Materials and A-REITS had the strongest quarter returning 28.0%, 14.7% and 11.6% respectively.
Key stats (ASX 200) (12-month returns in brackets): 9.4% (-1.1%).
Bonds
Bond yields increased over the quarter (the U.S. fixed income returned around 1.9%), with inflation in the U.S. continuing its upward trajectory. This rise in yields led declines in the global benchmark index.
Key stats in local currency terms, (12-month returns in brackets): Australia: 0.4% (-9.7%); Global: 0.6% (-12.3%).
Global property & infrastructure
Domestic and global listed property & infrastructure returned positive results throughout the quarter alongside global equities.
Key stats (in AUD terms) (12-month returns in brackets): Australian listed property: 11.6% (-20.1%); Global listed property: 4.5% (-25.0%); Global listed infrastructure: 7.2% (1.3%).
Unlisted Property
The MSCI/Mercer Australia Core Wholesale Monthly Property Fund Index fell by 0.10% over the quarter, based largely on the performance of Office Funds that fell 1.5% for the quarter. Office Funds represent 34% of the total net asset value of all funds in the index. The listed real estate investment trust sector was hit early and hard by rising interest rates globally which drove valuations down.
Unlisted Infrastructure
The MSCI Australia Quarterly Private Infrastructure Index (Unfrozen) increased marginally to 2.0% over the quarter. This performance was underpinned by a continued recovery in transport as demand for air travel continued to increase despite high jet fuel costs being passed through airfares and continued resilience in toll roads despite the escalation in toll prices in line with inflation.
Currencies
The U.S. dollar appreciated against most major currencies given the continuing sharp rises in the Federal Funds rate and typical “flight to safety” that occurs during instability, with the Australian dollar finishing the quarter at 64 US cents, down from 68 US cents at the start of quarter. Albeit, stronger than other major currencies which experienced larger falls against the USD.
Changes to the Balanced Portfolio over the December quarter
- The portfolio remained slightly underweight risk assets over the quarter.
- In international equities, we rebalanced the U.S. exposure in favour of more attractive valuation opportunities by adding to the Communication Services sector (technology stocks) and Financials sector (commercial and investment banks), funded from select holdings in the Consumer Staples and Health Care sectors. We also added to the South Korea exposure and the Chinese technology sector by realising profits on the Brazil exposure.
- 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.
Positioning & Outlook
Unfortunately, 2022 will go down as a very difficult year for investors, who have grown accustomed to a decade-long equity- and bond-market rally. The S&P 500 lost 18.1% for the year – its biggest calendar-year loss since 2008 - and global bonds were down 12.3%. This came despite stocks and bonds both rallying in 2022’s fourth quarter, trimming the losses built up earlier in the year.
Chief among the challenges were inflation, rising interest rates, and weakening company fundamentals prompting increasing concerns of a potential recession. Markets were further buffeted by a range of geopolitical issues including the war in Ukraine and increasing tensions in the South Pacific. Together this saw meaningful falls in equities, most prominently in growth stocks such as technology companies, which were priced at historically expensive multiples coming into 2022. In the fourth quarter, market sentiment seemed to be reacting positively to tentative signs of the US inflation growth rate peaking. Markets read this as a sign that the US central bank would not need to tighten as much as had been expected. In turn supporting stock prices, particularly those of the “beaten down” technology companies. The Reserve Bank (along with many other central banks) raised interest rates eight times in 2022, but the 25-basis-point hike in December was smaller than the previous increases, perhaps offering a small sign that the worst of the increases were behind us. However, in typical 2022 fashion, investors were reminded that volatility remained lurking, and eyes quickly turned to the deteriorating state of the economy, with higher interest rates pinching both households and companies alike.
Over the course of the year, members’ portfolios were subjected to volatile conditions, leaving few places to hide. Nearly every corner of the financial markets posted large losses. Only a very narrow section of the stock market— energy-related assets or truly defensive names such as stable, high-dividend payers—offered shelter from the storm. As valuation-driven investors, members’ portfolios were well positioned coming into 2022 preserving investor capital in hostile market conditions to help members reach their long-term goals.
It is hard to imagine a more brutal year than 2022, which saw both major equity and bond markets down by double digits, although the longer-term picture is much more balanced. A key variable that many investors are watching in 2023 is the degree to which corporate earnings can remain buoyant or if expectations are too high, which could spell more trouble for the market. That said, a potential burst of optimism is that the central banks might be able to pause their rate hikes and ``pivot” to lowering rates. Yet, much of these “macro” issues are unknowable and it is therefore dangerous to presume a certain path. To overcome these temptations, an investor must think probabilistically. The correct question is not “what is the market going to do next?” but rather “are assets priced reasonably for the current environment?”
Heading into 2023, bearish sentiment among investors is at the highest it’s been since tracking such data started 35 years ago. With a contrarian lens, this could be a positive as it provides opportunity to purchase valuable assets at a discounted price. However, while the overall valuation landscape has undoubtedly improved, there are many assets which remain around fair value. In such an environment, we remain determined to balance opportunities against risks and believe that the portfolio is appropriately positioned to achieve its investment objective over time.
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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