Investment markets and your super
Overview
- Stocks and bonds delivered a positive performance for the quarter, despite shouldering concerns of a banking crisis.
- Economic data continues to shape expectations, with interest rates and banking stability among the top concerns for investors.
- Many markets remain below their peaks. While opportunities present themselves, it is worth having a critical eye on risks and we remain determined to prioritise research over reaction.
Asset class recap of March quarter 2023
Global shares
The MSCI World Ex-Australia NR Index returned 7.5% over the quarter in local currency terms, reducing the 12-month return to -5.6%. In Australian dollar terms, quarterly returns were 7.5% due to the falling Australian dollar, also reflected in the 12-month return of 4.3%.
Information Technology and Communication Services were the strongest performers over the quarter, returning 21.0% and 17.9%, respectively. Consumer Discretionary also had a strong start to the year, returning 16.1%.
While most sectors achieved positive returns, performance was negative in Energy (-3.8%), Financials (-1.9%), and Healthcare (1.9%) for the quarter.
All remaining sectors returned the following: Industrials (6.7%), Materials (5.8%), Consumer Staples (2.9%), Real Estate (0.7%), Utilities (0.1%), all measured in local currency terms.
U.S. shares ended the quarter returning 7.5% in local currency terms.
Australian shares
Australian shares had a positive quarter, outperforming major global indices, with the S&P/ASX200 index returning 3.5%. most sectors in the S&P/ASX 300 produced a positive return, Consumer Discretionary and Consumer Staples had the strongest quarter returning 10.8% and 7.5% respectively.
Bonds
Bond yields continue to increase over the quarter 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, Australia: 4.6%, Global: 2.4%.
Global property & infrastructure
Domestic and global listed property & infrastructure returned positive results throughout the quarter alongside global equities.
Key stats (in AUD terms): Australian listed property: 0.3%, Global listed property: 0.7%, Global listed infrastructure: 3.2%.
Currencies
The U.S. dollar appreciated against most major currencies, with the Australian dollar finishing the quarter at 66 US cents, down from 68 US cents at the start of quarter.
Changes to the Balanced Portfolio over the March quarter
- The portfolio remained marginally underweight risk assets over the quarter, though the underweight was reduced compared to where it stood at the end of 2022.
- In international equites, we rebalanced the U.S. by increasing the banks exposure and decreasing the consumer staples exposure taking advantage of relative value differences between the sectors. The decision to reduce the consumer staples exposure was based on having made a considerable return on the sector and there being less upside subsequently. The banking sector in the U.S. saw a drawdown in the last part of March, during which we added to existing holdings whose balance sheets and deposit bases remain strong and well insulated from the risks, which ultimately saw the failure of several smaller capitalisation banks like SVB.
- We have started to increase the portfolios’ bond exposure, taking advantage of rising bond yields Volatility in yields continues to provide modest selection opportunities that we are seeking to take advantage of in the portfolio.
- 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
After a tough 2022, stocks and bonds posted gains during the first quarter. But it was worries about a banking crisis and continued interest rate speculation that took headlines.
The chief concern among many investors shifted from inflation to a liquidity crisis among US regional banks, which began with the collapse of Silicon Valley Bank. While it escalated quickly with fears of contagion, investors seem convinced that central banks have contained the problem so that much of the stock market was able to weather the storm and rally in the aftermath.
Underlying the back and forth of sentiment in the stock and bond markets were significant swings in expectations for central bank policy. We saw further interest rate rises in the quarter, but continued at a slowing rate, as investors started off the year believing that inflation pressures were weakening. However, economic surprises continued, often with stronger than expected data. Corporate earnings were a soft point in the reporting season, although investors took this mostly in stride.
At the sector level, the first quarter saw a reversal of the trends that dominated the market in 2022. Technology and communication services stocks carried the market higher during the first quarter. Meanwhile, energy and defensive sectors— generally the most buoyant names in 2022—lagged in the first quarter. Growth stocks more broadly staged a rebound, while value and dividend-paying stocks trailed. Developed-markets stocks also outperformed emerging-markets stocks, although both posted positive outcomes.
Looking Ahead
As the second quarter gets underway, the question facing investors (and central banks) is whether the banking scare will reverberate through the economy and cause a recession through tighter credit conditions. Obviously, this is difficult to predict and remains a genuine risk. What is clear is that investors and central banks are watching closely, with the risk of further bank failures (and undesirable knock-on effects) weighed against a potentially friendlier interest-rate outlook.
Overall, sentiment remains bearish among investors on most measures. In some respects, this is cause for optimism, as it can mean there could be mispricing to be taken advantage of as investors become overly cautious. The negative sentiment expressed towards banks is reminiscent of the 2008 Global Financial Crisis when market participants sought the next weakest financial institution. The GFC left an indelible mark on investors’ minds, so it is not surprising that it is influencing their perspective to this day.
Looking beyond sentiment, the differences between the current situation and 2008 are more noticeable than the similarities. However, regardless of the strength of bank balance sheets, a loss of confidence in a bank can create a destructive ‘bank run’ and a sharp tightening of lending standards across the system. This environment is extremely challenging for central banks and perilous for investors.
The collapse of SVB and UBS/Credit Suisse merger is yet to create any outstanding investment opportunities, so caution is warranted. While some of the best investment opportunities could emerge among the banks, a greater margin of safety is required given the near-term risks.
While we may continue to experience heightened volatility, the portfolio is built with what we consider to be attractively priced assets and is appropriately positioned to achieve its objective over the long term.
Volatility in the bond market has remained at twice its historical level over the past four quarters, a notable occurrence for a market that most investors look to for stability. That said, bonds broadly produced positive outcomes in the first quarter.
The relative appeal of bonds compared to shares has improved (largely given recent sharemarket results, which makes bonds appear more attractive, relatively speaking). With yields on key bond markets much improved compared to this time last year (as is their ability to help diversify our equity investments at current valuations), in the first quarter of the year, we increased our investment in Australian and global bonds.
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. As an REI Super member, you have access to advice on contributions, investments, and insurance. There are competitive fixed fees to set up or review transition to retirement strategies or to obtain comprehensive advice.
Call us today on 1300 13 44 33.
………………………………………………………………………………………….
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 organizations 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. REI Super does not give any warranty to the accuracy, completeness or currency of the information provided. Although REI Super makes every reasonable effort to maintain current and accurate information, you should be aware that there is still the possibility of inadvertent errors and technical inaccuracies. REI Superannuation Fund Pty Ltd ABN 68 056 044 770, AFSL 240569, RSE L0000314 Trustee of REI Super (ABN 76 641 658 449), SPIN REI0001AU, RSE R1000412. MySuper unique identifier 76641658449129