Quarterly report - December 2018

Investment markets – a snapshot

• Volatility pushes share markets into negative territory
• Ongoing US-China trade tension
• Another rate rise in the US
• The RBA kept interest rates on hold at 1.5% p.a.
• The Australian dollar weakens against all major currencies and drops to US70.53

The December quarter was an extremely volatile period for both overseas and Australian share markets but other asset classes such as property, infrastructure, fixed interest and cash all posted positive returns.

The economic environment

The December quarter has seen quite a bit of fluctuation in financial markets with steep declines in both overseas and Australian share markets. And this impacted returns for super funds across the board.

So what caused this volatility? Some of the key influences were:

• Higher US interest rates – The US central bank has been steadily increasing interest rates since March 2015 and investors are worried that this might lead to an economic downturn.
• Trade issues and politics – The ongoing trade tensions between the US and China and the impact that this will have on global growth and company profits – particularly in the technology sector, also played a part. Furthermore, the ongoing uncertainty around Brexit and the civil unrest in Europe have also weighed heavily on business and consumer confidence.
• Slowing of China’s economy – China’s growth has slowed with the economy recording its weakest quarterly growth since the global financial crisis.
• Falling domestic house prices – The Australian housing market continued to cool, and investors fear that this is likely to dampen consumer confidence.

The impact on super investments

Investment returns of super funds over the December quarter reflected this negative tone in share markets. Our Balanced (MySuper) option ended the quarter with a return of -4.27%. Steady returns from our cash and fixed interest asset classes, and good returns from our holdings in property and infrastructure assets, helped to absorb some of the share market losses for the quarter.

This share market volatility was confined to the December quarter. Over the 12 months to 31 December 2018, the Balanced option has remained positive returning 1.35% as markets were stronger earlier in the year.

Our Balanced option returns remain strong over the long term returning on average 8.36% per annum over the last ten years and on average 7.89% per annum over the last 20 years. Returns for our pension members were slightly higher because pension members don’t pay tax on investment earnings. 

The returns for all our Managed and Asset class options over various time periods are set out in the performance table.

Key drivers behind our returns

Shares

Global developed markets (in local currency terms) returned -11.00% for the quarter. The US and Japanese markets were amongst the worst performers while the Australian Share market fared better with a return of -8.40%. Emerging markets broadly outperformed developed markets posting a return of -4.83% for the quarter.

Our Balanced option invests in a diversified mix of assets, which includes infrastructure, property, fixed interest, cash, as well as shares. So while share market returns were negative for the quarter, our other assets helped to cushion some of the losses.

Alternatives

Our alternative investments posted much better returns over the quarter with private equity returning 2.16%, infrastructure 1.01%, absolute return -0.24% and credit -2.39%.

These alternative investments, such as private equity and infrastructure, perform differently to more traditional growth assets like shares and can offer attractive returns during times of market volatility. Apart from our Capital Guaranteed option, all our Managed options have considerable exposure to alternative assets.

DIRECT PROPERTY

Our Direct Property option delivered the strongest return with 2.76% for the quarter. While residential property prices in Australia have been falling, our property investments are primarily in commercial real estate, such as shopping centres and office buildings.

FIXED INTEREST AND CASH

Fixed interest (or bond) markets provided solid returns across most countries. Australian bonds returned 2.20% over the quarter outperforming hedged global bonds (1.70%), as the Reserve Bank held rates steady at 1.5% while the US Federal Reserve hiked rates by 0.25% during the quarter.

Our Fixed Interest Index (which is made up of global and Australian indices combined) returned 2.03% for the quarter while Australian cash was lower with a return of 0.48%.

Focus on the long term

While falls in share markets over the December quarter have impacted overseas and Australian markets in a big way, they come after a very strong financial year. We know it can be worrying to see your balance fluctuate, but it’s important to remember that volatility in markets is a normal part of investing. Your super is a long-term investment to grow your savings for your retirement. So rather than just looking at quarterly or annual returns, we encourage you to look at the longer term as we do. Our Balanced option continues to perform in the top 10 over 3, 5, 7 and 10 years and is number 1 over 20 years.*

*SuperRatings Fund Crediting Rate Survey (Balanced (60-76) Index, December 2018.

The outlook

In the month of January, markets have recovered quite a bit from the December quarter losses, mainly as the US central bank adopted a softer tone on interest rates. And although markets have picked up, there are reasons to remain cautious.

Key concerns continue to be whether the US and China can strike a deal on trade, whether the US central bank can get interest rates just right and to what extent political and policy issues, such as the US Government shutdown and Brexit, will have on markets going forward.

Moreover, we’re in the late stages of an extended global growth cycle and we believe it’s important to be realistic about the returns that can be expected. We do think that the market environment is changing and we’re carefully monitoring these trends.

As part of our active management approach, we’ll continue to assess the opportunities and risks in markets through 2019, but remind members that we’re focused on delivering strong, consistent returns over the long term.