Markets Summary – December 2019
Take a look at what has been happening in the economy for the month of December.
Over the March quarter, a minor health report from China quickly transformed into a full-blown pandemic. Coronavirus has infected more than 700,000 people globally and resulted in extreme economic disruptions that impacted billions more worldwide.
As developments evolved, world policymakers announced trillions of dollars in various support measures to help stabilise global economies and financial markets. Australia was no different.
While the RBA cut the cash rate to a low of 0.25% and announced monetary policy measures to help support the economy, the government enforced lockdowns and announced three stimulus packages worth more than $200 billion to help aid businesses and households impacted by the pandemic.
Developments in global economies impacted financial markets. Investors embraced a less-risky approach to investing, rapidly selling out of share markets and buying into safe-haven assets such as government bonds and cash. All investments were impacted, however, global fixed interest investments returned more to investors over the quarter – up 4% compared to global shares, down 10%.
Financial markets were highly volatile and sensitive to Coronavirus developments. For example, despite peaking at all-time highs in February, global share markets still declined by 10% over the quarter. This would mean that members in funds with higher exposures to riskier growth assets likely received more negative returns than members with more conservative investment portfolios.
The volatility that financial markets experienced over the quarter was extreme, so it’s understandable for members to feel concern about the value of their superannuation investments.
While it’s too soon to tell when markets will recover, history shows us that they eventually do. So it is important to remember that while markets can and do fluctuate over the short and medium term, investing your superannuation does require a longer-term view.
Looking ahead, we anticipate that financial markets will continue to be volatile before showing some signs of stabilisation as world economies, businesses and households adapt to a new normal.
In the meantime, our team is communicating closely with investment managers to understand the risks and opportunities in investing during this period. As markets learn more about the Coronavirus and its implications every day, we can gain more insight as to the economic impacts of the pandemic – in turn, helping us to make more informed decisions on behalf of our members over time.
As always, we would like to thank you for your continued support and wish you well in these difficult times.
When economists of the future look back at 2019, they might say it was the year central bankers successfully managed to reinflate financial markets – if not the global economy at large. Despite the global backdrop of easing monetary policy, a slowing global economy and escalating geopolitical risks, all asset classes performed well during 2019 with global and Australian shares, listed real assets and global infrastructure securities performing particularly well. Looking ahead, we anticipate further developments in trade negotiations and continued central bank monetary policy easing worldwide, leaving us cautiously optimistic in our outlook for 2020.
What were some of the major market trends last quarter? Investment markets were sensitive to media headlines over the quarter – particularly surrounding news on the US-China trade deal, Brexit and tensions in the Middle East. In the same way that positive news was reflected as optimism in markets, negativity tended to push markets down. This was particularly evident in the lead up to December’s phase-one trade deal, which saw markets fluctuate on an almost daily basis. While the highs and low of investment markets can cause some uncertainty for investors, we continue to emphasise the importance of adopting a long-term approach to investing.
How did Colonial First State’s investments perform?Over the quarter, Colonial First State’s Multi-Index and Multi-Manager Multi-Sector options delivered positive returns to investors. However, we saw some individual sectors impacted by changeable macro conditions – for example, the highs and lows experienced across healthcare and technology. While asset classes generally benefited from central bank easing, investors have received higher returns overall if they had more exposure to share markets. For example, over the year to December 2019, the Australian share market returned 24% and global share markets returned 27%, while more conservative assets such as Australian bonds delivered 7% over the same period.
The third quarter of 2019 reminded us once again why considering a long-term view on investing for superannuation can be important.
Much like the first half of this year, markets were driven by a number of macro-economic factors from ongoing trade negotiations and geopolitical tensions to interest rate changes and easing rhetoric across many of the world's central banks, including our own. While these influences have had an impact on investment markets worldwide, we believe that our long-term approach to both identifying and investing in the best possible opportunities for members is reflected in performance during this time. During the September quarter, the US Federal Reserve cut its federal funds rate by 25 basis points, citing the weakness in global growth and the potential implications of global developments on the country's economic outlook as key considerations. Other central banks have also begun lowering the rates in response to slowing economic growth and Australia has been no exception.The RBA cut rates to 1% in July, noting that uncertainty generated by trade and technology disputes had affected investment and tilted global economic risk to the downside. Driven by the Central Bank's continued uncertainty as to those developments, another cut was announced at its October meeting, a new low of just 0.75%.However, while smaller economies like Australia can be highly exposed to the impacts of global developments, the RBA has previously said that it expects growth in Australia to strengthen gradually over time. Interestingly, we saw quite extreme fluctuations in the performance of bonds over the quarter.Bond yields declined to record lows in many countries before increasing in the month of September. Share markets also experienced ups and downs over the quarter, but returns for Australian investors were mostly positive during this time.In particular, developed market shares outperformed emerging markets with the Australian share market returning 2.37% over the quarter, and the global market returning 1.37%.
Looking ahead, trade negotiations between China and the US are anticipated to drag on both the investor and the real economy until such time as official talks recommence. While there are concerns surrounding lower economic growth and where the rapid changes to conditions could signal a recession in the US, the economy appears to have remained relatively stable.
On behalf of the team, I'd like to thank you for your continued support.
The latest financial year has been a stark reminder as to why we should consider a long term view when looking at our Superannuation.
Over the past 12 months two very different stories have played out in the stock market. In the lead up to the end of 2018, share markets suffered their worst three months in seven years with almost 13% being wiped off the value of markets globally. However, the first three months of 2019 saw a very sharp rebound in share markets and by the end of the financial year, share markets had completely recovered and the majority of members’ superannuation balances restored. Towards the end of 2018, investors became concerned about trade wars and the impact higher interest rates would have on the global economy. The US Federal Reserve raised interest rates four times during 2018, the last just a few days before Christmas. Equity markets fell while long term interest rates also fell in the anticipation of slower economic growth.
However, in early 2019, and partly as a response to the fall in share markets, the US Federal Reserve announced that interest rates would be less likely to rise in 2019 and that it would ease off on the previously announced intention to tighten conditions. Share markets then started on an extraordinary rally that has continued to the end of June despite continued uncertainty around geopolitics and trade wars. Paradoxically, long term interest rates have continued to fall meaning investors in both equities and fixed interest have been rewarded in the last 6 months.
To highlight how much sentiment has changed over the past year, the Australian share market declined almost 7% in the second half of 2018. Since 2019 ticked over, markets have rebounded all around the world. The Australian equity market has returned 19% in just 6 months with similar recoveries occurring around the globe. Despite the euphoria of the share market, the Reserve Bank of Australia recently reduced short term interest rates by half a percent. Long term interest rates, set by the market, have also fallen – the ten year bond rate has fallen by nearly 1% over the first 6 months of 2019 and is now at a very low 1.3%. Normally this signals a lack of confidence in the economy, in contradiction to the confidence of share markets.
Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State) is the issuer of interests in FirstChoice Personal Super, FirstChoice Wholesale Personal Super, FirstChoice Pension, FirstChoice Wholesale Pension, FirstChoice Employer Super offered from the Colonial First State FirstChoice Superannuation Trust ABN 26 458 298 557. It also issues interests in the Rollover & Superannuation Fund (ROSCO) and Personal Pension Plan (PPP) offered from the Colonial First State Rollover & Superannuation Fund ABN 88 854 638 840. This document may include general advice but does not take into account your individual objectives, financial situation or needs. You should read the relevant Product Disclosure Statement (PDS) carefully and assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision. PDSs can be obtained from colonialfirststate.com.au or by calling us on 13 13 36.