Markets Summary – October 2019
Take a look at what has been happening in the economy for the month of October.
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.
Colonial First State continues to integrate responsible investment considerations into our investment strategy. In late 2018, we announced that we were divesting from tobacco and controversial weapons manufacturers because of the child labour, human rights and environmental risks that these investments pose. We also became a signatory to the United Nations Tobacco Free finance pledge. This pledge supports tobacco free investments, a global movement amongst financial services organisations to stop financing tobacco companies. Our commitment to our members was to remove all investments in tobacco and controversial weapons by the end of 2019. We are pleased to confirm that as at 30 June 2019 we have sold down over half of the investments that we had and are on track to meet our promise.
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.
In 2018 we saw two different sides of the share market. The year started with great optimism and the first half of 2018 began with expectations that markets would continue the multi-year trend of delivering good returns from share markets. However, the second half of the year and particularly the last three months saw a number of events coincide to reduce investor confidence and markets fell. As midnight struck on New Year’s Eve share markets globally had lost value over the previous 12 months. So, what exactly happened?
We show markets were impacted by a series of events, some of which were present in the first half of the year, but not considered to be of concern until later in the year. And these included the trade war between the US and China, increasing investor concern about a global economic slowdown, European politics, creating uncertainty in those markets, and four rate increases by the US Federal Reserve.
To illustrate how much sentiment changed over the year, the Australian share market returned more than 4% in the first six months of 2018 before declining 7% in the second half. The US market delivered a very strong 9% over the first three quarters of 2018 and the abruptly fell in October and December to be down 6% for the full calendar year.
In the middle of 2018, US President Trump tested the boundaries of global trade by imposing tariffs on billions of dollars’ worth of goods imported to the US from China, the European Union, Canada and Mexico. Each country then returned the favor by imposing large tariffs on US goods imported into their own country, effectively resulting in a global trade war. Trade wars tend to reduce economic activity with the risk that this reduces the earnings of companies and consequently share prices. Last year the UK struggled to reach agreement on how to Brexit from Europe in March in 2019 the political uncertainty translated to economic uncertainty and this detracted from investor sentiment leading to lower share markets in the UK and beyond.
There are also broader concerns with fractured politics across Europe and how this would impact the European economy. Meanwhile, the US Federal Reserve increased the cash rate four times during the year from 1.5 to 2.5%. The rate is now the highest it has been since April of 2008. While the Fed’s intentions are to bring interest rates back to a more normal level, higher rates will flow through to borrowers, meaning that people may pay more on their mortgages and credit cards. Higher rates reduce the amount people spend and so investors are concerned as to whether the higher interest rates would have a detrimental knock on effect on the economy. Markets were also impacted by the ongoing reduction by central banks of their balance sheets post the global financial crisis. In a process known as quantitative easing, central banks have purchased financial instruments to stimulate markets and economic demand.
The Federal Reserve is now reducing its balance sheet by $50 billion a month, reducing the stimulus effect and potentially adversely impacting markets. While share markets delivered negative returns over a 2018 there were positives for investors. Defensive assets such as fixed interest were positive, with the Australian bond benchmark returning four and a half percent over the 12 months. Another positive for Australian investors was the depreciation of the Australian dollar against most of the major currencies. The dollar was down 10% against the US, five and a half percent against the euro, and over 12% against the Japanese yen. A lower dollar increases the value of overseas investments, and most investors have some exposure to overseas investments in their portfolios.
You may be wondering how the Firstchoice Lifestage portfolios performed in 2018. Over the past six months, like most other investment options, lifestages mirrored the decline in the share market and experienced negative returns. However, lifestages designed to match investment risk with members stage of life. Younger members are invested in portfolios with high allocation to growth assets such as shares. And over the longer term these portfolios should deliver higher returns than the portfolios designed for older members. Older members are invested in portfolios with substantially lower exposure to shares and more exposure to defensive assets such as cash and fixed interest. However, in periods when share markets fall, the older members should be less impacted and experience and better returns than those received by younger members due to their life stage portfolio investments. This has been the experience over 2018 with our older members experiencing small negative returns and our younger members receiving returns consistent with the fallen share markets. Over the longer term, younger members have received good returns and all members have received returns that exceed the investment objectives we have for their age.
We believe that shares were outperforming the long term, so we're confident that the life stage portfolios will stay on track to achieve their overall objectives. The last six months saw a range of events that impacted share markets and investment returns. With 2018 seeing the return of volatility, it is likely that this volatility will remain a reminder that investors need to keep an eye on the big picture, making sure that investment portfolios are diversified and positioned to recover from short term fluctuations while keeping long term investment strategies in place.
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.