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Investment strategy

By Brian Parker - April 2019

Sunsuper Chief Economist Brian Parker explains what’s happening around the world and at home, where markets are heading and what it all means for your super investment.

Sunsuper’s Balanced option for Super-savings accounts returned 6.0 per cent for the quarter, and 8.1 per cent for the year to 31 March 2019. Longer-term returns remain solid, with the Balanced option posting returns of 8.5 per cent p.a. over the last five years and 9.1 per cent p.a. over the ten years to the end of March. Returns from the major publicly traded asset classes are shown in the table below. 

Returns to 31 March 2019 3 months % 1 year % 3 year % p.a. 5 year % p.a. 10 year % p.a.
Cash – Bloomberg AusBond bank bill index 0.5 2 1.9 2.1 3
Australian diversified fixed income – Bloomberg AusBond Composite 0 + Yr Index 3.4 7.2 4.2 5.1 5.5
Global diversified fixed income – FTSE World BIG hedged into $A 2.8 4.5 3.1 4.8 6.4
Australian listed property – S&P/ASX300 A-REIT Accumulation Index 14.4 25.9 10.2 14.9 15.3
Global listed property – FTSE EPRA/NAREIT Index hedged into A$ 14.8 17.3 7.9 10.1 16.8
Australian shares – S&P/ASX300 Accumulation Index 10.9 11.7 11.4 7.4 10.3
Developed market shares – MSCI World, unhedged in $A 11.6 13 14.3 13.2 12.8
Developed market shares - MSCI World, hedged in $A 12.7 7.2 12.6 10.2 15.2
Emerging market shares – MSCI EM, unhedged in A$ 9 0.4 14.1 9.7 9.1

Sources: Datastream, Bloomberg. Past performance is not a reliable indication of future performance.

Macroeconomic environment

After a decade-long recovery from the GFC-induced recession, the world economy clearly slowed in 2018, and this slowdown has continued in 2019. The slowdown has been most pronounced in Europe and in some key emerging economies, including China. In contrast, US growth slowed only modestly in the second half of 2018, partly because fiscal stimulus continued to support consumption spending. 

While we continue to place a low probability on a near-term global recession, there are signs that global growth is likely to weaken further over the remainder of the year: China’s economy continues to slow in response to past efforts to rein in credit growth, notwithstanding recent fiscal and monetary steps aimed at boosting the economy; the impact of the US fiscal easing should begin to fade; global trade continues to slow, a development that will likely persist beyond what appears to be an impending resolution of the US-China trade dispute; and continued uncertainty over Brexit and its potential impact on growth in both the UK and the Eurozone. Latest Brexit developments have the UK requesting a postponement of the Brexit date, but it is far from clear whether a revised Brexit agreement could ever be crafted that would win UK Parliamentary approval.

More positively, latest business surveys point to some improvement in conditions, at least in some parts of the world, and largely in the services sector. And in response to weaker growth and very benign inflation, signals from both the US Federal Reserve and the European Central Bank have turned decidedly more ‘growth friendly’ in recent months.

Australian economy 

Here in Australia, the flow of economic news has turned quite negative in 2019. House prices have continued to decline, and leading indicators of housing activity (most notably a sharp fall in residential building approvals) suggest that while there remains a good deal of residential building activity in the pipeline, activity levels are likely to decline over the next two years or so. Business confidence declined sharply in December, and failed to rebound in January and February. Retail sales have mostly been subdued, notwithstanding a decent gain in the most recent data. And job ads, while still consistent with reasonable employment growth, have nevertheless fallen in recent months. Despite these factors, there remain reasons for optimism: export volumes, public spending and business investment should still contribute solidly to growth over the coming year or so. 

The Reserve Bank continues to anticipate a period of above-trend growth ahead, and a gradual rise in both wage and price inflation. However, a more challenging global environment and the string of weak domestic economic news has prompted the RBA to revise its growth, wages and CPI inflation forecasts lower, and drop its long-held tightening bias, moving to a clearly neutral view of the next move in official interest rates.

Share market returns

Following the sharp correction experienced in world share markets in the December quarter, the New Year has brought happier tidings for investors, with Australian and major developed markets indices posting double-digit returns for the quarter. 

The US Federal Reserve signalling a pause in rate hikes, an easing in US-China trade tensions and some better signs in key economic indicators all contributed to an improvement in investor sentiment.

The Australian dollar moved slightly higher over the quarter, causing unhedged overseas equity market returns to underperform hedged overseas shares. 

Fixed income markets

Both Australian and global bonds outperformed cash during the March quarter with Australian bonds performing particularly strongly. 

Longer-term bond yields fell across the world’s major bond markets. Credit spreads narrowed, leading to sovereign bonds underperforming corporate and other non-government securities over the quarter. 

What is Sunsuper doing?

We view the diversification benefits provided by unlisted assets as well as carefully selected hedge funds and alternative strategies as very attractive. Prospective returns in unlisted and alternative assets have come down. However, we continue to find opportunities in these asset classes that offer very attractive medium to long-term returns. Over recent months, we made a number of small investments in our unlisted assets portfolios, but did not make any major asset purchases.  

In developed share markets, our managers consider shares in Asia more attractive than in the US, where finding value remains more challenging. Our fixed income portfolios continue to favour higher quality corporate bonds over sovereign bonds; although, over the past two years we have increased our exposure to sovereign bonds as yields became more attractive.

Help to choose your investments

There are a number of Sunsuper options that give exposure to a diversified range of asset classes, including both public market and unlisted investments. In fact, Sunsuper offers members a range of 20 investment options to allow you to tailor your investments to your needs. 

If you want more information or advice to decide which investment option or group of options best meets your needs, our financial advisers are here to help. Please give Sunsuper a call on 13 11 84.

Past performance is not a reliable indication of future performance. Sunsuper employees provide advice as representatives of Sunsuper Financial Services Pty Ltd (ABN 50 087 154 818 AFSL No. 227867) (SFS), wholly owned by the Sunsuper Superannuation Fund.