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Investment strategy

By Brian Parker - January 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.

The Sunsuper’s Balanced option for Super-savings accounts returned 1.9 per cent for the calendar year after volatile market conditions resulted in a –4.0 per cent return for the December quarter. However, longer-term returns still remain solid, with the Balanced option posting returns of 7.5 per cent per annum over the last five years and 8.1 per cent per annum over the ten years to the end of December. Returns from the major publicly traded asset classes are shown in the table below.

Returns to 31 December 2018 3 months % 1 year % 3 year % p.a. 5 year % p.a. 10 year % p.a.
Cash – Bloomberg AusBond bank bill index 0.5 1.9 1.9 2.2 3.1
Australian diversified fixed income – Bloomberg AusBond Composite 0 + Yr Index 2.2 4.5 3.7 4.7 5.2
Global diversified fixed income – FTSE World BIG hedged into $A 1.7 1.6 3.4 4.8 6.2
Australian listed property – S&P/ASX300 A-REIT Accumulation Index -1.7 3.3 7.6 12.5 10.7
Global listed property – FTSE EPRA/NAREIT Index hedged into A$ -5.5 -3 4.2 8 12.6
Australian shares – S&P/ASX300 Accumulation Index -8.4 -3.1 6.7 5.6 8.9
Developed market shares – MSCI World, unhedged in $A -10.9 2 8.1 10.3 10.2
Developed market shares - MSCI World, hedged in $A -13.3 -6.9 7.6 7.9 12.7
Emerging market shares – MSCI EM, unhedged in A$ -4.8 -4.7 10.9 7 8.3

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

Macroeconomic environment

2018 marked the global economy’s ninth consecutive year of expansion. Compared with synchronised global GDP growth in 2017, growth in 2018 was more varied with the US economy continuing to grow strongly while economic growth in Europe and the Emerging Markets began to slow. The sustained US growth was largely driven by fiscal stimulus and tax cuts, which lifted both US growth and corporate profits. The long-term impacts of fiscal stimulus at such a late stage of the economic cycle remain to be seen. 

Inflation for most developed economies remains stubbornly below central bank targets. With unemployment rates at such low levels, the inability to meet inflation targets remains a challenge with interest rates globally remaining extremely low across the developed world. 

Australia is a prime example, with the Reserve Bank of Australia keeping rates on hold for a record 28 months, with the cash rate target at an all-time low of 1.5 per cent despite unemployment being barely above 5 per cent.

Share market returns

Listed equities corrected sharply over the December quarter, resulting in a negative annual return for most major markets. 

Multiple geopolitical events weighed on equity prices and investors’ sentiments with the US-China trade war dragging markets down. In addition, the uncertainty regarding both the Brexit negotiations in the UK and the budget negotiations in Italy proved to be a further headwind for markets. The quarter culminated with a US government shutdown just prior to Christmas, further denting sentiment in an increasingly fragile market.

Although all major equity markets ended down for the quarter, Emerging Market and Australian equities outperformed the major developed markets.
As it often does in weak equity markets, the AUD fell over the quarter insulating unhedged overseas equity market returns, which outperformed hedged overseas equity investments. 

Fixed income markets

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

Longer-term bond yields fell across the world’s major bond markets with bonds outperforming equities, playing their traditional diversifying role in portfolios. Within fixed income, credit spreads widened leading to sovereign bonds outperforming corporate and other non-government securities over the quarter. 

Australian 10-year bond yields continue to trade below US 10-year yields reflecting the strength of the US economy, further supporting the strong USD.

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.   During the last six months, we have 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 Europe and 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.