Quarterly Economic Update – August 2019

Our Investment Team’s quarterly economic and investment update for the June 2019 quarter.

The key points

  • The 2018–19 financial year investment return was positive for most investment markets despite market volatility.
  • Economic conditions remain steady but uncertainty exists, especially around the continuing of current trade arrangements.
  • Positive market returns have seen Energy Super’s investment options provide another year of positive returns. You’ll find current performance figures here.
  • Energy Super’s long-term investment returns demonstrate consistent performance against objectives and compared to peers. We explore our 2018–19 investment performance in some detail here.
  • Market volatility may continue for the near term and is likely to become the ‘new normal’.

Some background to the recent market volatility

The ups and downs of investment markets are completely normal. Many of us are unsure how to deal with it because in recent times – particularly the past 10 years – we’ve been so used to seeing markets steadily going up.

Since the end of the June 2019 Quarter, global investment markets fell, rose, then fell again. Initially, the fall in share markets in Australia and other global markets, including the United States (US), were as a result of ongoing trade tensions between the US and China.

Many global markets fell after the value of the Chinese Yuan fell. This fall allowed Chinese goods to remain cheaper, which partially offsets potential impacts of any tariff imposed by the US Government on imports from China. This led to concerns of a ‘trade war’ between the two countries.

Within days of the Chinese Yuan falling however, the US Government announced it would delay trade tariffs to mid-December 2019. It did this to ensure that import tariffs on discretionary items such as mobile phones, computers and gaming consoles didn’t have an impact on the Christmas season. Subsequently, global markets rose, then fell again a few days later, as investors grew increasingly concerned about the potential for a global recession.

It’s worth keeping in mind that the recent volatility happened over a period of less than 10 days! And this was just after many global markets reached market highs.

Take a look at these July and August 2019 headlines. They highlight that investment markets, particularly the Australian share market (ASX200), have reached all-time highs since the lows of the Global Financial Crisis in March 2009:

And this was the headline less than a week after the Australian share market reached the all-time high on 31 July:

Note: Wiping ‘$38b off ASX’ is equal to a one day return of -1.9%; the corresponding return for the ASX200 in July 2019 was 2.9%, and for the 12 months to July 2019 was 13.3%.

And if this isn’t enough, have a look at the graph below showing share market activity over the past 10 years.

Source: Bloomberg, Energy Super. Australian Shares is the S&P ASX300 Accumulation Index, Global Shares is the MSCI All Country World Index (ex-Australia) in AUD (unhedged), Australian Cash is the Bloomberg AusBond Bank Bill Index.

How investment markets performed in FY2018–19

The 2018–2019 financial year investment market performance was a ‘game of two halves’. There were some significant bouts of volatility and at ‘half time’ share markets weren’t looking so good. You can see this clearly in the orange bars in the table below.

Investment markets, in particular during December 2018, were concerned about the impacts of a global economic slowdown, ongoing inflation fears (or a lack of), trade tensions between China and the US, and the potential for interest rate increases by the US Federal Reserve.

Source: Bloomberg, Energy Super. NOTE: The returns for Australian Shares and International Shares for the period from 30 June 2018 to 31 December 2018 were -6.8% and -9.8% respectively.

Fast forward to the end of June 2019. By this time, most investment markets – shares, bonds, credit, real estate, private markets – finished strongly as concerns about trade wars and increasing interest rates eased. As a result, most major asset classes were able to produce reasonable gains over the period, especially compared to where they began at the start of 2019.

The table below highlights the returns from key investment markets over longer periods:

Source: Bloomberg, Energy Super.

What’s interesting to note from the market movements in 2019 is that both share and bond markets performed well. Typically, when share markets are doing well, bonds produce more moderate returns, and vice versa.

In the last few weeks, even with the recent market volatility, the Australian stock market has hit new record highs. Australian Government Bonds have also rallied to record levels. This is likely to be more of a reflection of the current market and economic cycle as Central Bank policy continues to influence investment market conditions (see below).

Global economic conditions over the 2018–19 financial year

Economic conditions globally have slowed. This has been driven by several factors, the most obvious of which are rising interest rates in the US and the ongoing trade dispute between the US and China. This has dampened the Chinese economy and has had knock-on impacts to China’s major trading partners in Europe and Japan. Concerns about Brexit, along with growing corporate debt, aren’t helping.

In response to this slowdown in economic growth, Central Banks around the world have either started cutting interest rates or have signalled a readiness to provide further support for their economies[1] in the coming months. This is expected to provide continued support for economic conditions, although this stimulus can take some time to work through the economy.

The slowdown in global economic growth has also had some impact here in Australia, given China is one of our largest trading partners. But the bigger economic story locally has been falling house prices (particularly in Sydney and Melbourne). While house prices have stabilised in recent months[2] following the Federal Election and an easing of credit availability, low wage growth continues to impact consumer spending.

Economic growth is slipping below long run averages and inflation continues to run under target[3]. To prevent any potential deterioration in employment, the Reserve Bank of Australia cut the official cash rate to historically low levels at its June and July 2019 meetings. These rate cuts, coupled with the recent income tax cuts, should see a significant level of stimulus hitting the Australian economy in coming months.

Despite all the negative news headlines, several bright spots still remain in the economy. Of most significance are employment indicators which continue to remain robust. As an example, the unemployment rate in the US remains close to a multi-decade low of 3.8%, in Australia it has hovered around 5% for the last 12 months.

The significance of strong employment indicators can’t be understated. It’s expected that while people remain employed they are likely to keep spending, which keeps economic growth ticking along. It also means that debts can be repaid, limiting any further downward pressure on house prices.

How Energy Super’s been managing your investment

As long-term investors, the Energy Super Trustee looks through short-term market cycles. Market volatility is just a normal part of investing. Timing markets is extremely difficult and very rarely successful. We prefer to harness the benefit of compounding returns by maximising performance over the long term. We believe investment returns from your super fund should always be measured and considered on this long-term basis.

Without taking investment and market risk, it’s very difficult to generate higher long-term investment returns without experiencing some shorter term volatility like we’ve seen recently. However, our strategy of diversification seeks to manage the overall level of market volatility and provide a smoother return profile for members. Sure, our diversified member investment options that have a higher allocation to growth assets like shares and property – our Growth, My Super, Balanced, and to a lesser extent, Stable options – will move up and down with markets, but the level of volatility will be balanced by the performance of less volatile asset classes.

Adopting this long-term (7+ years) approach provides the Energy Super Trustee and our members with the ability to ride out periods of volatility to produce strong returns over the long term.

You’ve heard it many times before: superannuation is a long-term investment. Even if you’ve just reached retirement age, you’re most likely to have at least another 15+ years of being invested. This investment horizon obviously increases the younger you are.

More volatility is likely

Most investment markets have had good returns over the last six months to 30 June 2019, mostly driven by expectations that Central Banks will intervene with further cuts to official interest rates or the use of other policy tools such as quantitative easing.

As markets wrestle with the threat of slowing economic growth and the trade war fallout, as well as the effect of considerable fiscal and monetary stimulus, it won’t be surprising to see further volatility over the months ahead.

In the short term, though, investors remain cautious as Central Banks globally may cut interest rates to continue to stimulate growth against a backdrop of concerns of an ongoing trade war and a slowing global economy.

Talk to us

If you’re not comfortable with your level of risk or you’re close to retirement, it might be a good idea to speak with one of our financial advisers*. They can speak to you about the appropriateness of your investment strategy and may help you feel more comfortable with market volatility.

To talk to a financial adviser about your Energy Super investment strategy and whether it’s right for you, contact us.

* Energy Super’s advice is provided by ESI Financial Services Pty Ltd (ABN 93 101 428 782) (AFSL 224952), a wholly owned entity of Energy Super. The financial advice you receive is provided under the Australian Financial Services Licence held by ESI Financial Services Pty Ltd and therefore is not the responsibility of Energy Super.

The past performance information provided in this article is for illustrative purposes only and should not be relied upon as (and is not) an indication of future performance. The latest investment performance information can be obtained from https://www.energysuper.com.au/performance-and-fees/latest-performance

[1] List of Central Banks to cut rates in recent months includes (but not limited to) the Central Banks of: Australia, Brazil, Chile, India, Indonesia, Mexico, New Zealand, Philippines, South Korea, Thailand, United States.

[2] The CoreLogic RP Data Home Value Index of Australia’s five largest cities rose 0.10% in July 2019, its first increase since September 2017.

[3] Australian economic growth (as measured by GDP) came in at 1.8% for the year ending March 2019, below the 10 year average (March 2009 to present) of 2.6%. The RBA has a targeted inflation level of 2-3% p.a.

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