Investment update

Share markets perform strongly on the back of solid economic growth while other asset classes struggled

The 2016-17 financial year saw mixed results from the various assets classes, with shares performing strongly and most other assets struggling. A number of factors contributed to strong share market performance:

  • Signs of economic growth in many developed economies.
  • Strong economic growth in China.
  • Strong growth in company earnings globally.
  • Very low interest rates around the world.
  • The expected negative impact of Brexit and Trump’s election win didn’t occur.

International shares delivered double digit returns. Hedged1 international shares outperformed unhedged2 international shares by more than 5% on the back of the Australian dollar rising against most currencies during the year. Global emerging markets were boosted by strong performance from the IT sector and materials companies.

Australian shares performed well with large company shares outperforming small company shares, a reversal of their fortunes in the previous financial year. Companies in the resources and materials sectors performed strongest while telecommunications companies performed poorly.

Global listed property shares posted low returns while Australian listed property shares delivered a negative return. This followed a strong result in the previous financial year. Our holding in unlisted property investments, which make up the bulk of our property investments, outperformed listed property shares.

Bonds performed poorly, with Australian bonds delivering a small positive return and International bonds a small negative return. Bond yields started the year at very low levels and rose a little, amid solid economic conditions in the US and Australia and improving conditions in Europe and Japan.

Cash returns were low, unsurprising given current low interest rates. Given low interest rates and the outlook for inflation, we believe returns on cash will remain low for a long time to come. 

On the economic front, the Australian economy posted another solid result, growing 1.7% for the year (12 months to end of March), boosted by low interest rates and price improvements in some commodities such as coal. The year ended with an unemployment rate of 5.6% (at end of May), which points to a solid labour market. The Australian economy has now gone 28 years without recession. This is an amazing achievement and the longest continuous growth in any country around the world.

A major risk is the housing market combined with a ‘stretched’ consumer. A correction in house prices could quickly impact consumer confidence and have a strong flow-on effect to the broader economy. However, this risk is offset a little by our very low interest rates which are likely to stay around the current 1.5% level for a while yet.

Another headwind for Australia is low wages growth. With inflation outpacing wages growth it means we have less in our pockets in real terms. This is bad for the economy as we have less money to spend, and consumption is a key driver of economic growth.

The US economy has performed strongly, enabling the Federal Reserve to increase official interest rates three times during the year. Economic growth is solid, the labour market is strong and there appears little risk of inflation breaking out. The main risks are the impact of likely further increases in interest rates and political / policy uncertainty.

In Europe economic growth was a better than expected at 1.9%, although the unemployment rate remains at a frustratingly high level of about 9%, albeit falling slowly. Europe has a long way to go but is heading in the right direction.

China continues to perform strongly though there are clear risks with the property market and growing company debt.

Asset class returns – year to 30 June 2017

Asset class  2015-16 return %pa 2016-17 return %pa 
Australian shares 0.6 14.1
Australian small
company shares
14.4 7.0
International shares - 
hedged1 in Aus dollars
-1.4 20.5
International shares - 
unhedged2 in Aus dollars
0.4 14.7
Emerging market shares -
unhedged
-14.2 21.2
Australian listed property
shares
24.6 -6.3
Global listed property shares - 
hedged1 in Aus dollars
12.3 2.2
Australian bonds 7.0 0.3
International bonds 8.6 -1.7
Cash 2.0 1.5

Source: Invesco, Bloomberg, Mercer
1. Hedged means the returns from international assets are fully protected from movements in international currencies.
2. Unhedged means the returns from international assets will be fully impacted by movements in international currencies.

How have your investment options performed?

Looking at the actual numbers, all our investment options posted positive results over the past year, with the standouts those options with the greatest exposure to shares. The Aggressive, Australian Shares and International Shares options all posted double digit returns.

It was also a strong year when we look at performance against the options’ investment objectives. All investment options beat or matched their one year investment objective except Cash and Bonds, which were hurt by the low returns from these asset classes. Again, the best performers were the Aggressive, Australian Shares and International Shares investment options.

Looking at the 10 year numbers, most of our investment options are lagging their investment objectives. The main reason for this is the impact of the global financial crisis (GFC) which is still impacting the 10 year numbers. Share markets sank during this period while bonds and cash did surprisingly well. The impact of the GFC in the 10 year numbers will persist for a couple more years. 

Super investment options’ returns – one year returns versus investment objective

Investment option Return %pa
Investment
objective %pa
Relative
performance %pa
Aggressive 10.8 7.2 3.6
Growth 8.7 6.2 2.5
Balanced 6.9 5.7 1.2
Stable 5.2 5.2 Flat
Australian Shares 11.4 7.2 4.2
International Shares 16.5 7.2 9.3
Property 6.7 5.7 1.0
Bonds 2.8 3.2 -0.4
Cash 1.6 2.2 -0.6

Pension investment options’ returns – one year returns versus investment objective

Investment option Return %pa
Investment
objective %pa
Relative
performance %pa
Aggressive 12.0 7.2 4.8
Growth 9.8 6.2 3.6
Balanced 7.9 5.7 2.2
Stable 6.1 5.2 0.9
Capital Guarded 5.9 5.2 0.7
Australian Shares 12.6 7.2 5.4
International Shares 16.4 7.2 9.2
Property 8.7 5.7 3.0
Bonds 3.6 3.2 0.4
Cash 2.2 2.2 Flat 

Looking to the future 

Overall, the outlook for the global economy is reasonably positive. We expect the major world economies to continue posting solid economic growth underpinned by low inflation and low interest rates.

But there are risks, the biggest being political. Every day we hear more talk about Trump, North Korea, Brexit and Russia. Less spoken about is high government debt in the three major world economies: the US, Europe and Japan. And we’re also likely to see further increases in US interest rates.

However, our base view is that the positives outweigh the negatives and economic growth will continue to be solid, providing some support to global share markets. However shares are not cheap: there is ‘valuation risk’ ie markets look overpriced. However, our view is that we’re not yet in a market bubble. Our long term seven year forecast is for modest positive returns, but don’t expect the stellar performance of 2016-17 to be repeated.

We’re more concerned about the long term outlook for cash and bonds. For both of these asset classes our view is that it will be difficult to achieve any positive real returns of note. The ‘real return’ is the return after inflation and is a measure of whether the purchasing power of your savings is increasing or decreasing.

In closing, the 2016-17 financial year demonstrated that performance of one particular asset class can fluctuate considerably from year to year. Investing in concentrated, rather than diversified portfolios, results in outcomes that are more volatile over time. This illustrates the benefit of diversification, a lesson we should never lose sight of. The Investment team strives to construct high quality, well diversified portfolios which will help you achieve an excellent retirement outcome.

Signing off
David Bell
Chief Investment Officer

While every care has been taken in the preparation of this material, neither AUSCOAL Superannuation Pty Ltd (the “Trustee”) ABN 70 003 566 989, AFSL 246864 nor Mine Wealth and Wellbeing Superannuation Fund (the “Fund”) ABN 16 457 520 308 makes any representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts.  Past performance is not a reliable indicator of future performance.  This material has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs.  An investor should, before making any investment decisions, consider the appropriateness of the information in this material, and seek professional advice, having regard to the investor’s objectives, financial situation and needs.  This material is for the use of members of Mine Wealth and Wellbeing Superannuation Fund only and is provided solely in the context of their superannuation investment.