LGIAsuper 2015/16 market update
The 2015/16 financial year was one of increasing global economic uncertainty, with the International Monetary Fund (IMF) and World Bank once again downgrading global growth forecasts throughout the year.
This was primarily caused by economic and geopolitical risks in the Eurozone (the potential Grexit and eventual Brexit), uncertainty and volatility surrounding the Chinese economy, a fall in global commodity prices and concerns relating to Japanese deflation.
Strong diversification was key to LGIAsuper’s success this year. With sharemarkets fairly flat it was the strong performance in our infrastructure and property sectors that led to our Diversified Growth and Balanced options returning 3.26% and 4.12% respectively.
In a volatile investment environment it’s important to ensure your investments are diversified across different markets and sectors.
- International shares
The performance of global sharemarkets was mixed over the last year. Volatility was high and returns were somewhat lower than the previous year.
The US S&P500 returned a modest 1.7% despite at one stage being down 12.3% in February. Elsewhere, the UK’s FTSE 100 fell 0.3%, Europe’s EURO STOXX 50 index fell 16.3%, Japanese sharemarkets fell 23.5%, Hong Kong shares fell 20.8%, and the Chinese Shanghai Composite index was down 31.5% for the financial year to 30 June 2016.
As interest rates across the developed world look set to ease further (with the exception of the US), the hunt for yield is supporting US sharemarkets which are approaching all-time highs.
LGIAsuper’s International Shares sector finished the financial year down 0.7% before tax and fees.
- Australian shares
In a volatile year, the ASX200 Accumulation Index finished with a return of 0.6%, with the financials, mining and materials sectors hampering returns. Chinese market volatility in August spurred the worst month on the Australian share market since the GFC. There were further falls due to a plunge in the iron ore price, more Chinese market volatility, and all-time lows in crude oil, which saw the ASX200 reach its lowest point for the year in February (-13.8%). As commodities rebounded from lows, we saw markets recover and stabilise before the UK’s vote for 'Brexit' in June caused more global volatility.
LGIAsuper’s Australian Shares sector finished the financial year with gains of 1.7% before tax and fees.
LGIAsuper’s highly diversified property portfolio consists of high quality office buildings, retail shopping centres and industrial properties both in Australia and abroad. Low gearing and low vacancy rates mean these investments provide consistent rental income streams and strong capital growth. Most notable investments were the GPT Wholesale Office Fund which returned 18.6% and AMP Wholesale Office Fund which returned 16.3%.
In addition to the solid performance of our unlisted property holdings, our global listed shares performed very well and returned 16.9%. Overall, the property sector finished the year with impressive gains of 14.5% before tax and fees, far exceeding its benchmark.
Our investments in alternatives returned 1.6% for 2015/16 before tax and fees. The diversification attributes of the alternatives sector were evident throughout such a volatile year for sharemarkets. Returns were less volatile than the equity sectors with low correlation, helping to reduce risk and smooth returns for LGIAsuper’s ready-made options. Within this sector we invest across two broad themes —hedge funds and emerging market/high-yield debt.
Our infrastructure assets returned a substantial 15.3% before tax and fees. Throughout the year LGIAsuper continued to invest in infrastructure, particularly the renewable energy sector. Among many other exciting assets, we invested in a gas pipeline in Queensland, an oil and gas port in Norway and wind assets in India and the Philippines. We will continue to build on this sector over the coming years as new investment opportunities present themselves.
- Fixed interest and cash
Australian fixed interest continues to attract overseas investors. Of the developed economies, Australia has one of the highest official cash rates at 1.75%, second only to New Zealand at 2.25%. The economy is in relatively good shape and the AAA credit rating remains, however, this is under some pressure and the government needs to enact some budget reform to maintain this rating. Strictly speaking, Australia is viewed as a relatively safe place for foreign investors to invest and receive attractive returns.
The Reserve Bank of Australia (RBA) is expected to take a more accommodative approach to monetary policy in the next 12 months with at least one more cut to the cash rate expected. This will lower expected returns on cash investments and should also put downward pressure on the Australian dollar (AUD).
The AUD depreciated by 3.3% against the US dollar over the course of the year, finishing the year at $US0.7426, trading in quite a large range – from a low of $US0.6824 in January to a high of $US0.7848 in April.
The fixed interest sector returned 5.7% for the year before tax and fees.
In the year ahead, investors will be cautious as Britain progresses toward an exit from the European Union (EU) which could potentially cause further disruption to global markets. These negotiations will also have an effect on European economies as the Euro area continues to battle low inflation and high unemployment. We expect the EU will look to take a tough stance in the exit negotiations.
US economic data continues to indicate the US economy is strengthening albeit at a slower pace than expected. The near term focus will be when and at what rate the US will tighten monetary policy. Eyes will also be on the outcome and any effects of the upcoming presidential election result.
Domestically, the economy continues the transition away from the mining sector. Encouraging GDP data saw the economy grow 3% for the year, although low inflation persists and the Australian dollar is relatively strong which is increasing pressure on the RBA to cut the official cash rate below existing historically low levels of 1.75%.