LGIAsuper market update November 2016
As Brexit and the US election dominated headlines, LGIAsuper continued to perform strongly in the background, achieving positive returns for all options for the second successive quarter.
Political risk and central bank policies weighed heavily on financial markets throughout the September 2016 quarter. While market volatility immediately followed news the UK would exit the European Union (EU), solid gains were soon achieved as it became clear a full exit would take some time to complete and the Bank of England eased its official cash rate.
Domestically, the Reserve Bank of Australia (RBA) cut the official cash rate in August to 1.50% in a bid to combat low inflation and stimulate growth.
Globally, August and September saw the focus shift to US monetary policy amid expectations the US Federal Reserve would increase the federal funds rate. Equity and fixed income markets retreated in anticipation of a September rate hike (that did not eventuate) before staging a recovery to finish the September quarter ahead.
All LGIAsuper investment options recorded positive returns for the quarter ending 30 September 2016. LGIAsuper’s MySuper Lifecycle (under 75) and Diversified Growth options returned 2.59%, while our MySuper Lifecycle (75 plus) and Balanced options returned 1.97%. Due to a higher allocation to equities (which recovered as markets moved on from Brexit) and continuing low US interest rates, our Aggressive option returned 3.16%.
Key asset class performance
- Australian and international shares
Global sharemarkets enjoyed somewhat of a recovery in July following a post-Brexit period of volatility. Since then investors have gained a better understanding of when and how the UK will leave the EU. Throughout September sharemarket returns retreated as expectations of a US interest rate hike intensified and ultimately recovered as rates remained unchanged at their September meeting.
LGIAsuper’s International Shares option returned 3.88% for the quarter, before tax and fees.
The Australian sharemarket also enjoyed a strong recovery in July. Further support came in August by way of an RBA interest rate cut to 1.50% before giving back some of those gains in September, much like its global counterparts.
LGIAsuper’s Australian Shares option returned 5.46% for the quarter, 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. In addition to unlisted property, the portfolio also consists of global listed shares.
LGIAsuper’s Property option returned 1.15% for the September quarter, before tax and fees.
- Alternatives (also known as other)
The diversification attributes of the alternatives sector were evident throughout the continuing volatility. 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 —absolute return strategies and private credit. Our investments in this sector returned 2.64% for the quarter before tax and fees.
Returns in this sector experienced little volatility and provided good diversification throughout the quarter. We will continue to build on this sector in both renewable and traditional infrastructure assets over the coming years as new investment opportunities present themselves. Our infrastructure assets returned 1.10% before tax and fees.
- Fixed interest and cash
Australia’s official cash rate was cut by 0.25% in August and is now at 1.50%. The economy is resilient, in relatively good shape and has maintained its AAA credit rating. The Australian Government’s monetary policy is expected to remain stable in the short term. Our fixed income portfolio returned 1.20% for the quarter.
Australian and other markets in the Asian region posted large short-term losses following Donald Trump’s election win in the US. Concerns around a Trump driven sell off were abated after Trump, in his acceptance speech, seemingly toned down the rhetoric he became known for throughout the election campaign. Trump spoke about unifying a divided American public, large infrastructure programs and broad tax reform which would benefit the US economy. Nevertheless, he is considered an unknown quantity to financial markets and how he performs in the role of President will be intensely monitored. Further volatility could result if his economic and foreign policies are seen as negative.
Additional focus will be on the US Federal Reserve as economic data continues to indicate the US economy is strengthening. Combined with a possible increase in government spending from a Trump administration, US interest rates may increase quicker than currently forecast to counter an expected lift in inflation.
Britain’s progress toward an exit from the European Union will remain at the forefront of market developments, with the potential for further volatility across global markets.
With all eyes on the US, central bank policy around the developed world is beginning to shy away from ultra-low interest rates, with a greater focus on fiscal policy to promote economic growth.
Domestically, the focus will be on inflation and labour markets. With the official cash rate now at 1.50% and with no further interest rate cuts forecast in the short term, government spending may have to play a bigger part in keeping the economy healthy.
Protection through diversification
The key to any successful investment strategy is to strike a balance between return and risk that suits your own investment objectives and diversify to minimise the impact of volatility.
Our Investment risk profiler can help you gain insight into the type of investor you are and your attitude towards risk so you can choose an investment strategy that’s right for you.
Regularly reviewing your strategy to make sure it aligns with your financial goals and return expectations is also important. We continually review all our portfolio holdings to ensure our exposures are the right ones for the long term. Our investment strategy has been positioned to minimise the effects of volatile sharemarkets to help you grow your super.