Posted on 26/04/2018
“I came in like a wrecking ball’
Writers: Maureen McDonald, Lukasz Gottwald, Stephan Moccio, Henry Walter, Sacha Skarbek. Singer: Miley Cyrus
March Quarter 2018 – Miley Cyrus trades volatility and sings about it…
The return of volatility in this quarter reminded us of Miley Cyrus’ (well one of us but we’re not owning up to it) song. The wrecking ball clearly being the abrupt entrance of financial volatility in shares during February and March after a largely benign few years. We are however reminded of the scene from the Monty Python movie “tis but a scratch” and unlike that manic Knight, the -0.17% MySuper return for the month of March was actually just that. Australian shares bore the brunt with the ASX200 Accumulation index down 3.7% in the month of March.
Like a broken record, we’ve been highlighting for a while that the markets are a bit ahead of themselves so February/March was a timely reminder of what can go up quickly can also fall. We believe months like February is just the start not the end of what we think will be more volatility across the markets for the rest of the year.
The table below shows Superannuation option returns over 1, 3 and 5 years ending 31 March 2018.
|Super Returns to 31 March 2018*||1 Year||3 Year||Since Inception|
*Statewide Super Pre Retirement Investment Options. Returns are net of investment fees and tax on investment income. Administration and other fees apply. See our “Fees and Costs” booklet for further information.
#These investment options have been available for less than 5 years. Returns since inception (July 2013) are shown.
Pension options are not shown but are available on the Website. Investment returns can go up and down and are not guaranteed. All investments have risk, and past performance is not a reliable indicator of future performance For more information on risks associated with investing, consider the “Risks of Super” and “How we invest your money” booklets available at statewide.com.au or by calling 1300 65 18 65.
The chart below shows the returns of Statewide Super’s MySuper option since inception relative to the median MySuper return. We continue to comfortably exceed our peers since MySuper was launched in 1 July 2013 and will have a 5 year track record at the end of June 2018.
Source: SuperRatings Performance Survey
A Global Economic Recovery with Volatile Markets
The global economy including Australia continues to chug along benefitting employment growth, although wages growth remains sluggish. There’s finally some stirring of inflation in the US economy and their central bank increased interest rates back in March with more expected over the remainder of the calendar year. Japanese and Chinese economies are also growing, however European growth has slowed. China is gradually moving away from export and state owned investment to a more sustainable model relying on consumption. The issues of high debt and credit creation remain and working that excess off will take time. The other issue for China is the path to an open governance society, with property rights for its citizens backed by an independent rule of law.
One area for concern is the risk that the Federal Reserve tightens monetary policy via interest rates and reversing the years of quantitative easing too quickly, but there is a need for some normalisation after years of easy money. The global rate- tightening phase, like a bad hangover, will be difficult for some parts of the economy that have relied on low rates and high debt.
For the first time in a generation, we have official interest rates in the US at or above Australian ones with an expectation that theirs will be over 2% by year end compared to our benign 1.5%. This is unusual and the Australian dollar has followed suit, falling from 81c back to 77c.
Australia’s growth is reasonable but masked somewhat from population growth with underlying growth per person remaining weak. We also have to balance the difficulty of lower wage growth, high household debt and the start of falling property prices.
The good news at least is our floating currency and proximity to the growing Asian economies allow us to continue supplying goods and services to those growing economies. This isn’t as glib as it sounds with exports like iron ore, agribusinesses, soft commodities and services like education and consulting professions. Moreover, we are finally well into the era of venture capital allowing entrepreneurs to innovate and create businesses for the future. Managing the good and bad parts will be the challenge with high debt and low rates dominating opinion editorials for years to come.
South Australia continues to grow but needs to “step up” a notch to address both the unemployment rate and leaking population growth. A new state Liberal government was elected in March for the first time in 16 years and has announced a raft of measures which they believe will help to address some of these issues.
Geopolitical issues continue to dominate from time to time – global trade wars, Chinese leadership succession, Middle East wars and in this modern age, irresponsible tweets from supposedly responsible statesmen. Unfortunately the geopolitical tensions cannot really be foreseen but the pulse is higher than it’s been for a few years.
A Brief Discussion on Market Timing and Returns
We frequently get asked – when’s the next crash? And if the economy is doing well why are the markets volatile?
The answer to the first question is hard. “Crashonomics” has a long and interesting history but frankly we cannot, nor can anyone else, pick a stock market crash. If you look at the past few years we’ve been warning about being careful, but to actually move money around in trying to anticipate one would actually cost you returns. The chart below from JP Morgan Asset management shows the 20 year history of returns for Australian shares (with dividends reinvested). Just missing the 10 best days would have cost you 2.5% per annum, and missing the best 20 would have cost you 4.4% per annum. If you happen to have missed the best 40 days over that 20 year period, you’d be looking at a return less than Cash (1.5% per annum).
The old adage of “time in the market beats timing the market” contains an element of truth. A strategy that covers both diversification and an appropriate time frame for an individual’s overall lifecycle is a better plan than one based on short term trading/timing the market.
The second question is easier to answer. There’s little correlation between stock market returns and economic growth. Stocks try to anticipate future economic growth and therefore move in accordance with underlying valuation levels and unanticipated profits. In other words, markets already put a value on future growth via today’s price. Any movement in that price is basically a surprise change to future expectations and valuation moods. Basically, markets move in accordance with both fundamental factors and behavioural views.
We’ve said this many times in the past but beware the “guru seer” that believes she/he can profit from predicting market or economic events. Check their long term track record and we’re confident, barring some statistical good luck, it would average out to the bar charts more to the right than the ones on the left.
Market Outlook and Summary
The strong confidence back in January from pundits regarding market returns seems less likely at the time of writing this in mid-April. We haven’t changed our views that returns over the next 5 years will be lower and more volatile than the previous 5 years. We continue to believe our members are best served via investing in well-diversified portfolios that seek to match their retirement goals.