Posted on 31/03/2017
“I have become comfortably numb”
Writer: David Gilmour,
Roger Waters (Pink Floyd)
The first quarter of 2017 was incredibly strong across all of Statewide Super’s investment options. The returns for the 1 year ending 31 March ranged from official “cash-like” returns for the Cash option right through to “high-teen” returns in our Australian and International Shares investment options. The returns across the board over the past 5 – 7 years has helped many of our members recover and exceed the lost ground from 2009 during the depths of the global financial crisis. While we welcome the good returns for members, we also strongly caution the temptation to extrapolate these returns into the future.
The table below shows our superannuation options’ returns over 1, 3 and 5 years ending 31 March 2017.
|Investment Options*||Super Returns to 31 March 2017|
|1 Year||2 Year||3 Year|
*Note: Selected Statewide Super Pre-Retirement Member Investment Options, returns are net of fees and tax. Pension options are not shown but are available on our Website.
The results over the past 3 years continue to remain competitive relative to industry peers. The chart below shows the MySuper return relative to the SuperRatings median return since its 1 July 2013 inception date. Our MySuper option remains the best MySuper option for the 3 years ending 31 March 2017.
Source: SuperRatings Fund Crediting Rate Survey for the 3 years ending 31 March 2017.
Global Economy and Market Outlook
We typically do an overview of the economy, both domestically and globally. Having just returned from overseas visits to Asia, UK, and the US, let me break down some key observations for economies and markets. There are four key points we’ve picked up travelling and reviewing across our investments.
The first point is that the global economy is doing well compared to last year. Despite the recent low first quarter 2017 US GDP number, all economies are growing, with better growth in Europe, continued growth in China and the US, and even Australia. The International Monetary Fund recently upgraded growth forecasts for the global economy for the next 3 years. The global increase in manufacturing activity and sentiment bodes well for the economy for the rest of 2017 and into 2018. The downside is the “Amazon” effect on retail trade and employment in the US. We witnessed closed stores and many retailers in the US were complaining of tough trading conditions as consumers move from physical store purchases to online retailing.
The second point relates to the risks of the sustainability of global growth. We still worry about the unsustainable high credit growth in China and potential ”geo-political” issues out there, like trade wars and populist political parties across the world. Notwithstanding the expected centrist French election victory, the mood across the world is still dark and we doubt this will flicker out. Markets remain relatively optimistic about these issues and we do not think that’s a fair assessment of the current mood.
For Australia, the extremely high cost of housing plus a record amount of mortgage debt will act as a brake on consumer-led economic growth. Luckily, the current low levels of interest rates make it easier for borrowers to service, but also makes the Australian economy vulnerable to any official interest rate increase. Policymakers at the Treasury and Reserve Bank of Australia will have a hard job trying to balance employment growth, house prices, inflation, and wage growth in the near future.
The third point relates to the current historical lows in interest rates around the world. We believe that rates are expected to go higher over the next 5 years and the tailwinds of lower rates for shares, bonds, property, and infrastructure will become headwinds over the next cycle. There is also talk of the US administration “going for growth” via tax cuts and increased budget debts. We believe this will further add pressure to long-term interest rates, not only in the US but across the world. This implies lower returns from all asset classes, as bond yields finally offer competition to bond-like investments in property, infrastructure, and high-dividend yielding shares. Nonetheless we do believe rate hikes will be slower and lower than the past.
Finally, we believe market valuations for the key asset classes are high and expectations in terms of profits and future returns are elevated. At current valuations, the major asset classes are priced for perfection. Moreover, current volatility levels are at near lows implying investors are “comfortably numb” about the future. We beg to differ and think both lower returns and higher volatility will be the “new normal” from here.
You may suspect on reading the above that we appear to be a little negative. We would prefer to be realistic and prudent in terms of overall investment outcomes and meeting our objectives. We are also not forecasting short-term market corrections or indeed continuing rises. What we are trying to do is dampen any expectations that the recent returns are indeed sustainable and that now is not the time to take any careless risk.
We remain close to our medium term asset allocation for all of our diversified investment options. In essence we hold less shares than our strategic asset allocation, more cash together with investments in absolute return strategies that seek to do better in lower or negative returning markets. Despite the broader market move to passive management, our equity strategies continue to favour active management with the track record over the past 10 years being exceptional. For example for the 10 year period ending 31 March 2017, our Australian shares option was 8th out of 65 funds in the SuperRatings survey. We are top quartile over 3, 5, 7 and 10 years.
Summary and Market Outlook for 2017
Similar to our commentaries over the past few quarters, we continue to believe that a diversified portfolio remains the best investment strategy for meeting retirement outcomes. This applies to both pre and post retirement planning.