Posted on 29/10/2021
“You can check-out any time you like
But you can never leave”
The Eagles – Hotel California
September Quarter 2021 Review
The September quarter was positive for all options excluding Diversified Bonds as markets priced in another post Covid recovery across the World. Rising vaccination rates in Australia plus the warmer seasonal climate offers some hope across Australia that recent lockdowns give way to a return in “normal” conditions. Nonetheless the Covid shocks are not over as vaccination levels, cases and serious hospitalisations will be tested over the Northern Hemisphere winter and Australian summer as Australia reopens. We can all hope the restarting of economies will bring back personal and international travel freedoms that have been restricted as part of containing the virus.
Long term interest rates and short term inflation pressures have increased, reflecting the better global outlook. Day to day the markets are moving around due to headlines like reopening economies, supply bottlenecks, inflation, China related geo politics and Covid related news. In this Quarterly, we focus on the recent inflation threat and our approach to minimising the impact of some of the issues which are affecting markets.
The shorter term market movements remain in our opinion ‘noise’. Our preferred approach remains investing over the medium to long term (at least 5+ years and preferably 10+ years) and maintaining asset class diversification across Statewide Super’s portfolios. Our edge remains focusing over the longer term and investing in various asset classes and businesses that offer a diverse set of income streams.
The table below shows superannuation investment option returns ending 30 September 2021 over 1 year, 3 years, 5 years, 7 years and since inception.*
Super Returns to 30 September 2021**
^Statewide Super Accumulation Member Investment Options.
*Sourced from SuperRatings Accumulation Fund Credit Rating Survey September-21. Returns are net of investment fees, tax on investment income and asset based administration fees (where applicable). Further administration and other fees and costs may apply. See our “Fees and Costs” booklet for more information. 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.
Pension returns are not shown but are available here.
The default MySuper option ranks 6 out of 44 funds over the 7 years ending 30 September 2021 according to the SuperRatings** MySuper survey. Pleasingly, 9 out of 10 investment choice options are above median using SuperRatings** peer performance surveys.
**Sourced from SuperRatings Accumulation Fund Crediting Rate Survey Sep-21. Returns are net of investment fees and tax on investment income. Further administration and other fees apply. See our “Fees and Costs” booklet for more information. 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.
A Short History of Inflation
Lately, there’s been a glut of news stories pertaining to an old nemesis, inflation. Inflation can broadly be defined as the change in prices of goods and services. If inflation goes up more than your income it implies a loss in your purchasing power. The opposite of inflation is deflation, where the change in prices of goods and services falls. If your income remains steady, deflation reflects an increase in your purchasing power.
The charts below show the recent price increases in oil and global shipping.
The next chart shows search trends in supply chain disruptions.
Clearly we are living through some supply side issues that are raising prices. They are not limited to just energy prices (oil) and shipping costs, but also affect semiconductors, transport, petrol prices, food, cars, computers and mobile phones. The 1970s was the last major supply side inflation outbreak (higher oil prices) that deeply affected the economy leading to higher inflation and lower economics growth (termed ‘stagflation’).
We believe there are 6 major reasons why we are not heading for another period of severe ‘stagflation’ like the 1970s.
- The current economy has less dependence on oil than the 1970s. A rising oil price will still produce cost pressures, but the economy has more sources of energy than the 1970s.
- The oil cartel OPEC (Organization of the Petroleum Exporting Countries) is impacting prices less so now than in the 1970’s.
- The 1970’s also saw geopolitical disruptions in oil via the Iranian Revolution, Middle East tensions and the Vietnam War.
- The global economy in the 1970’s was in the process of liberalising in terms or capital flows and free floating currencies.
- The high current personal debt loads around the world will limit any major interest rate increase (i.e. in technical terms the economy can move from supply side inflation towards debt deflation).
- The ongoing innovation and technological advance means that the economy continues to evolve and fund ways to offer goods and services at lower prices and better quality.
The chart below from the Reserve Bank of Australia shows little effects from the recent increase in supply side inflation affecting wage growth.
Despite the reasons mentioned above, we do believe the economy will experience mild inflation and therefore higher interest rates. Assuming herd immunity against Covid is achieved, interest rates could rise 1-2% over the next 3 years. The opening up of the global economy (including Australia!) will help to alleviate some of the supply side issues over the medium term. Over the next year, this may keep inflation higher and central banks will be reluctant to prematurely increase rates until they see sustained pricing pressures.
Our portfolios are well placed to take advantage of this environment. Our current strategies embrace long term diversification, are underweight in long term government bonds and biased towards businesses that can either pass on inflationary costs or take advantage of higher rates. Our bond portfolios are biased towards shorter maturity investments, often with variable interest rates and corporate credit that are expected to hold their value. Our share portfolios are biased towards ‘value’ investment styles that are exposed to companies that will benefit from mild inflation. The overall portfolio is also well exposed to businesses that should benefit as the economies open up e.g. Adelaide Airport.
Statewide Super is currently completing a due diligence process with Hostplus with a view to a potential merger in the June quarter of 2022. We will have more to say in the December quarter but are excited by the opportunities this will provide our members.
The markets and the economy continue to look beyond the current Covid issues. Our members with longer investment time frames have been relatively well rewarded over the past year. We still believe we are entering a better global outlook for the economy, although investment returns will moderate from here.
We thank you for your continued membership. Please contact us if you need guidance on your superannuation at Statewide Super.