Herbert Chang, Head of Capital Markets
Further evidence of China’s slowing economy last week has triggered a fall in global equity markets as sentiment deteriorated and volatility spiked. Emerging market assets and commodity prices weakened significantly as investors sought safe-haven assets, prompting a rally in sovereign bonds. The Australian dollar depreciated over the week, continuing its trend of the last few months, as markets pared back expectations that the US Federal Reserve is close to ending its zero-cash-rate policy.
These recent events indicate signs of change in market valuations. Here we bring you an update of the main events driving these market movements and the impact to the QSuper portfolio.
China’s slowing economy has been of increasing concern to the markets, particularly after the equity market deteriorated sharply in June and the subsequent devaluation of the yuan. The recent global equity market sell-off followed the release of the China Purchasing Managers’ Index, which measures business activity in the manufacturing sector, and which last week indicated the lowest result in six years.
Globally, the currencies of emerging markets devalued in response to China’s falling yuan – Vietnam, Malaysia, Kazakhstan and others have or will be devaluing. The Hong Kong dollar is holding its peg to US dollar, but will be tested.
Crude oil has fallen to a six-year low of under US$40 per barrel, down from over US$90 a year ago. China has taken advantage of current pricing to fill its strategic reserves of oil, overtaking the US as the largest oil importer.
Despite the US economy continuing to generate solid economic data (with inflation an exception), markets have become less convinced that the Federal Reserve (the Fed) will start normalising interest rates in September as has been widely expected. The Fed funds futures market is pricing in only a 32 per cent chance of a rate increase in September. Interestingly, Australian markets are now pricing in a 60 per cent chance of a cut in the Reserve Bank of Australia (RBA) cash rate in November and is even indicating some probability of a second cut. The markets are expecting that current conditions (if continued) will give the RBA little choice but to act.
So how is the QSuper portfolio reacting? Equities remain the dominant risk in the Balanced and Aggressive options and therefore these options will be exposed to this kind of negative market event to some extent. However following the strong performance of equities over recent years, the allocation to shares in the Ready Made options (Balanced, Aggressive, Moderate1) is now at the lowest level it has ever been. The growth portfolio of the QSuper Lifetime option (the default option) is similarly positioned.
Bond allocations were also reduced following their strong performance over recent years, but a desire to maintain diversification, and concerns about global risks, have seen us retain a larger exposure than we would have based on a view of bonds in isolation. A material exposure to high return seeking bonds has provided some buffer to the multi-asset class options1 during this recent equity sell-off.
The portfolio positioning described above represents in practice the new investment strategy that has been in place for QSuper’s Ready Made1 options since 2011 and which also forms a significant part of the investment strategy of the Lifetime option.
In summary the recent market movements, while larger than normal, do not require us to make portfolio adjustments at this time, although what these imply will be factored into our thinking in managing portfolio exposures into the future.
1. This does not apply to the QSuper Socially Responsible option which is wholly managed by AMP Capital Investors through its Responsible Investment Leaders Balanced Fund.
The views of the author and those included in the responses to comments posted on this blog are not necessarily the views of QSuper. This information is for general purposes only. It is not intended to constitute advice and persons should seek professional advice before relying on this information.
Past performance is not a reliable indicator of future performance. Each of our investment options has a different objective, risk profile, and asset allocation.
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Head of Capital Markets, Investments
As Head of Capital Markets Herbert is responsible for overseeing the efficient implementation of QSuper's investment strategies and the management of fund level risks.