Investment update: Longer-term returns remain strong

Sources: Bloomberg, Australian Retirement Trust. Past performance is not a reliable indication of future performance.

After very strong performance in 2021, world share markets mostly lost ground over the March 2022 quarter. Inflation concerns and the likelihood that monetary policy would be tightened sooner and more aggressively than previously thought unsettled markets over the quarter. At the same time rising tensions between Russia and Ukraine, which culminated in Russia’s invasion of Ukraine in late February, produced further declines in share prices. Share prices in the Eurozone, because of its proximity to the Russia-Ukraine conflict and the emerging markets experienced the largest declines. US and Japanese shares also posted negative returns despite a reasonably solid recovery in March.

A stronger Australian dollar detracted from the returns of both developed and emerging markets shares over the March quarter. Generally, when global financial markets are unsettled, the Australian dollar tends to decline in value. However, the war in Ukraine has triggered further gains in a range of commodity prices and therefore Australia’s position as a major commodity producer and net energy exporter suggests that our economy could benefit from the crisis. This was also reflected in the performance of the Australian share market which produced positive returns over the quarter, driven by strong gains in materials, energy and financials shares.

Both Australian and global fixed income returns were sharply negative over the quarter. Bond yields have risen sharply as persistently high inflation in the US and elsewhere raised expectations that official interest rates would rise. After the central banks of Korea, Norway, New Zealand and the UK began raising rates last year, the US Federal Reserve raised official interest rates at its March meeting for the first time since 2018, and clearly indicated that further rate increases are likely over the remainder of 2022. In early April, the Reserve Bank of Australia signalled its intention to begin raising interest rates over the coming months.

While growth in both the global and Australian economies is likely to be reasonably solid in 2022, the war in Ukraine is imposing significant shocks on the global economy. Growth is likely to be weaker and inflation pressures even more exacerbated because of the conflict. In addition, COVID-related setbacks to global growth, such as China is experiencing, remain likely, although much of the developed world has achieved sufficient vaccine coverage and economic resilience to limit the economic impact of these setbacks. Despite the adverse growth effects of the war in Ukraine and the ongoing risks from COVID, the world’s major central banks are likely to persist with planned rate hikes this year.

The QSuper investments team continued to adjust the portfolio opportunistically as higher inflation expectations caused bonds and equities to sell off. We initially increased our exposure to shares, following a correction stemming from the Russia-Ukraine crisis, before selling equities once markets had begun to recover. We also added foreign currency, which had become cheaper with the rise in the Australian dollar through higher commodity prices. Foreign currency also became more desirable, given safe-haven currencies tend to rise during risk-off episodes and when bond yields rise. We also added bond exposure in those markets where the rise in yields (the fall in bond prices) was most pronounced relative to fundamentals.

In alternatives, the portfolio enjoyed a strong positive return early in the quarter from our commodities exposure, primarily industrial metals and agricultural products, reflecting inflation concerns and the commodity supply bottlenecks caused by both sanctions on Russia and another COVID wave. Such an exposure is another example of how the QSuper Balanced portfolio attempts to invest in asset classes to support returns in all environments, including inflationary ones. Given elevated prices, we sold down some commodities exposure in the second half of the quarter.

In unlisted markets, we continue to hold a substantial allocation to property, infrastructure, private equity, and private credit, and we continue to look for opportunities that represent good risk-adjusted returns. In March 2022, the largest take-private deal in Australian history closed, giving the fund a 7.5 per cent stake in Sydney Airport, the country’s primary international gateway. The airport’s strong market position makes it a good fit for our infrastructure portfolio, which seeks to provide long-term resilient returns that serve as diversifiers for listed equities.

How your super is invested can have a big impact on what you'll have in retirement. Our online advice tool or a financial adviser can help you select the right blend of QSuper investment options for you. QSuper members can access advice from QInvest about their QSuper accounts at no additional cost.¹