Market Watch: October 2022

Australian Retirement Trust Chief Economist Brian Parker recaps our strong long-term investment performance despite short-term volatility.

The QSuper Balanced Accumulation option returned -2.65% for the September quarter and -5.15% over the year to September 2022. Longer-term returns remain strong, with the QSuper Balanced accumulation option posting a return of 7.06% p.a. over the 10 years to the end of September 2022.¹

As part of a risk-balanced approach, QSuper Balanced invests more in unlisted assets such as infrastructure and has lower exposure to equities than traditional funds. Returns for other QSuper investment options can be found here.

Returns from the major publicly traded asset classes for periods to the end of September 2022

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

Modest gain in Australian shares but world share markets declined further

Solid gains in banks, energy and materials shares led to a modest gain in Australian shares over the September quarter. Elsewhere, however, share prices declined further across the developed world, with share markets in Japan and the UK outperforming those in the US and the Eurozone. In addition to the ongoing war in Ukraine, markets remain troubled by stubbornly high inflation and rising interest rates.

Central banks across the world, including the US, the Eurozone, Australia, the UK, Scandinavia, and Canada increased official interest rates over the quarter. In short, markets are worried that central banks may overdo it – raising rates too far and ultimately triggering a global recession.

Emerging share markets also suffered negative returns over the quarter. Share prices in China, Korea, Taiwan, and some Eastern European markets saw the largest falls, while strong gains were recorded in Turkey, Brazil, and India. A weaker Australian dollar added to the returns of unhedged developed and emerging markets shares over the September quarter and the year to September 2022.

Fixed income returns were again negative

Australian and global fixed income returns were again negative over the quarter as bond yields rose further in response to inflation concerns and increases in official interest rates.

UK bond yields rose particularly sharply late in the quarter in response to the announcement (since reversed) of a fiscal package that included large tax cuts at a time of already heightened concerns over an overheating economy and high inflation.

Non-government securities underperformed sovereign bonds with credit spreads widening further, both here in Australia and globally. Higher bond yields also undermined the performance of Australian and global listed real estate securities, which were the worst performing asset classes over the quarter, as higher bond yields reduce the relative attractiveness of the yields available on property securities.

The outlook and what is Australian Retirement Trust doing?

The challenge facing the world’s central banks is an extraordinarily difficult one. Further cash rate increases, both here in Australia and elsewhere are almost certain, although there are signs here in Australia that the RBA is slowing the pace of its rate increases.

While there is a risk of recession in a number of economies – partly reflecting the ongoing economic impacts from the war in Ukraine, but also the risk of monetary policy being tightened too aggressively – we do not see a global recession as inevitable at this point.

We do not design portfolios based on our own or anyone else’s short-term economic, market or geopolitical forecasts. And we have no way of knowing with any certainty how long it will take for the markets’ inflation and interest rate fears to subside.

While much of the rise in inflation we have seen over the past year or so is likely to fade (as supply chain pressures ease and key commodity prices stabilise or decline, for example), this is likely to take some time and over the medium to longer-term inflation is likely to be somewhat higher than we saw in the pre-COVID years.

However, our investment team and our external investment managers do seek to capitalise on opportunities that inevitably emerge during times of crisis and heightened market volatility, such as we are currently experiencing.

Our asset allocations and recent investments

The QSuper Balanced option is designed to be less dependent on any particular market environment, such as rising share markets, to achieve the CPI+ return objective. The option has outperformed its return objective over the past 10 years and delivered annual returns above the objective more consistently than a traditional balanced option.

The September quarter was challenging for bonds and shares as markets grappled with the potential for higher inflation and interest rates, producing a loss for the Balanced option. We made a number of asset allocation adjustments in response to the changing conditions.

Late in the June quarter and in early August, weights to commodities and equities were lowered, reducing portfolio losses in subsequent months. The bond exposure was significantly reduced after the initial COVID-19 outbreak in 2020 when long-term interest rates had fallen very close to zero. Through the September quarter, with interest rates and the potential forward return from fixed income higher, the portfolio’s allocation to bonds was increased slightly.

In addition, we continue to hold a significant allocation to foreign currencies. This provides additional protection to our diversified portfolios as the Australian dollar tends to fall sharply during most periods of market stress. We did slightly reduce foreign currency exposure over the September quarter as we took profits on recent foreign currency gains.

The QSuper diversified portfolios continue to hold a substantial allocation to alternative assets, particularly the key unlisted asset classes – real estate, infrastructure, private equity and private credit – as well as an exposure to commodities and other alternative investment strategies. These allocations have provided significant diversification benefits, particularly in an environment where both fixed income and shares have delivered negative returns.

During the quarter our infrastructure team was part of a consortium that acquired a stake in VicRoads, the Victorian government’s motor vehicle registrations, licencing and customs plates business.

We also sold 50% of our interest in United States Infrastructure Corporation, the leading North American provider of utility location services, providing a meaningful return of capital to ART members, and we acquired an interest in Foundation Risk Partners (FRP), a specialist insurance broker in the United States. FRP has a footprint of 139 offices across 18 states, with a primary focus in Florida, New Jersey, New York, and California.

Volatility in public credit markets has created opportunities for private credit managers to acquire loans from investment banks at significant discounts to face value. These opportunities provide very attractive returns relative to the risks involved.

We’re here to help

How your super is invested can have a big impact on what you'll have in retirement. Our online advice tool can help you select the right blend of QSuper investment options for you, as can speaking with a financial adviser. Advice about your QSuper account is included with your membership.²

Book an appointment today or call QInvest³ 1800 643 893.

1. Past performance is not a reliable indication of future performance. The figures shown reflect the returns of the investment options, not the returns of individual member’s investment as these returns do not take into account the timing of contributions, investment switches or withdrawals.
2. Please refer to our website for more information about your advice options.
3. QInvest Limited (ABN 35 063 511 580, AFSL 238274) is a separate legal entity responsible for the financial services it provides. Eligibility conditions apply. Refer to the Financial Services Guide for more information.