Investment performance and economic update: January 2023

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

The QSuper Balanced Accumulation option returned 2.68% for the December quarter and -4.77% over the year to December 2022. Longer-term returns remain strong, with the QSuper Balanced Accumulation option posting a return of 7.14% p.a. over the 10 years to the end of December 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.

The table below shows returns from the major publicly-traded asset classes for periods to the end of December 2022.

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

Share markets produced solid returns over the quarter despite ongoing volatility

World share markets produced solid returns over the quarter, despite significant share price falls during December. All the major developed markets produced positive returns over the quarter, with shares in Europe and Australia outperforming those in the US and Japan.

However, returns over 2022 were sharply negative, with nearly all the developed markets experiencing large share price falls. US shares, particularly in the technology sector, experienced the largest falls among the developed markets.

Australian and Japanese shares produced only modest declines, while the UK share market was the only major developed market to produce a positive return for the year.

Emerging share markets also enjoyed a solid quarter, while losing ground over the course of 2022. Chinese shares benefitted from an easing in China’s zero-COVID policy late in the year but were still among the worst performing emerging share markets over the year, along with Korea and Taiwan.

A lower oil price in the second half of the year adversely affected shares in major oil producing economies. However, shares in Turkey, Argentina, Egypt and Chile enjoyed strong gains over both the December quarter and the year to December 2022.

A stronger Australian dollar against both developed and emerging currencies detracted from the returns of unhedged developed and emerging markets shares over the December quarter, while a weaker Australian dollar added to the performance of unhedged international shares over the course of 2022.

Fixed income returns were sharply negative over the year

Australian and global fixed income returns were sharply negative over the year to December. Non-government bonds significantly underperformed sovereign bonds over the year as credit spreads widened. However, over the December quarter, fixed income returns were positive despite a sharp rise in yields during December.

Credit spreads narrowed somewhat, allowing non-government bonds to recover some of the year’s underperformance. The world major central banks continued to tighten monetary policy over the quarter with official interest rates rising in nearly all major economies.

And in a surprise move late in the year, the Bank of Japan, while leaving its overnight interest rate target unchanged, raised its target ceiling for long-term government bond rates.

Higher bond yields over 2022 severely undermined the performance of Australian and global listed real estate securities (REITs), 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.

During the December quarter, the improvement in fixed income returns was also reflected in a recovery in REIT performance, despite significant losses in December as bond yields rose.

The outlook and what is Australian Retirement Trust doing?

The challenge facing the world’s central banks remains an extraordinarily difficult one: bring inflation back under control without causing a major economic downturn in the process. Further cash rate increases, both in Australia and elsewhere, are almost certain, although the RBA has slowed the pace of its rate increases and may be close to completing its tightening cycle.

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. The magnitude of the energy price shock that has been imposed on the Eurozone and the UK economies makes it highly likely that those economies are already in recession.

While much of the rise in inflation over the past year or so is likely to fade in 2023 (as supply chain pressures have clearly eased and key commodity prices stabilise or decline, for example), the medium to longer-term inflation is likely to be somewhat higher than we saw in the pre-COVID years.

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.

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.

Markets continued to grapple with high inflation and rising interest rates, and we made a number of asset allocation adjustments in response to the changing conditions through the December quarter. With inflation showing signs of peaking and interest rates at elevated levels, the potential forward return from fixed income improved, and we increased the portfolio’s exposure to bonds. We also raised equity weights after equities became cheaper.

As a form of diversification, we also added foreign currency exposure alongside higher equity and bond weights, as foreign currency tends to rise (or the Australian dollar falls) when global growth disappoints (equities fall) or if global inflation rises (bonds fall). Overall, the Balanced option made a positive gain of 2.68% for the quarter.

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 exposure to commodities and other alternative investment strategies. These allocations have provided significant diversification benefits, particularly during 2022, when both fixed income and shares delivered negative returns.

During the quarter, our private equity managers continued to be active including an additional investment in leading independent Swiss watchmaker Breitling. Breitling is poised for future growth through its brand positioning, wide product offering and robust supply chain. It will continue its geographic expansion and launch new products that harness the value of its extensive back catalogue.

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. Additionally, the downside protection featured in credit securities is an appealing attribute, particularly in the face of an uncertain macro environment.

During the quarter, our real estate team made an investment in US multi-family residential real estate and committed capital to both Australian and UK aged care real estate. Australian Retirement Trust holds the real estate that is underpinned by long-term leases with reputable aged care operators, providing members with a reliable rental stream.

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.