Investment performance and economic update: April 2024
Our Chief Economist, Brian Parker, recaps the current economic environment and future outlook.
Share markets start the year strongly …
World share markets performed strongly over the first quarter of 2024, supported by increased confidence in prospects for the global economy.
Japanese equities continued their strong performance from 2023, outperforming shares in the US and Europe over the quarter. All major industry sectors produced strong returns with technology shares again the best performers.
A fall in the Australian dollar against a range of developed and emerging market currencies added to the returns of unhedged international shares over the quarter, and over the year to March 2024.
Australian shares underperformed the major developed markets while nevertheless producing strong returns, with the major indices rising to all-time highs late in the quarter. While IT shares were the best performing over the quarter, financials and consumer discretionary shares made the largest contributions to returns.
… while bond markets were more challenging
Australian fixed income returns were positive over the quarter despite a small rise in government bond yields: a positive return from non-government securities offset modest losses on government bonds.
However, global fixed income returns were negative as yields rose substantially in the world’s major bond markets.
Although inflation rates have generally declined, service price inflation remains elevated in most major economies.
Most of the world’s major central banks – and the Reserve Bank of Australia (RBA) – kept interest rates unchanged over the quarter, while signalling that official interest rates were unlikely to be reduced as quickly as markets had been expecting.
In contrast, the Bank of Japan began its long-awaited normalisation of monetary policy, raising its official interest rate to 0, after reducing it to -0.1% in 2016.
The rise in global bond yields impacted the returns from global listed real estate securities (REITs), as higher bond yields reduce the attractiveness of REITs. However, Australian REITs performed very strongly, largely reflecting a strong performance from the Goodman Group.
The outlook and what ART is doing
The challenge facing the world’s central banks remains an extraordinarily difficult one: bring inflation back under control within a reasonable timeframe without causing a major economic downturn in the process. In addition, the geopolitical environment remains a fraught one.
However, labour markets generally remain very tight, and there remains a risk that faster growth in wages and labour costs will result in inflation remaining at unacceptable levels, particularly in the service industries.
While this is unlikely to see official interest rates increased further – at least outside of Japan – it is likely to delay and limit any future interest rate cuts.
Tighter monetary policy settings across much of the world have slowed economic growth considerably, but the risk of a major economic downturn appears to have eased.
Economic conditions in the US remain particularly solid, although elsewhere, the major economies are either in a mild recession (UK) or teetering on the brink of one (Eurozone and Japan).
Here in Australia, overall economic growth has slowed to a crawl as strong growth in business investment and public spending has been mostly offset by weaker consumer spending.
While the highest population growth in decades has propped up overall spending volumes, they are nevertheless declining in per capita terms.
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 far or how quickly inflation will fall from here or when interest rates will peak.
However, our investment team and our external investment managers do seek to capitalise on opportunities that inevitably emerge during times of heightened market volatility.
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. You can view the current and long-term performance of this option here.
We have continued to adjust our Dynamic Asset Allocation (DAA) strategy in response to changes in relative value between asset classes over the March quarter and will continue to do so as opportunities present themselves.
During the quarter, we reduced our exposure to equities as share prices continued to rise and increased our holdings of sovereign bonds as government bond yields moved higher.
At the end of March 2024, our DAA strategy slightly favoured shares and bonds over cash. Within DAA’s shares allocation, we preferred Japanese, UK and European shares over shares in the US and Australia. In fixed income, we increased our overweight positions in the UK and US while remaining underweight in European and Japanese bonds.
The DAA strategy’s currency exposure favours the Scandinavian currencies, the Malaysian ringgit and the Japanese yen over the Canadian and New Zealand dollars, the Czech koruna and the euro.
Well diversified portfolios
We continue to hold a substantial allocation to alternative assets, particularly the key unlisted asset classes – real estate, infrastructure, private equity and private debt.
As a large superannuation fund, we have well-diversified portfolios of these assets that we expect will deliver strong, long-term returns, while reducing our members’ exposure to share market volatility.
During the quarter, our infrastructure team entered into an agreement to sell our stake in CampusParc, the car parking system for Ohio State University. The decision to sell the asset follows more than a decade of double digit returns for QSuper members and reflects a desire to refocus the portfolio on larger scale assets.
Our private equity team committed additional capital to our investment in Phenna Group, a UK based testing, inspection and compliance business. The additional capital will support Phenna Group’s continued inorganic growth strategy.
In addition, a commitment was made to acquire a large portfolio of buyout funds focused on North America, together with 16 direct investments. At the time of acquisition, the portfolio comprised some 300 underlying companies, with exposure to a broad range of sectors, including application software, consumer finance, and healthcare supplies.
Help to choose your investments
How your super is invested can have a big impact on what you'll have in retirement. We’re making changes to the investment options we offer members from 1 July 2024. The Product Update has the details. Speaking with a financial adviser can help you select the right blend of QSuper investment options for you. Advice about your QSuper account is included with your membership.
Book an appointment today online or call 1800 643 893.
Past performance is not a reliable indication of future performance. 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.