Written By Kris Wrenn – Senior Adviser
As the New Year gets fully underway I thought it a good time to break down the various asset classes and consider both the “story” of 2020 and the recent changes we’ve seen, and just as importantly, what may be in store for 2021. As has and perhaps will always be the case, the various share and property markets do not move in tandem and even in the darkest days there are generally always opportunities if you target certain sectors and niche markets.
We’ve seen a clear improvement in our economic position in the last few months, but it also goes without saying that a defining reason for this has been the financial stimulus (handouts) that the Government has been providing. Some of these (jobkeeper) are literally scheduled to come to an end and as such the general consensus (although in no way a guarantee) is that any major changes by the RBA to rates are likely to be a couple of years away.
As investors this of course leaves us very much as we have been for quite some time, in an era where it is a great time to borrow but a terrible time to save. I can certainly vouch for the fact that this has led to a lot of investors (especially retirees) to ask the question of what investment options are available that should yield more than Cash, but are still defensive in nature.
Fixed Interest (Bonds, Debt Securities)
A combination of improving economic conditions, combined with a very successful control of covid-19 (comparative to other countries), has led to bond yields rising. This is not necessarily a good thing for investment options that are based on fixed rate investments. In fact the Australian Government Bond Index has actually fallen -0.62% over the 12 month mark at the time of writing. The 3 year annualised return however has still been very lucrative at 5.3% p/a.
In my opinion for those seeking to achieve some form of balanced portfolio (again, retirees), it is very important to maintain a diverse range of Fixed interest investments, including “floating rate” investments, because as with shares the various sectors do not necessarily move in tandem. As an isolated month, Australian credit investments outperformed that of the domestic share market across January.
As I write this, it is 12 months almost to the day that the domestic share market peaked. That peak (using the All Ords), was 7,255 on 20th February 2020. As we all know, we then saw “the month from hell”, as our market fell 37% in 31 days to land at 4,564 on 23rd March 2020. We have of course seen a frankly remarkable recovery and by December the All Ords surpassed the 7,000 mark and has since bounced around this mark, never reaching its previous peak, but “holding steady”. When you factor in dividends the domestic share market as a whole has roughly broken even in the last 12 months.
With all the volatility however comes opportunity and as such some of the more actively managed funds, including small companies funds, have vastly differed, whether it be underperforming or outperforming the market at large.
In terms of the global share market at large let’s first consider the most commonly used index by Australian investors, the MSCI Ex Australia Hedged; that is, the largest 1,500 companies worldwide, excluding Australian companies and removing the effect of currency change. This index has fared significantly better than our own yielding approximately 10% over the last 12 months. This is largely off the back of the US share market, which makes up around 65% of that index.
There are some that have concerns regarding the US, with respect to their debt levels. Like Australia they have very much been “propping up” their economies through stimulus measures. In fact, on Jan 14th Biden announced a $1.9 trillion economic stimulus package. This is despite their significantly increasing Government debt levels, which has been ramped up year on year ever since the GFC.
Of course not all global markets fared the same. Just as within the Australian spectrum, the global spectrum saw varying results depending on where you look. The UK for example was at the other end of the spectrum, falling around 17% in 12 months, while Japan pretty much broke even like Australia rising just 2% in 12 months. One interesting sector with arguably some potential is the “Emerging markets sector”, with the MSCI Emerging markets index beginning to pick up with a 12% return over 12 months, but an annualised average of just 6.3% p/a over 3 years and just 7% p/a over 10 years.
Property / Infrastructure
In terms of Super/Managed funds, where the exposure tends to reside with commercial property, sadly this sector appears to have been a victim of covid-19. Generally speaking both property and infrastructure funds fell in line with shares, but unfortunately haven’t enjoyed the upturn. With lockdowns came large numbers of employees working from home and this trend has in no way gone away as the virus has been combatted. To the extent that many companies have or are considering continuing to allow employees to work remotely. As such this has potentially reduced the need, i.e. the demand for commercial premises.
Other funds with a focus on sectors within the Property arena, such as shopping centres, residential construction, and retirement villages have not fared as badly, and arguably have a brighter outlook. Likewise funds with an Infrastructure bias may well benefit from Governments seeking to stimulate the economy by increasing infrastructure spending. This may be especially prevalent as the covid-specific financial relief comes to an end, and given the seeming inability to use monetary policy given interest rates cannot go any lower without going negative.
The Aussie Dollar
Against the $US, the Aussie $ has had a complete reversal in the last 12 months compared to the 12 months prior. Between Mar 19 and Feb 20 we saw it begin at around 71c, drop slowly and then crash with covid down to 57c. Since then however it has risen a whopping 36% and now sits at 78.7c. This has meant enormous differences in returns for “Hedged” versus “Unhedged” global funds over the last 12 months.
As 2021 continues it is more than important than ever to diversify your investments. Global share exposure can include large companies and small, large countries and small, hedged funds and unhedged. Australian share exposure might be indexed based for cost and diversification purposes, but it can also target small companies and individual sectors which might be undervalued. Property doesn’t have to be isolated to commercial property but may include global property and infrastructure securities.
Diversifying your assets will reduce potential volatility with respect to your balance and it also allows us as advisers to overweight or underweight sectors based on past performance and also how current economic conditions may impact those sectors going forward.
If you wish to speak to an Adviser at Hudson Financial Planning, please call direct on 1800 804 296 or submit a contact form directly on our website.