Market update - fourth quarter (Apr-Jun 2018)

Finishing on a high

Key points

• This quarter our MySuper Balanced option returned 3.46% and our Balanced option for pensions returned 3.84%.
• We ended the financial year with a return of 9.22% for our MySuper Balanced option and 10.27% for our Balanced option for pensions.
• Main themes impacting investment markets were talk of trade wars, rising inflation and tightening monetary policy (to slow down economic growth).
• The official cash rate remained at 1.5% - unchanged by the Reserve Bank of Australia (RBA).

 

The scene this quarter

Political and economic uncertainty continued with talk of looming trade wars, rising inflation and the tightening of global monetary policies. Increased global market volatility was further amplified by the first meeting of President Trump and North Korea’s leader, Kim Jong-un. Despite the unease, most markets still managed to finish the financial year on a high, bouncing back from the market lows of February. Business and consumer confidence was high globally and domestically, and unemployment rates generally decreased around the world.

What this means for your LUCRF Super account

Our strategy for dealing with current market volatility remains consistent with our views and discussion in our last market update.

We're continuing to use strength in share markets by taking profits to build up cash when shares are no longer good value for the risks involved. Then we can buy back in when shares become cheaper (especially within our MySuper Balanced and Balanced option for pensions, where the majority of our members are invested). In addition, we’re seeking out fairly-priced alternative assets like unlisted property and infrastructure. These assets are more stable and unlikely to suffer the ups and downs that traditional assets such as shares do. 

How the markets performed

Global developed market shares (unhedged) have performed well with a quarterly return of 5.5% and a return of 15.4% for the 2017/18 financial year.

US market

The US market has been at the centre of much of the uncertainty affecting global shares. Economic stimulus measures in the US (like government spending and corporate tax cuts) along with protectionist policies restricting imports and protecting domestic industries, are aimed at increasing jobs and promoting growth in the US economy.

However, these measures are also creating concerns that inflation will rise in the US. This has caused the US Federal Reserve to raise official interest rates and, for the first time since the early 2000s, the US official cash rate is now higher than the RBA’s official cash rate.

Inflation: The calculation used to measure the increase in the price of a country’s goods and services via the consumer price index (CPI). Central banks, like the RBA try to keep inflation within particular bands. For example, the RBA tries to keep Australia’s inflation between two and three percent and will adjust monetary policy to ensure this is maintained.

 

Other markets

Following on from the debate surrounding the UK’s exit from the European Union (EU), Italy’s recent election of an anti-establishment, protectionist government is deepening concerns that Italy could also exit the EU.

Ongoing trade concerns (particularly with the US) are slowing down European markets. Although, the Euro has weakened against the US dollar and this may be seen as a short-term positive. A weaker Euro means that European exports become cheaper to manufacture and for other countries to buy.

Rising US interest rates saw wobbles in emerging market returns, particularly for countries with large amounts of debt in US dollars including Argentina, South Africa and Turkey. This instability in interest rates meant that emerging markets had lower returns than developed markets with a return of –3.5% (in local currencies) this quarter.

However, business earnings in emerging markets have remained mostly positive leading to emerging markets still achieving a strong return of 10.5% for the 2017/18 financial year, with slightly lower returns than developed markets.

Here at home

The Australian market has remained strong, outperforming global markets to achieve a return of 8.4% this quarter.

The highest performing sectors were energy, technology and consumer staples. Growth in these sectors, and the economy as a whole, was mainly due to net exports and increased government spending. 

For the 2017/18 financial year, domestic shares had a return of 13.2%. The Australian listed property sector performed exceptionally well in this quarter compared to the March quarter, with a return of 9.8% (S&P/ASX 300 A-REIT Index), up from a loss of –6% in the last quarter. In comparison, while global listed property performed satisfactorily, it underperformed the Australian market with a return of 7.3% this quarter.

The RBA has maintained the official cash rate at 1.5%. This rate has remained unchanged for 21 consecutive RBA meetings (held monthly). While unemployment levels have decreased slightly, the RBA has suggested that unemployment levels would need to continue to decrease further before inflationary concerns triggered an increased cash rate (i.e. higher interest rates).

Official cash rate: The overnight interest rate the RBA sets, which dictates the cost of money between commercial banks. The cost of this affects the interest rates that commercial banks then charge. If the official cash rate increases, then commercial bank lending interest rates also increase and vice versa. The RBA controls the official cash rate to control inflation (monetary policy). 

 

Looking ahead

The current political climate will ensure continued ups and downs in financial markets. We're monitoring the markets closely while maintaining a well-diversified portfolio for our members. As always, we encourage members not to switch in and out of long-term investment strategies in response to short-term movements in the market.

Latest returns

The table below shows how your investment has performed for the quarter and the 2017/18 financial year. To discuss market conditions or your own financial situtation, please call one of our financial advisers on  1300 130 780 .

Super/TTR rates

Pre-mixed Investment options4th Quarter (1 Apr-30 Jun 2018)2017/18
MySuper Balanced (default)3.46%9.22%
High Growth4.46%11.54%
Targeted Return1.16%4.78%
Moderate2.79%7.35%
Conservative2.13%5.65%
Asset class investment options4th Quarter (1 Apr-30 Jun 2018)2017/18
Australian Shares6.54%12.59%
International Shares4.76%12.05%
Indexed Shares6.63%14.09%
Property8.65%11.51%
Cash0.49%1.88%

Pension rates

Pre-mixed investment options4th Quarter (1 Apr-30 Jun 2018)2017/18
Balanced (default)3.84%10.27%
High Growth4.95%12.74%
Targeted Return1.27%5.56%
Moderate3.10%8.18%
Conservative2.37%6.32%
Asset class investment options4th Quarter (1 Apr-30 Jun 2018)2017/18
Australian Shares7.23%14.15%
International Shares5.15%12.96%
Indexed Shares7.14%15.33%
Property9.70%12.94%
Cash0.58%2.23%

Past performance is not a reliable indicator of future performance.