Welcome to our Investment Insights January 2019 update
The unpredictable nature of global markets was highlighted by a stunning bounce back in shares around the world in the first quarter, reversing a poor end to 2018. Bonds also rallied strongly as markets revised down expectations for global economic growth and re-calibrated their view of the future path of monetary policy.
The US Federal Reserve in March projected no further official rate increases for 2019. Aside from shifting expectations for interest rates, media and market commentary also focused on hopes of a breakthrough in trade talks between the US and China as well as the United Kingdom’s attempts to seal its exit from the European Union.
Both the Australian and US equity markets registered their best quarterly performances since coming out of the financial crisis. According to Bloomberg data, it was the Australian market’s best first quarter in three decades of record keeping. The New Zealand market rose nearly 12% over the quarter, reaching record highs in late March. Australia’s gains were led by materials stocks. Fortescue Metals was a standout, powered by iron ore prices hitting five–year highs. Strong gains were also posted in the sectors of IT, communication services, energy and real estate.
Financials lagged the overall market, though, amid continued fallout from the Hayne Royal Commission. In developed and emerging markets, the sector pattern was similar. IT, REITs and energy were among the top performers. Healthcare and financials lagged. In terms of the individual premiums, small cap stocks outperformed large everywhere but in emerging markets in the quarter. The profitability premium was also positive, while low relative price stocks underperformed growth across the board. In the bond market, both the term and credit premiums were positive. Yield curves shifted downward in most markets, while corporate bonds outperformed government bonds.
The financial media’s focus globally in the first quarter was on changing expectations for global growth and interest rates, developments in US–China trade talks and the UK government’s ongoing attempts to secure a Brexit deal.
In Australia, the wash–up from the Hayne Royal Commission’s final report in February occupied much attention, as did speculation about the timing of the federal election and the quandary of strong jobs growth alongside stagnant incomes. The following headlines are not intended to explain the markets’ performance in the quarter, but to provide some perspective about what people were talking about:
British pound rebounds as Brexit deal rejected in parliament—Financial Times
IMF cuts global growth forecast for second time in three months—Reuters
Euro area back on the brink of recession—The Economist
Hayne Royal Commission urges shake–up of Australian financial sector—AFR
Federal Reserve flags end to balance sheet run–off, patience on rates—Reuters
US trade chief sees long–term China challenges—Reuters
Trump’s second summit with North Korea’s Kim collapses—Bloomberg
Boeing in crisis as carriers ground 737 Max—New York TimesFederal Reserve signals no further rate hikes in 2019—Reuters
Federal Reserve signals no further rate hikes in 2019—Reuters
Cash and bonds
Australian Cash 0.52%
Australian Bonds 3.43%
Global Bonds 2.79%
Developed (Unhedged) 11.50%
Emerging (Unhedged) 8.93%
REIT’s (Unhedged) 13.23%
Hedging Premium 1.09%
The graphs below have been produced by Dimensional.
With markets having rebounded strongly from the December lows it again highlights that trying to time the market is a terrible investment strategy particularly when you are planning for retirement. In the series of articles below there are some valuable insights into the key areas that should be focused on when planning and implementing a retirement strategy. Namely
1. Saving is the single most important factor in building your position for retirement.
The detailed research conducted by Morningstar showed that your actual retirement age is uncertain and as a result of this uncertainty the need to focus on and increase where possible your savings rate is a key factor that is both very simple to do but also very easy to not do.
2. Financial Advice
We of course are strong proponents of financial advice as the bedrock of any financial strategy is understanding your goals, determining the amount of money required to achieve them and establishing a plan that gives you the highest probability of attaining them. With that in mind Ben Carlson from A Wealth of Common Sense highlights the difference between valuable advice and overvalued advice. Coupling a focus on your savings highlighted above with the 4 undervalued advice principles in this article and you will be well on your way to achieving those goals.
3. The risk of the “Overs”
We spend a lot of time looking at research and data around risk, but not as much as Dr Greg Davies who is the Head of Behavioural Finance at Oxford Risk. In this article Greg discusses that two of the biggest problems that most investors have is overoptimism and overconfidence. That can be a double whammy when it comes to investing as if you compound overly optimistic returns with an overconfidence that you will achieve them this can lead to what we professional call “sub-optimal results.”
“It’s never as good as you think and it’s never as bad as you think” was the quote running through our minds when we recently read an article from CNBC talking about the strong equity market performance that rounded out the first quarter of 2019 and herein lies the danger of spending too much time reading about and focusing on financial markets. If you recall, and we wrote about in our last edition, the end of 2018 was not a great time for markets with substantial falls over the final 3 months of the year with no lack of copy and talking heads telling us that this was terrible, that it would keep going down and that Armageddon is here. Low and behold at the dawn of the new year things turned around and markets have rallied strongly which has now led to a swing the other way in some parts telling us that 2019 is going to continue to be a great year. Take this table for example from said SNBC article.
So is it time to pile in?.....We think not as of course the universal disclaimer of “past performance is no indication of future returns” seems to be missing from the article predominately because the author has not considered your personal circumstances, needs or objectives and more importantly bares no responsibility for the resulting impact on your wealth and goals if they are wrong. What it does tell us is that there is no replacement for a good long term strategy as if you had read the coverage before Christmas and had sold out of fear, you would have then missed the recovery so in most circumstances the best strategy when markets are volatile is to do nothing other than stick to your strategy.
Back to top
Speaking of doom and gloom and in a follow up to our piece on the property market in our last edition, the good news is that the rate of falls in the Australian property market has slowed. So should we still be worried?
The short answer is No, as again the headlines of falling property prices grab out attention, for long term investors or homeowners the movement in your property over the past year is negligible relative to your long term position. It is also really important to put some of these numbers in context which is done very eloquently in this article from Core Logic, which we extract below and highlight for emphasis.“National dwelling values have been trending lower for seventeen months and have fallen by a cumulative 7.4% since peaking in October 2017. Despite the broad based weakness, the national index remains 15.9% higher relative to five years ago, highlighting that most property owners remain in a strong equity position.”
So in simple terms let’s understand what the impact on you of the “property market crashing” could be:
1. If you bought at the peak of the market in October 2017 you would be down 7.4%
2. If you bought after October 2017 you will down less than this number
3. If you bought before October 2017 you will also be down less than this number, but
4. Will more than likely still be in front as properties increased in value by almost 16% between October 2012 and October 2017.
This also assumes that:
You are selling your property now; and
You are not buying back into the same market.
So when you add all of these things together, the vast majority of those who own property have not actually “lost” anything… but who are we to let the facts get in the way of a good story.
Over recent years the rise of more socially conscious investors has seen many start to focus not only on the performance of their portfolio but what impact it has on Ethical and Social matters along with the Governance of the companies by its Board and senior management. There are many lenses from which investors can look at these issues and there is no right or wrong answer on how it should be tackled as we all have different views. However to help with understanding the concepts here are a few primers on “ESG”
The best place to start is at the United Nations who have developed the Principles for Responsible Investing. These principles are a Universal set of guidelines that are seen as a global standard with many fund managers and companies “signatories” to them.
Fund Managers and companies that sign up to the principles are then required to report on their activities each year. As an investor you can search up and then read the reports of the signatories using this link: https://www.unpri.org/signatories
As the principles and movement has evolved, there have been many who (without having any evidence) suggest that applying these principles doesn’t have any impact and more to the point can produce sub-optimal investment returns. However as the level of sophistication evolves in the application of these principles, evidence continues to point towards including these principles in investment analysis leads to positive impacts for investors
There are a number of ways that these principles can be applied and the methodology on how to do this differs based on the type of impact that you are trying to have. In this video from Morningstar they explain that the 3 main approaches of Values, Mitigation and Impact which as individuals need to be considered and then applied based on your beliefs and what you are trying to achieve.
Jack Bogle, the founder of Vanguard Investments and proponent of low cost, buy and hold index investing passed away at the age of 89 in January. There was much written about him when the news was announced and the article below was one of the better pieces we came across detailing his impact on the investing public including the below quote from probably the world’s most famous investor
If a statue is ever erected to honor the person who has done the most for American investors, the hands-down choice should be Jack Bogle. For decades, Jack has urged investors to invest in ultra-low-cost index funds. In his crusade… Jack was frequently mocked by the investment management industry. Today, however, he has the satisfaction of knowing that he helped millions of investors realize far better returns on their savings than they otherwise would have earned. He is a hero to them and to me. Warren Buffet – 2016
Upon his demise, as noted above this “frequently mocked” man’s global investment company had $6.8 trillion in assets under management as of 30 June 2018, including more than $1.1 trillion in ETFs and is one of the world's largest global investment management companies.
As always, the firm has been busy providing insight and opportunities for our clients. Through March we ran a major campaign around Federal Budget, complete with a detailed survey to gauge the economic temperature, and we were not surprised by the results. You can take a look at the summary and our Federal Budget videos here.
On the events side, it may interest that we held our inaugural State of the Market series in Sydney and Melbourne. While the series will focus on a range of asset classes, the focus for this event was listed and unlisted property funds, so investors heard from investment managers at Newmark Capital, Placer Property Group and APN Property Group. Let us know if you’d be interested in attending the series for any of our future topics: debt funds, equity funds and alternate/infrastructure funds.
This month we will also released a refreshed version of our firm’s major thought leadership piece, The Long Boom: What China’s rebalancing means for Australia’s future. In conjunction with the Australia China Business Council, Monash University and the Australian Centre for Financial Studies, this report includes commissioned economic forecasting from Monash University of the trade relationship between Australia and China from 2016 – 2026, with a focus on key sectors that will be most impacted. It makes for interesting reading.
That’s a wrap from us for this quarter, we look forward to being in touch soon.