Hi, my name is Graeme Miller and I’m the Chief Investment Officer at TelstraSuper. In today’s video I’ll be speaking about investment returns in the three months to 30 September 2018 and the outlook for investment markets.
How have investment markets performed in the September 2018 quarter?
The September quarter was a good start to the financial year with all of TelstraSuper’s investment options delivering positive returns to our members.
Our Growth option returned 2.39% for the quarter, our Balanced option earned 1.93% and our Conservative option delivered 1.26%. These returns are net of all investment fees and taxes for our accumulation members. For our pension members, the returns were even higher because pension members don’t pay tax on investment earnings.
What have been the key drivers of these investment returns?
The United States share-market was the standout performer for the quarter – it was up 7.7% over the three month period. Despite a lot of political uncertainty, the US economy is performing very well – unemployment is low, inflation seems under control and companies are growing their revenue and profits. The US is also home to most of the world’s top technology and online companies which have continued to take market share from traditional competitors.
The Japanese share market also had a strong quarter, but European and Australian share markets were weaker. Emerging markets such as Turkey, China and Argentina had a very difficult quarter. They delivered negative returns, as concerns emerged about the strength of their currencies and the possible impact that a trade war would have on their economic health.
What has happened since the end of the quarter?
In the first two weeks of October, we’ve seen significant falls in share markets all around the world and quite a bit of volatility. In fact all of the positive returns in the September quarter have been reversed in the first two weeks of October.
You may remember that we saw a similar market sell-off in January of this year, and the October sell-off seems to have been sparked by the same concerns – mainly about the potential for increases in inflation and interest rates. This time round, investors also seem to be worrying about trade tensions between the United States and China.
Should I be concerned about the recent falls?
While the dip can seem scary, it’s important to put these moves in context:
First of all, it’s not unusual for there to be volatility in share prices. In fact we expect to see a couple of negative months in every year. Share investments offer much higher potential returns than assets such as cash and fixed interest, but the price we pay for those high expected returns, is greater volatility.
Secondly, these falls have followed some extraordinarily strong returns in recent years. So although many of our members’ balances will have fallen in the first few weeks of October, they will still be a fair bit higher than they were twelve months ago. And even higher than they were twelve months before then.
What is the outlook for the economy and financial markets?
At TelstraSuper, we’re optimistic that we’ll continue to see economic growth across the world. Most of the ingredients for growth, such as low unemployment, low interest rates and low inflation, are in place. This should ensure that consumers have confidence to spend and companies have confidence to invest.
Of course, this doesn’t mean that we won’t continue to see volatility in share markets. As always, there are a number of risks that we’re keeping an eye out for. In addition to monitoring inflation and interest rates, there are two other risks that we’re watching particularly carefully:
First of all, we are concerned about the trade tensions between the two biggest economies in the world - United States and China. The US kicked these tensions off a few months ago by imposing tariffs on a range of imported Chinese goods. China followed up with tariffs of its own, the US retaliated with even more tariffs, and China responded by widening the tariffs net on US imports. Trade tariffs are bad for everyone. They reduce economic activity and destroy prosperity. They have the potential to slow down economic growth considerably and even cause recessions. So any escalation in tensions can be expected to be bad for investors.
Secondly, in Australia we are carefully watching household debt, the pace of bank lending and housing prices. If we see banks beginning to slow the pace of their lending, households begin to default on their loans, or significant falls in housing prices, these may well be signals of impending slowdown in the Australian economy.
How are TelstraSuper’s portfolios positioned today?
We have not made many changes to our portfolio positioning over the last few months. Our portfolios continue to be somewhat defensively positioned. For example in our Growth and Balanced portfolios, our exposure to Australian shares is about two percentage points lower than our long term positioning. Our share portfolios have been tilted away from the most expensive market sectors such as Information Technology, and towards sectors such as Consumer Goods that represent better value. We’re also holding less fixed interest securities than usual and a greater amount of cash.
We believe that this is a prudent way to position the portfolio, given that we appear to be in the late-stage of an economic cycle and most asset prices have appeared to be elevated. Under this positioning, our members will continue to enjoy the benefits of continued investment strength, but will also be more protected in the event of a significant market fall.
It’s a privilege to be entrusted with the management of your superannuation savings. As always we will continue to manage your investments in a prudent and proactive manner – remaining vigilant to identify both risks and opportunities as they emerge.