Investment update June 2018 quarter

Emerging market investors head for the exits

Much of the volatility that dominated financial markets earlier in the year persisted well into the second quarter. This was particularly evident in emerging markets. From their January highs, mainland Chinese shares plunged more than 20% - down 10% in June alone - while the MSCI Emerging Markets equity index tumbled 16% (in USD terms).

This slide was triggered by signs of slowing growth in China and concerns the further escalation in US-China trade tensions could lead to a global trade war. Renewed currency volatility, rapidly rising oil prices, uncertainty around Italy, as well as expectations for rising global interest rates also made investors wary.

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Developed markets grind higher

Uncertainty is generally not good for an economy because it erodes confidence and dampens business investment. Yet, despite negative news dominating headlines over the past quarter, International shares, as measured by the MSCI All Country World ex Australia Index (unhedged in AUD), still managed to edge +0.3% higher over the June quarter, ending the 2017-18 financial year a robust +11.4% firmer. US shares, particularly the US technology sector, were the star performer.

In the US, economic data remains strong, with sizeable tax cuts and additional government spending continuing to filter through to the broader economy. This is translating into robust corporate earnings and a buoyant job market. Overall global growth also remains solid, with the IMF (International Monetary Fund) expecting global growth of 3.9% over both 2018 and 2019 – above the long-term average.

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Australia outperforms despite cooling property

Australian financial markets showed remarkable resilience in the face of worsening US-China trade rhetoric and cooling property prices. After a tepid first quarter, the S&P/ASX300 Accumulation Index rallied +8.4% over the quarter, and +11.4% over the year ended 30 June 2018.

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The beginning of the end of ‘easy’ money

As widely expected, the Federal Reserve raised the US Fed Funds rate by another 0.25% in June. This brings US rates, currently sitting at around 2%, back to the same levels of almost 10 years ago. The European Central Bank also announced it would end its ‘easy money’ policies aimed at making money less expensive to borrow to stimulate economic growth. This leaves the Bank of Japan now the only major central bank yet to announce an end to similar policies.

The end of easy money marks an important first step to a return to normal for interest rates. The good news is it shows policymakers are growing increasingly confident in the growth outlook. The bad news is that interest rate rises are often a precursor to more volatile financial markets.

In Australia, rising risks in the housing market combined with still low-price inflation suggests the Reserve Bank of Australia will keep interest rates lower for longer. And, with the gap between Australian and US interest rates set to widen, the Australian dollar could see further falls.

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Looking ahead

Global economic momentum continues to gather pace. Together with still record low interest rates, this has led to strong corporate profitability which we believe will continue to rise. Also on the rise though, is the potential for more volatility given the myriad of risks on the horizon.

Geopolitical turbulence around global trade has already made 2018 a less comfortable journey in financial markets than 2017. The outlook for tighter global monetary policy, high debt levels in both the corporate and household sectors, and the slowing pace of Chinese growth are other risks we are watching.

At Rest, we believe investing is inherently about understanding and managing uncertainty and risk. In view of the many risks on the horizon, and the fact most markets are already trading at above long-term average valuations that leaves them vulnerable to volatility we see good reason to keep our relatively defensive positions in place. Currently, around 12% of our Core Strategy is held in cash and around 42% in Australian and overseas shares.

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3 month (%)	1 Year (%)	10 Year (%pa)
2.48	8.76	7.44

3 month (%)

1 Year (%)

10 Year (%pa)

2.48

8.76

7.44

3 month (%)	1 Year (%)	10 Year (%pa)
1.74	6.76	7.37

3 month (%)

1 Year (%)

10 Year (%pa)

1.74

6.76

7.37

Ongoing US-China trade tensions made emerging markets investors nervous, yet international shares moved higher, with the US being the star performer. The Aussie market performed well despite cooling property prices, but will our interest rates buck global trends?

Rest performance results to 30 June 2018*

Superannuation - Core Strategy option

Balanced option (REST Pension)*

Rest performance results to 30 June 2018*

Rest pension performance results to 30 June 2018*

¹ Growth Alternatives comprise of Credit (credit or debt securities typically issued by corporations and governments), Equity Strategies (investment in equity related strategies), Private Equity and Agricultural investments.

Ongoing US-China trade tensions made emerging markets investors nervous, yet international shares moved higher, with the US being the star performer. The Aussie market performed well despite cooling property prices, but will our interest rates buck global trends?

Rest performance results to 30 June 2018*

Superannuation - Core Strategy option

Balanced option (REST Pension)*

Rest performance results to 30 June 2018*

Rest pension performance results to 30 June 2018*

1 Growth Alternatives comprise of Credit (credit or debt securities typically issued by corporations and governments), Equity Strategies (investment in equity related strategies), Private Equity and Agricultural investments.

¹ Growth Alternatives comprise of Credit (credit or debt securities typically issued by corporations and governments), Equity Strategies (investment in equity related strategies), Private Equity and Agricultural investments.