17 July 2013
‘Supported by central bank action, share markets produced excellent returns.’
Share markets surged ahead
Investment returns in the 2013 financial year were solid, despite falls in world share prices towards the end of the year.
While all the major asset classes shown in the table below produced positive returns, it was share markets – both in Australia and globally – that really delivered for investors this year. Australian shares rose 22.8%. Hedged global shares (whose foreign currency exposure is hedged to the Australian dollar) and unhedged global shares were up 23.1% and 31.3% respectively.
While fixed income returns were positive for the financial year as a whole, returns declined as the end of the year approached. This was because government bond yields rose significantly from their multi-decade (and in some cases, multi-century) lows at that time.
With short-term interest rates and government bond yields close to historic lows, assets that offered attractive income, such as property securities and non-government bonds, were highly sought after for much of the year. Australian property securities delivered a stellar 24.2% return for the year.
A fall in the value of the Australian dollar, particularly from mid-May 2013, boosted returns to unhedged global share portfolios. Unhedged global shares ended the year as the best-performing major asset class. This contrasts with the last few years, when the strength of the Australian dollar meant unhedged global shares significantly underperformed hedged.
Sources: Datastream, MLC Investment Management
Benchmark data are UBS Bank Bill Index (cash), UBS Composite Index (Australian bonds) Barclays Global Aggregate hedged to $A (global bonds), S&P/ASX200 A-REIT Accumulation Index (Australian property securities), MLC global property strategy benchmark hedged to $A (Global property securities), S&P/ASX200 Accumulation index (Australian shares) and MLC global equity strategy benchmark (MSCI All Country Indices hedged and unhedged in $A).
Monetary policy continued to sustain share markets
This year, world share markets were again supported by the extraordinary monetary policy measures, or ‘quantitative easing’, implemented by major central banks and led by the US Federal Reserve (the Fed). For example, the Fed engaged in a massive bond-buying program to inject more money into the US economy and try to stimulate economic growth.
In the final months of the year, a reminder from the Fed that this monetary stimulus can’t last forever caused share prices to fall and bond yields to rise. This highlighted just how important the actions of the world’s central banks had been in maintaining asset prices.
The global economy remained weak
Despite central banks’ extraordinary monetary policy measures, the recovery of the world economy from the GFC-induced recession of 2009 remained weak. This was partly due to government debt reduction measures in the US and across the eurozone.
There were also considerable differences in the performance of the major economies over the financial year. The US economy has grown at a modest pace in the last few years, but seems to have lost some momentum in the last 12 months.
Across the Atlantic, the UK and much of the eurozone have either been in recession or on the brink of one since mid-2011. However, the latest economic data from Europe and the UK has shown some improvement.
The eurozone’s problems continued
The unresolved problems in the eurozone remain a potential source of risk.
During the second half of 2012, investors became less concerned about the financial crisis in the eurozone, which has occupied much of the world’s attention in recent years. This was at least partly due to the European Central Bank’s announcement that it was prepared to intervene aggressively in eurozone bond markets to support the countries worst affected by the crisis.
However, concerns about Europe re-emerged in the first few months of 2013 after an uncertain result in the Italian elections and then the bail-out of Cyprus’ banking system.
Japan’s economy improved while China’s slowed
In Japan, there were signs of economic growth even before the Bank of Japan announced in April a massive program of quantitative easing in a bid to weaken the Japanese yen and stimulate growth. It’s too early to tell whether more recent, stronger growth is due to this and the government’s other measures to revive the economy, but it’s clear confidence there is improving.
Generally, growth in emerging markets has weakened. While China’s overall growth rate remained very strong, it has clearly slowed in the last few years, and recent data suggests the slowdown is continuing. The authorities in China have shown they are willing to accept lower growth in order to limit some of the excesses in the economy and financial sector.
Australia’s economy also slowed
Our economy grew at a moderate pace over the financial year. However, for the 12 months to March, economic growth was reported at 2.5% – a significant slowdown from the annual growth rate of 4.4% reported a year before that. The massive pipeline of mining-related investment activity, which has supported Australia’s growth in recent years, seems to be reducing.
The Reserve Bank of Australia lowered the official cash rate three times during the financial year. However, it’s uncertain whether this, and the competitive boost from the lower Australian dollar, will be sufficient to offset weakness in the mining-related areas of the economy.
What has MLC been doing?
We remain focussed on delivering long-term investment outcomes for our investors, rather than reacting to short-term market movements.
We actively manage our portfolios and work constantly to improve them. Our activity in the 2013 financial year included:
- making some changes to managers of our asset classes, particularly Australian shares and Australian property securities
- carefully managing currency exposures to benefit from weakness in the Australian dollar
- adjusting the asset allocations in our diversified portfolios to prepare them for possible market developments, and
- introducing in our diversified portfolios a Low Correlation Strategy, which aims to generate a pattern of returns mostly independent of share market performance.
We’ll continue to look for ways to both capture the maximum return potential that markets have to offer and limit the risks as much as we can.