Our Chief Investment Officer Mark Rider explains what has happened during the past six months and what we expect moving forward.
What has happened in recent months?
In the past 6 months financial markets have continued their impressive recovery from their COVID-19 induced slump early last year. This has been reflected in the recent strong returns for our more growth asset orientated investment options. For example, our default My Ethical Super product has returned 8.7% in the 6 months to March to post an overall return of 18.2% for the past year. Returns for our other investment options have been equally strong for the past year, ranging from a 31.3% return for our Ethical Index Shares option to a 9.0% return for our Ethical Stable option. Click here to see the returns for all of our investment options.
All of our diversified options have benefited from a strong recovery in share markets at home and abroad. After an initial bounce back from the slump in share markets in March last year on the back of massive financial support by governments and central banks, news of the successful development of a number of COVID-19 vaccines late last year provided a second wind. This improved the prospects for the re-opening of economies, the overall economic outlook and the earnings expectations for a range of companies hit hard by the COVID-induced recession. This was added to by the prospects for further fiscal stimulus by the United States with the election of President Biden and the continued strong recovery in China.
Share markets responded positively to this news with the Australian share market returning 18.5% in the 6 months to March 2021, and the U.S. S&P 500 only marginally behind. Returns have also improved for a range of unlisted growth assets such as property, infrastructure and private equity that were hit earlier in the year.
In contrast, returns have struggled in more defensive asset classes. The Reserve Bank of Australia (RBA) continues to hold interest rates for cash and short-term government bonds around 0.1%, providing only minimal returns for Ethical Cash. As the economic outlook has improved, we have seen longer term interest rates across the world increase, with U.S. 10-year government bond yields reaching a recent high of 1.7% from a low of 0.5% mid last year. With the price of a bond inversely related to its yield, our bond portfolio has posted small negative returns in recent months.
What do we expect moving forward?
Looking ahead, the continued support for the global economy provided by central banks and governments around the world is positive for the outlook. The RBA, based upon its current economic forecasts, has flagged it is unlikely to raise interest rates before 2024 to ensure a strong economy leads to a clear shift higher in inflation and wage growth. On a similar note, governments are in no hurry this time, in contrast to the period following the 2007 Global Financial Crisis (GFC), to aggressively cut budget deficits.
While this is all supportive for returns for growth assets, we expect more subdued returns in the period ahead as this positive story is well known and understood and is largely reflected in current market pricing. The risks are both ways. There is a vulnerability to a slow down or reversal in the re-opening of economies or a continued move higher in long term interest rates, a reversal of factors that have been supportive of share markets rising back to, or to new record highs. Then again, markets have continued to be surprised by the strength in the economic recovery over the past year and this positive risk can’t be ignored as governments attempt to not repeat the mistakes made in the wake of the GFC.