The December quarter saw a continuation of losses across world markets. While it is never good to see members’ retirement balances reducing due to investment losses, it has been pleasing to see all options delivering better results than the broader market.
The apparent end of what has been one of the longest bull markets (for both shares and bonds) in history is not unexpected. Extraordinarily generous government support across the world cannot be maintained indefinitely, and the signs are present that central banks are preparing to wind back some of this economic support. Stable economic growth does not appear to be under threat, although business seems to be jittery, as evidenced by the effect of the US Government Shutdown on consumer confidence in the US, and the risks posed by a slow but lengthening decline in house prices here in Australia.
Australian GDP growth has slowed to just 2.8%p.a. in September, compared with 3.4%p.a. in the previous quarter. While we do not consider it an imminent risk, a continued slowdown here, coupled with falling house prices across the eastern states and a decline in business investment (despite unemployment continuing to fall), could lead to a recession. The Reserve Bank of Australia has minimal scope to further decrease interest rates. Inflation remains within their target 2% – 3% range, and the Australian Dollar continued to weaken off the back of trade tensions between China and the United States.
In the US, strong economic growth continued. Underlying economic drivers remain positive following substantial personal and business tax cuts, and with interest rates still at very low levels, strong household balance sheets and a high degree of business optimism there are strong conditions for continued growth. Potential threats here include a loss of business confidence (as seen in the recent government shutdown, with the potential for further damage with a gridlocked congress) or the damaging effects of an escalating trade war.
Asia and Europe
Growth in China is slowing – an intended consequence of government efforts to promote deleveraging, however this has been amplified by tariffs. Similarly, Euro zone growth has slowed because of increasing political concerns which have led to lower business confidence. Brexit is leading to a number of large companies relocating substantial parts of their business operations – in most cases within the EU but in at least one recent case (Dyson) to Singapore. In our view, the increasing likelihood of a no-deal Brexit has already been included in market pricing, but there are likely to be isolated instances of sharp movements if that outcome eventuates.
In a slowing growth environment, investors are likely to focus even more on the downside risks. And there are indeed a range of important downside risks, including an escalation in trade protectionism, the impact of tighter global liquidity, Brexit and political pressures in Europe. However, while growth is expected to slow across all the major economies, we do not see strong evidence of potential recessions emerging, meaning that there is a strong possibility of flat or slightly upward returns over the next few years.
Overall, we maintain a cautiousness to reducing our overall defensive portfolio positioning but are conscious that we cannot position the portfolio defensively indefinitely. The returns offered by global private markets are one of only a handful of compelling investment opportunities, but our illiquidity budget will constrain substantial acquisitions in this space.
Again, while it is never good to see members’ retirement balances reducing due to investment losses, it has been pleasing to see all options delivering better results than the broader market.