Rest’s Core Strategy ended the March quarter marginally higher, with gains of +0.41% for the period ending 31 March 2018.

Over the last 12 months, the Core Strategy has returned +8.65%, well above its return objective of CPI + 3% (over rolling 10 year periods).

Once again, overseas shares contributed the most to returns. Property, infrastructure and growth alternatives 1 also made notable positive contributions.

March quarter investment update

With Brendan Casey, Rest’s General Manager, Investments

Volatility makes a comeback

The first quarter of 2018 saw a resurgence in global sharemarket volatility following a prolonged period of unprecedented calm. Signs of a strong US jobs market was the catalyst for this volatility comeback. Concerns the US Federal Reserve (Fed) could raise interest rates faster than expected to combat inflation from higher wages saw the US Dow Jones Industrial Index witness one of its biggest single day point loss ever on 5 February with a drop of nearly 1,200 points.

Strong growth trumps inflation fears

Despite inflation fears, international shares, as measured by the MSCI All Country World ex Australia Index (unhedged in AUD), climbed a further +0.91% over the March quarter, and an impressive +15.19% over the year ended 31 March 2018. The benefits of strong, synchronized global growth clearly provided a welcome backdrop for robust corporate profits, and hence, stockmarket returns.

In line with this, in January the International Monetary Fund (IMF) raised its forecast for world growth to 3.9% for 2018 and 2019.
  This is up +0.2% for both years from its October 2017 projection and marks the fastest rate of global growth since 2011 when the world was bouncing back from the financial crisis. Corporate confidence is also on the up, with multiple business surveys pointing to further increases in business investment and employment.

Not so ‘lucky’ Australia

Australia’s sharemarket didn’t fare as well as its global peers with the S&P/ASX300 Accumulation Index down --3.78% for the quarter, but up +2.86% for the 12 months ending 31 March 2018.

Weighing on local sentiment was concern over a potential trade war between China - Australia’s largest trading partner - and the US.

Largely reflecting Australia’s slower pace of economic recovery compared to the US, the March quarter also saw Australia’s cash rates and 10-year bond yields fall below their US counterparts for the first time in 18 years.

Trump’s trade moves

US President Donald Trump’s tax reform driven boost to global markets proved shortlived, thanks to a decision to impose 25% tariffs on up to US$50 billion of Chinese imports. There are no winners in trade wars - and with China threatening to retaliate with its own US specific tariffs, there are concerns a US-China trade war could be negative for broader global growth.

Looking ahead

Now is a good time to be thinking about risk. After the calm of 2017, the year so far has been full of surprises. And given the potential for escalating trade tensions, ongoing geopolitical issues, and the risk of inflation overshooting and growth undershooting, it’s not unrealistic to expect more surprises ahead.

Globally, shifts in central bank policy, and tightening that is set to begin in earnest in 2018 almost 10 years after the start of the GFC, could also prove a game changer. While the economic backdrop remains strong, equity valuations, despite the correction, remain relatively unattractive in view of the risks on the horizon.

Accordingly, we see good reason to keep our relatively defensive positions in place. Rest currently holds around 13% of the Core Strategy in cash and around 43% in Australian and overseas shares. These asset class weightings are consistent with our view that equities markets may struggle to maintain their recent strong performance as valuations have become stretched.

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