REST Core Strategy produced another quarter of positive returns (+1.66%) for the period ending 30 September 2017.

Over the last 12 months, the Core Strategy has returned +9.22%, well above its return objective of CPI + 3% over the long term.1

Overseas shares were the largest contributor to returns followed by Australian shares, property and growth alternatives.2

September quarter investment update

with Brendan Casey, REST’s General Manager, Investments

Overseas shares rally on improved conditions

International shares, as measured by the MSCI All Country World ex Australia Index (unhedged in AUD), added +4.3% over the September quarter, returning an impressive +20.0% for the 12 months ended 30 September 2017.

The US share market rallied to a new record, with the S&P500 rallying 4.0% over the quarter to reach 2,519 on 29 September. This assisted REST’s Overseas Shares option return 1.83% for super and 1.99% for pension during the quarter.

In encouraging news, the US unemployment rate for August remained low at 4.4% and upcoming corporate tax cuts were announced.

This offset the US Federal Reserve announcing an end to its quantitative easing program from October and indicating that US interest rates will likely continue to rise slowly.

Australian shares post modest gains

Australian Shares, represented by the S&P/ASX300 Accumulation Index, increased 0.8% over the September quarter. Australia’s unemployment rate remained low into August, at 5.6% and the Reserve Bank of Australia indicated that the next interest rate move would likely be up.

The Australian dollar pushed up to USD $0.812 as the US dollar weakened against major currencies, before retreating to $0.783 as iron ore prices weakened.

China downgraded despite continued growth

China’s economy grew strongly at around 6.9% pa for the first half of 2017 and has been a major driver for global growth. China is the world’s largest exporting nation, exporting over USD $2 trillion annually. China constitutes around 32% of Australia’s exports and 22% of Australia’s imports.

China was downgraded by ratings agency S&P during the quarter due to concerns over mounting debt levels. China’s strong economic growth has been supported by record levels of debt.

China’s current debt level is estimated to be around 300% of GDP. If China reduces its debt and cuts back on government spending, its economic growth rate is likely to stall, with negative repercussions on the global economy.

Global markets unsettled by North Korea tensions

During the September quarter, tensions between North Korea and the US reached crisis levels, raising concerns for major stock markets. North Korea fired a missile over Japan and detonated a suspected hydrogen bomb, ignoring warnings from the US. China’s involvement as North Korea’s predominant trading partner and the possibility of a US-China trade war has kept global markets on edge.

Looking ahead

Economic growth and employment levels in many major economies have generally improved. As a result, central banks in the US, Europe and Australia appear to be transitioning to unwind ultra-low interest rates and liquidity support that’s been held in place since the GFC.

The US has raised interest rates four times since December 2015 and announced that it will cease quantitative easing in October 2017. Combined with high levels of debt, increases in interest rates could put borrowers under pressure and put downward pressure on asset valuations.

In response to this increased uncertainty, REST has been positioning the Core Strategy more defensively, allocating a greater share of the portfolio from shares and property into lower risk asset classes such as cash. This will provide the opportunity to purchase assets at cheaper valuations if markets experience a correction as interest rates normalise.