REST Core Strategy delivered strong performance for the first quarter of 2017, returning 2.29% over the three months ending 31 March 2017 and 8.5% for the financial year to date.
The largest contributor to Core Strategy performance over the March quarter was international equities, followed closely by Australian shares. Both markets benefited from an overall improvement in investor confidence and the positive effects of the ‘Trump’ share market rally.
Property was another key contributor to the returns of the Core Strategy over the first quarter of 2017, with rising property asset valuations supported by the ongoing strength of commercial property in major Australian cities.
Hopes of ‘Trumponomics’ drive global share markets higher
Donald Trump made a dramatic start to his US Presidency following his inauguration in January and global equity markets responded in similar dramatic fashion. Share investors managed to look past much of the controversy around border protection and foreign trade and looked favourably upon Trump’s proposals to lower US taxes and boost government spending.
Share markets rallied strongly with hopes that Trump’s economic policies – known as ‘Trumponomics’ – could bolster growth in the world’s largest economy and have positive spill-over effects for the rest of the world.
International shares, as measured by the MSCI All Country World ex Australia Index (unhedged in USD), added 6.3%. Australian shares, according to the S&P/ASX300 Accumulation Index, rose 4.7% over the three month period ending 31 March 2017.
But the more telling numbers were over the financial year to date, with international shares returning 12.3% and Australian shares increasing 15.6% over the period.
The ‘Trump’ effect not so good for bond markets
The rise of ‘Trumponomics’ could see growing inflationary pressures on the US economy and this has resulted in growing expectations of rising interest rates. As bond prices move in the opposite direction to interest rates, this prompted many investors to sell out of bonds.
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Global government bonds, as measured by the Citigroup World Government Bond Index (in USD), returned - 6.8% over the financial year to date despite managing a gain of 1.5% over the quarter ending 31 March 2017.
Expectations of rising interest rates arise from potential action that may be required by the US central bank to moderate inflationary conditions, by increasing rates. In fact, the US Federal Reserve did raise rates in March by 0.25% to a new federal funds rate target of 0.75% - 1.00%. This was the second rise in three months and was spurred by positive economic growth in the US.
March quarter investment update
with Brendan Casey, REST’s General Manager, Investments
Risks emerging as share markets reach new peaks
It’s no secret that equity markets have had an impressive run over recent months and investment portfolios with exposure to shares have certainly benefited from this strong performance, including REST’s own flagship Core Strategy investment option.
But risks appear to be emerging as share markets continue to rise and share prices – reflecting company market value – appear to be increasing with no end in sight. There are some concerns that these valuations may not be driven by key fundamental drivers of company growth such as quality earnings.
Looking ahead
REST sees potential risks with the continuing rise in the valuations of both Australian and international equity markets and has reduced its investment in shares in the Core Strategy by 10% since late 2016.
This is very much a part REST’s active management approach to manage risks and capture opportunities which has seen REST deliver competitive investment performance for members in the long term.
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