December quarter investment update
With Brendan Casey, Rest’s General Manager, Investments

Financial markets endured a tough end to 2018, with steep sell-offs on Australian and overseas sharemarkets.


Rest’s Core Strategy finished - 4.79% down for the quarter ending 31 December 2018. Over the last 12 months, the Core Strategy has remained in positive territory, returning +0.15%.

Steady returns from our Bonds, Cash and Credit1 portfolio allocations helped to cushion part of this pullback, while our holdings in unlisted property and infrastructure assets also provided diversification benefits.

The Core Strategy’s returns remain solid over the longer term, returning +8.32% per annum over the 10 years to end December, well above its investment objective of returning CPI + 3% per year over the long term.
 
 

Fading optimism

After two consecutive years of unusually high returns, 2018 didn’t end well for shares. Volatility came roaring back from unprecedented lows - not just in share markets, but in currencies and commodities as well.

This was despite the temporary trade ‘ceasefire’ between the US and China, the Federal Reserve’s less aggressive tone on future US interest rate hikes, and China’s moves to ‘smooth out’ its cooling economic growth.
 

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Global sharemarket gains for the year erased

The December slide capped off a disappointing 2018 for global sharemarkets. Led by the dramatic declines in US stocks, International shares, as measured by the MSCI All Country World ex Australia Index (unhedged in AUD),  ended the December quarter -11.1% lower but up a modest +1.5% for the year ended 31 December 2018.

For both US and global markets, 2018 marked the worst yearly returns for shares since the Global Financial Crisis (GFC) 10 years ago. Europe’s Euro Stoxx 600 dropped -13.2% for the quarter, also a decade worst. Germany's DAX index plunged more than -18%, while Japan's Nikkei 225 lost more than -12%. Still, it was the Chinese market that was the biggest loser among major markets, down almost 25% for the year.
 

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Australia down, but not out

Despite recording its worst yearly performance since 2011, Australia managed to outperform most other major equity markets in 2018. Australia’s S&P/ASX300 Accumulation Index, lost -8.4% over the quarter, and -3.1% over the year ending 31 December.

Australia’s economic growth has remained good, and inflation is still under control. The weaker Aussie dollar has been positive for Australian businesses and tourism, and has helped to keep Australian exports competitive. Consumer confidence has remained positive thanks to ongoing improvements in the labour market. However, housing prices have continued to head lower, as banks tighten lending standards and investor interest wanes. While the declines so far have remained orderly, there are growing concerns a prolonged housing downturn will drag on consumer spending.

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China watch

Beyond housing, there are growing risks around China’s economic slowing that could impact Australia’s growth prospects. China is Australia’s largest trade partner. And it’s this Chinese influence that has underpinned Australia’s record 27-year recession-free streak.

Recent data showing China’s manufacturing sector contracting more than expected in December, for the first time since 2016, highlights yet another growing risk on the horizon.

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Looking ahead

Key concerns continue to be whether the US and China can strike a deal on trade, the US Federal Reserve can get interest rates just right, and to what extent political and policy issues such as the US government shutdown and Brexit will further drag the market’s already negative tone.

Closer to home, China’s ability to engineer a soft landing, and how we manoeuvre our own housing correction are just two of the ‘known unknowns’ we continue to monitor as part of our active management investment approach at Rest.

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Sell-offs in perspective

Pullbacks are disappointing, and there’s no denying 2018 was a disappointing year for financial markets. But it’s important to remember that they are a normal part of investing. The past ten years since the GFC have been friendly to investors – so friendly, many investors have forgotten that markets move down as well as up. 
 
A share market that only moves up and ignores all risks is not realistic and often signals complacency that can lead to knee-jerk market reactions – February’s sharp pullback and December’s steep sell off are a case in point.

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Focus on the long term

At Rest, we encourage members to focus on long-term returns rather than short-term volatility. Super is a long-term investment to grow your savings for your retirement, and   a long-term investment horizon can help to smooth the impact of the regular ups and downs of markets.

Rest’s competitive long-term performance demonstrates our capability to manage through difficult periods such as the GFC. Because of this long-term view, we’re focused on managing risk through investment cycles, with a strong emphasis on protecting members’ investments while being positioned for opportunity.   
 
We currently hold a relatively defensive 39% of the Core Strategy in Australian and overseas shares. Around 14% of the Core Strategy remains in cash to ensure we’re well positioned to take advantage of opportunities as markets correct.
 

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Rest performance results to 31 December 2018*

Superannuation - Core Strategy option
3 month (%) 1 Year (%) 10 Year (%pa)
-4.79 0.15 8.32
Balanced option (REST Pension)*
3 month (%) 1 Year (%) 10 Year (%pa)
-4.06 -0.45 8.05

Rest super performance results to 31 December 2018*

Rest pension performance results to 31 December 2018*

1 Growth Alternatives comprise of Credit (credit or debt securities typically issued by corporations and governments), Equity Strategies (investment in equity related strategies), Private Equity and Agricultural investments.

 

This material is current as at December 2018 but may be subject to change. This information doesn’t take into account your circumstances. So, before acting on it, you should consider whether it is appropriate for you. Before making a decision about your super, please read the relevant Product Disclosure Statement at rest.com.au/pds or call 1300 300 778. Rest has no relationships that might influence our advice to you. Rest does not pay or receive commissions. This information is provided by the issuer, Retail Employees Superannuation Pty Ltd ABN 39 001 987 739, AFSL 240003 as trustee of Rest (Retail Employees Superannuation Trust ABN 62 653 671 394).

 

* Returns are net of investment fees and tax, except Pension which is untaxed. Three month returns are not annualised returns. Returns for the ten year period are annualised returns. Past performance is not an indicator of future performance. For more investment information including the latest investment returns visit rest.com.au/investment.

 

This website is provided by Retail Employees Superannuation Pty Limited ABN 39 001 987 739, AFSL 24 0003 (Rest), trustee of Retail Employees Superannuation Trust ABN 62 653 671 394 (Fund), of which Rest Super, Rest Corporate, Rest Pension and Acumen are part. It contains general advice that has been prepared without taking account of your objectives, financial situation or needs. Before acting on the information or deciding whether to acquire or hold a product, consider its appropriateness and the relevant Product Disclosure Statement (PDS), which is available on this website. The cost of providing financial services is included in the fees in the Fund as disclosed in the relevant PDS. Rest and the Fund do not charge any additional fees or obtain any commissions for the advice provided. Rest’s employees are paid a salary and do not receive any commissions. They may receive a performance related bonus that takes into account the financial services provided. Super Investment Management Pty Limited (ABN 86 079 706 657, AFSL 240004), a wholly owned subsidiary company of Rest, manages some of the fund’s investments. Apart from this, Rest does not have any relationships or associations with any related body corporate or product issuer that might reasonably be expected to be capable of influencing Rest in providing financial services.

Rest personal advice is provided by Rest Advisers as authorised representatives of Link Advice Pty Ltd ABN 36 105 811 836 AFSL 258145

Awards and ratings are only one factor to consider when deciding how to invest your super. Further information regarding these awards can be found at rest.com.au/about-rest/awards. Past performance is not an indicator of future performance. SuperRatings Pty Limited does not issue, sell, guarantee or underwrite this product. Go to superratings.com.au for details of its ratings criteria. For further information about the methodology used by Chant West, see www.chantwest.com.au