Investment update December 2019 quarter

Some highlights in the way we’ve invested

Western Australia’s largest windfarm:

The Collgar Wind Farm is one of Australia’s largest wind powered renewable energy generators, displacing between 480,000 and 660,000 tonnes of greenhouse gas emissions each year. Rest has been involved with Collgar since construction began in 2010, and previously held a 40 per cent stake in the project before acquiring the remaining 60 per cent from UBS Asset Management’s Real Estate & Private Markets Infrastructure business.

Long Beach Container Terminal:

Located in the port of Long Beach, California, Long Beach Container Terminal together with the neighbouring Port of Los Angeles, is part of the largest container port complex in the United States. The terminal uses electric autonomous guided vehicles and automated stacking cranes, which have improved productivity, safety and minimised greenhouse gas emissions.

Investment in premium real estate:

52 Martin Place in Sydney is a one of the prime business properties and also the home of Channel 7’s breakfast show. 50 Bridge Street. This Circular Quay office complex is currently being redeveloped and Rest will be joint owners of this landmark property. More on Rest’s Property Investments here.

Trump, trade and the end of a remarkable decade

Sharemarkets globally continued to rally through December, ending the year, and the decade, on a high note. And, what a decade it’s been. The ‘10’s will go down in the history books as a global ‘recession-less’ decade dominated by much geopolitical uncertainty, yet still strong price growth across multiple asset classes due to record low interest rates and extraordinary central-bank intervention.

Meanwhile, Trump’s tweets, particularly on trade, ensured there was never a dull moment in more recent financial markets.

Global policymakers to the rescue

International shares, as measured by the MSCI All Country World ex Australia Index (unhedged in AUD), gained +4.3% over the December quarter- and +28.0% over the year- ending 31 December 2019. US equities were again the standout performer; the S&P500, for instance, surged to all-time highs, up +4.3% over the fourth quarter and +29.2% over the year in 2019. A key driver was global central bank measures - led by the US Federal Reserve, European Central Bank and Bank of Japan - to keep monetary conditions accommodative and interest rates lower-for-longer to sustain the economic expansion.

Investor sentiment around the world was boosted as well by the progress towards a “Phase 1” deal in US-China trade negotiations. No one wins in a trade war. And while the Phase 1 agreement, which includes agricultural purchases and some tariff relief, is fairly minor in the grand scheme of things, it does highlight a willingness by both the US and China to compromise to avoid more economic harm.

Lower for longer Aussie interest rates

In Australia, the S&P/ASX300 Accumulation Index managed to add +0.7% over the quarter, and +23.8% over the year ending 31 December, despite ongoing weakness on the domestic growth front. Most notably, business investment has remained lacklustre, and consumer spending, subdue, due to anaemic wage growth and high household debt levels.

On a brighter note, Australia’s labour market continues to be relatively robust. Last year’s correction in Aussie housing prices has also proved shortlived, with the Reserve Bank of Australia's commitment to keeping Australian interest rates low to stem the risks of a slowing global economy resulting in a meaningful upswing in property prices, notable in Sydney and Melbourne.

More uncertainty and greater volatility

While not impossible, it would be unrealistic to expect a repeat of last year’s double digit returns in 2020. Concerns around the possibility of a US recession have largely eased thanks to fresh stimulus from the Federal Reserve, but the world economy has moved into a slower phase of expansion. With slower global growth, expect corporate profitability to also trend lower, at a time when many assets are already fairly valued.

Around the world, central bank policy is likely to remain accommodative for some time, still. But, with interest rates close to- and/or already at- zero in many parts of the globe, and even negative in some countries, monetary policy is not without its limits.

Meanwhile, geopolitical uncertainties remain heightened. Middle East tensions, ongoing Brexit, protests in Hong Kong, North Korea’s nuclear ambitions, US 2020 elections, Trump’s impeachment, etc., all have the potential to surprise markets on the downside. Following on from what have been exceptional investment circumstances that have been made possible by very accommodative central bank actions around the world, poorly positioned investors could be in for a rude shock when more 'normal' markets make a return.

Looking ahead

At Rest, our focus remains on delivering competitive long-term investment performance for members. Protecting members from downside risks is equally important to us. Staying well diversified, disciplined and long term focussed is key to achieving this. That’s why, while much has been said about the sharemarket’s highs, don’t expect Core Strategy's portfolio-based returns to match the market.

Right now, we believe shares overall are not attractively valued, and find Australian shares to be less attractive to Overseas shares. These high asset valuations along with elevated global debt levels, slowing global growth and geopolitical uncertainty are key risks ahead, and the reasons that continue to underpin our relatively defensive positions to equities within the Core Strategy.

On the other hand, we continue to see diversification benefits being provided by unlisted assets, like infrastructure, property and private equity. In the current low interest rate environment, infrastructure and property assets are continuing to benefit from strong investor demand for yield. With our relatively large cash position, this means we have the “dry powder” to quickly act on opportunities as they arise and/or if markets correct.

Rest pension performance to 31 December 2019*

* Returns are net of investment fees and tax, except Pension which is untaxed. 3 month returns are not annualised returns. Returns for the 10 year period are annualised returns.