End of Financial Year Investment Update - June 2023

FY2023 - In a nutshell

What happened and why?

Returns for our Core Strategy and diversified portfolios were strong in what could have been a challenging year for investing. Share markets were the standout performers. Overseas shares were led by strong US tech stocks and excitement about artificial intelligence, whilst Australian stocks rose primarily due to strong demand for resources and commodities. Our investment in agriculture was also a top performer.

However, inflation remained stubbornly high, with rising interest rates directly affecting sectors like property. Despite this, solid employment rates and spending fuelled growth, and helped the share market rally.

Unlisted infrastructure also continued to deliver steady inflation resilient returns as airports returned to life after COVID. Interest rate sensitive asset classes like property, listed infrastructure and private equity detracted from performance.

As outlined in the table above, the Core Strategy’s 2023 financial year results are ahead of its long-term annualised returns over both 10 and 20 years, delivering on our commitment to provide strong returns for the retirement for our members. We are continuing to work hard to keep your super on track. 

Looking back at the markets…

Share markets led returns upwards despite cost of living pressures

Employment remained high, and pockets of ongoing spending from COVID-19-savings generally supported economic growth. In addition, positive company earnings continued to support share market gains.

Countering this was a backdrop of elevated inflation and interest rate hikes. Markets also had to navigate:

• the prolonged Russia-Ukraine war adding to inflationary pressures and gas shortages;
• the UK government fiscal plans causing bond markets and non-US Dollar currencies to plummet; and
• the collapses of Silicon Valley Bank and Credit Suisse with fears of a wider banking meltdown.

Following twelve rate rises in Australia, the effect of stubbornly high inflation on markets has been varied. Looking at the graph below, we can see that the positive performers are asset classes that have navigated higher interest rates and strong growth. Generally, the weaker performers are those that are more exposed to rising rates and higher inflation. 

Even within the asset classes, we also saw a range of returns. US “mega-tech” stocks drove market performance (S&P500) over the final six months, benefitting Rest’s portfolios holding overseas shares, as excitement and optimism grew around the potential for artificial intelligence (AI). Australian shares also performed well over the year, driven by demand for resources.

The strong performance of the US market, the S&P500, has been extremely concentrated amongst a handful of star performers, with the top 5 stocks (dark blue line) driving most of the returns as shown in the graph below. Apple became the first stock in history to reach a value of US$3 trillion, whilst a handful of similar stocks have doubled or tripled in price since January. 

This concentration of returns to a small number of stocks is heightening risks. Are the mega-tech stock prices themselves now “artificially” inflated and too expensive based on their actual earnings? The rest of the US market doesn’t look quite as strong as companies deal with the impact of rising interest rates, costs and wages all putting pressure on the bottom line. The difference between the top 5 and the rest of the market highlights the value of active management – Rest’s investment process across its diversified portfolios. 

Looking forward…

Whilst our Core Strategy has delivered strong returns, a few things are keeping us on our toes as we look forward:

• we believe higher inflation is likely to persist for some time above the normal 2-3% target range;
• the global political and economic backdrop remains challenging; and
• will share markets continue their impressive run?

Given our analysis of share market performance and ongoing risks, we are taking a more neutral position across the diversified portfolios. Inflation is showing early signs of responding to interest rate rises. But, with inflation still higher than the target levels globally, we believe that the interest rate pain is unfortunately unlikely to be over.

It is important to remember that market volatility, risks and cycles can potentially create shifts and buying opportunities to set the portfolio up well for the long term.

We believe the risk of a serious downturn in Australia is starting to fall. However, as some investment opportunities may already have the downturn risk factored into their prices, they may therefore present a buying opportunity. Put simply, certain cheaper assets (for example, some discretionary retail companies) are starting to look more attractive as we position our portfolios for the future.

We continue to maintain a well-diversified portfolio that we believe can weather all market conditions. Our mix of assets across listed and private markets helps us continue to deliver strong long term results year in and year out, showing resilience to market and economic swings, and unexpected turns. Our goal remains delivering strong long term returns for your future and to help you achieve your best possible retirement outcome.