January 27 2023
Investment Update

December 2022 Quarterly Review

Cityscape view of Quay Quarter Tower

A message from Andrew Lill, our Chief Investment Officer

Rest Chief Investment Officer Andrew Lill

Hopefully many of you took a well-deserved break over the holidays and are refreshed and ready to start the new year. For those of you working in the retail sector, we hope the busiest time of the year went smoothly and you can have a break soon! I managed to take some time off with my family and enjoy the cricket along with some beach swims.

Reflecting during the break, I thought about 2022 and what a tough year in investing it’s been. It’s probably been the most challenging global backdrop for investors in many years with the war in Ukraine, surging inflation and frequent rate rises from central banks around the globe. It has also been a year where traditional portfolio diversification, with shares and bonds, didn’t work.

Thinking about what we’ve learned during the year, having multiple sources of returns, including real assets like buildings and farms, has been important and helped the portfolio have some inflation resilience. Thinking ahead, gold and other in demand commodities may play a more significant role diversifying returns going forward.

At Rest, we are ready for whatever 2023 may bring. While we think the year ahead will remain challenging for markets and the global economy, we are firmly fixed on the aim of meeting the longer-term investment goals of our members. In the shorter term, volatility provides opportunity and we remain optimistic that we have the right processes and people to continue our mission of delivering competitive long-term returns for your super. 

Performance update

Rest’s Core Strategy had a positive end to 2022, returning 3.00% over the quarter, and 3.24% for the Financial YTD ('Year-to-date'). For Pension members, the default Balanced option delivered 2.50% for the quarter and 2.88% over the Financial YTD.

Core Strategy (Super) to 31 December 2022

3 months (%) Financial YTD (%) 10 years (% p.a.)
3.00 3.24 7.48
3 months (%) 3.00
Financial YTD (%) 3.24
10 years (% p.a.) 7.48

Balanced (Pension) to 31 December 2022

3 months (%) Financial YTD (%) 10 years (% p.a.)
2.50 2.88 6.91
3 months (%) 2.50
Financial YTD (%) 2.88
10 years (% p.a.) 6.91

Source: Rest, 31 December 2022. Returns are net of investment fees and tax, except Pension which is untaxed. The earnings applied to members’ accounts may differ. Investment returns are at the investment option level and are reflected in the unit prices for those options. Returns for the ten-year period are annualised returns. Past performance is not an indicator of future performance.

Market update: some late relief in a tough year

After three consecutive quarters of negative returns, global share markets rebounded in the December quarter. Although most markets delivered positive returns in the final quarter, this masked the volatility across the period. While there was a strong rebound initially, some gains were reversed in December – serving as a reminder as we head into 2023 that we are still grappling with the ongoing themes of high inflation, rising interest rates, and slowing global growth.

The recovery in share markets was initially driven by growing expectations that the pace of interest rate rises could slow. Adding further to the rally in shares, the corporate earnings season was generally stronger than expected and signalled resilience across businesses despite higher interest rates. In the UK, markets responded favourably to the appointment of the new prime minister with UK government bonds stabilising, and the British pound recovering some of its prior losses.

The positivity continued through November as data showed that inflation across the US and Europe had moderated somewhat. Markets took this as a sign that inflation may have peaked, so central banks could potentially scale back on their rate hikes – even though inflation remains sharply elevated, particularly in Europe, largely due to continued high energy costs. Signs that China may relax its zero-tolerance approach to COVID-19 were also received positively as China is a key player in global supply chains and this prompted optimism around an economic rebound for the region.

The bounce back proved short-lived in the final weeks of the year. The downturn was sparked by central bank commentary that more would need to be done to control inflation, which raised concerns that continued rate hikes would lead to a recession. Not to be outdone, Japan’s central bank announced surprise policy changes that led to huge moves in markets. The Japanese yen had its largest daily gain in over 20 years and bond markets across the world slumped to end 2022.

Despite the volatility to close the year, most share markets ended the quarter up with global shares as measured by the MSCI ALL-Country World Index ex Australia (100% Hedged to AUD) delivering 6.4%. Locally, Australia’s S&P/ASX 300 Total Return Index was up 9.1%, making it one of the standouts for the period and a strong contributor to the portfolio’s returns. Rest’s Balanced option had a slightly lower return than the Rest Core Strategy over the quarter as it is more conservatively positioned with a lower allocation to shares, and a higher allocation to more defensive assets such as bonds and cash.^

^Past performance is not an indicator of future performance.

The outlook heading into 2023

The last year was a particularly challenging one for markets, with most asset classes generally moving in one direction…down.

As we head into 2023, the economic environment is expected to remain volatile against a backdrop of significant global economic risks. Parts of the market that are sensitive to interest rate moves such as housing and manufacturing have shown signs of slowing, but labour markets are still tight – and this poses a risk of increasing wage demand that in turn flows through to increase inflation. Europe appears closer to recession than other major economies like the US, but the combined headwinds of sticky inflation, rising rates and tight labour markets means that recession risk is still elevated in most major markets. In Australia, we’ll have to wait to see if there is a lagged impact of mortgage rate rises on household spending in 2023.

Rest’s investment approach: discipline and diversification

We continue to position the portfolio cautiously against this backdrop of share market volatility, higher inflation, and central bank action. This means that we start 2023 with a lower allocation to growth assets and a higher allocation to cash than was the case at times in 2022. However, we do view the current period as one in which great opportunities can emerge across both public and private markets. We therefore continue to screen global investment markets looking for great companies, projects and assets that will aim to benefit our members longer term and meet our commitments to responsible investing and sustainability. 2022 was a great lesson in the value of diversification and we maintain a well-diversified portfolio with a strong focus on quality assets. With both shares and bonds delivering negative returns last calendar year, Rest’s investments in other real assets, such as property and infrastructure, have helped to stabilise returns and provide an ongoing contribution to protecting the portfolio against inflation.

Investing is rarely a smooth ride, but by maintaining balanced judgement and discipline, we will continue to review, adjust and evolve our investments in line with our ongoing focus on helping our members to achieve their personal best retirement outcome. 

Quay Quarter Tower exterior view

Investment highlight: Quay Quarter Tower

Quay Quarter Tower (‘QQT’), an iconic Sydney CBD landmark, is an example of one of Rest’s real assets. The building, completed in April 2022, is an innovative redevelopment of the old 45-floor AMP Tower with around 68 per cent of the original tower’s core structure retained, while also doubling the leasable space. We are excited to share with you that QQT’s unique design has been recognised internationally as it was recently awarded World Building of the Year in the World Architecture Festival’s 2022 Awards in Lisbon.

The building was also named winner of the 10th annual International Highrise Award at the November prize ceremony in Frankfurt. Next time you’re in Circular Quay in Sydney, why not pop in and have a look?

Want to learn more?