December 2022 Quarterly Review

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

Balanced (Pension) to 31 December 2022

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.