March 2022 Quarterly Review

With these uncertain times, frequent and significant market moves can be expected. Rest’s experienced investment team have managed periods of market volatility many times before and fully expect to navigate them again while remaining focused on delivering long-term superior investment performance for our members. We are well-positioned for the challenge, through a disciplined investment process that ensures we have portfolios that are resilient through a range of outcomes. We are large enough to drive value for members, yet agile enough to respond to opportunities that volatile markets can bring.

Ukraine, Russia and market volatility

Following strongly positive returns in 2021, the start of the new year was punctuated by some significant volatility in global markets, with the Australian and US major share markets down 6.3% and 5.3% respectively in January. Shares, listed property and longer-term bonds all fell on the back of inflation fears and the prospect of central banks around the world raising interest rates.

Also spreading anxiety through markets was the risk of war amidst rising political tension between Ukraine and Russia.

By the time of the Russian invasion in late February, most of the geo-political risk had already been priced into markets. Markets therefore fell a little more in February, but quickly rebounded in March. It’s important to remember that during any time of market upheaval, there are always winners and losers, highlighted in the graph below, which shows a wide range of returns as investors shifted to traditional safe haven assets like gold. 

Source: Bloomberg, March 31, 2022

This graph strongly reinforces one of our key beliefs - that diversification adds value. Rest’s portfolios are invested across a wide range of different assets. This has the dual purpose of minimising risk during choppy markets and diversifying return sources, both of which contribute to the overall performance. Rest’s exposure to energy and commodities within our share portfolio and our exposure to listed infrastructure and private assets such as property and infrastructure helped the portfolio’s resilience over the quarter.

It is also important to note that Rest’s Core Strategy held less than 0.1% of the portfolio in Russian assets at the time of the invasion and we have exited our remaining positions where possible.

The Russia-Ukraine war has also shone a spotlight on inflationary pressures and heightened the impact of rising prices on investment markets. 

Inflation, interest rates and petrol

Inflation concerns were already present prior to the war, with the Covid-19 pandemic creating supply chain issues but inflation risk has been compounded by the post invasion led rise in energy, commodities and food prices.

With the Russia-Ukraine war in full swing, petrol prices quickly moved past $2 per litre in metropolitan centres. Russia is the world’s largest combined exporter of oil and gas and is a key supplier of energy to Europe. Ukraine is also a large energy producer and one of the world’s largest wheat exporters. The ensuing lack of supply has seen significant prices rises, which of course have had a flow on effect to the cost of living and business expenses. 

How do we protect the portfolio against inflation?

Performance in share markets is improving since January but it’s important to remember that we are likely to remain in a lower growth and higher inflation environment for the moment, and share markets are therefore likely to remain volatile.

Generally, shares markets are negatively impacted by high inflation. This is because inflation increases costs for a business which then flows through to negatively impact on profits. Wages growth is also becoming a more significant issue with a fight for talent, both globally and locally.

However, some sectors within share markets offer great inflation protection, like those linked to materials, commodities and energy, and our exposure to these sectors helped cushion the impact.

Unlisted investments such as unlisted property, unlisted infrastructure and agriculture all have features that also offer inflation protection. Property and infrastructure display characteristics of both growth and defensive asset classes and they have acted well to stabilise the portfolio.