The latest commentary on investment markets and the performance of our investment options.

2016-17 delivers best annual returns for several years

The strong gains already accrued in our pre-mixed options this financial year were largely carried through to the year-end numbers, with members receiving some of the best 12-month returns for several years.

All our pre-mixed options achieved their target returns for the year to 30 June 2017.

The US and Asia/Pacific share markets finished mostly in positive territory for the month, while European markets were down. In the US, while the S&P 500 finished only slightly higher for the month, it was up an impressive 15.5% for the full year. 

Fed commits to unwinding its balance sheet

The Federal Reserve increased interest rates by 0.25% during June and at the same time, flagged ongoing efforts to ‘unwind its balance sheet’, which means reduce the $4.5 trillion it holds in bonds. This huge holding is a result of the Fed’s massive bond-buying program over the past few years which provided liquidity to financial markets in the aftermath of the global financial crisis.

Markets reacted positively to these measures, with good support also coming from the banking sector, which recorded good results from ‘stress tests’ undertaken by the Fed. The tests assess whether banks have sufficient capital to absorb losses and operate during stressful economic and financial conditions.

US withdrawal dampens markets

President Trump announced the US withdrawal from the Paris climate accord, which had a dampening effect on the market. UK shares were subdued (down 2.8%) in the wake of the May election, and the hung parliament and minority government that followed.

European economic activity at present is characterised by persistently low inflation and interest rates. The European Central Bank (ECB) left interest rates at zero during June, and the Bank of England voted to maintain interest rates at 0.25%, a record low. Nonetheless, central bank governors gave more ‘hawkish’ signals during the month, suggesting that interest rates may increase over the coming months.

Strong year for Aussie shares

The Australian share market was flat in June, with the S&P/ASX300 Accumulation Index finishing up just 0.22%. Performance during the month was helped by a rising iron ore price (up 11%) and a strong Aussie dollar, which rose 3.5% against the US dollar. This was largely offset by energy stocks, which fell 6.9%, mainly due to a sharp fall in the crude oil price.

Overall, the 2017 financial year closed on a strong note, with the index up 13.8%.

Most of the talk in fixed interest markets is about higher rates. In Europe, for example, the ECB president hinted at stronger growth and the possibility of rate rises, which sparked a bond sell-off during the month. (If rates rise, bonds tend to lose market value, so bond holders are inclined to sell to avoid potential losses.)

There is little prospect of rate cuts in the near future. The market appears to be pricing in rate hikes over the next six months. Locally, the Reserve Bank kept interest rates on hold at 1.5% at their June meeting.

RBA outlook reasonably positive

The pick-up in the global economy is continuing. Forecasts for global growth have been revised up since last year. Above-trend growth is expected in a number of advanced economies, although uncertainties remain. In China, growth is being supported by increased spending on infrastructure and property construction, with the high level of debt continuing to present a medium-term risk. Further increases in US interest rates are expected and there is no longer an expectation of additional monetary easing in other major economies. 

Source: RBA media release

Our performance

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Investment commentary

All the pre-mixed options achieved their CPI-plus target returns for the year to 30 June 2017. Our default Growth option delivered very strong performance relative to peers, finishing near the top in industry performance comparisons. 

While share market performance was flat in June, the 2017 financial year closed on a strong note, with the S&P/ASX300 Accumulation Index (which includes dividends) up 13.82%. Performance during the month was boosted by a rising iron ore price (up 11%) and a strong Australian dollar (up 3.5%).

Banks did well notwithstanding a widespread Moody's downgrade over concerns on household debt, and a proposed new state levy in South Australia. Financials finished up 1.6%. Energy stocks were down 6.9% as crude oil fell sharply. 

US shares rose during June, with the S&P 500 finishing 0.5% higher. This came off the back of strong performance in the banking sector after positive stress testing results from the Federal Reserve. President Trump's announcement of the US withdrawal from the Paris climate accord dampened markets, but this was offset by the Fed's 25 bps higher interest rate move.

The market tends to view a rate hike as positive for the economy becasue it suggests growth. European markets were generally down, with the UK off 2.8% in the face of ongoing political uncertainty for the now-minority Conservative government. Global index provider MSCI announced that China's domestic equities would be included in its benchmark indices, which helped boost most Asian markets. The Shanghai Composite index rose 2.4%. 

Australian fixed income fell during the month (-0.9%) and underperformed global fixed income (-0.20%) as global yields moved higher. These increases were largely centred in Europe where hawkish noises from the ECB president about less accommodating monetary policy sparked a bond sell-off during the month.

The US Federal Reserve announced a 0.25% rate increase during June. There are few prospects of rate cuts in most markets, with many pricing in rate hikes over the next six months. The RBA kept interest rates on hold at 1.5%  during the month, as was widely expected. The Australian dollar rallied in June, finishing 3.5% higher against the US dollar.

Past performance is not a reliable indicator of future performance. This information has been prepared by First State Super Investments on behalf of FSS Trustee Corporation ABN 11 118 202 672 AFSL 293340, trustee of the First State Superannuation Scheme ABN 53 226 460 365.