Market Watch

Debbie Alliston, Head of Multi-Asset Portfolio Management, AMP Capital.

Volatile and weak sharemarkets

Sharemarkets were volatile during 2015/16 and delivered poor returns for the period. Sharemarket performance was adversely impacted by a number of concerns, including falling commodity prices and lacklustre global growth. Of particular note, economic growth in China has been weaker than expected; while in Europe, growth has been so sluggish that policy makers in many European countries have turned to negative interest rates to stimulate growth. In June, Britain’s decision to leave the European Union, or ‘Brexit,’ also contributed to market volatility and pushed most global share markets lower.

Australian equities ended the financial year with an annualised return of 0.6%. International sharemarkets delivered an annualised return of -1.4% on a fully hedged basis.

On the positive side, Australian listed and global listed property continued their positive trend, benefiting from the chase for yield, delivering annualised returns of 24.6% and 18.7% respectively. Australian and international bond returns also delivered solid positive returns.

Figure 1: End of financial year – investment market performance snapshot

Past performance is not a reliable indicator of future performance

Source: Bloomberg, AMP Capital, as at 30 June 2016; Australian shares: S&P ASX 200 Accumulation (AUD); International shares (unhedged): MSCI World ex AU Accumulation (AUD); International shares (hedged): MSCI World ex AU Accumulation Hedged AUD; Australian listed property: S&P ASX 200 A-REIT Accumulation; Global listed property (hedged): FTSE EPRA/NAREIT Developed Rental Hedged AUD; Global listed infrastructure (hedged): Dow Jones Brookfield Global Infrastructure Net Accumulation Index Hedged (AUD); Australian bonds: Bloomberg AusBond Composite 0+ Yr Index; International bonds (hedged): Barclays Global Aggregate Index Hedged AUD; Cash: Bloomberg AusBond Bank Bill Index.

Looking ahead – expect lower for longer

With cash rates and bond yields already so low, sharemarkets are likely to be a key source of return for investors.

However, as global growth and inflation are likely to remain subdued for some time, investment returns are likely to remain relatively muted. We anticipate that single-digit super returns are likely over the next few years.

Keep your focus on what really matters

With market volatility expected to continue in the near term, investments in well-diversified, actively managed portfolios will help to smooth out returns.

We expect active positions in the Australian dollar will be important going forward, but so too will investment in alternative assets, such as infrastructure, absolute return strategies and private equity, which have a low correlation with mainstream markets, such as shares.

Final thoughts

Recent market volatility has made it more important to review your investments and ensure they are still delivering against lifestyle and retirement objectives while being mindful that long-term – not short-term – performance needs to be the focus.

Source: AMP Capital

Debbie Alliston

Debbie Allison is the Head of Portfolio Management within the Multi-Asset Group, responsible for overseeing the Group’s multi-asset investment capability which specialises in the management of diversified portfolios. She is also the Portfolio Manager for AMP’s flagship Corporate Super portfolios.

Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.

At its meeting today, the Board decided to leave the cash rate unchanged at 1.75 per cent.

The global economy is continuing to grow, at a lower than average pace. Several advanced economies have recorded improved conditions over the past year, but conditions have become more difficult for a number of emerging market economies. China’s growth rate has moderated further, though recent actions by Chinese policymakers are supporting the near-term outlook.

Commodity prices are above recent lows, but this follows very substantial declines over the past couple of years. Australia’s terms of trade remain much lower than they had been in recent years.

Financial markets have been volatile recently as investors have re-priced assets after the UK referendum. But most markets have continued to function effectively. Funding costs for high-quality borrowers remain low and, globally, monetary policy remains remarkably accommodative. Any effects of the referendum outcome on global economic activity remain to be seen and, outside the effects on the UK economy itself, may be hard to discern.

In Australia, recent data suggest overall growth is continuing, despite a very large decline in business investment. Other areas of domestic demand, as well as exports, have been expanding at a pace at or above trend. Labour market indicators have been more mixed of late, but are consistent with a modest pace of expansion in employment in the near term.

Inflation has been quite low. Given very subdued growth in labour costs and very low cost pressures elsewhere in the world, this is expected to remain the case for some time.

Low interest rates have been supporting domestic demand and the lower exchange rate since 2013 is helping the traded sector. Financial institutions are in a position to lend and credit growth has been moderate. These factors are all assisting the economy to make the necessary economic adjustments, though an appreciating exchange rate could complicate this.

Indications are that the effects of supervisory measures have strengthened lending standards in the housing market. Separately, a number of lenders are also taking a more cautious attitude to lending in certain segments. Dwelling prices have risen again in many parts of the country over recent months. But considerable supply of apartments is scheduled to come on stream over the next couple of years, particularly in the eastern capital cities.

Taking account of the available information, the Board judged that holding monetary policy steady would be prudent at this meeting. Over the period ahead, further information should allow the Board to refine its assessment of the outlook for growth and inflation and to make any adjustment to the stance of policy that may be appropriate.

Source: RBA July 5th 2016

Exchange-traded funds (ETFs) have become popular with investors due to their simple structure and comparatively low cost. Now, active exchange traded managed funds are available that utilise the same simple structure yet have the ability to respond to current market conditions.

According to ASX there were 130 Exchange Traded Products (ETFs and similar products) listed on the Australian Securities Exchange in April 2016. The market at that time was worth $21.8 billion, a 96 per cent increase from April 2014. Significant growth in these products is anticipated to continue going forwards.

ETFs are investment products that typically only track an index such as the ASX200. Therefore, investors only receive the return of the index by investing in ETFs, without the opportunity for outperformance.

Transparency, stability and ‘fair value’

Active exchange traded managed funds have all the benefits of a traditional ETF. They can be bought and sold on the Australian Securities Exchange, but rather than tracking an index, they are managed by professional fund managers. The live market price is created by the fund acting as market maker during the day and will use an indicative net asset value (iNAV) to provide investors with a ‘fair value’ for the funds throughout the trading day.

AMP Capital, in alliance with BetaShares, has recently launched two exchange traded managed funds. The Global Listed Infrastructure Securities Fund (Unhedged) (Managed Fund) (ASX: GLIN) invests in monopoly infrastructure assets across a number of sectors, including transport, water and energy. Infrastructure is an attractive asset class as governments around the world have flagged a funding shortfall for projects, and are relying on the private sector as a source of capital. This fund offers visible and stable cash flow, with the potential for capital improvements. It’s a source of diversification in a portfolio of equities and fixed interest assets, and could form part of a balanced portfolio.

Diversification opportunities

The Global Property Securities Fund (Unhedged) (Managed Fund) (ASX: RENT) largely invests in real estate investment funds (REITs) and other listed property securities around the world. It allows local investors to diversify away from the Australian property market, while achieving an exposure to the real estate sector. This fund also provides the opportunity for income and capital growth, and can also be a source of diversification for investors.

Both products are listed on the ASX and comprise investments that would otherwise be inaccessible by retail investors such as interests in large, global infrastructure and real estate businesses. As the investments are held in a fund structure, investors can access a universe of infrastructure opportunities in one trade and they can be managed alongside all other broker portfolio holdings for each. Moreover, they are cost-effective compared to many managed funds.

Both active products, which are the first in their asset class, are based on existing AMP Capital managed funds. They have the same investment management strategy, investment portfolios and management costs as the original funds.

Of course, it’s also important to be aware of risks when trading. For instance, the trading price of exchange traded managed fund units traded on the ASX may differ from the underlying net asset value. But as the funds are open ended and act as their own market maker, each fund will aim to provide bids and offers in the market at a tight spread. As a result, it is expected that the fund’s units will generally trade at or around each fund’s net asset value.

Liquidity may also be a risk. While the funds’ unit prices are traded on the ASX, there’s no guarantee there will be a liquid market for units or the fund’s investments.

Before investing in these funds, it’s important to read the product disclosure statement and consider factors such as the likely investment return, the risks of investing and your investment timeframe.

Taking these risks into account, exchange traded managed funds offer investors a great opportunity to diversify their portfolio into new sectors and gain global exposure, through familiar and easy to use investment vehicles.

Find out more about active exchange traded managed funds here.

Source: AMP Capital

Important note: This article has been prepared by AMP Capital Investors Ltd (ABN 59 001 777 591, AFSL 232497) (“AMP Capital”). BetaShares Capital Ltd (ACN 139 566 868, AFSL 341181 (“BetaShares”) is the responsible entity and the issuer of units in the Fund. AMP Capital is the investment manager of the Fund and has been appointed by the responsible entity to provide investment management and associated services in respect of the Fund. Investors should consider the Product Disclosure Statement (PDS) for the AMP CAPITAL GLOBAL PROPERTY SECURITIES FUND (UNHEDGED) (MANAGED FUND) AMP CAPITAL GLOBAL INFRASTRUCTURE SECRURITIES (UNHEDGED) (MANAGED FUND), AMP CAPITAL DYNAMIC MARKETS FUND (HEDGE FUND) before making any decision regarding the Fund. The PDS contains important information about investing in the Fund and it is important investors read the PDS before making a decision about whether to acquire, continue to hold or dispose of units in the Fund. Neither BetaShares, AMP Capital, nor any other company in the AMP Group guarantees the repayment of capital or the performance of any product or any particular rate of return referred to in this document. Past performance is not a reliable indicator of future performance. While every care has been taken in the preparation of this email, neither BetaShares nor AMP Capital makes any representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. This email has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. Investors should, before making anyinvestment decisions, consider the appropriateness of the information in this email, and seek professional advice, having regard to their objectives, financial situation and needs.

At its meeting today, the Board decided to leave the cash rate unchanged at 1.75 per cent.

The global economy is continuing to grow, at a lower than average pace. Several advanced economies have recorded improved conditions over the past year, but conditions have become more difficult for a number of emerging market economies. China’s growth rate moderated further in the first part of the year, though recent actions by Chinese policymakers are supporting the near-term outlook.

Commodity prices are above recent lows, but this follows very substantial declines over the past couple of years. Australia’s terms of trade remain much lower than they had been in recent years.

In financial markets, conditions have generally been calmer for the past several months following the period of volatility early in the year. Attention is now turning to some particular event risks. Funding costs for high-quality borrowers remain very low and, globally, monetary policy remains remarkably accommodative.

In Australia, recent data suggest overall growth is continuing, despite a very large decline in business investment. Other areas of domestic demand, as well as exports, have been expanding at a pace at or above trend. Labour market indicators have been more mixed of late, but are consistent with continued expansion of employment in the near term.

Inflation has been quite low. Given very subdued growth in labour costs and very low cost pressures elsewhere in the world, this is expected to remain the case for some time.

Low interest rates have been supporting domestic demand and the lower exchange rate overall is helping the traded sector. Over the past year, growth in credit to businesses has picked up, even as that to households has moderated a little. These factors are all assisting the economy to make the necessary economic adjustments, though an appreciating exchange rate could complicate this.

Indications are that the effects of supervisory measures have strengthened lending standards in the housing market. Separately, a number of lenders are also taking a more cautious attitude to lending in certain segments. Dwelling prices have begun to rise again recently. But considerable supply of apartments is scheduled to come on stream over the next couple of years, particularly in the eastern capital cities.

Taking account of the available information, and having eased monetary policy at its May meeting, the Board judged that holding the stance of policy unchanged at this meeting would be consistent with sustainable growth in the economy and inflation returning to target over time.

Source: RBA

Tax cuts, a superannuation concession wind back and increased fiscal deficit were significant outcomes of this year’s budget announcement – which occurred during the same week as the Reserve Bank of Australia’s (RBA) surprise rate cut. Our investment specialists provide insight into how these key economic events will impact specific asset classes, and the consequential considerations for investors.

Australian equities – rate cut overshadows budget measures

Michael Price
Head of Australian Fundamental Equities

Investment markets are likely to overlook federal budget measures and focus on the RBA rate cut. However, at the margin the small decreases in personal income tax to combat bracket creep and cuts to small business tax will assist consumer-related sectors. Increases in tobacco excise will impact on gaming revenues and discretionary consumer spending. Increases in spending on state works and city infrastructure will go part way to alleviating the impact of a reduction in mining and energy capital expenditure.

If the government continues to increase the fiscal deficit, the longer term prospect of a reduction in Australia’s credit rating and associated impact on the Australian dollar is likely to have a larger impact on equity markets than direct budget measures.

What does this mean for investors?

The will be no acute immediate changes to markets as a result of the budget however, an increasing fiscal deficit could ultimately impact the Australian dollar and equity markets.

Additionally, changes to superannuation tax mean that tax-aware investment strategies, such as those offered by the AMP Capital Equity Income Generator, are now even more relevant to investors

Infrastructure – building confidence through infrastructure development

Michael Cummings
Head of Australian and New Zealand Infrastructure Equity Funds

We welcome the federal government’s continued focus on infrastructure investment as it will help to build even greater confidence in the Australian infrastructure sector for both local and international investors.

The national infrastructure plan attempts to address the major impediments to developing modern infrastructure and telegraphs more federal involvement. Transport reform in particular is key to stimulating economic growth by both reducing the cost of transport inefficiencies and creating more development opportunities, which is positive for investors.

We are also supportive of efforts to strengthen the links between the private sector and the federal government to create more innovative financing solutions. The private sector has an important role to play in financing the essential assets that support service delivery, enhance growth and productivity and underpin the operation of Australia’s society, and it has a lot of insights and ideas to offer.

What does this mean for investors?

Opportunities in infrastructure investment within Australia will continue to grow for local and foreign investors, particularly in the transport sector.

Fixed income – pressure for yields to push higher

Ilan Dekell
Head of Macro – Fixed Income

We are entering an uncertain period for Australia during the next six months as we face a federal election, a new RBA Governor and the possibility that the RBA will ease monetary policy further as growth remains subdued and inflation continues to surprise to the downside. It is through this lens that the budget should be interpreted.

During the past two years, economic forecasts have been somewhat more conservative, which has led to less slippage with regard to the budget undershooting the government’s forecast. Nonetheless, the economic forecasts used to project the budget into the future continue to be high relative to Australia’s economic performance over the past few years.

Once again the government has pushed the return to a budget surplus out to beyond the forecast horizon of 2020. This ongoing delay of returning to surplus will continue to test the credit rating agencies’ assessment of Australia’s sovereign risk. We continue to believe that as long as the change in general government debt as a percentage of GDP is between 0-3%, and net government debt can hold below 30% GDP, a sovereign credit downgrade can be held off.

In regards to impacts on activity and interest rates, we will be watching non-mining capital expenditure and household consumption in the months ahead for any signs of positive momentum following the budget announcement. With the RBA having cut rates, a positive interpretation may lead to improving growth and inflation expectations, and therefore see some pressure for yields to push higher.

What does this mean for investors?

Fiscal deficit means that Australia’s sovereign risk will remain under the lens of credit rating agencies.

Property – the chase for high-quality property will continue

Tim Nation
Head of Real Estate Capital

We believe the impact of the federal budget on commercial real estate is fairly benign with no ‘show stoppers’ likely to materially impact real estate markets either negatively or positively. Continued focus on infrastructure investment across the country is great news and has positive implications for real estate – both commercial and residential. The government’s decision to hold off on any changes to the negative gearing regime supports continued residential development and a correction of the long-term undersupply.

Clearly we remain in a low-growth environment and this will remain the case for the medium term, based on the government forecasts. This is likely to see continued appetite from domestic and offshore investors alike for income-producing commercial real estate where yields remain at a historically wide spread to the risk-free rate. While Australian commercial real estate is priced at historically high levels, it remains relatively cheap versus other asset classes and versus other global core property markets.

With the weight of money continuing to chase high-quality real estate and further yield compression, the focus remains on identifying assets that will be in a position to capture net operating income growth through the cycle.

For example, commercial assets with long-weighted average unexpired lease terms, let to strong covenants and offering a fixed 3% or more plus annual rental uplifts will generate defensive returns and income streams irrespective of capital markets.

Currently, we favour Sydney and Melbourne office, high-quality retail assets, and well-located industrial assets with the ability to drive net income, as offering the best opportunity for investors to capture rental growth that’s above inflation moving forward.

What does this mean for investors?

It is important that residential development continues to rectify the long term undersupply and subsequent negative impact this has had on housing affordability. But it must be the right development in the right locations where excess supply is not a risk, and will in turn adversely impact values.

Commercial real estate – office, retail and industrial – is also worth consideration as a good alternative to achieve long-term defensive income streams. Again, investors should be focussed on location and quality; a number of markets and sectors across the country offer relatively robust occupational fundamentals. The depth of capital from domestic and offshore investors alike remains strong for high quality real estate generally.

Source: AMP Capital

At its meeting today, the Board decided to lower the cash rate by 25 basis points to 1.75 per cent, effective 4 May 2016. This follows information showing inflationary pressures are lower than expected.

The global economy is continuing to grow, though at a slightly lower pace than earlier expected, with forecasts having been revised down a little further recently. While several advanced economies have recorded improved conditions over the past year, conditions have become more difficult for a number of emerging market economies. China’s growth rate moderated further in the first part of the year, though recent actions by Chinese policymakers are supporting the near-term outlook.

Commodity prices have firmed noticeably from recent lows, but this follows very substantial declines over the past couple of years. Australia’s terms of trade remain much lower than they had been in recent years.

Sentiment in financial markets has improved, after a period of heightened volatility early in the year. However, uncertainty about the global economic outlook and policy settings among the major jurisdictions continues. Funding costs for high-quality borrowers remain very low and, globally, monetary policy remains remarkably accommodative.

In Australia, the available information suggests that the economy is continuing to rebalance following the mining investment boom. GDP growth picked up over 2015, particularly in the second half of the year, and the labour market improved. Indications are that growth is continuing in 2016, though probably at a more moderate pace. Labour market indicators have been more mixed of late.

Inflation has been quite low for some time and recent data were unexpectedly low. While the quarterly data contain some temporary factors, these results, together with ongoing very subdued growth in labour costs and very low cost pressures elsewhere in the world, point to a lower outlook for inflation than previously forecast.

Monetary policy has been accommodative for quite some time. Low interest rates have been supporting demand and the lower exchange rate overall has helped the traded sector. Credit growth to households continues at a moderate pace, while that to businesses has picked up over the past year or so. These factors are all assisting the economy to make the necessary economic adjustments, though an appreciating exchange rate could complicate this.

In reaching today’s decision, the Board took careful note of developments in the housing market, where indications are that the effects of supervisory measures are strengthening lending standards and that price pressures have tended to abate. At present, the potential risks of lower interest rates in this area are less than they were a year ago.

Taking all these considerations into account, the Board judged that prospects for sustainable growth in the economy, with inflation returning to target over time, would be improved by easing monetary policy at this meeting.

Source: RBA