2024 Financial Market Update

Global Markets:

Over the past financial year through 30 June 2024, major global stock markets were higher. The MSCI World Index, which tracks stocks from around the world, increased by 16.0% in US dollar terms while in the US, the NASDAQ and S&P 500 saw big gains of 28.6% and 22.7% respectively.

Japan’s TOPIX index also did well, rising by 22.8%. European markets had smaller gains, with the EuroTop100, UK’s FTSE 100, and Germany’s DAX increasing by 11.3%, 8.4%, and 12.9%.

Asia-Pacific Markets: 

In our region, the results were mixed. Australia’s S&P ASX 300 Index went up by 11.9%, but China’s CSI 300 fell by 9.9%.

Bonds and Yields: 

Bond yields, which are the returns on investments in government bonds, were mostly higher., meaning the value of bonds fell over the year. In Australia, the 10-year government bond yield increased to 4.3%. In the US, the 10-year yield rose to 4.4%, and the Japanese equivalent to 1.1%.

Currency and Commodities:

The Australian dollar was slightly higher against the US dollar, ending at 0.6679. Crude oil prices were strong, with the West Texas Intermediary (WTI) benchmark price increasing by 17.2%.

Tech Stocks and AI:

A lot of the market gains were driven by big US tech companies, often referred to as the ‘Magnificent Seven’. These include Nvidia, Microsoft, Amazon, Alphabet (Google), and Apple. Nvidia had a huge increase of 191% over the year. These companies make up about 30% of the S&P 500 index.

Economies:

Major economies like the US, Europe, and Australia did better than expected overall. However, inflation remains high, around 4% in Australia and the US. Despite many interest rate hikes by the Reserve Bank of Australia (RBA), inflation stayed well above its target range of 2-3%.

Official Cash Rates:

In Australia, expectations for interest rate cuts were adjusted after stronger-than-expected inflation and employment data. In the US, the market also lowered its expectations for rate cuts from the Federal Reserve. Inflation weakened in Europe and Canada allowing the European Central Bank and the Bank of Canada to cut their official interest rates in June.

Geopolitical Events:

Global politics had a significant influence on markets over the year. The Israel-Hamas conflict increased tensions throughout the Middle East, leading to higher oil prices. This conflict seemed to overshadow the ongoing Russia-Ukraine war.

The market appeared to remain unclear as to the potential impact should the war escalate beyond Ukraine’s border. Elections in the UK and France also had an impact, with the UK seeing a change in government and France’s left-leaning parties gaining power. In the US, the upcoming presidential election is causing concerns about future size of its government debt.

How Did That Affect Your Investments?

Investment Strategy

At the start of the financial year, we believed that there was a reasonable chance that there might be a downturn in the economy and possibly a recession. This was due, in part, to the rapid increase in official interest rates over a short period to fight high inflation.

To protect the capital value of your investments in the event of either of these outcomes, the investment portfolios were positioned more defensively by allocating more of your money to less risky asset classes like Cash and Fixed Interest, and less to the higher risk asset classes like international equities.

For the international companies that we did invest in over the year, we focused on identifying and investing in strong and stable companies forecast to grow earnings steadily over the long term which were, in our opinion, reasonably valued. This meant we didn’t invest as much in the small number of mega cap US tech companies, collectively referred to as the ‘Magnificent Seven’ that drove the increase in equity markets. Investors piled into these companies to gain direct exposure to the AI theme pushing their valuations to very extreme and possibly unsustainable levels.

What This Means for You

By taking a more defensive stance within the investment portfolios in light of our views, we aimed to protect the capital value of your investments from the risk of any significant market falls. Holding more in defensive assets meant that the performance impact of the riskier investments in portfolio was reduced.  This balanced approach aims to protect the value of your investment and ensure that your superannuation grows steadily over time.

Investment Options and Asset Classes

Growth-Oriented Investment Options

The main drivers of performance for growth-focused investments were International and Australian equities. These are companies that operate overseas and/or in Australia.

Conservative Investment Options

For more conservative investments, Fixed Interest was the strongest performer. This includes things like bonds, which are generally safer than stocks.

Property Asset Class

The Property asset class underperformed in comparison to the other diversified investment options. Higher interest rates had a negative impact on property values. The Office sector suffered more due to the “work from home” impact on office supply, vacancies and leasing rates.

Long-Term Performance

Despite the shorter term volatility typical in all markets, long-term performance remains positive. Since 1995, the Balanced Tax-Exempt investment option has returned 7.9% per year, and the State’s Defined Benefit Strategy has returned 8.0% per year.

Meeting Investment Objectives

All investment options with a horizon of 10 years or more, as well as Cash, have exceeded their stated return objectives as of June 30, 2024. However, options with shorter-term horizons are currently not meeting their targets. All investment options have a stated investment objective of Consumer Price Index (CPI) plus a margin. Higher inflation in the last few years (peaking at 7.8% in December 2022) has made it challenging to generate investment returns above the objectives for these shorter term options.

What This Means for You

By understanding how different types of investments perform over the economic cycle, you can see how we aim to balance risk and return. While some asset classes like property didn’t perform, others like Fixed Interest and Infrastructure performed strongly. This approach helps to ensure your superannuation grows steadily and securely over time.

Underlying Investments

International Equities

The Information Technology and Financials sectors were the strongest performers.

While we were invested in the mega cap US tech companies and top international Health Care companies, we held less exposure relative to the major market indices which hurt our performance. Our preference to identify and invest in strong companies with steady, long-term growth profiles that are reasonably was the primary reason for this. The portfolios benefited strongly from decisions to invest more in the Financials sector and picking good companies in Taiwan and South Korea.

Property

Although property investments had negative returns, they still did better than the benchmark. Listed property trusts (AREITs) did well, but unlisted property values, especially in the Office sector, continued to decline.

Infrastructure

Infrastructure investments performed strongly and outperformed the benchmark. These assets provided strong returns as their businesses grew. Regulated utilities also did well in an environment with higher inflation and interest rates.
 

Fixed Interest

Investment Grade Credit:

Active management and good security selection helped this asset class outperform the benchmark.

Inflation-Linked Securities:

Both tax-exempt and taxable inflation-linked securities had low positive returns but underperformed the benchmark due to a higher allocation to global inflation-linked securities.

Long-Term Fixed Interest:

This asset class had positive performance but didn’t meet the benchmark. Earnings from bonds were the main driver of returns.

Short-Term Fixed Interest:

This asset class performed well and outperformed the benchmark, driven by income from bonds and tighter credit spreads for Australian investment grade securities.

Cash:

The Cash investment option outperformed the benchmark.

What This Means for You

Understanding the different types of investments helps you see how we manage your superannuation. While some asset classes like Property faced challenges over the year, others like Infrastructure and Fixed Interest performed well. This balanced approach helps ensure your savings grow steadily and securely over time.

Investment Management Costs

The costs of managing your investments play a critical role in the growth and value of the investment when you retire.  We continue to work hard to lower to the investment management costs across all our investment options to make sure that our fees are as low as possible and competitive with our peers.

The Indirect Cost Ratios (ICRs) realised throughout the year were lower than the targets set at the beginning of the year.

For our default Balanced Investment Option, the realised ICR of 0.59% at 30 June 2024 was 0.16% lower than the target. Realised ICR’s were between 0.05% and 0.17% lower than the targets across the investment options.

What This Means for You

By managing costs effectively, we ensure that more of your money stays invested and working for you. Lower transaction costs, strategic asset allocation, and successful fee negotiations all contribute to keeping our investment management costs down. This helps maximize the growth of your superannuation over time, providing you with better value and more secure savings for the future.