Market Overview

Key highlights

• All investment options had positive returns and the Triple S Balanced Default Option returned 4.1% for the quarter.
• Economic indicators suggest inflation may have peaked across large parts of the developed world.
• Market volatility remains as there is an increased possibility of a US-led global recession in 2023.
• Australian and international equity markets returned 9.1% and 4.0% respectively for the quarter.
• Bond markets were volatile, and their returns were mixed.
• The 12-month target return of the Cash Option is increasing with the RBA increasing the cash rate to 3.1% in December.

Triple S returns to 31 December 2022 

Investment option	3 months       %	1 year        %	3 years     % p.a.	5 years    % p.a.	10 years    % p.a.
Cash	0.8	1.3	0.6	1.1	1.8
Capital Defensive	2.0	-5.8	0.1	2.0	3.6
Stable	2.8	-6.6	1.0	3.0	5.0
Moderate	3.3	-6.6	2.1	4.0	6.3
Socially Responsible	3.6	-10.3	3.6	5.3	7.3
Balanced	4.1	-7.3	3.9	5.5	7.7
High Growth	4.5	-7.4	4.3	6.2	9.2

Returns net of fees and gross of tax, based on Super SA unit pricing formula.

Economic update

In Australia, inflation remains elevated and the RBA continued to raise the cash rate to try to bring it back down to target. The cash rate was increased three times over the quarter to finish the year at 3.1%. The RBA noted that ‘higher inflation and higher interest rates are putting pressure on household budgets, with the full effects of higher interest rates yet to be felt in mortgage payments’. In other words, it takes time for higher interest rates and higher mortgage payments to slow down household spending and have their full effect on curbing inflation.

There are indicators that suggest inflation may have peaked across large parts of the developed world and that central banks will slow down the pace of rate rises next year. As US consumers are expected to be constrained by the higher interest rates in 2023, there is an increased likelihood that the US economy will slow down and enter a recession. Australia is better placed but there is a moderate chance that we will experience a recession.

Australian equities

Australian shares (S&P/ASX 300) delivered a 9.1% return over the December quarter, achieving the strongest quarterly return in 2 years.

All sectors achieved a positive return, with performance being particularly strong within the Materials (+14.7%) and Financials (+10.8%) sectors. In October, the market expected the RBA to increase the cash rate by 0.50%. It was a positive surprise when the RBA only increased rates by 0.25% and the Australian market rallied strongly. China’s reopening and relaxation of COVID-zero policies also flowed through positively to commodity prices, and iron ore prices rebounded almost 50% from their lows in November.

International equities

Global developed market equities returned 4.0% over the quarter. US and European equities were generally strong as there were signs the US Federal Reserve and the European Central Bank would slow down the pace of rate increases. There are indications that inflation may have peaked in both markets. The Federal Reserve’s final rate hike of the year was pared back to 0.50% compared to the previous four hikes of 0.75% each.

Global emerging market equities performed in line with developed markets, also returning +4.0% (unhedged, AUD) over the quarter as Asian equities performed particularly well. Global emerging market equities also ended the quarter stronger. Chinese equities, in particular, were boosted by the relaxation of China’s COVID-zero policies and government support for the property sector.

Fixed interest

The Fixed interest asset class had slight positive returns in a volatile quarter, as the market grappled with interest rates and inflation expectations.

Over the year, increasing cash rates were a negative force, pulling down bond prices. In October, central banks began to slow down rate hikes and this indicated that cash rates may not peak as high as previously expected. This was positive news for bond markets and bond prices rallied.

However, towards the end of the quarter, central banks reiterated that they will continue to raise interest rates until inflation is back within the target range. This saw bond prices reverse some of their gains from earlier in the quarter.  

Cash investment option and rising cash rates

Investment returns are not guaranteed. This is true for all investment options, including the Cash investment option. This option is invested in short-dated assets like term deposits, bank bills, and floating rate notes. While the  target return is the cash rate set by the Reserve Bank of Australia (RBA), the return is dependent on the performance of the underlying ‘cash-like’ assets, and fees and taxes are deducted.

It is important for us to explain how the RBA increasing the cash rate has impacted the assets in the Cash option. Some of the assets are locked into an interest rate for a short time. This is like the way term deposits lock an investor into a quoted rate for a short period. If the cash rate increases over that period, the term deposit investor will still receive the locked in lower interest rate.

In April 2022, before the RBA began increasing the cash rate, part of the Cash option was invested in assets that reflected the low cash rate of 0.10%. In May, when the cash rate was increased, some assets matured, and we were re-invested at the higher rate. However, there were other assets still locked into the lower rate (like being locked into a term deposit). As the RBA continued to increase rates between June and December, more assets matured, and the funds could be invested at the higher interest rate. This explains how it takes a short time for the portfolio’s assets to mature so they can be invested at the higher interest rate. As the cash rate was only increased to 3.10% in December, it will take a period of time for old assets to mature. Please note that the target return of the Cash investment option is now 3.10% over one-year.

The other important thing to note with cash rates, is that the rates specified are an annual term rate meaning it takes a full 12 months for the rate to be realised. 

If you have any questions, please contact Super SA. 

 

Disclaimer

The information in the article above has been prepared in good faith by Funds SA. However, Funds SA does not warrant the accuracy of the information and to the extent permitted by law, disclaims responsibility for any loss or damage of any nature whatsoever which may be suffered by any person directly or indirectly through relying upon it whether that loss or damage is caused by any fault or negligence of Funds SA or otherwise. The information is not intended to constitute advice and persons should seek professional advice before relying on the information.

 

 

^{The information in the article above has been prepared in good faith by Funds SA. However, Funds SA does not warrant the accuracy of the information and to the extent permitted by law, disclaims responsibility for any loss or damage of any nature whatsoever which may be suffered by any person directly or indirectly through relying upon it whether that loss or damage is caused by any fault or negligence of Funds SA or otherwise. The information is not intended to constitute advice and persons should seek professional advice before relying on the information.}