A strong start to the financial year

Both Australian and international share markets produced solid gains in the September quarter, supported by steady global growth, low inflation and supportive monetary policy.

While there was an increase in share market volatility late in the quarter, AustralianSuper’s strategy of maintaining a diversified portfolio tilted towards shares and unlisted assets, like infrastructure and property, has continued to benefit member returns. Maintaining a low weighting to global bonds and cash has also been positive for members, given they have been the lowest performing assets classes over the last five years.

The Balanced option ranked in the top five performing funds for the 1, 3, 5 and 20 years to 30 September 2018 in the SuperRatings survey*.

Portfolio insights

AustralianSuper recently added two important investments to the portfolio which demonstrate the Fund’s ability to leverage its size and scale and partner with major investors to acquire high quality assets:

WestConnex Sydney

AustralianSuper members are now part owners of a major piece of NSW infrastructure after the Sydney Transport Partners consortium won the bid for 51 per cent owners of Westconnex, the largest road infrastructure project underway in Australia. The deal provides a boost for economic growth and will employ thousands of workers while providing returns that will contribute to the long term retirement savings of the Fund’s members.

One Crown Place London

AustralianSuper jointly financed the development of One Crown Place in London with a £230 million senior secured development loan. Once complete, One Crown Place will comprise 136,000 square feet of office space, 7,000 square feet of retail, a 41-bed boutique hotel and 246 luxury residential units. The development will be 370,500 square feet in total and is located in London’s Eastern Central 2 (EC2) district.

Outlook

The global economy remains in good shape, although growth is more uneven and less robust than in 2017. Economic activity is accelerating in the US, with the labour market and business confidence (especially small business) continuing to get a boost from fiscal stimulus and strengthening capital spending. Economic growth is moderating in the eurozone, UK and Japan, and slowing in China and other emerging markets.

Looking into the year ahead, there are three key risks to the economic and investment outlook we’re watching closely:

  1. The economic cycle – the present economic expansion has been underway since 2009 and follows the aggressive stimulus by policymakers in developed economies and China post the Global Financial Crisis. The US is at the forefront of normalising policy and lifting interest rates given the economy is performing well with annual economic growth above 4% and historically low unemployment. This has some investors thinking the Fed will lift interest rates too quickly and cause an economic downturn – which historically has been the catalyst for weaker share prices. This is the most significant risk we are monitoring.
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  3. US/China trade wars – tensions have escalated in recent months with the US imposing tariffs on US$250 billion of Chinese imports, and China responding with tariffs worth $110 billion on US imports. There are also concerns about the impact this will have on technology stocks with computers and computer parts likely to be the hardest hit by the tariffs. While we don’t think tariffs are a good thing for global economic trade, we estimate these tariffs will only reduce global GDP by around 0.2%. We believe this issue will have a higher impact on confidence and sentiment than activity and growth.
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  5. Lower Australian house prices – falling house prices in Australia have led to concerns of a housing collapse. The main reason housing prices have fallen has been due to government restrictions and disincentives to foreign property buyers and local investors who use interest only loans. While housing affordability for owner-occupiers is an issue, interest rates remain at historically low levels and unemployment is also low. While we don’t believe there will be a property crash in Australia, a potential downturn poses a risk for the domestic economic outlook.

 

We’re closely monitoring any signs of deterioration in the economic outlook, although at this stage the global economy remains strong, and we see the benefits outweighing the risks. When the time is right, we will gradually look to lower the risk in the portfolio by reducing the high weighting to shares and growth assets.

More on AustralianSuper’s investments.

*SuperRatings Fund Crediting Rate Survey, SR50 Balanced (60-76) Index 30 September 2018.

Returns are net of investment fees and taxes Investment returns aren’t guaranteed and past performance isn’t a reliable indicator of future returns.

AustralianSuper members that have exposure to these new assets are those in the Balanced, High Growth, Conservative Balanced, Capital Stable and Socially Aware PreMixed options