Tag Archives: Investments

What alternative assets bring to your super investment mix

By Robert Wright /November 17,2021/

Most of us have heard of the main asset classes: shares, property, fixed interest and cash, but alternative assets are less well known. However, these types of assets can provide further diversification and enhanced returns for your super.

Alternative investments are those found outside the traditional asset classes. Typical ones include real estate, private equity, venture capital, infrastructure, renewable energy, hedge funds, commodities, and private debt.

Generally, these are assets that aren’t correlated to the performance of the sharemarket, that is they can often perform when sharemarket returns are down or flat.

The net result is that alternative investments add an extra layer of diversification – you’re not ‘putting all of your eggs in one basket’ and seeing all asset class suffer at the same time.

Low returns pique interest in alternatives

In the current low interest rate environment, which tends to mean lower returns for cash and bonds, alternative investments can help members grow their super to retire comfortably.

Alternative investments differ to publicly available funds as they’re part of the private investment market and aren’t easily accessible for individual investors. They typically include:

Infrastructure

Infrastructure assets are known for providing long-term, stable and predictable cash flows. Opportunities can be found within energy production and transmission but are also emerging in newer sectors such as agriculture infrastructure and renewable energy, particularly wind-powered energy and a selection of solar-power opportunities.

Private equity

The private equity sector invests in companies that are not publicly traded. The advantage is that by investing at the start of a company’s lifecycle, it’s possible to generate strong risk-adjusted returns and benefit from high earnings growth when compared to listed markets.

Real estate

Real estate has a low correlation to shares but is often considered to be a good hedge against inflation. The asset class has evolved over time to include publicly listed and real estate investment trusts (REITs) that include data centres, childcare and storage facilities, as well as commercial real estate debt, which provides loans to commercial borrowers who need funding for real estate purposes.

Performance can lift when using alternative assets because alternatives are generally less impacted by daily market movements in the way that other assets are. Shares and bonds can be quickly affected by changing market, social and economic events, such as the COVID-19 pandemic for example. Therefore, the overall volatility, or the ‘roller-coaster ride’ of increasing and decreasing valuations, should reduce when funds include a proportion of alternative assets in the mix.

Not all alternatives are equal

Of course, alternative assets need to be carefully researched and reviewed in order to find the most appropriate options for each particular fund. They need to be carefully weighed up against other asset classes and sectors to ensure the most appropriate levels of risk and reward that will support investors to achieve a comfortable retirement.

Source: IOOF

Retirees: How to beat Inflation before it beats you

By Robert Wright /November 17,2021/

Investors with long memories – or a good education – will recall the bad old days when inflation was the economic bogeyman. It broke Germany’s Weimar Republic in the 1930s and nearly cratered America’s economy in the 1970s.

Fortunately, inflation has been a non-issue in Western economies for decades. But is that about to change? In the first quarter of FY2021, Australian inflation ran at a comfortable 1.1%. By the second quarter it had leaped to 3.8%.

Perpetual’s recent Quarterly Update summed up the problem: “With very easy monetary policy likely to continue for the next couple of years, and government spending at record-breaking levels, there remains the risk that inflation could become out-of-control. Historically, high levels of inflation have been very difficult to contain once in place.”

Inflation hurts retirees

Inflation is bad news for retirees. “A continual rise in the price of goods and services can really affect someone who’s retired or approaching retirement”, says Malissa Tobias, a Perpetual Private adviser in Melbourne. “Inflation eats your purchasing power – you get fewer goods and services for the same amount of money.”

If you’re still working, your salary can rise to keep pace with inflation. Retirees – especially those with money in low-rate assets like term deposits or cash – suffer because their spending power is cut and the real (after-inflation) value of their capital is falling.

Anti-inflation strategies for retirees and near-retirees

Manage your retirement

By managing the timing and shape of your retirement you can offset some of the inflation threat.

If you work a little longer (either full or part-time) you can earn an income that might go up with inflation. Those extra earning years also give you more time and money to build up the largest possible nest egg to generate your retirement income. Finally, but just as importantly, retiring later delays the day you start drawing on your capital.

Invest in inflation-beating assets

Investing in higher-returning assets – like shares or property – can deliver the same benefits as earning work-income because their value can rise in line with, or above, the rate of inflation. However, the inevitable complication is that higher returning assets are usually higher risk assets.

Plan your spending

Knowing how much money you’re going to need in retirement is a crucial part of retirement planning.

Draw on capital

The recent Retirement Income Review suggested many retirees die with their capital intact. But that’s not the case for everyone. In a world where the threat of inflation is rising, some retirees will need to dip into their capital to fund the retirement lifestyle they want. The key is to do that prudently.

Source: Perpetual

Market volatility during COVID-19

By Robert Wright /November 17,2021/

Market volatility refers to extreme price movements over a given period. These movements may occur in a particular area, such as real estate or shares, and may be upward or downward.

Ever since COVID-19 started spreading across the world in late 2019, affecting every aspect of our lives, the term ‘market volatility’ has been hitting headlines.

But, what does market volatility mean? And what might it mean for your finances?

Market volatility can feel like a one-off crisis. However, it’s important to remember that volatility is in the very nature of markets. Fluctuations are bound to occur and, sometimes, they’re rather extreme.

For instance, in February and March 2019, markets dropped 37%, but fast-forward to the June quarter, and they picked up 16%. That’s quite a wild swing. Anyone who panicked and withdrew from the market at the end of March would have missed out on the subsequent gains.

In the scheme of things, three months isn’t long at all. In the 141 years since the ASX was established, there have been 28 negative years, and the rest have been positive. In other words, each year, the average investor has a 1 in 5 chance of a setback, but a 1 in 4 chance of making gains.

Further, in the 20 years leading up to 2018, the ten best days in the market were responsible for 50% of returns.

During downturns, it’s easy to be swayed by the news. Headlines often focus on the negatives. When the COVID-19 pandemic began, the emotional impact of worrying financial news was intensified by the fact that the virus itself was new and unknown. Plus, so many people were unable to go to their workplaces, or catch up with friends and relatives.

If you were reading the headlines and not speaking to anyone about them, you may have been susceptible to making big financial decisions based on your emotional reactions.

That’s why it’s important to speak to your financial adviser, who will remind you of your long term plan—and that a downturn is just a short term blip, when you think of the next 20 years.

Source: TAL

Economic and market commentary

By Robert Wright /November 17,2021/

Investors remained focused on rising inflation and the possibility of policy settings being tightened worldwide.

Bond yields continued to rise – particularly in Australia – as investors brought forward their expectations for interest rate hikes. This hampered returns from fixed income markets.

Equity markets performed much more strongly, aided by the release of pleasing corporate results for the September quarter.

Australia:

The latest surveys indicate conditions have improved modestly for both manufacturers and services companies, although backward-looking economic data were largely ignored given recent restrictions in NSW and Victoria. Instead, like elsewhere, the main focus was on potential changes to central bank policy.

In early October the Reserve Bank of Australia reiterated its yield target of 0.1% on 3-year government bonds. Later in the month, market movements had pushed the yield on these securities above 1.0%, seemingly with limited effort from the Reserve Bank to defend the target. This prompted investors to question whether officials were changing their stance on policy settings.

At an annual rate of 3.0%, headline inflation for the September quarter printed in line with consensus forecasts. The Reserve Bank’s preferred measure of inflation – the trimmed mean – rose at a more modest 2.1% over the year. Official interest rates are unlikely to be changed for the foreseeable future.

New Zealand:

As had been widely anticipated, official interest rates were raised by 0.25%, to 0.50% in October.

Reserve Bank of New Zealand officials appear to be concerned about quickening inflation – consumer prices rose by more than 2% in the September quarter alone, and are nearly 5% higher on a rolling 12-month measure.

As a result, some commentators are suggesting interest rates could be raised by a further 0.75% at the Bank’s next meeting in late November.

US:

At an annual pace of 2.0%, growth in the world’s largest economy fell short of expectations for the September quarter.

Pandemic-related supply shortages and bottlenecks continued to hamper manufacturers. Car production fell around 7% in September, for example, due to a shortage of semiconductors.

Services sectors are enjoying better operating conditions, as consumers continue to increase spending following months of lockdowns and disruptions.

There were mixed signals of the jobs front – new payrolls were lower than expected, but the unemployment rate dropped 0.4%, to 4.8%.

All of these data releases were overwhelmed by comments from Federal Reserve officials on the outlook for inflation and, in turn, potential changes to interest rate policy. The Federal Reserve is still expected to start tapering its quantitative easing program during November, likely reducing its monthly purchases of Treasuries and mortgage-backed securities.

Afterwards, attention is expected to increasingly shift to the likely timing of interest rate hikes. Inflation remains very high and whilst officials continue to suggest this will prove temporary, pricing pressures owing to supply disruptions seem likely to persist into 2022 and longer-term inflation expectations are rising due to elevated energy prices.

Consequently, some investors are now anticipating two interest rate hikes in the US before the end of next year.

Europe:

The latest GDP data in the Eurozone beat expectations. The region’s economy grew by 2.2% in the September quarter, meaning overall activity levels have rebounded to 99.5% of pre-Covid levels. The upturn has been attributed to an encouraging recovery in services sectors.

The increase in discretionary spending is being reflected in higher inflation; consumer prices rose 0.8% in October alone. Like elsewhere, this prompted suggestions that the European Central Bank might have to raise official interest rates.

Less encouragingly, the latest data highlighted a slowdown in industrial production in Germany; Europe’s largest economy. Moreover, ongoing reports of supply shortages suggest weakness in the manufacturing sector could persist through the December quarter and, potentially, into next year.

Asia:

In China, large property developer Evergrande Group avoided a bond default following a last-minute coupon payment. This failed to calm investors’ nerves, however; high yield credit spreads in Asia widened sharply over the month, resulting in disappointing returns from the region’s credit markets.

In Japan, there was an unexpected upward revision to economic growth forecasts for 2022. Officials expect growth to rebound back towards pre-pandemic levels in the next 12 months or so.

Australian dollar

The dollar reversed its recent weakness and strengthened by 4.0% against the US dollar. The ‘Aussie’ appreciated similarly against a trade-weighted basket of international currencies.

Performance relative to the Japanese yen was particularly impressive. At the end of October the Australian dollar bought nearly ¥86, an increase of 6.6% over the month.

The dollar was buoyed by rising commodity prices – coal and oil increased, which offset slightly lower iron ore prices.

Australian equities

The local share market started October on the back foot, as concerns about rising inflation drove the S&P/ASX 200 Index more than 2% lower on the first day of the month.

Equities quickly recovered and had moved nearly 2% higher towards the end of the month thanks to positive trading updates from the start of the AGM season. A sudden jump in bond yields on the last day of the month saw these gains reverse, however, and caused the Index to finish the month close to where it started, with a total return of -0.1%.

The Energy sector fell 2.7%, despite higher oil prices (Brent oil rose 7.5%). Energy companies struggled late in the month as news releases indicated oil supplies could soon increase, given a surprising jump in US inventories and the possibility of a resumption in Iranian oil exports.

Weakness among iron ore miners drove Materials stocks -0.5% lower. Iron ore prices fell around 5% due to Chinese steel production restrictions and weakening demand expectations.

In contrast, Materials stocks helped drive the S&P/ASX Small Ordinaries Index 0.9% higher thanks to strong performances from several gold and rare earth mining companies.

Listed property

Global property stocks fared well, with the FTSE EPRA/NAREIT Developed Index increasing by 1.9% in Australian dollar terms.

The best performing regions included Sweden (+14.0%), USA (+7.8%) and Hong Kong (+6.1%), while laggards included Germany (-0.3%), Japan (-0.3%) and Australia (+0.4%).

Global equities

Several major share markets enjoyed their strongest month of performance of the year. The S&P 500 Index in the US closed October 7.0% higher, for example. Technology stocks continued their good form, enabling the NASDAQ to perform even better; up 7.3%.

In Europe the Stoxx 50 added 5.0%, while in Asia Hong Kong’s Hang Seng and Singapore’s Straits Times rose 3.3% and 3.6%, respectively. Japan was the only major market not to participate in the rally, with the Nikkei closing the month 1.9% lower.

Returns from all major markets were diluted for Australian investors due to the strength of the dollar. Nonetheless, global shares made a positive contribution to diversified portfolios over the month.

Global and Australian Fixed Income

Bond yields rose in most major regions, as investors continued to focus on high inflation and the possibility that interest rates could be raised earlier than previously thought.

The yield on 10-year Treasuries rose 6 bps over the month, to 1.55%. Similar moves were seen on 10-year yields in other countries (Germany +9 bps, Japan +3 bps and the UK +1 bp).

The most significant yield movements were seen in Australia, where 10-year yields skyrocketed by 60 bps and closed the month above 2% for the first time in more than two years; well before the Covid pandemic began.

Global credit

Spreads on investment grade and high yield credit were little changed in October, at least in the US and Europe. Asian markets were a little weaker, partly reflecting ongoing concern about high leverage in the Chinese property sector. Consequently, returns from global credit markets were broadly neutral over the month.

Source:  Colonial First State