Review - Financial Year 2020
No one needs reminding of events of the past 12 months, but it’s worth reviewing market returns over this period because some may be surprised by the results.
The major themes for the past year include:
Global equities stage dramatic bounce back after Q1 2020 slump
Australian stockmarket up 16.8% in Q2 2020 – the second strongest quarter on record
Sentiment still sensitive to ebb and flow of coronavirus cases
Growing global political and economic instability
From 20 February to 23 March 2020, the Australian stockmarket declined by 37% - the fastest decline on record. One of the worst quarters in years was immediately followed by the second best on record. In the US, the S&P 500 was up over 20% in the June quarter, being the 9th best quarter on record. This provides a strong reminder of why selling out of stocks after a sharp fall can be very costly to investors. Patience, confidence and “staying in your seat” is so important.
While the International Monetary Fund warned that the global economy faced its worst recession since the 1930s, the acute strains seen in markets in March eased as central bank and government policy responses boosted sentiment. The Reserve Bank of Australia said more settled markets had allowed some central banks to scale back bond purchases.
The 12-month returns for the major asset classes to 30 June 2020 are summarised below, with cash at 0.85%:
After several years of strong performance, listed Real Estate Investment Trusts (REITs) were the worst performing asset class for FY2020. This outcome reflects the expected shift to greater working from home practices and the subsequent ability of businesses to reduce their need for office floor space and an acceleration of online shopping habits.
The sub equity asset classes of “value” and “small” under performed “growth” and “large” over the last 12 months. However, the sub-asset classes can and indeed have bounced back very quickly in the past after under performing over various periods.
The Australian stockmarket was down 7.6% for the year, although this came after seven successive years of gains. Indeed if you look at the recent performance of the ASX300 in context of the past 10 years, COVID19 has caused investors to lose approximately 18 months of returns:
Source: ASX 300 in Returns Program
In Australia and globally, energy was the worst performing sector for the year. This enabled share and bond investment strategies to outperform over this period.
Healthcare was the strongest sector for the year in Australia, primarily driven by CSL. However, CSL was one of the worst performing Australian stocks in the June quarter. The graph below shows sector performance in Australia for the June quarter and past 12 months:
Looking at global stockmarkets, many countries finished the year with positive returns. This is a strong reminder of the importance of having a globally diversified investment portfolio, especially as Australia only represents 2% of total global equity markets.
Source: MSCI World IMI Index
Did the events of the past 12 months cause our Investment Committee to ask questions and challenge our investment approach? Absolutely. We adopt an evidence and science based approach to portfolio construction and new information is always emerging that we seek to review and challenge our existing practices. No material changes have resulted to our approach over the past 12 months, but new investment strategies frequently emerge which we review to determine if they can contribute marginal improvements to our approach. We don’t assume the way we help clients invest now will necessarily remain the optimal approach into the future.
Looking ahead, the continuation of historically low yields on fixed interest and bonds remains a key challenge for investors; however, importantly the purpose of continuing to hold fixed interest is not to generate high yields, but rather to act as a buffer to market volatility, provide capital stability and liquidity. The use of bonds and fixed interest in portfolios – particularly for those who have left the workforce or are planning to – remains a critical factor in combating the inevitable volatility in stockmarkets, as this article reminds us: https://www.stewartpartners.com.au/insights/2020/3/17/covid-19-update-no3
Author: Rick Walker