It was a tough quarter for investors. Rapidly rising interest rates and concerns on economic growth resulted in losses in both the equities and bonds markets. Overall, our Balanced growth investment option (for accumulation) returned negative 0.38% during the September 2022 quarter.
The investment environment continues to be challenging as inflation remains stubbornly high and the US central bank, the Federal Reserve, has reaffirmed its strong commitment to fighting inflation. The current job market is tight in the US, with historically high vacancies relative to unemployed workers. Nominal wage growth remains elevated and combined with supply chain disruption is contributing to high, persistent inflation. Central banks are concerned about a wage/price rise spiral becoming entrenched and have been raising interest rates at a rapid pace which causes asset values to fall.
Russia’s invasion of Ukraine is a tragedy which has caused a large loss of life and livelihood. Its impact has extended outside the fighting, bringing about a surge in energy and food prices. This is seen most clearly in Europe which relies heavily on Russian gas supplies. Russia closed its largest gas pipeline to Europe in July, ostensibly for maintenance, and again in September. Energy companies were forced to buy natural gas from higher cost sources. The main source of gas distribution from Russia, the Nord Stream pipelines appear to have been sabotaged and will not be easily fixed. Consequently, Europe may face supply shortages as they approach this winter and next. Energy bills are expected to increase further, adding to the cost-of-living pressures faced by many households. Escalation of the conflict remains a significant risk.
Chinese economic growth continues to remain weak, due to the zero covid policy and their slowdown in housing. The zero covid policy continues to restrain growth and hurt supply chains within China. Chinese authorities had sought to cool the property market and they have achieved this, with a slowdown in the housing market, where new-home prices have dropped for the first time since 2015. As a result, prices of industrial metals have fallen. In the medium term, a potential for a China-Taiwan conflict to transpire is a concern for investment markets. This has already impacted the semiconductor industry, where the US has imposed export restrictions to slow China’s technological and military advances.
As a result of high and sticky inflation, slowing growth and rising interest rates, the earnings results for US firms have been disappointing relative to expectations and historical averages. There is a risk of further earnings downgrades if inflation persists, with not all companies able to pass inflationary costs on to their customers and interest rate rises expected to rein in demand.
Outlook
Our central case includes a further weakening of the US economy in the short term, likely a US recession. While this is not the most likely outcome for Australia, rising rates will negatively impact the housing market, increasing the probability of a recession.
The key upside scenario relative to our central case is where inflation falls faster than expected, allowing central banks to revert to more neutral policy settings, rather than actively having to slow the economy to fight inflation. This would provide a more favourable environment for risky assets to perform.
Given equities have fallen considerably this year and noting the challenging investment environment will eventually turn, the medium to long term outlook has improved.
Investment returns are not guaranteed. Past performance is not a reliable indicator of future returns.
This information is general advice which does not take into account your personal financial objectives, situation or needs. Before making a decision about Vision Super, you should think about your financial requirements and consider the relevant Product Disclosure Statement and Target Market Determination issued by Vision Super Pty Ltd ABN 50 082 924 561 AFSL 225054 at Target Market Determinations
