2015-16: THE YEAR THAT WAS
It was a year bookended by “exits” within the European Union (EU), opening with the threat of a ‘Grexit’ following the mid-2015 debt crisis in Greece; and closing with the ‘Brexit’ when the UK elected to leave the EU on 23 June 2016.
Although concerns over Greece eventually subsided, market fears soon elevated in response to a slowdown in China, and the US Federal Reserve’s (the Fed’s) plans for interest rates. Along with a renewed decline in energy and other commodity prices, plus growing doubts over forecast US earnings growth, there was a lot going on to spook the markets, and spur a sell off. More positively, amid rising volatility, the continued decline in the Australian dollar (AUD) provided something of a cushion against falling global share markets for local investors.
Toward the end of 2015, tentative signs of improvement in sentiment helped to secure a solid December 2015 quarter.
However, investment markets deteriorated sharply as we entered 2016, with a volatile mix of developments in January fuelled by China, disappointing US economic data, negative interest rates in Japan, and falling oil prices.
This resulted in a sharp slowdown in economic growth in developed economies, contributing to renewed fears of recession and deflation. This, in turn made share markets highly volatile making investors very nervous that the run of positive financial years in a row may have come to an end.
The Fed moved to calm the market over prospective interest rate rises while Japanese, Chinese and European Central banks moved again to ease monetary conditions. In Australia, the Reserve Bank continues to leave the door open to further policy easing, noting the prospect of inflation remaining low for a prolonged period of time.
While such measures mitigated recession and deflation risks, markets remained dubious they would lead to a strong upturn in global growth. Yet a recovery started in March and financial market returns were able to generally maintain their positive trajectory through April, May and June.
Market reactions immediately following the UK’s Brexit vote were significant.
Initial sharp market moves saw the UK market down 7 per cent, Europe down 8.6 per cent and Japan down 8.4 per cent. However, by the end of June markets had started to settle and, in some cases, partly reverse the post-Brexit losses. Further offsetting the post-Brexit turmoil was some strong some upward movement in the week leading up to the vote, as expectations (incorrectly) grew that the vote would be to stay in the EU.
SHARE MARKET PERFORMANCE
The total return from Australian shares (including dividends) for Australian investors was 0.9 per cent for the full financial year (see Figure 2). Global equities returned 0.4 per cent in unhedged terms and -1.4 per cent in hedged terms.
New Zealand share investors fared better with NZ shares (including dividends) achieving an astounding 21.9 per cent for the year. A number of factors drove this strong return, including the RBNZ cutting rates to record lows, and profit growth driven by record migration, construction and tourism Coupled with high dividend yields this created high local and foreign demand for NZ shares. Global equities returned -2.7 per cent in NZ terms, however the recent appreciation of the NZ Dollar led to a return in unhedged terms of -7.7 per cent.
It was the seventh year in a row of positive returns for most superannuation customers, including those who invested in Mercer’s flagship options, Mercer Growth and, more recently, Mercer SmartPath.
Mercer Growth also continued to outperform the median of the SuperRatings Master Trust Survey over both one year and longer time frames. The net (after tax and fees) return of 2.1 per cent for the 2015-16 financial year was 0.2 per cent ahead of the SuperRatings Master Trust median. Mercer Growth remains comfortably ahead of peers over longer periods: +8.1 per cent p.a. over three years (0.5 per cent p.a. ahead of its peer group), and +7.7 per cent p.a. over five years (+0.6 per cent p.a. ahead). While the 2015-16 financial year was the seventh year of positive returns in a row, we do remain cautious on the outlook for returns.
Relative to its own benchmark, Mercer Growth was marginally behind over the year to 30 June 2016. While value was added from manager selection in most sectors, this was offset by asset allocation decisions, as the portfolio was positioned for a more challenging market outlook – and despite the volatility experienced through the year, markets have not yet fallen in a sustained way. We remain comfortable with this cautious positioning looking forward.
Over periods of two years and greater, Mercer Growth remains comfortably ahead of its benchmark return (for example, by 1.0 per cent p.a. over three years), with both stock selection from underlying managers and Mercer’s asset allocation decision making positive contributions.
Mercer SmartPath options had net returns varying from 1.2 per cent to 2.3 per cent, depending on the relevant age and therefore differing levels of exposure to growth assets. Older Mercer SmartPath members had returns at the upper end of the range above for this financial year, thanks to a more conservative investment strategy designed to protect their super the closer they get to retirement age. Key performance drivers for each SmartPath option were broadly the same as those for Mercer Growth, though the magnitude can vary due to differences in underlying asset allocations.
Although it’s been great to have seven financial years in a row of positive returns, it’s also important to remember negative returns are inevitable at some point. Your return for the 2016 fiscal year is likely lower than in previous years. That’s because your super is held in a wide range of investments such as shares, property, fixed income and cash, the value of which will move up and down with market movements.
Just as you can’t expect every day to be sunny and warm, you can’t expect markets will always deliver growth.
At this point, we are cautious about the outlook for returns over 2016-17. Risks have risen significantly in a world of fragile growth where Mercer already believes risks are high.
Our investment portfolio management team maintains a relatively neutral overall exposure to shares, while maintaining some level of downside protection; for example, investing some money into “low volatility” shares. We continue to monitor economic and market developments and adjust portfolio exposures accordingly.
WHAT SHOULD AN INVESTOR DO?
With elevated global risks looming and no asset classes offering particularly compelling value, this is not a time to be taking risks with your super. That said, it all depends on your individual goals, needs and expectations.
If you’re invested in a multi-sector portfolio like Mercer Growth or the Mercer SmartPath options, there’s nothing you need to do because our portfolio management team are monitoring asset exposures and adjusting accordingly. If you’re unsure about whether you are in the right investment option, talk to your financial adviser or request a meeting with someone from Mercer’s financial advice team.