Investment update – December quarter 2023

Here’s a look at what’s been happening in investment markets recently and what it means for your superannuation.

Inflation and geo-political tensions remain a core factor

How quickly expectations of the financial markets can change. And then, there is always that unexpected new event which unsettles the financial markets.

As inflation further slowed and economic performance softened, there was growing expectations that interest rates would start to fall sooner rather than later. China’s economic performance remained sluggish, and conflict in the Middle East created volatility in commodity prices, with concerns the conflict could expand and disrupt oil output levels.

Global financial markets rebound

Global equities started the quarter negatively due to new and existing geopolitical tensions, mixed economic data, and inflation remaining above expectations. With interest rates on hold or increasing, global government bonds declined as bond yields raised sharply. These higher interest rates continued to negatively impact the listed property and infrastructure sectors.

Over November performance improved. Global equities produced strong returns as inflation declined, expectations of interest rate cuts grew, and corporate earnings remained resilient. Government bonds reversed some of the recent losses, due to hopes of interest rates easing in international markets. This change in sentiment produced large positive returns for listed property and infrastructure.

The trend continued in December. A good example of this was the US Federal Reserve’s indication of potential rate cuts in 2024. This caused bond yields to fall significantly, the US dollar to weaken against major currencies, and equity prices to surge. Even in Europe and the UK, where the central banks signalled that interest rates will be maintained due to concerns of inflation rebounding and rising wages, financial markets still expected cuts from April 2024. This caused the property and infrastructure sectors to produce large positive returns.

How your investments are performing

First Super is underweight (meaning a lower percentage of member’s pool of funds are invested in that sector) in the Australian and international fixed interest sectors. This has been beneficial as the quarterly returns are above the market benchmark in a volatile bond market.

The Fund is also overweight in cash, which continued to deliver performance above the benchmark for the quarter, due to higher interest rates.

An underweighting in Australian and international equities produced mixed results. The Australian equity sector performed below the benchmark, whilst international equities (unhedged) performed above.

The Australian private equity sector underperformed against the benchmark (to exceed ASX 300 performance by 5%), which is not unusual when equity markets rally in a relatively short period.

Australian and international infrastructure performance rebounded in December, but not as strongly when compared to the benchmark. The overweight position in this sector may provide stronger performance in the future if interest rates decline.

Looking ahead, will interest rates fall?

The big question is central banks’ timing of interest rate cuts. We saw last quarter how financial market sentiment can change, and the flow-on effects, like those experienced in the US.

Conflict continues in the Middle East, with other countries’ armed forces taking action to disrupt shipping to Israel or ‘allied’ countries who are using the shipping lanes to transport goods around the world. Stemming the flow of goods to meet demand can push up inflation, which may mean that central banks maintain or increase interest rates.

And what will China’s sluggish economic performance mean for Australia? Especially in the real estate sector and the potential collapse of Evergrande, one of China’s biggest property developers.

We’re here to help

Remember market volatility is a normal, short-term part of the investment cycle, and your super is a long-term investment.

If you have questions about your super investments, or you’re planning to switch the way you’re invested, we’d encourage you to speak with us first. We’re easy to get hold of, with most members only waiting a few minutes to speak to a real person. Contact our Member Services Team 1300 360 988 or email mail@firstsuper.com.au.

Stay up to date with investment updates by visiting our Investment updates webpage and our Crediting rates webpage.

Disclaimer

Issued by First Super Pty Limited (ABN 42 053 498 472, AFSL 223988) as Trustee of First Super (ABN 56 286 625 181).

Past returns are not an indicator of future returns.

This article contacts general advice which has been prepared without taking into account your objectives, financial situation or needs. You should consider whether the advice is appropriate for you or read the Product Disclosure Statement (PDS) before making any investment decisions. To obtain a copy of the PDS or Target Market Determination, please contact First Super on 1300 360 988 or visit our website at firstsuper.com.au/pds.