There was nowhere to hide last financial year
Last week marked the end of the month for June and the end of another financial year. It was another weak month in markets with the Australian equity market down around 9% and global markets down around 4.6%. For the financial year end, the Australian market and global markets were down around 6.8% and 6.5% respectively. In a more peculiar period for financial markets, traditionally defensive asset classes being fixed interest were down for the month and financial year also. Australian fixed interest markets returned around -1.5% for the month and -10.5% for the financial year, while global fixed interest markets were down around 1.6% for the month and 9.3.%over the year. The reason for this has been the sharp normalisation of interest rates on the back of higher inflation. Earlier this year fixed income government bonds bore the brunt of the concerns around inflation whereas more recently corporate bonds have suffered from recession fears and the higher probability of default. For both sub-asset classes double digit losses are amongst the worst on record, which goes some way to illustrating how much is already priced in concerning both rises in interest rates and economic weakness. In effect there were very few major asset classes that have offered positive returns over the year with cash being one of the few places to hide and perhaps gold.
Within Australian equites, most sectors were down for the month led by materials and financials down 12.4% and 11.9% respectively. Consumer staples was the only sector that was positive for the month, +0.2%,with the energy sector the next best performer down only 0.3%. Globally, all sectors were negative for the month, similarly led by materials (-15.7%) and finance (-10.4%), while energy also joined the ranks of worst performers at-15.2%. Health care and consumer staples proved a little more defensive, only down 3.3% and 3.6% for the month.
Listed real estate markets were not immune from the sell-off, typically viewed as a bond proxy for their income characteristics, they too have been impacted by rising interest rates and sentiment around the prospects of a weaker economy. Australian listed property was down 10.4% for the month and down around 11.2% for the year, while global listed property was down around 7.8% for the month and down 9.25% for the year. Oddly enough, despite prices of listed property securities being down in traded markets, underlying property valuations haven’t moved nearly as much, in some cases caprates have even tightened in the face of higher interest rates. Suggesting there is a disconnect with private valuations and listed markets. On a relative basis, listed infrastructure has faired much better, only down around 5% for the month and actually delivering a positive return of around 5.3% for the financial year, this can probably be explained by the sector having much better inflation protection mechanisms imbedded in their structures with less economic risk to the underlying cash-flows.
All of that meant that returns for Australian diversified funds for the last financial year were around negative 9% across the risk spectrum for passive, market linked products over the last twelve months. This is perhaps most disturbing for conservative investors, many of whom may not have been prepared for this even though the potential for negative returns had been well telegraphed by many in the funds management and advice industries. One modest silver lining is that active asset allocation and funds management has, on average added considerable value in this period and been especially effective in cushioning falls so far this year. Returns for actively managed diversified funds were also similar across risk profiles but raged between minus 5% to minus 7% for the last financial year. Over the next few weeks and months advisers will have their work cut out explaining much of this but another silver lining is that the forward looking prognosis for savers is much, much better than it was 6 months ago and we estimate that return expectations are now in Iine with objectives for most products, even before the ratcheting down of expectations which is also happening as we speak.