SuperRatings and Lonsec have announced the winners of this year’s Fund of the Year Awards, which was held virtually for the first time in the event’s 18-year history.

The Fund of the Year Award went to QSuper, which also took home the Pension of the Year Award and the Smooth Ride Award. UniSuper claimed the MySuper of the Year Award, and Sunsuper clinched the MyChoice Super of the Year Award.

The winners were announced at a virtual awards event on 29 October, broadcast live from the Museum of Contemporary Art, Sydney.

“It’s important to recognise the significant work that all funds have done to support their members through a very challenging year,” said SuperRatings Executive Director Kirby Rappell.
“In a highly competitive field, we decided that QSuper was the fund that performed most strongly across the key criteria of investment performance, fees, member services, financial advice and insurance, and fund governance.”

“Congratulations to the team at QSuper on a fantastic effort. It was a strong field this year and we note the high calibre of all award winners, with the quality of their offerings shining through the pandemic.”

“A lot has changed in super, and there are even more changes to come. We should always be focused on improvement, but we shouldn’t lose sight of the incredible outcomes being produced by a large number of funds, both for their members and the retirement system as a whole. Despite the uncertainty, there is every reason to be positive about super.”

 

Congratulations to all of the finalists for this year’s SuperRatings and Lonsec Fund of the Year Awards Dinner. A full list of the awards is available below.

SuperRatings Fund of the Year Award

Winner

QSuper
 
 
 
 
 
 
 
 

SuperRatings MySuper of the Year Award

Awarded to the fund that has provided the Best Value for Money Default Offering.

Winner
UniSuper

Finalists
AustralianSuper
BUSSQ
CareSuper
Cbus
Equip
HESTA
QSuper
Sunsuper
TelstraSuper
UniSuper

SuperRatings MyChoice Super of the Year Award

Awarded to the fund with the Best Value for Money Offering for Engaged Members.

Winner
Sunsuper

Finalists
AustralianSuper
Aware Super
Hostplus
Mercer Super Trust
NGS Super
QSuper
Statewide Super
Sunsuper
Tasplan
UniSuper

SuperRatings Pension of the Year Award

Awarded to the fund with the Best Value for Money Pension Offering.

Winner
QSuper

Finalists
AustralianSuper
Aware Super
BUSSQ
Cbus
HESTA
Hostplus
QSuper
Sunsuper
TelstraSuper
UniSuper

SuperRatings Career Fund of the Year Award

Awarded to the fund with the offering that is best tailored to its industry sector.

Winner
Cbus

Finalists
BUSSQ
Cbus
HESTA
Mercy Super
TelstraSuper
Hostplus

SuperRatings Momentum Award

Awarded to the fund that has demonstrated significant progress in executing key projects that will enhance its strategic positioning in coming years.

Winner
Aware Super

Finalists
Aware Super
Cbus
Equip
HESTA
Mercer Super Trust
Sunsuper

SuperRatings Net Benefit Award

Awarded to the fund with the best Net Benefit outcomes delivered to members over the short and long term.

Winner
AustralianSuper & HESTA

Finalists
AustralianSuper
Cbus
HESTA
Hostplus
QSuper
UniSuper

SuperRatings Smooth Ride Award

Awarded to the fund that has best weathered the ups and downs of the market, while also delivering strong outcomes.

Winner
QSuper

Finalists
AustralianSuper
Aware Super
BUSSQ
CareSuper
Cbus
QSuper

Infinity Award

Awarded to the fund most committed to addressing its environmental and ethical responsibilities.

Winner
Local Government Super

Finalists
Australian Ethical Super
CareSuper
Christian Super
Future Super
HESTA
Local Government Super

Lonsec Investment Option Award

Seeks to recognise and highlight the work of asset managers and key players incorporating ESG.

Winner
CareSuper – Sustainable Balanced

Finalists
CareSuper – Sustainable Balanced
Cbus – Growth (Cbus MySuper)
Suncorp Multi-Manager Growth
Sunsuper for Life – Balanced

 

Release ends

US elections, daily pandemic updates, and political scandals are dominating the news headlines. In this world of hyper-connectivity and a constant flow of information, investors must be focused on their game plan and learn to tune out the noise of the crowd. As we witnessed during October’s grand final (AFL or NRL depending on your favoured code), discipline is the key to success.

Markets don’t like uncertainty. True to label in the current environment, markets have been range-trading as significant uncertainty surrounds the outcome of the US elections, as well as the size and scope of a US fiscal package, which requires an agreement with Congress. Add to this ongoing concerns over the pandemic, especially in the US and Europe, and the fraught process of reopening, which has seen mixed success globally.

Managing our portfolio through times like these calls for a solid game plan and the patience to see it through. We can’t afford to bank on one particular outcome (a strategy akin to flipping a coin). We must determine which part of our portfolio will provide protection and which part will allow us to capitalise on the upside and take advantage of potential growth.
Lonsec’s game plan is simple. In a low yield world, you need growth. We have retained our exposure to growth assets such as equities, especially as interest rates remain low and markets continue to be supported by liquidity from central banks. However, we are cognisant that there are risks in the market and therefore we have diversified our equity exposure to incorporate a mix of investment styles that can perform well in different market conditions.

We’re also consciously ensuring that we have exposure to some traditional defensive sectors and investment strategies that we expect to hold up better than the market should we experience a correction. Incorporating diversifying assets that can behave differently from equities and bonds is prudent. We have therefore incorporated alternative assets such as gold in some of our portfolios to bolster our defensive positioning.

Periods of uncertainty can provide opportunity as well as risks, and a dynamic approach is essential for managing both. We have invested in parts of the bond market where we identified significant mispricing opportunities, and we continue to have a positive view on emerging market equities, where we believe the additional potential returns warrant the risk.

As investors, we’re not just playing a single match, or even a single season—we’re playing for long-term success. Markets are unpredictable, but having the right strategy that takes into account a range of possible scenarios, including those that might seem unlikely to us today, will assist in generating more consistent outcomes over the long-term. We can’t win every game or every premiership, but we can increase our chances of accumulating some silverware over time.

IMPORTANT NOTICE: This document is published by Lonsec Investment Solutions Pty Ltd ACN 608 837 583, a Corporate Authorised Representative (CAR 1236821) (LIS) of Lonsec Research Pty Ltd ABN 11 151 658 561 AFSL 421 445 (Lonsec Research).  LIS creates the model portfolios it distributes using the investment research provided by Lonsec Research but LIS has not had any involvement in the investment research process for Lonsec Research. LIS and Lonsec Research are owned by Lonsec Holdings Pty Ltd ACN 151 235 406. Please read the following before making any investment decision about any financial product mentioned in this document.

DISCLOSURE AT THE DATE OF PUBLICATION: Lonsec Research receives a fee from the relevant fund manager or product issuer(s) for researching financial products (using objective criteria) which may be referred to in this document. Lonsec Research may also receive a fee from the fund manager or product issuer(s) for subscribing to research content and other Lonsec Research services.  LIS receives a fee for providing the model portfolios to financial services organisations and professionals. LIS’ and Lonsec Research’s fees are not linked to the financial product rating(s) outcome or the inclusion of the financial product(s) in model portfolios. LIS and Lonsec Research and their representatives and/or their associates may hold any financial product(s) referred to in this document, but details of these holdings are not known to the Lonsec Research analyst(s).

WARNINGS: Past performance is not a reliable indicator of future performance. Any express or implied rating or advice presented in this document is limited to general advice and based solely on consideration of the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (“financial circumstances”) of any particular person. Before making an investment decision based on the rating or advice, the reader must consider whether it is personally appropriate in light of his or her financial circumstances or should seek independent financial advice on its appropriateness.  If the financial advice relates to the acquisition or possible acquisition of a particular financial product, the reader should obtain and consider the Investment Statement or the Product Disclosure Statement for each financial product before making any decision about whether to acquire the financial product.

DISCLAIMER: No representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the information presented in this document, which is drawn from public information not verified by LIS. The information contained in this document is current as at the date of publication. Financial conclusions, ratings and advice are reasonably held at the time of publication but subject to change without notice. LIS assumes no obligation to update this document following publication. Except for any liability which cannot be excluded, LIS and Lonsec Research, their directors, officers, employees and agents disclaim all liability for any error or inaccuracy in, misstatement or omission from, this document or any loss or damage suffered by the reader or any other person as a consequence of relying upon it.

Copyright © 2020 Lonsec Investment Solutions Pty Ltd ACN 608 837 583 (LIS). This document may also contain third party supplied material that is subject to copyright.  The same restrictions that apply to LIS copyrighted material, apply to such third-party content.

The performance of the Alternatives universe in the September 2020 quarter was again widely dispersed albeit sector performance was skewed to the upside.

After eight months of the global pandemic, many nations still struggle to control the virus and have expended all ordinary policy responses to prop up the global economy. Volatility in security prices remain, with added geo-political uncertainty and the US presidential election further clouding the global market outlook. Despite these uncertainties, the market has been largely unwavering in its ‘risk-on’ stance albeit retreating somewhat in September.

Managed future strategies were largely unfavourable over the quarter as choppy market conditions and shifting market sentiment hampered trends previously established. While stimulus led trends were evident early in the quarter, simmering geopolitical concerns and fears of a potentially more disruptive second wave weighed on markets late in the quarter. Credit exposure, notably high yield, was a reasonably strong performer through the September quarter. Additionally, risk appetite was also evident for less defensive areas of the fixed income securities such as emerging markets given the yield control measures in place within many developed markets. Commodities, as measured by the S&P GSCI Index, delivered a positive return in the third quarter, aided in part by US dollar weakness with oil the key laggard during the quarter.

As occurred in the previous quarter, the equity market neutral sub-sector continued its strong performance during the quarter. Stock dispersion continues to be elevated, which is highly favourable for the strategies. The market continues to punish companies operating in industries adversely exposed to the virus, while paying a significant premium for those with strong growth prospects or higher quality balance sheets that can survive the continued drop off in economic growth. Equity issuance slowed within the Australian market over the quarter. Equity issuance had allowed for strong alpha capture in the previous quarter as many offers were priced at attractive discounts to market prices.

Discretionary global macro strategies continued to post positive returns through the quarter benefitting from favourable cross-asset and inter-sector dispersion. The qualitatively driven strategies appear better placed to adapt and react to changing market conditions and significant central bank intervention compared to their systematic global macro peers. These tend to be better placed to balance the portfolio across asset classes using a combination of directional and spread trades in addition to dedicated hedges.

Private equity and debt markets were up through July and August, while those funds with exposure to real estate assets weighed on returns. Deal flow and activity is making a return, albeit not within the secondary market as might be expected. Given the strong rally and sentiment in public markets, stress and forced selling hasn’t yet materialised across the sectors, with the exception being real estate.

The focus of Managers largely remains on managing the current pool of assets and seeking opportunistic bolt-on acquisitions with controlling interest. Managers with excess capital are well placed to buy attractively priced business if forced selling becomes more widespread. Within private debt, the market has largely normalised, with risk appetite returning albeit the market less favourable for debt exposed to leisure, retail and energy sectors. Nonetheless, newly priced issues tend to require greater level of asset security and financial covenants which is favourable for the lender.

Issued by Lonsec Research Pty Ltd ABN 11 151 658 561 AFSL 421 445 (Lonsec). Warning: Past performance is not a reliable indicator of future performance. Any advice is General Advice without considering the objectives, financial situation and needs of any person. Before making a decision read the PDS and consider your financial circumstances or seek personal advice. Disclaimer: Lonsec gives no warranty of accuracy or completeness of information in this document, which is compiled from information from public and third-party sources. Opinions are reasonably held by Lonsec at compilation. Lonsec assumes no obligation to update this document after publication. Except for liability which can’t be excluded, Lonsec, its directors, officers, employees and agents disclaim all liability for any error, inaccuracy, misstatement or omission, or any loss suffered through relying on the document or any information. ©2020 Lonsec. All rights reserved. This report may also contain third party material that is subject to copyright. To the extent that copyright subsists in a third party it remains with the original owner and permission may be required to reuse the material. Any unauthorised reproduction of this information is prohibited. 

The Australian property securities market has seen most prices continue to recover during the September quarter 2020 as the reporting season was better than expected. However, the bifurcation between sub-sectors is similar to the global property securities markets. Industrial/Logistics, specialist, funds management, large format, and non-discretionary retail sectors have outperformed in calendar 2020. Discretionary retail and office sectors underperformed.

The Retail sector has had to deal with forced store closures (excluding supermarkets and essential provisions), with the Melbourne metropolitan region still under lockdown restrictions. The government mandated Leasing Code of Conduct has shared the pain of reduced revenues for eligible small-to-medium enterprises, although some larger retailers have been attempting to withhold rents and renegotiate based on a revenue-linked model.

Overall, rent collections in retail have been around 55% for the June 2020 quarter, with dividends cut or omitted by the likes of Scentre Group. Retail rents for discretionary stores are likely to continue to come under pressure. In contrast, non-discretionary retail centres anchored by supermarkets have traded strongly, as have large format centres with Bunnings Hardware, Officeworks, and JB Hi-Fi as tenants. Property valuations of the latter have remained firm, while discretionary mall valuations have fallen.

The Office sector has continued to collect a high level of rents and valuations have seen limited reductions given the level of local investor interest in high quality Australian property (albeit international interest is more subdued given that travel is not possible for inspections). Medical and tech-related space is also well sought after by smaller investors. However, rental incentives are rising and sub-lease space in Sydney and Melbourne has grown by 100,000 square metres.

The Industrial/Logistics sector has been led by Goodman Group, with a strong FY20 earnings result and reaffirmed positive outlook based on its global development pipeline and recurring funds management fees. In Australia, logistics developments are expanding to cater for the ongoing shift to online networks with some vacancy increase on the east coast.

The Residential sector has received significant government support from the JobKeeper and JobSeeker programs and other incentives by various state governments. Further easing of lending criteria by APRA, in addition to loan repayment deferrals by the major banks, has lent support during the pandemic period. However, these measures are scheduled to unwind over the next six months (excluding the $25,000 Homebuilder program and easier lending requirements), which is likely to expose the residential sector to high unemployment. While Australia’s international in-bound travel is severely limited, migration numbers will be down significantly relative to previous years and the outlook for new residential property sales from this source is likely to be subdued.

Several Australian REITs (A-REITs) had capital raisings during 2020, so balance sheets are well-positioned with average gearing around 27%. At the same time the cost of debt has reduced with interest costs for new debt down from around 3.0–3.5% to 2.0–2.5% over the last year.

Pricing in the A-REIT sector has Industrial/Logistics (+71%), Hardware (+33%), and Service Centres (+13%) at premiums to net asset values (NAV). Sectors at a discount to NAV are Office (-17%) and Retail, although discretionary malls are at -54%, but non-discretionary centres at a 1.0% premium. Capitalisation rates have reduced over recent years and have now started to ease (for retail discretionary) or steady out (for office) but remain firm for Industrial/Logistics and Specialties (including Hardware).

Lonsec believes the Australian real estate market, which was already late in the cycle pre-COVID, has extended its late-stage duration as a result of ‘lower-for-longer’ monetary policies. Despite deferrals and cancellations of dividends by some REITs, Australian property securities still offer attractive yields relative to both bonds and cash (holding at a 3.0–4.0% yield differential). Sectors with structural tailwinds (logistics, industrial, and specialised) are expected to enjoy more resilient cashflows and distributions, and as a result will continue to trade at a premium. Until the COVID-19 pandemic is brought under control, the way forward remains unclear. However, value investors will be tempted to look at heavily sold-off sectors at some stage.

Issued by Lonsec Research Pty Ltd ABN 11 151 658 561 AFSL 421 445 (Lonsec). Warning: Past performance is not a reliable indicator of future performance. Any advice is General Advice without considering the objectives, financial situation and needs of any person. Before making a decision read the PDS and consider your financial circumstances or seek personal advice. Disclaimer: Lonsec gives no warranty of accuracy or completeness of information in this document, which is compiled from information from public and third-party sources. Opinions are reasonably held by Lonsec at compilation. Lonsec assumes no obligation to update this document after publication. Except for liability which can’t be excluded, Lonsec, its directors, officers, employees and agents disclaim all liability for any error, inaccuracy, misstatement or omission, or any loss suffered through relying on the document or any information. ©2020 Lonsec. All rights reserved. This report may also contain third party material that is subject to copyright. To the extent that copyright subsists in a third party it remains with the original owner and permission may be required to reuse the material. Any unauthorised reproduction of this information is prohibited. 

Watch the webinar recording.

Synopsis

Super funds are on track to stage a remarkable comeback in the second half of 2020. But there are still a host of challenges facing funds, including early access, market volatility, insurance claims, and ongoing regulatory uncertainty.

Join Kirby Rappell, Executive Director of SuperRatings, as we examine how funds are positioned to manage these challenges through 2020 and beyond.

Key takeaways:

• Get insight into trends across fees, insurance, asset allocation, and member servicing, based on the most in-depth bench-marking data available.
• Assess the major market themes affecting super fund portfolios through the 2020 pandemic and how trustees are responding.
• Learn how consolidation is impacting the super industry and what funds need to do to keep their offering competitive.
• Understand the key tests of tomorrow for super funds and how advisers can assess and compare super fund offerings to meet their best interest duty.


Any advice that SuperRatings provides is of a general nature and does not take into account an individual’s financial situation, objectives or needs. Because the information that SuperRatings receives about superannuation and pension financial products is from a number of sources, it is not guaranteed to be completely accurate. Because of this, individuals should, before acting on the information, consider its appropriateness having regard to their own financial objectives, situation and needs and if appropriate, obtain personal financial advice on the matter from a financial adviser. Before making a decision regarding any financial product, individuals should obtain and consider a copy of the relevant Product Disclosure Statement from the financial product issue.

The shockwaves caused by the COVID-19 pandemic are still being felt across the economy with extreme readings observed across various economic indicators over the June and September quarters. These include a spike in the unemployment rate to 7.5%, a 7.0% decline in GDP, and a 12% decline in household spending over the June quarter. In this article we look at some of these historic fluctuations and discuss the likely path to recovery.

Households

Household income rose 2.2% over the June quarter despite a 10% fall in hours worked, driven by the increase in social assistance schemes and additional COVID-19 support payments including Jobkeeper. Household spending also declined 12% over the June quarter, reflecting significant changes in spending patterns of consumers due to COVID-19 restrictions around the country. Consumer spending patterns are expected to remain volatile for the remainder of the year, particularly across the services and goods categories.

Household spending

Businesses

The COVID-19 pandemic has also had a significant impact on businesses with many industries recording declines in gross value added over the June quarter. Hospitality and tourism related industries have recorded the largest declines on record, with payroll data indicating a 15–20% decline in jobs in these sectors over the June quarter.

The mixed fortunes of various industries become more obvious when we look at retail sales data, which have also seen historic swings post March 2020. After an initial spike in March, retail sales fell 17.7% in April before showing a record monthly rise of 16.9% in May. The numbers have turned negative again in August, falling 4.0% over the month, driven by the Victorian lockdowns. Nonetheless, despite the extreme volatility experienced since March, overall retail sales are around 6% above the pre-COVID levels in February 2020. At the industry level, Food and Household goods retailing have grown strongly since March, while sales within the Cafes, Restaurants, Clothing and Footwear segments have recorded double digit declines over the period and continue to remain relatively weak into the December quarter.

Retail sales – seasonally adjusted % change

Online retail and e-commerce have also been a main beneficiary of recent events, with many online businesses seeing a huge influx of orders during the lockdowns. Following a large spike in online sales in March and April, the seasonally adjusted online sales figures rose 81.1% in August 2020 compared to August 2019, highlighting the shift to online shopping at the outset of the COVID-19 pandemic in Australia. While these elevated levels of sales activity are unlikely to continue post the lockdowns, COVID-19 has to some extent expedited the structural shift to online retail, a trend we expect will continue for some time given the relatively low penetration of online sales (around 10%) within retail sales in Australia.

Total online sales

International travel

No industry has been more impacted by the pandemic than tourism and international travel. Overseas arrivals have virtually ground to a halt since March 2020, a far cry from the 9.5 million annual visitors to Australia in the preceding year. This has in turn had a material impact on the local tourism industry, with the federal government indicating the industry is likely to lose $55 billion this year alone. This has forced a swath of companies into survival mode resulting in significant job losses across the sector.

To date, not all companies have been able to navigate the challenging environment. The likes of Virgin Australia and STA travel fell into administration in 2020, while companies like Qantas, Sydney Airport, Flight Centre, and Webjet have been forced to raise emergency funds via discounted equity raisings to survive.

Short term visitor arrivals

Unlike some of the other industries that are expected to experience a rather speedy recovery over the next 12 months, the recovery in international travel remains uncertain. The commentary we are seeing from the likes of Qantas and Sydney Airport indicate that international travel is unlikely to return to pre-COVID levels until 2024, implying a long and slow recovery for industry participants.

Outlook

The economic indicators discussed in this article provide a small snapshot of the severe impact of the COVID-19 pandemic on the local economy, with many indicators recording extreme fluctuations over the June and September quarters. This highlights the critical nature of the monetary and fiscal policy changes implemented by the RBA and the Federal Government to support the economy post March 2020.

Looking ahead, the path to recovery remains uncertain with some industries faring better than others. As such, we are likely to see further coordinated policy responses from the RBA and state and federal governments, most likely in the shape of further targeted stimulus and accommodative monetary policy options.


This information is provided by Lonsec Investment Solutions as a corporate authorised representative of Lonsec Research Pty Ltd who hold an AFSL number 421445. This is general advice, which doesn’t consider your personal circumstances. Consider these and always read the product disclosure statement or seek professional advice prior to making any decision about a financial product. You can access a copy of our financial services guide at lonsec.com.au

This video is provided by Lonsec Investment Solutions Pty Ltd ACN 608 837 583, a Corporate Authorised Representative (CAR 1236821) (LIS) of Lonsec Research Pty Ltd ABN 11 151 658 561 AFSL 421 445 (Lonsec Research). LIS creates the model portfolios it distributes using the investment research provided by Lonsec Research but LIS has not had any involvement in the investment research process for Lonsec Research. LIS and Lonsec Research are owned by Lonsec Holdings Pty Ltd ACN 151 235 406.

Past performance is not a reliable indicator of future performance. This is general advice, which doesn’t consider your personal circumstances. Consider these and always read the product disclosure statement or seek professional advice prior to making any decision about a financial product. While care has been taken to prepare the content of this video, LIS makes no representation or warranty to the accuracy or completeness of the information presented, which is drawn from public information not verified by LIS. The information contained in this video is current as at the date of publication.

Copyright © 2020 Lonsec Investment Solutions Pty Ltd ACN 608 837 583

If the May 2019 Budget was all about back to black, this year’s Budget is all about rescuing and repairing the economy.  

Last year’s Budget forecast a small surplus of 0.4% of GDP in 2019-20, the first surplus since the GFC. In fact, a small surplus of 0.4% of GDP was indeed achieved in 2018-19, but budget deficits as large as -4.7% was forecast for 2019-20, and -10.2% for 2020-21. This compares to the -3.7% deficit at the height of the GFC, making it the deepest since World War II. 

Budget net operating balance (% GDP) 


Source: Treasury, Lonsec
 

How did we get here? 

We’ve had a tumultuous year since last year’s Budget, with bush fires, drought, and a global pandemic. Those negative shocks sank our economy into the first recession since 1991, with GDP contracting 7% in the June quarter. 

With reduced economic activity, tax receipts have reduced. Income taxes collected have fallen on the back of lower employment and hours worked. Company tax receipts have also fallen as many businesses remain shut or operate below capacity. GST revenue declined too, with fewer sales of goods and services. Tax receipts fell across the boardwith the one notable exception being—perhaps appropriately—taxes on the sale of spirits. 

Commonwealth revenue and expenses (% GDP) 


Source: Treasury
 

On the spending side, the government has put in place significant stimulatory measures to support the economy and employment. These include: 

  • $120 billion over 2019-20 and 2020-21, primarily for the JobKeeper payment. 
  • $46 billion mainly in the Coronavirus Supplement, economic support payments to households, and increased JobSeeker payment. 
  • $40 billion to provide further support for apprentices, trainees, hospitals, aviation, and the infrastructure sector. 


S
ource: Budget papers 

Overall, compared to the government’s Economic and Fiscal Update in July 2020, where a small surplus of $12 billion was forecast for 2020-21 (0.6% of GDP), this Budget shows an estimated deficit of $198 billion (-10.2% of GDP). Contributing the most to the deterioration is around $127 billion in additional spending, followed by $42 billion less in expected revenue due to reduced economic activity. 

How are we going to pay for all this?  

The short answer is, with debt. And a lot of it. Commonwealth Government net debt is forecast to rise to 36% of GDP in 2020-21, and even further to 43.8% in 2023-24. This compares to 19% in 2018-19. 

This may sound high, but by international standards Australia’s net government debt level is relatively manageable. Prior to the COVID-19 pandemic, the average net debt level among developed economies was 43% of GDP. The US and UK both had net debt of around 77% of GDP, while Japan had the highest at 155% of GDP. Ratings agency S&P has confirmed Australia’s AAA rating with negative outlook, with Fitch and Moody’s reserving judgement for now.  

With interest rates at historic lows, financing the debt should be a secondary consideration, with the primary focus being to get the economy back on track 

What are the key Budget measures? 

  • $26.7 billion temporary investment tax incentives: Businesses with aggregated annual turnover of under $5 billion can deduct the full cost of eligible capital assets acquired from 6 October 2020 and first used or installed by 30 June 2022. 
  • $17.8 billion of income tax cut: Bringing forward the second stage of the Personal Income Tax Plan by two years to 1 July 2020 as well as a one-off additional benefit from the low and middle income tax offset in 2020-21. 
  • $15.6 billion in additional spending on the JobKeeper Payment: Eligibility has been expanded largely In light of the prolonged restrictions in Victoria. 
  • $10.7 billion in infrastructure spending: Including $6.7 billion in grants to the states, $3 billion for roads and community infrastructure, and $1 billion for water infrastructure. 
  • $4 billion for a JobMaker Hiring CreditTo give businesses incentives to take on additional employees aged between 16 and 35. 
  • Additional measures: Including $1.2 billion to support 100,000 new apprentices and trainees with a 50% wage subsidy and undoing $2 billion cuts to R&D incentives. 

When will we get out of the recession? 

The Treasury forecasts economic activity to pick up from late 2020 and into early 2021. The recovery is expected to be driven by a further easing of restrictions and improvements in business and consumer confidence. Economic activity will be further supported by Government stimulatory measures, both fiscal and monetaryThe RBA has also hinted at further easing, with another rate cut or announcement of further QE widely expected at its November meeting 

The IMF in its June 2020 World Economic Outlook forecast Australian GDP to decline by -4.5% in 2020 before rising by 4% in 2021. While this is our first recession since 1991, Australia’s experience with containing the virus outbreak means the economic is faring relatively well by international standards. For example, the IMF forecast US GDP to contract by -8% in 2020, -10.2% in the UK, and -12.8% in Italy and Spain. 

Yesterday’s Budget forecasts GDP to fall by -3.75%better than the IMF forecastbefore growing by 4.25% in 2021. It also forecasts unemployment to peak at 8% in the December quarter of 2020, before falling to 6.5% by June 2022 as economic activity recovers. Both the GDP and unemployment forecasts are more optimistic than many leading economists believe. 

While the COVID-19 pandemic should be a severe but temporary shock, the path to recovery remains a gradual and uncertain process. This Budget has taken important steps to support the economic recovery, but the speed and magnitude will depend on many other factors, including international health and economic outcomes, as well as domestic business and consumer confidence. 

Broad measures such as income tax cuts and investment allowance will support overall business and consumer confidence, but more targeted measures might be welcomed by more severely affected sectors such as education and tourism. The government also failed to take the opportunity to enact structural reforms such as reforming the tax system or improving overall labour productivity, which would benefit economic growth in the long term. 

Issued by Lonsec Research Pty Ltd ABN 11 151 658 561 AFSL 421 445 (Lonsec). Warning: Past performance is not a reliable indicator of future performance. Any advice is General Advice without considering the objectives, financial situation and needs of any person. Before making a decision read the PDS and consider your financial circumstances or seek personal advice. Disclaimer: Lonsec gives no warranty of accuracy or completeness of information in this document, which is compiled from information from public and third-party sources. Opinions are reasonably held by Lonsec at compilation. Lonsec assumes no obligation to update this document after publication. Except for liability which can’t be excluded, Lonsec, its directors, officers, employees and agents disclaim all liability for any error, inaccuracy, misstatement or omission, or any loss suffered through relying on the document or any information. ©2020 Lonsec. All rights reserved. This report may also contain third party material that is subject to copyright. To the extent that copyright subsists in a third party it remains with the original owner and permission may be required to reuse the material. Any unauthorised reproduction of this information is prohibited. 

In recent weeks we’ve seen increased market volatility. The Nasdaq, which represents the leading technology stocks in the US market, has seen a pull back following an incredible rally, and markets seem to be in a range-trading pattern. We all know the saying that when the US market sneezes, the rest of the world catches a cold, and there is some truth in that.

The much-anticipated upcoming US presidential election is certainly contributing to market volatility. Historically, in the months leading up to US elections, markets have exhibited an increased level of volatility, and it is no different this time. Markets are not political, but they are sensitive to uncertainly, so as we get closer to the election in November, we are likely to see the market gyrate. As to how markets will react to a Republican or Democratic win, history is not conclusive on this, however what has been observed is that in the lead up to an election, avoiding recessions and a positive stock market tend to assist re-election.

On the policy front, attention has shifted from monetary policy to fiscal policy and markets are looking to see to what extent fiscal support will continue to prop up economies across the world. In Australia, as we await the wind back of policies such as the JobKeeper payment scheme, markets will be watching carefully to see if we succumb to the so-called ‘fiscal cliff’ and to what degree some sectors have been supported by government money. The retail sector in particular will be interesting to observe given the incredible rebound and resilience the sector has shown since March, with companies such as Harvey Norman and Nick Scali posting strong sales.

Amidst this backdrop we have not shifted our Lonsec asset allocation views. While we have seen some valuation support appear within Australian equities, much of the value is being driven by down beaten-down parts of the market, such as the banks, and we still think the sector will face challenges in a world dominated by low interest rates, so at this stage we have opted to retain our ‘Neutral’ exposure to Australian equities. If we see a material pull back in markets over the next few weeks or months, we will reconsider our position across Australian and global equities.

Importantly, we have adjusted our portfolios to assist in managing downside risk by taking specific sector and investment strategy tilts within the portfolios, and at the same time having exposure to growth parts of the market should markets appreciate. Alternative allocations such as our gold exposure have performed in line with expectations, holding up better than equity markets on down market days.

In the meantime, buckle up because the ride may be bumpy over the coming months!

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Traditionally a defensive asset class with yield, backed by leases delivering reliable income streams; global listed property appears to be better positioned than most asset classes for a post COVID-19 world.

As at 31 May 2020, G-REITs appear to be attractively priced relative to other asset classes, trading at a -13% discount to Net Asset Values (-4% in May 2019) and at a discount to Global Equities. However, valuations of sub-sectors and regions vary and most Managers are positioning their portfolios according to their assessment of relative value of stocks within their sector and region. While earnings growth expectations for CY2020 have slipped from +4.8% to -3.7%, they are expected to recover in CY2021 as COVID-19 restrictions ease and the situation normalises. G-REITs still offer dividend yields of 3.3% to 5.8% p.a. which are attractive and offer an
above-average premium relative to bonds (+3% to +5%) across all markets.

There has been a close correlation between bond rates and the global property securities sector in recent years, with upticks in the outlook for interest rates coinciding with pull-backs in the value of property securities. Despite the deterioration in operating conditions due to the COVID-19 pandemic, the commitment of central banks to maintaining interest rates ‘lower for much longer’ through expansionary monetary policy and yield curve control is expected to provide support to the asset class. For rental focussed REITs the outlook is underpinned by existing tenants on long leases with in-built rental growth. REITs with large funds management exposure may hold up well (based on ongoing fees), but those with high development exposure are more susceptible in weaker market conditions.

Unlike during the Global Financial Crisis (GFC) of 2008, G-REIT balance sheets are in better shape although many REITs have raised equity capital in order to ensure they can withstand potential reductions in valuations impacting on debt covenants. Gearing is manageable (LVR ~30%), interest rates are low (2-3%), and REITs have a more conservative payout ratio on their corporate earnings component.

The COVID-19 pandemic has in many ways exacerbated and accelerated secular trends and bifurcation between sector ‘winners and losers’. Sectors expected to benefit from the ‘new normal’ include Data Centres, Storage and Manufactured Housing, which have grown materially over the last 10 years, and are expected to continue to outperform based on the rise of the ‘digital economy’ and demographic changes. Another potential beneficiary is the Industrial/Logistics sector, which outperformed during the COVID-19 downturn, and is expected to continue to grow off the back of e-commerce tailwinds. However, access to these sectors comes at a premium.

Residential rental (apartments, multi & single family housing, student housing) is also favoured given the consistency of income and demographic trends, however higher unemployment poses a risk.

On the flip-side, traditional ‘bricks and mortar’ Retail property, the tenants of which were already under pressure pre-pandemic, are expected to face increased weakness particularly from ‘middle’ placed assets (between fortress malls and food-based neighbourhood centres). While earnings will recover once restrictions are lifted, long-term structural issues mean asset values may come under pressure as rents adjust downwards. Hotels/Lodging are expected to recover more slowly and will be heavily reliant on vaccines which remain some time away.

While the ‘working from home’ phenomenon poses a risk to Office demand, astute landlords may look to offer tenants a more flexible model to encourage continuity at the next lease expiry. Expectations are for a rise in vacancy levels and lower net effective rents, although whether this is a cyclical or structural change is still up for debate.

Issued by Lonsec Research Pty Ltd ABN 11 151 658 561 AFSL 421 445 (Lonsec). Warning: Past performance is not a reliable indicator of future performance. Any advice is General Advice without considering the objectives, financial situation and needs of any person. Before making a decision read the PDS and consider your financial circumstances or seek personal advice. Disclaimer: Lonsec gives no warranty of accuracy or completeness of information in this document, which is compiled from information from public and third-party sources. Opinions are reasonably held by Lonsec at compilation. Lonsec assumes no obligation to update this document after publication. Except for liability which can’t be excluded, Lonsec, its directors, officers, employees and agents disclaim all liability for any error, inaccuracy, misstatement or omission, or any loss suffered through relying on the document or any information. ©2020 Lonsec. All rights reserved. This report may also contain third party material that is subject to copyright. To the extent that copyright subsists in a third party it remains with the original owner and permission may be required to reuse the material. Any unauthorised reproduction of this information is prohibited. 

Global equity markets in 2020 had a promising start to the year as the S&P 500 Index reached a new record peak of 3,380 on 20 February 2020, backed by better macroeconomic data and the prospect of reduced geopolitical headwinds (particularly on the US-China trade front).

However, the progressive realisation across financial markets that COVID-19 represented an existential threat to society necessitating the shutdown of whole swathes of the economy triggered a sharp sell down in mid to late March, sending the S&P 500 index falling by 34% to a low of 2,237 on 23 March 2020. The US equities market tripped circuit breakers four times in two weeks (March 9, 12, 16 and 18). The circuit breakers pause trading for 15 minutes in the event of a sudden 7% fall.

Key indices were hit hard as the coronavirus spread globally

Assets with any risk were sold off. Equities expectedly suffered steep drawdowns with the US and Australia, for instance, entering bear markets. This also marked the close of the longest bull market in US history which lasted some 11 years. Credit also suffered heavy losses with high yield nursing a drop of some 20%. US Treasuries retained their safe harbour status with yields collapsing by nearly 30%. The same cannot be said about Australia’s government bonds which experienced rising yields and casting a cloud over fixed income portfolios.

The sell-off was exacerbated by an oil price collapse after Saudi Arabia launched a price war. Oil prices experienced their worst quarter in history with prices dropping by close to 26% in the US on March 9 after Saudi Arabia dissolved a pact with Russia to curtail production. The prospect of reduced global demand due to COVID-19 forced the oil prices to enter in negative territory in April 2020 for the first time ever, as producers ran out of space to store the oversupply.

This rekindled fears for the solvency of the US shale industry from 2015/2016 when the world was last awash with oil. There was concern in markets then that there would be mass failures which would particularly rattle high yield bond markets. The worst concerns weren’t then realised but have re-emerged with COVID-19 and Saudi actions.

Investors are venturing out of safehaven assets

The deep recession in Q1 2020, fuelled by public health, economic, and energy crises, caused investors to start piling into expensive defensive and growth sectors like healthcare, information technology and consumer staples. In contrast, cyclical sectors such as banks, airlines, energy and travel stocks were hit hard.

As the economies went into hibernation to stop the spread of the coronavirus, major central banks slashed rates and restarted asset purchases, while G20 governments promised $5 trillion stimulus packages to moderate the economic impact of the pandemic. Such aggressive measures by policymakers globally boosted the safehaven assets such as government bonds and Gold. US Treasuries had their best quarter in Q2 2020 since the GFC and Gold price reached an all-time high of close to $2000/ounce in August 2020.

In Q2 2020, investors’ risk appetite gradually returned with the easing of COVID-19 lockdown restrictions and excessive monetary and fiscal stimulus measures announced across the world. This led to the recovery of equity markets with S&P 500 officially entering a bull market on August 18, reaching an all-time high of 3,500. While the S&P 500 index has returned to pre-pandemic levels, there is a sharp contrast in the gains of various sectors, with only 38% of stocks (primarily healthcare and information technology) in the index reporting gains over that period.

Which strategies worked?

Lonsec monitored a number of strategies within the global equities sector during the depths of the crisis that were deemed higher risk due to their market exposure, central bank or government policy intervention, market volatility, and illiquidity or possible high volumes of redemption requests.

While the market has now settled, we saw funds operating within hedged variation strategies, Emerging Markets, Quantitative, Natural Resources, and Fundamental Value, posting deep declines in the first quarter of 2020. Unsurprisingly, COVID-19 induced discrepancies in the wider sectors favoured growth managers over value (and the benchmark).

Value-style funds have endured a long period of underperformance relative to growth-biased peers in a long bull market favouring large technology firms. Lonsec notes that the Value managers under its coverage are not necessarily buying ‘junk’ stocks and that a volatile downturn such as this can be used as an opportunity to buy well-capitalised businesses at cheaper prices. While this sub-sector returned 3.7% for the June quarter, ranking at the lower end of the global equity spectrum, this remains a positive sign for those dogmatic value-oriented managers.

Lonsec notes that the funds management industry had been refocusing on systematic strategies which offer the promise of consistent and repeatable alpha but with scalability and cost advantages demanded by investors. Sadly, the average product in the Quantitative cohort experienced similar weakness to Fundamental Value due to a heavy dose of ‘value’ in addition to momentum in their quantitative models’ building blocks.

Quantitative strategies in general have struggled to price assets in current markets, as their processes are designed to function in ‘normal’ market conditions, when the market is operating according to fundamentals and long-term observations. The uncertainty, volatility, and leverage are causing pain generally across the sector. Performance for the average systematic product over Q1 2020 was -15.3%, compared to -3.0% per annum over the 12 months to 30 June 2020. Pleasingly, the average Managed-Volatility strategy outperformed its vanilla Quantitative peers, collectively returning -8.6% over the March quarter.

Typically emerging markets-oriented strategies tend to get caught up in a flight to quality, although Lonsec notes the Asia sub-sector (-7.6%) held up better than developed markets during Q1 2020 due in part to the relatively fast and well-organised response to COVID-19 within the region, presumably as a result of lessons learned in the past. The same cannot be said of regional India strategies (-20.8%), which suffered heavy losses given the country’s less successful containment efforts.

Other factors at play include the greater cyclical exposure generally within emerging market regions due to the greater exposure to commodities and energy from countries within the Latin America and Middle East regions, as well as Russia. As mentioned, dispersion has also considerably widened among stocks as the market punished companies exposed to discretionary spending (i.e. travel) and in highly cyclical sectors (i.e. energy), while rewarding those stocks that were unaffected or ended up benefiting from the new environment, most notably technology firms. Such dispersion is, however, an attractive environment for active managers to add considerable alpha.

Issued by Lonsec Research Pty Ltd ABN 11 151 658 561 AFSL 421 445 (Lonsec). Warning: Past performance is not a reliable indicator of future performance. Any advice is General Advice without considering the objectives, financial situation and needs of any person. Before making a decision read the PDS and consider your financial circumstances or seek personal advice. Disclaimer: Lonsec gives no warranty of accuracy or completeness of information in this document, which is compiled from information from public and third-party sources. Opinions are reasonably held by Lonsec at compilation. Lonsec assumes no obligation to update this document after publication. Except for liability which can’t be excluded, Lonsec, its directors, officers, employees and agents disclaim all liability for any error, inaccuracy, misstatement or omission, or any loss suffered through relying on the document or any information. ©2020 Lonsec. All rights reserved. This report may also contain third party material that is subject to copyright. To the extent that copyright subsists in a third party it remains with the original owner and permission may be required to reuse the material. Any unauthorised reproduction of this information is prohibited. 

Important information: Any express or implied rating or advice is limited to general advice, it doesn’t consider any personal needs, goals or objectives.  Before making any decision about financial products, consider whether it is personally appropriate for you in light of your personal circumstances. Obtain and consider the Product Disclosure Statement for each financial product and seek professional personal advice before making any decisions regarding a financial product.