Investor risk-on behaviour that was clearly on display in the first quarter 2019 continued in April. Risk assets performed strongly across the board, particularly in AUD terms. Weaker AUD boosted returns for investors with offshore unhedged investments. Many risk assets have now recovered the losses incurred during the fourth quarter of 2018 with the year to date returns now in higher double digits. Defensive assets generally held up well despite the strong risk-on theme. The dovish policy stance of central banks around the world, and Fed Reserve in particular, is likely to support risk assets in the short to medium term.
- Risk assets continue to advance, Global unhedged equities lead
- After a strong first quarter performance, risk assets continued to advance in April 2019.
- The risk on behaviour of investors was triggered by the shift in the monetary policy stance of the Federal Reserve, Bank of United States and subsequently by other central banks around the world.
- Broad global equities indices (MSCI ACWI and MSCI ex-Aust) delivered over 4% return in April which is expected to be up nearly 16% for the calendar year.
- Small and mid-cap companies globally and in Australia also performed strongly as investors chased higher risk sectors and segments of the market.
- Bond proxy assets had mixed results – while Global infrastructure and EM REITS advanced, A-REITs and Global DM REITs retreated after strong perfor-mance in March quarter.
Exhibit 1: Risk assets continue their advance from first quarter 2019, double digit returns recorded so far
2. Defensive assets held up well de-spite the risk-on behaviour evidenced during the month
- Bond asset classes delivered flat results over the month.
- FTSE World Global government bond index and Barclays Aggregate Global Bond index were flat for the month. Both indices are up by 5% on a 12-month basis.
- Bloomberg Australian composite bond index delivered 0.3% return for the month, to be up 7.8% on a 12-month basis.
- Gold which is often treated as a defensive asset also remained flat for the month but was up 4.5% over the past 12 months.
Exhibit 2: Risk assets fully recover their Q4 drawdown, double-digit returns recorded so far in 2019
3. AUD was weak against most major currencies except Swiss Francs and Korean Won.
- Australian Dollar Index (trade weighted) weakened slightly over the month.
- The biggest relative losses were noted against the USD and British Pound.
- The biggest gains were noted against the Swiss Francs and Korean Won
- The volatility of AUD/JPY continues to be abnormally high, tracking its 5-year annualised average.
- The volatility of AUD/CHF is also ex-tended and is closely tracking its 15-year average
- From the dataset, it appears that the Swiss Francs (CHF) has lost its stripe as a safe heaven currency for now.
Exhibit 3: AUD was generally weaker across its major trading partner currencies
4. Weaknesses in AUD over the past year across most major currencies deliver positive currency effects for unhedged investors.
- The FX moves over the past 1 year, 3 years and 5 years have translated into positive currency effects for unhedged defensive and growth assets
- The unhedged developed market Global equity investors realised a positive currency effect of 5.6% over the past year, 1.4% over the past 3 years and 3.2% over the past 5 years.
- Similar quantum of positive currency effects have been recognised across Global Listed Infrastructure (unhedged) and Global DM REITs although the 12-month pick-up in FX effect for Global Listed Infrastructure was lower at 3.5%.
- Overall, the favourable currency moves (such as weaker AUD) have accounted for a substantial proportion of 12-month total returns delivered by offshore growth assets.
Exhibit 4: Unhedged Defensive and Growth assets benefited substantially from weaker AUD over the past 12, 36 and 60 months
5. Analysis of correlations and volatilities continue to demonstrate the benefits of multi-asset diversification for investors.
- Longer-term volatility trend continues to rise for growth assets and in particular small and mid-caps.
- The most volatile asset over the past 12 months in AUD was Global Small caps (ex-AUST), GREIT -EM, followed by Australian small and micro-caps.
- The least volatile outside of Cash was Australian and Global Bonds. The realised 12-month volatility for Australian bonds was 2.1% whilst for Global bonds (Aggregate), it was 2.3%.
- The Global listed infrastructure – DM, had the lowest volatility (9.4%) among growth asset classes.
- Evidence from correlation analysis shows that multi-asset investors continue to benefit from cross-asset diversification with most defensive and bond proxy growth assets continuing to offer good diversification benefits against the most dominant holdings for most investors – Australian shares.
Exhibit 5: Risk assets continue their advance from first quarter 2019, double digit returns recorded so far in 2019
Investors with a growth and offshore (unhedged) bias in their multi-asset portfolios have been well rewarded over the past 12 months and beyond. This is despite bouts of volatility and uncertainty around the global economic outlook, trade wars, geopolitical risk and valuation concerns. Clearly, central bank policies have played a role in these positive outcomes. The outlook, while solid will remain volatile and subject to uncertainty. Hence, holding a genuinely diversified portfolio with a well thought-out cyclical positioning will allow investors to ride-out any short-term gyrations in the market.
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