JUNE 2017 QUARTERLY MARKET COMMENTARY

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1 JUNE 2017 QUARTERLY MARKET COMMENTARY Market Commentary Australia: The Reserve Bank of Australia (RBA) left the cash rate unchanged at 1.5% in the June quarter The Australian seasonally adjusted unemployment rate for June fell to 5.6% from 5.9% at the end of the March quarter The Australian Dollar (AUD) appreciated relative to the US Dollar (USD), closing at US cents at the end of June 2017 (up from US cents at the end of the March quarter) Australian equities The Australian share market, as measured by the S&P/ASX 300 Accumulation Index, returned -1.6% over the June quarter, driven by a single negative month in May (-2.7%). The strongest performing sectors over the quarter were Industrials (8.7%), Healthcare (7.1%) and Information Technology (5.7%). The weakest performing sectors over the quarter were Financials (-4.4%), Consumer Staples (-5.3%) and Energy (-5.9%) and Telecommunications (-8.0%). International equities International equities achieved solid returns over the quarter with the depreciation of the Australian dollar adding to returns. The MSCI World ex-australia Accumulation Index returned 3.6% (including the impact of currency movements) but if the impact of currency movements are removed, this equated to a return of 3.2%. The weaker performing regions (including the impact of currency movements) were the UK (4.3%), Japan (4.8%) and North America (2.4%). Emerging Markets (5.8%), Asia Pacific (ex-japan) (7.0%), and Europe (ex-uk) (8.0%) were the three best performing regions. Property The Australian listed property sector posted a negative return with the S&P/ASX 300 Property Accumulation Index returning -3.1% over the quarter. Global listed property experienced positive returns, delivering 1.7% for the quarter as measured by FTSE EPRA/NAREIT Developed ex-australia Rental Index (AUD hedged). Bonds and Cash The RBA Board maintained the official cash rate at 1.5% in its June meeting. The minutes of the meeting noted a continued improvement of global economic conditions in 2017, although headline inflation and core inflation remain low. Australian GDP growth of 0.3% in the March quarter was in line expectations and brought growth for the year to 31 March to 1.7%, ahead of consensus estimates of 1.5%. Growth was driven by increases in electricity, gas, water and waste services which rose 3.2% for the quarter, the fastest increase for the division since the fourth quarter of 2009; nominal output growth over the March quarter was also observed, supported by strengthening terms of trade over the quarter. Labour markets continued to be a contentious topic as the disproportionate growth in part-time work 1

2 persisted, evidenced by the number of employed people who would like to work more hours remaining steady, despite unemployment falling. The minutes commented on a general cooling in national housing markets, with residential construction slowing, price growth and auction clearance rates declining, and housing credit growth remaining steady; although it was noted that this may be due primarily to poor weather conditions and isolated pockets of weakness, particularly in Perth and Brisbane. Given the uncertainties discussed above, the Board decided that the current cash rate of 1.5% remains consistent with its goal of delivering sustainable economic growth and meeting long term inflation targets. Global bond yields changed little over the June quarter. The Euro area 10-year Government Benchmark bond yield came in at 1.07%, down from the March quarter end yield of 1.46%. The UK 10-year government bond yield increased slightly from 1.14% p.a. to 1.26% p.a. over the three months while the German 10-year bond yield increased slightly from 0.33% p.a. to 0.47% p.a. The US 10-year government bond yield marginally decreased from 2.39% p.a. to 2.30% p.a. over the June quarter. Quarterly asset class performance chart 15% Australian Equities 10% International Equities (Unhedged) International Equities (Hedged) Australian Direct Property 5% Global Listed Property (Hedged) Australian Nominal Bonds 0% Global Nominal Bonds (Hedged) Australian Inflation Linked Bonds -5% Australian Cash 2

3 Investment option performance The performance of each investment option for the quarter ended 30 June 2017 and over 1, 3 and 5 years to 30 June 2017 is summarised below. The underlying investment option performance shown is net of investment manager fees and an allowance for tax and will not be exactly the same as the earnings of each individual member due to individual account activity and provision made for certain fees, charges and other allowances. Members have earnings applied through changes in the investment option unit price. Unit prices are determined weekly. Pre-mixed investment option performance Growth option The return for the Growth option was +2.0% over the quarter, +12.0% over 1 year, +8.1% p.a. over 3 years and +11.0% p.a. over 5 years. Higher risk assets performed relatively well over the quarter, with the Growth option s exposure to overseas shares particularly beneficial to performance. On a relative basis the Growth option s returns were lower than the Aggressive option but were higher than the Moderate option s returns over the quarter. Aggressive The Aggressive option returned +2.1% over the quarter, +1% over 1 year, +9.1% p.a. over 3 years and +12.4% p.a. over 5 years. The Aggressive option also performed well over the quarter outperforming all other pre mixed options. Similar to the Growth option, the Aggressive option s performance was aided by exposure to overseas shares. Moderate The Moderate option returned +1.5% over the quarter, +8.0% over 1 year, +6.0% p.a. over 3 years and +8.2% p.a. over 5 years. The Moderate option had a positive quarter but with lower returns than other pre-mixed options due to its relatively high allocation to defensive asset classes such as bonds and cash. During periods of strong returns the Moderate option is expected to provide lower returns than the Growth and Aggressive options, due to its lower exposure to growth-orientated assets. However, when share markets fall, the Moderate option is expected to be less affected. 3

4 Asset class investment option performance Australian shares The Australian shares option returned -0.2% over the quarter, +16.5% over 1 year, +9.3% p.a. over 3 years and +14.1% p.a. over 5 years. The Australian shares option outperformed its benchmark over the quarter and remains above benchmark over 1, 3 and 5 years. Overseas shares The Overseas shares option returned +4.2% over the quarter, +17.4% over 1 year, +10.4% p.a. over 3 years and +15.7% p.a. over 5 years. The Fund s overseas shares portfolio achieved positive returns over the quarter, benefiting from the very strong performance of European equities. Overseas markets have performed strongly over the past 5 years and is commensurate with the Fund s performance. Property The Property option returned +2.5% over the quarter, +10.1% over 1 year, +10.4% p.a. over 3 years and +9.9% p.a. over 5 years. Property returns were largely attributed to Australian unlisted property, returning +3.5% for the quarter. Global listed property also positively contributed to return over the quarter. Bonds The Bonds option returned 0.9% over the quarter, +1.1% over 1 year, +3.1% p.a. over 3 years and +3.7% p.a. over 5 years. Although all of the Fund s bonds sectors experienced positive absolute returns, performance was slightly below the benchmark over the quarter. Cash The Cash option returned +0.5% over the quarter, +2.6% over 1 year, +2.5% p.a. over 3 years and +2.7% p.a. over 5 years. Looking forward Global economic activity is currently broadly in line with normal levels and major investment markets are expected to achieve positive returns over the next five years. However, the current environment of government policy uncertainty (particularly in the US) and political transitions has increased risks to both growth and inflation and therefore there remains significant uncertainly over investment market performance over shorter timeframes. The commentary in this report is provided by the Fund s investment consultant Willis Towers Watson. This report is designed to provide an insight into the investment option choices that are available to you. The information does not constitute financial advice, nor should you make any decisions based on this information alone, and in particular please note that past performance is not a reliable indicator of future performance. You should consider consulting a professional financial adviser before making any investment decisions. 4

5 PRE-MIXED OPTIONS Actual Asset allocations (%) Moderate Growth Aggressive 35% 17% 16% 13% 19% 6% 14% 18% 34% 27% 15% 10% 40% 35% Australian Shares International Shares Property Alternative Assets Private Capital Bonds Cash Other Investment Performance (%) Quarter 1 Year 3 Years 5 Years - Quarter 1 Year 3 Years 5 Years - Quarter 1 Year 3 Years 5 Years * Figures may not sum to 100% due to rounding The underlying investment option performance shown is net of investment manager fees and an allowance for tax and will not be exactly the same as earnings of individual members due to individual account activity and provision made for certain fees, charges and other allowances. Please note that all 3 & 5 year investment performance numbers are expressed as a percent per annum. This document was prepared and issued by (ABN RSE R ) which includes Kinetic Smart Pension (KSP). 5

6 ASSET CLASS OPTIONS Actual asset allocations (%) Cash Bonds Property Overseas Shares Australian Shares 100% 100% 100% 100% 100% Investment Performance (%) Cash Bonds Property Overseas Shares Australian Shares The underlying investment option performance shown is net of investment manager fees and an allowance for tax and will not be exactly the same as earnings of individual members due to individual account activity and provision made for certain fees, charges and other allowances. Please note that all 3 & 5 year investment performance numbers are expressed as a percent per annum. This document was prepared and issued by (ABN RSE R ) which includes Kinetic Smart Pension (KSP). 6