InvestSMART Balanced Portfolio Update - December 2018

The diversification of the Balanced Portfolio meant it was able to withstand the volatility of the markets reasonably well considering most equity markets corrected and, in some instances, even entered bear markets (defined as a decline of 20% or more).

The Balanced Portfolio declined -4.64% as the growth side of the Portfolio was hit by the volatility.

The Vanguard MSCI index International Shares ETF (VGS) detracted -2.55% from overall performance. VGS has a 63% exposure to US markets which experienced their worst quarter in almost 10 years and its worst December in over 50 years. However, all international markets declined in the final quarter which explains why VGS performed so poorly in Q4.

International markets will be monitoring two key events during the first quarter of 2019 – the ‘finalisation’ of Brexit and US Q4 earnings season. US earnings season has already taken on a bigger meaning from an Australian-centric point of view after Apple signalled out China as the reason it will miss its original revenue estimates. If other US-listed firms follow suit and downgrade earnings due to Chinese demand issues, it’s likely the ASX will see downward pressure given Australia’s reliance on Chinese demand for Australian goods and services.

The iShares Core S&P/ASX 200 ETF (IOZ) detracted -1.87% from the overall performance of the Balanced Portfolio as the ASX was also swept up in the global sell-off. Adding to the downward pressure was the tail end of the Banking Royal Commission which saw increased speculation that the impact of regulation will be a theme of 2019 and beyond. Considering over 40% of the ASX 200 is made up of companies in the Financials sector, the possible impact of regulation has started being priced into future earnings.

Through the first quarter of 2019, the ASX will face several events that may turn out to be negative in nature. The first of these events is the H1FY19 earnings season which is likely to see downgrades considering global uncertainly around growth. The other is Chinese Lunar New Year, a cyclical issue each year. During this period Chinese demand plummets as China celebrates the festive season. This tends to cause bulk commodity prices to fall and these tend not to recover until late April.

The ‘defensive’ side of the portfolio did see capital gains over the quarter as investors shed risk. The iShares Core Composite Bond ETF attributed 0.4% to the portfolio in Q4. The Vanguard Global Aggregate Bond Index (Hedged) ETF (VBND) also saw inflows and attributed 0.14% over the same period. If the ‘risk-off’ sentiment from Q4 carries through into Q1, we expect the defensive side of the portfolio to see further upside which will buffer the portfolio during this period of volatility.

To see more information on our Balanced Portfolio, click here. 

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