Monthly Musings: The Market's 'Quiet Achievers'

Equities had another impressive month and, in most cases, performed better than the normal monthly average return.

Key takeaways:

• Domestic and International equities continue to outperform
• Fixed interest settled back to normal after a very abnormal three month start to 2021
• Cash sees strong inflows despite its continued poor performance
• Property remains mixed despite price surges in housing

The ASX 200 rose 3.5 per cent in April to once again be middle of the pack when compared to its MSCI developed market peers. Once again it was the US that impressed, with the S&P 500 adding 5.3 per cent over the month and now up over 10 per cent since the beginning of 2021. As the largest international exposure in our portfolios, the S&P 500 continues to be a key driver of overall total performance.

Interestingly enough, looking deeper into the ASX 200 performance shows it has room to move compared to global peers as once again ‘Growth’ (i.e., industrial, tech and material stocks which the ASX 200 lacks in size) outperformed ‘Value’ peers. Not by much it must be noted, only 0.3 per cent, but this trend has been happening for several months and that meant the broader All Ordinaries index reached a new record all-time high in April whereas the Value-heavy ASX 200 did not.

On the whole, equities continue to be strong achievers and are likely to maintain this position for the coming period as governments and central banks continue to support their respective economies with high amount of stimulus and loose policy settings.

What also assisted equities with their performance was a ‘settling down’ of the fixed income markets which had been under real pressure in the first quarter of the year. We should stress that what caused the sell off at the start of the year -- the rising expectation that inflation will take off -- has not gone away.

In fact, the April inflation data in the US was at its highest level since 2007, at 4.2 per cent year on year. Core inflation (not including food and energy prices) was 3 per cent, is a full 1 per cent above what the US Federal Reserve wants inflation to be and the strongest rise since 1981. The caveat here is that this time last year was the peak of the COVID crisis in the US and thus the gains are distorted but there is still a risk that inflation may run harder than expected. We are therefore still cautious and believe that fixed income markets may experience further pressure if inflation continues to be well above what is seen as ‘sustainable’ levels.

We should also highlight cash. The number of households investing in cash is reaching new records. According to APRA a further $8.6 billion of household investments entered the cash markets, taking total cash deposits across Australia to $1.123 trillion. That is a staggering amount of money. What is also concerning about this trend is that cash as an investment is continuing to lose ground.

The average yield on cash deposits currently sits at 0.87 per cent per annum due to the record all-time low cash rate. Once you factor in inflation, the real yield on cash is actually negative, meaning the $1.123 trillion in household cash investment is actually contracting every year. This is something that we believe investors need to consider when looking at their long-term total returns.

In fact, the story inside cash is why we strongly believe in our diversified portfolios. They spread your risk across asset classes to a level of risk you are comfortable with. Cash also shows that even an asset considered to be the least risky asset you can invest in still has risks for your capital returns and also shows why you should never put all your investment funds into one type.