InvestSMART High Growth Portfolio Update - December 2018
Growth assets suffered heavily in the final quarter of 2018 as markets questioned the future of global output, the rate tightening cycle by the US Federal Reserve and the impacts of the US-China trade war. These issues caused a complete reversal for the Vanguard MSCI Index International Shares ETF (VGS) in the December quarter. After attributing 3.57% in the September quarter, VGS detracted -5.22% in overall performance in the final quarter.
The ‘finalisation’ of Brexit and US Q4 earnings season are the two key events that international markets will be tracking in the first quarter of 2019. Apple has already singled out China as the reason it will miss its original revenue estimates, which indicates this quarter’s US earnings season could have an even greater impact from an Australian-centric point of view. If other US-listed firms follow suit and downgrade earnings due to declining Chinese demand, the ASX will likely feel the brunt of this given Australia’s reliance on Chinese demand for Australian goods and services.
The iShares Core S&P/ASX 200 ETF (IOZ) also suffered due to ‘risk-off’ trading, which became a worldwide phenomenon and detracted -3.24% over the quarter. Adding to the downward pressure from global markets was the tail end of the Banking Royal Commission. This fuelled greater speculation that regulation, and its impacts, will become a more prominent theme in 2019 and beyond. Considering over 40% of the ASX 200 is made up of companies that fall under the Financials sector, this has already begun to be priced into future earnings.
There are several events that may roadblock the ASX in the first quarter of 2019, the first of which is H1FY19 earnings season where we are likely to see downgrades considering uncertainly around global growth. The other is Chinese Lunar New Year. This is a cyclical issue every year. It’s a period where Chinese demand plummets as China celebrates the festive season. As a result, bulk commodity prices generally fall over this period and, as the trend goes, they tend not to recover until late April.
The High Growth Portfolio, however, is diversified with a portion of its weightings focused on defensive assets designed to mitigate the portfolio from being overexposed to one asset class. The iShares Core Composite Bond ETF (IAF) attributed 0.04% while the Vanguard Global Aggregate Bond Index (Hedge) ETF (VBND) added 0.02% in the final quarter as both domestic and international bonds markets saw solid inflows. Diversification will be key over the coming short-term period as this helps create a buffer from single-asset volatility.
In saying that, this portfolio’s fundamental focus is strong long-term growth and has an investment horizon of 7 years. Although the current correction has impacted the short-term performance, we believe the current conditions are providing entry points for those looking for long-term capital growth.