Fund Manager's View
Share markets continue to weaken
Global investment markets have had a pretty shaky start to the year so far as they continue to battle rising market volatility and concerns about the outlook for the world economy. Here, Dirk Morris, CEO of BT Investment Management, takes a look back at what’s been happening over the last few months and what investors might expect over the rest of 2008.
It’s been a pretty difficult start to the year for global share markets, with some having fallen as much as 35% from last year’s highs on the back of ongoing problems in global credit markets and increasing concerns over the outlook for the US economy. Just last month, several of the world’s leading financial institutions were forced to announce additional write-downs and credit losses relating to the US sub-prime mortgage market, and there is now some speculation that total losses could rise from around US$188 billion currently to as high as US$350 billion 1.
At the same time, we’re beginning to see increasing evidence that the US economy is weakening. A combination of rising unemployment and a housing market in perpetual freefall has seen consumer confidence in the US slump to 16-year lows.
What makes this so important, of course, is that the US consumer actually accounts for around 70% of all US economic activity, meaning any slowdown in consumer spending will have a significant impact on future economic growth. So far this year, the US share market is down 9.92% 2 and this has had an obvious ‘knock-on’ effect on bourses elsewhere, including the UK, Europe and Asia.
Unfortunately, weaker global share markets had an adverse effect on the performance of BT’s flagship international share fund — the BT International Fund — which returned -12.58% in the March quarter. Given the current market environment, we’ve now positioned the fund more defensively, with a preference for larger markets that we believe offer good value, such as the UK and Japan.
We’ll also continue to invest less in markets that we consider to be relatively expensive, such as Canada. But I think it’s important to note as well that, in addition to rising market volatility, the strength of the Australian dollar this year has also hindered the returns of Australians invested overseas.
Australian economy holding up
Despite what’s been happening in global markets in recent months, the underlying strength of the Australian economy has remained relatively robust. However, domestic inflation concerns and two interest rate hikes — in February and in March — were enough to push the S&P/ASX 300 Accumulation Index 14.61% lower over the March quarter.
The weakness in the local market was reflected in the performance of our flagship BT Australian Share Fund, which returned -14.43% over the quarter. But despite the fund’s poor returns, it did perform relatively well against the broader market. This is because we’ve invested only in stocks we believe offer good fundamental value, such as Rio Tinto, Oxiana and Qantas. We believe Rio and Oxiana will continue to benefit from China’s thirst for raw materials, while Qantas, in our opinion, is still very much undervalued by the market.
At the same time, we’ve also avoided investing in highly-leveraged companies and companies exposed to what’s been happening in the US and the rest of the world.
As we move into the next quarter, the Fund’s focus is now very much on identifying those companies that have been sold down on the back of recent market volatility but which we expect to perform well in tougher market conditions.
Listed property funds mixed
Market volatility has had a major impact on the Australian listed property sector lately, with the S&P/ASX 300 Property Accumulation Index falling 19.14% in the March quarter thanks to a combination of rising interest rates and ongoing problems in global credit markets.
We’ve already seen a number of highly-leveraged companies, such as Centro Properties and Valad Property Group, take a hit as banks become more and Global share market performance, March quarter 2008 more reluctant to lend, and this has had a significant effect on investors’ confidence.
Needless to say, the returns from our flagship BT Property Securities Fund were weaker over the quarter, down 18.35%. On the positive side, though, the fund has managed to avoid the likes of Centro and other highly-leveraged stocks vulnerable to the current credit market crisis, and we’ll continue to invest only in companies with low levels of gearing, reliable income streams and good management teams; companies like Commonwealth Property Office Fund and CFS Retail Property Trust.
I think it’s also worth noting that, in our view, we’re probably nearing the bottom in the Australian listed property market and that we still anticipate reasonable medium- to long-term gains from the sector. By contrast, global listed property markets rallied over the quarter — helped by falling interest rates in the US and UK — and this benefited our BT Global Property Fund, which returned 0.48% over the period.
Global bond funds positive
Global bond markets have performed relatively well in recent months, with the inevitable ‘Flight to Safety’ seeing investors offloading shares in favour of government debt. A series of rate cuts by the US Federal Reserve (Fed) has seen US 10-year bond yields fall sharply (prices higher) this year, and this had a positive effect on our flagship BT Global Bond Fund, which returned 4.90% in the March quarter.
With concerns over the outlook for the US economy intensifying, it’s very likely that we’ll see global bond yields continue to fall over the coming months, which should ensure further gains for the Fund in 2008.
In contrast to global bond markets, the Australian bond market has struggled of late, with yields moving higher (prices lower) as the Reserve Bank of Australia continued to raise interest rates to help battle inflation. Our flagship BT Fixed Interest Fund suffered as a result of the weaker domestic bond market, returning just 1.12% over the period, though performance was also hampered by the ongoing problems in global credit markets, which saw a negative contribution from the fund’s credit portfolio.
Diversified funds, which invest across multiple asset classes and which typically come into their own during times of market volatility, have also struggled so far this year. Our flagship diversified fund — the BT Active Balanced Fund — returned -9.43% in the March quarter, with our allocation to international and domestic shares impacting performance. Losses were limited, however, by the Fund’s investments in global bonds and alternative assets.
Where to from here?
With the economic news out of the US likely to get worse before it gets better, we’re undoubtedly going to see further market volatility in the near-term, though recent moves by the US Federal Reserve to lower interest rates should limit the chance of a long-term bear market. The Bank has already cut interest rates three times this year in a bid to maintain economic growth and it certainly appears ready to cut further if necessary.
The Australian economy should remain relatively robust compared to some of its global counterparts, though there are a couple of factors that will determine the direction of the local market in the medium-term.
The first is the impact that any slowdown in the US will have on China. Australia has benefited considerably from Chinese growth in recent years so if that growth begins to slow, it will have an obvious effect on our own market.
The second factor is whether the Australian consumer is able to withstand the ‘triple whammy’ of rising interest rates, higher household debt levels and falling share prices. We think that they can, though the risks obviously remain skewed to the upside.
Here at BT, we’ve stepped up our focus on ensuring that we have the right valued stocks and the right levels of diversification and risk within our portfolios, whether its Australian shares, listed property or fixed income, and we will continue with this strategy in the current market environment.
2_Returns to 31 March 2008. US share market measured by the S&P 500 Index.