This month we look at why being invested (and remaining invested) in the market is the key to long term investment success.
The temptation to “time” the market and deviate from your strategic asset allocation during volatile markets is strong. The opportunity cost, however, can be great.
The chart shows the impact that missing the best trading days of the Australian equities market (S&P/ASX300 Accumulation Index) can have on investment returns.
If you were invested in the market for the full period (June 2008 to June 2023) the annualized return would have been 6.73%. However, if you mistimed the market, and missed out on the best 50 trading days over the same period, the annualized return would have been -5.34%.
By being out of the market, you risk missing out on market rallies which tend to follow market downturns.
October saw the ASX 200 finish down 3.8%, marking the third consecutive month of negative returns. 10 of the 11 sectors finished in the red, with Utilities finishing October as the only gainer (1.7%). Several factors have contributed to the drag on returns, including stubborn inflation, rising bond yields, tentative company earnings outlooks and ongoing geo-political tension.
Expectations for a November RBA rate rise were high following accelerating retail spending data and a stickier-than-expected inflation report. This sentiment of rising interest rates was echoed in the yield-sensitive Real Estate sector as it saw a significant downturn.
In all, the ASX 200 retreated in October, indicative of the significant headwinds that the local market continues to face.
Global equities had another negative month across the board. Investor concerns continue around interest rates remaining higher for longer. US equities declined following the Federal Reserve’s stance of a “restrictive” policy until inflation seems to ease. This saw the S&P500 Index decline by -2.1% (in local currency terms) during the month. The same concerns were raised in the UK, also holding interest rates at 15-year historical highs. The FTSE 100 Index returned a loss of -3.7% (in local currency terms) for the month.
Equities across Asia were also predominantly negative. China’s economic growth recovery plans have seen relative slowdown, with headwinds in the real estate sector and investor pessimism around the levels of Government involvement. This was reflected by the CSI 300 Index, returning -3.1% (in local currency terms) for the month.
Michele Bullock kept the cash rate at 4.10% in her first meeting as Governor of the RBA. The Australian economy has remained strong and has meant inflation has been slower to fall. The market expected, and received, another rate hike at the RBA’s November Cup Day meeting with the official cash rate moving up by 25 bps to 4.35%.
Yields in the US continued to rise this month with US 10-Year Treasury note yields rising 36bps and 2-Year Treasury note yields rising 5bps. Strong economic data has kept central banks hawkish, and a peak this month in yields represented the highest yields for US 10-Year Treasury since 2007. However, the strong job market has maintained higher consumer spending levels and future rate hikes may lead to further rate hikes from the Fed.
Local and Global REITs continued to sell off during October. Domestically the A-REIT index (represented by the S&P/ASX 200 A-REIT Accumulation Index) ended the month –5.8% lower. Global REITS (represented by the FTSE EPRA/NAREIT Developed Ex Australia Index (AUD Hedged)) slightly outperformed the local REIT index, albeit still experiencing a significant drawdown of –4.4% during the month. Australian infrastructure finished lower through October, with the S&P/ASX Infrastructure Index TR returning –3.1% for the month.
The Australian residential property market experienced a +0.9% change month on month represented by Core Logic’s five capital city aggregate. Perth (+1.6%), Brisbane (+1.4%) and Adelaide (+1.3%) were the best performers. Notably, all five cities experienced positive change month on month through October.
