1Q Cross Asset Review Paper

In this month’s Cross Asset Review, we assess the past performance of various asset classes and draw implications for multi asset investors. During the month of January, Risk-on trade continued despite spikes in fear gauges. The worst performing asset classes were Global and Australian REITs, Global and Emerging Infrastructure as well as Gold. The Australian dollar index closed slightly lower (-0.6%) over the month after rallying strongly over the past 6 to 9 months against major pairs. The continued monetary and fiscal support around the world and broadening of the vaccine rollout program is likely to provide ongoing support for cyclical recovery in economies, business cycle and earning.

Periodic Asset Returns as of 31/01/2021

Risk-on trade continued in January despite spikes in fear gauges

Risk assets closed higher over the month despite volatility spikes late into the month of January. Both local and USA equity market volatility index spiked. Gold lost 1.8%.

The best performing assets in AUD over the month were Commodities, Australian Micro-cap equities, Emerging market Equities, MSCI World Small Caps and Frontier Market equities.

A range of asset classes closed flat (returns between – 0.5% to +0.5%). These included Australian shares, Australian and Global Bonds and Global equities.

The worst performing asset classes were Global and Australian REITs, Global and Emerging Infrastructure as well as Gold.

The Australian dollar index closed slightly lower (-0.6%) over the month after rallying strongly over the past 6 to 9 months against major pairs.

The continued monetary and fiscal support around the world and broadening of the vaccine rollout program is likely to provide ongoing support for cyclical recovery in economies, business cycle and earning.

Periodic-Asset-Returns- 1Q Cross Asset Review Paper

Asset Growth over Past Decade

Despite the Covid-19 induced set-backs, many asset classes have recovered from the March 2020 lows.

Over the 10-year period, the riskiest asset sectors such as small- and mid-cap equities have delivered the strongest returns. Risk seeking behaviour has been well rewarded, attributed mainly to ultra-loose monetary policy.

The VIX indices were one of the worst performing in- dices over the past 10 years, along with commodities, cash and gold.

CBOE VIX index spiked in January 2020 and fell, how- ever it spiked again later in 2020 during the US election. Over the last month the market volatility has in- creased again reflecting a regime shift in investor anxiety.

Volatility is likely to stay elevated as investors re-price assets for economic and inflation outlook.

Asset-Growth-over-Past-Decade 1Q Cross Asset Review Paper

Periodic returns for AUD as of 31/01/2021

The biggest relative losses for AUD over January were against the TWD (-0.94%), INR (-0.88%) and GBP (-0.86%).

On the other hand, AUD made strong gains over KRW (2.32%) and JPY (0.71%).

Over the last quarter, AUD appreciated most strongly against JPY, HKD and USD.

From our currency valuation analysis using inflation, interest rate and behavioral economic model suggests that AUD/USD fair value is around 77. With the current spot, the currency is trading with fair value and there is no strong case for hedging USD exposure.

Our expectations for SWF, EUR and GBP is different. Please get in touch with us to receive our full analysis.

Periodic-returns-for-AUD-as-of-31012021 1Q Cross Asset Review Paper

Currency Effects

FX movements over the past 1 and 5 years have mostly caused negative currency effects on unhedged defensive and growth assets.
Over the past year, negative currency effect has been visible across all asset classes – most notably in Fixed In- come.
Investors holding assets for medium-term (3 years) all realized positive currency effect.
In general, investors holding assets for short (1 year) and long (5 year) term periods have seen negative currency effects. Whilst investors holding for medium length have witnessed positive currency effects due to FX movements.

rrency-Effects 1Q Cross Asset Review Paper

Calendar year returns for AUD against other currencies

AUD appreciated the most against INR (16.37%) in 2020 followed by USD (14.21%) and HKD (14.03%)

AUDINR had relatively lower volatility (9.41%) com- pared to AUDHKD (13.31%) and AUDUSD (13.12%) in 2020.

There was in increase in volatility in all currency pairs in 2020 due to the uncertainty in market rises by the global pandemic. The extent of this uncertainty does not pertain to that of 2008 during the Global Financial Crisis.

In 2021, this increase in volatility is expected to continue as the economy deals with the new Ad- ministration, ongoing Brexit deal implementation, the progression of COVID-19 and other trade and tariff issues.

Correlation between Sectors in the past three years

The 3-year correlation statistics provide instructive in- sights on the relationship between the returns of two or more asset classes. However, given that correlation is not stable over time, investors need to consider cyclical & secular relationships between asset classes.

There is a moderate level of correlation between the largest sector in the index – Financials and bond proxy or long duration defensive sectors (from 0.32 for Healthcare to 0.54 for Utilities).

There is a high level of correlation between Financials and AREITS, Consumer Discretionary and Energy.

Evidence from correlation analysis shows that investors with diverse exposure to multiple sectors in the Australian share market can benefit from diversification.

Correlation-between-Sectors-in-the-past-three-years 1Q Cross Asset Review Paper

Foresight Analytics – unlocking your investment advantage.

Foresight Analytics, an independent Sydney based firm, provides investment diligence, data analytics, and advisory solutions to leading investment management companies, superannuation funds and wealth groups across the Asia Pacific. Foresight’s innovative, evidence-based approach blends both human and forensic insights to provide a range of analytical, predictive and market intelligence solutions to investors.

Foresight’s fiduciary solutions includes Diligence Services (ESG Diligence, Risk Diligence), Data Analytics and Portfolio Allocation Advice. Foresight’s fund strategy solutions include Data Analytics for asset managers, Fund Strategy Benchmarking Solutions and Strategic Research

For more information, please visit our website on www.foresight-analytics.com and social media platforms via LinkedIn, Facebook or Twitter.

Disclaimer

This report has been prepared solely by Foresight Analytics and Ratings Pty Ltd (ABN 95616254294, AFSL No. 494552). This report is for information purposes only. It is neither an offer to sell nor a solicitation of any offer to purchase any securities in an investment product or investment fund. Any investment in a financial product or fund involves a degree of risk.

Foresight Analytics and Ratings Pty Ltd has made every effort to ensure the reliability of the views and rating expressed in this report and those published on its website. Foresight Analytics and Ratings research is based upon information known to us or which was obtained from sources which we believed to be reliable and accurate at time of publication. All opinions and views expressed constitute judgment as of the date of the report and may change at any time without notice and without obligation. Such information may be based on certain assumptions and involve elements of subjective judgment and analysis. Foresight Analytics and Ratings Pty Ltd has received a fee paid by either the fund manager or investment product sponsor for the rating and this report.

This report is prepared for general information only, and as such, does not take into account individual circumstances and/or objectives. Individuals should therefore discuss, with their financial planner or advisor, the merits of each rating for their own specific circumstances and realise that not all investments will be appropriate for all subscribers.

To the extent permitted by law, Foresight Analytics and Ratings Pty Ltd and its employees, agents and authorised representatives exclude all liability for any loss or damage (including indirect, special or consequential loss or damage) arising from the use of, or reliance on, any information within the report whether or not caused by any negligent act or omission. If the law prohibits the exclusion of such liability, Foresight Analytics and Ratings Pty Ltd hereby limits its liability, to the extent permitted by law, to the resupply of the said information.