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.
  •  

    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.
  • 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.
  • 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.

    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.
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