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 February, the worst performing asset classes were Global and Australian REITs, the Australian Bonds Composite Index and gold. The Australian dollar index closed at 2.4% due to an increase in commodity demand and prices. The continued monetary and fiscal support around the world, and the broadening of the vaccine rollout program, is likely to provide ongoing support for cyclical recovery in economies, businesses and earnings.

1. Safety assets lose money

  • Risk assets closed higher over the month despite volatility spikes in the month of February. The Australian equity market volatility index rose to 10.9%, whereas the US volatility was as low as -16.3%. Gold lost 7.4%.
  • The best-performing assets in AUD over the month were Commodities, Emerging Market Equities, FTSE EPRA Nareit Global Real Estate Index and MSCI World Small Caps.
  • The Australian Dollar Index closed at 2.4%, up from -0.6% in February due to the widespread increase in commodity prices and demand from their trading partners.
  • The worst performing were the safety asset classes like Gold, BBgBarc Global Agg Corp TR and the Bloomberg AusBond Composite Index. Contrary to investors’ beliefs in fixed income and gold, these asset classes experienced a significant drop to as low as -7.4% and -3.6%, respectively.
  • The continued monetary and fiscal support around the world and broadening of the vaccine rollout program is expected to provide ongoing support for cyclical recovery in economies, businesses and earnings.
  • 2. Asset Growth over Past Decade

  • Despite the COVID-19-induced setbacks, many asset classes have recovered from 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, thanks mainly to ultra-loose monetary policy.
  • The VIX indices were one of the worst-performing indices over the past 10 years, along with commodities, cash and gold.
  • CBOE VIX Index spiked in January and fell thereafter in February, with the rollout of the COVID-19 vaccines. The decreased market volatility is an apt reflection of the gradual stabilisation of the economy going forward.
  • 3. Periodic returns for AUD as of 28/02/2021

    • The biggest relative losses for the AUD over January were against the GBP (-0.86%), the TWD (0.33%) and the CAD (0.52%).
    • On the other hand, the AUD made strong gains over the CHF (2.86%) and the JPY (2.65%). Over the last quarter, the AUD appreciated most strongly against the JPY and the KRW.
    • From our FX cyclical and strategic analysis, our expectations of the AUD from here continues to be bearish. There is no evidence to suggest that investors should consider hedging their risks against majors such as the USD at this stage

    4. 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, the negative currency effect has been visible across all asset classes – most notably in Fixed Income.
  • Investors holding assets for the medium-term (3 years) all realised a positive currency effect.
  • In general, investors holding assets for short-term (1-year) and long-term (5-year) periods have seen negative currency effects. Whilst investors holding for a medium length have witnessed positive currency effects due to FX movements.
  • 5. Yearly returns for AUD against other currency pairs

  • AUD appreciated the most against the INR (20.65%) in 2020, followed by the USD (18.37%) and the HKD (17.78%)
  • The AUD/INR had relatively lower volatility (8.97%) compared to the AUD/HKD (12.76%) and the AUD/USD (12.43%) in 2020.
  • There was an increase in volatility in all currency pairs in 2020 due to the global pandemic causing market uncertainty. The extent of this uncertainty does not compare to that of the 2008 Global Financial Crisis.
  • In 2021, this increase in volatility is expected to continue as the economy deals with a new US president, ongoing Brexit deal implementation, the progression of COVID-19, and other trade and tariff issues.
  • 6. Correlation between Sectors in the past three years

  • The 3-year correlation statistics provide instructive insights into the relationship between the returns of two or more asset classes. However, the correlation is not stable over time, so investors need to consider cyclical and secular relationships between asset classes.
  • There is a moderate level of correlation between the Australian equity market and bond proxies (from 0.31 for Consumer Staples to 0.44 for Utilities).
  • There is a high level of correlation between Financials and A-REITs, Consumer Discretionary and Energy.
  • Correlation analysis shows that multi-asset investors continue to benefit from cross-asset diversification.
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