Super Easy Conservative
Quarterly Investment Option Update
31 December 2016
Aim and Strategy
To provide returns primarily from income as well as some capital growth over the short to medium term, by investing
mainly in defensive assets with some exposure to growth assets. Exposure to individual asset classes will be
attained through the use of index focussed investment managers.
This investment option seeks to provide an index focussed solution to diversified investing. Through a process of
diversified market analysis combined with selection of the most appropriate investment managers for each
underlying asset class, this investment is designed to provide market tracking returns over the suggested investment
timeframe.
Global shares may be partially or fully hedged back to Australian dollars.
Investment Option Performance
To view the latest investment performances please visit www.amp.com.au
Availability
Top Ten Australian Shares Exposure
%
Product name
APIR
Commonwealth Bank of Australia
9.53
AMP Flexible Super - Retirement account
AMP1378AU
Westpac Banking Corp
7.51
AMP Flexible Super - Super account
AMP1507AU
Australia & New Zealand Banking Group Ltd
5.92
National Australia Bank Ltd
5.67
BHP Billiton Ltd
5.34
Investment Option Overview
Telstra Corp Ltd
3.92
Investment category
Wesfarmers Ltd
3.23
CSL Ltd
2.82
Macquarie Group Ltd
2.13
Rio Tinto Ltd
1.90
Diversified - Conservative
Suggested investment
3+ years
timeframe
Relative risk rating
Low
Investment style
Index Focussed
Top Ten International Shares Exposure
Asset Allocation
Benchmark Range (%)
Australian Shares
N/A
Global Shares
N/A
5 -25
0-20
%
HENDERSON GLOBAL EQUITY MULTI STRATEGY FUND
1.75
APPLE INC
1.72
Microsoft Corp
1.30
Alphabet Inc
1.29
Exxon Mobil Corp
1.00
Growth Alternatives
N/A
0-15
Australian Property
N/A
0-10
WELLS FARGO & COMPANY
0.84
0.84
Australian Bonds
N/A
15-35
Amazon.com Inc
Global Bonds
N/A
10-30
JPMorgan Chase & Co
0.81
15-35
Facebook Inc
0.78
Johnson & Johnson
0.73
Cash
AMP Life Limited
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N/A
Actual Allocation
%
Cash
29.21
Australian Fixed Interest
20.01
International Fixed Interest
17.08
International Shares
11.93
Australian Equities
10.76
Alternative Assets
6.56
Listed Property
4.44
Investment Option Commentary
Global
During the quarter the US presidential election was held and won by Republican candidate Donald Trump, contrary
to market and most polling expectations (although the polls were much closer than markets were pricing in). Global
shares were initially negatively impacted, due to uncertainty and surprise, before a rebound occurred as the news
was more rationally digested. In fact US stock indices hit record levels, with the US dollar also reaching a 13-year
high, putting further pressure on emerging economies. Post-election, and as President-elect, Trump pledged to
reduce taxes across the board, reduce regulation and implement significant infrastructure spending. His victory
speech was also more conciliatory in tone than some of the more bombastic statements made whilst courting votes,
and he appears to have watered down some of the more draconian pre-election pledges, which has ameliorated
concerns on some of the perceived negative aspects of his tenure.
As widely expected, in December the US Federal Reserve raised interest rates for only the second time in a decade
by a quarter percentage point to a range of 0.50% to 0.75%. However US Federal Reserve Chair Janet Yellen
remained cautious and told the market to expect only gradual increases going forwards. The decision was made at
the last meeting before Donald Trump is inaugurated as President on 20 January 2017. Although the increase in
interest rates had been expected by markets, US Treasury yields rose immediately following the announcement, with
the US dollar strengthening and dollar-sensitive assets, such as oil and gold, pulling back. There remains continuing
upward pressure on global bond yields because of better growth and inflation outcomes and expectations that
inflation will continue to lift from current levels.
The election of Donald Trump was positive for North American listed infrastructure companies, particularly the oil &
gas transmission segment, as the market priced in the large infrastructure programme he campaigned on. His profossil fuel rhetoric leading into the election has taken some pressure off US and Canadian pipeline companies that
have suffered protest from special interest groups. Announcements by Canadian Prime Minister Justin Trudeau were
positive for pipeline development in the region. In the Asia-Pacific region, the Australian federal and state
governments have announced infrastructure plans, including a second Sydney airport and the continuation of its
asset privatisation programme.
On the negative side, it is unclear at this stage how the new US administration will adequately fund its programmes
against a background of record-high sovereign debt and rising interest rates. Combined with worries over potential
inflationary pressures, this saw yields on long-term US government bonds rise. Donald Trump has also vowed to
remove the US from the Trans-Pacific Partnership trade deal.
At the end of November, OPEC reached a deal on production limits. However, the market is unconvinced at that this
stage on the stability of the arrangement and the specific details still need to be finalised. Hence some uncertainty
around the expected oil price remains.
The US grew at an annualised rate of 3.2% in the third quarter, indicating that Donald Trump will likely inherit a
relatively benign economic environment when he officially becomes President. Trump nominated former Goldman
Sachs banker Steven Mnuchin as Treasury Secretary and Wilbur Ross as Commerce Secretary. Mr Mnuchin told
CNBC that Americans should expect the largest change in the tax environment since the days of Ronald Reagan.
He has also said that he will revisit Dodd-Frank legislation with a view to changing elements that dissuade banks
from lending.
In Asia, Japan’s Tankan business survey and December manufacturing Purchasing Managers Index showed
improved conditions for manufacturers. Japanese wages growth remains weak but economic sentiment has risen to
levels last seen before the sales tax increase. The Chinese government looks like it will implement additional
restrictions on outward capital flows, which put some downward pressure on the renminbi and saw Chinese shares
weaken. However, Chinese export and import growth improved more than expected, adding to generally improving
conditions indicators.
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In Europe, the European Central Bank (ECB) changed the structure of its quantitative easing programme, reducing
monthly asset buying to €60 billion but extending the tenure to the end of 2017. Latest German industrial production
for October was soft but came with an increase in factory orders which points to positive momentum for industrial
activity looking ahead.
Europe was also the focus for geopolitical events in December. In Italy, the referendum on whether to reform the
Senate was voted down. This put Italian banks under the spotlight again with immediate concerns over Banca Monte
dei Paschi di Siena, which will now likely struggle to attract sufficient private capital to shore up its balance sheet. A
government bailout requires approval by the European Central Bank and the Italian government has tried to stall for
time, which the European Central Bank has been reticent to approve. Any ongoing uncertainty could lead to
contagion to other Italian banks and raises further questions on Eurozone long-term financial stability. Greek bailout
talks also continue to drag on, with talks between Eurozone ministers and the International Monetary Fund (IMF)
reaching an impasse, excepting some short-term debt relief measures. To complicate matters, the Greek
government has ignored some terms of its current bailout package, with a Christmas relief payment to low-income
pensioners and the exclusion of some Greek island citizens impacted by recent refugee flows from the sales tax.
As we move into 2017 overall global economic data continues to look quite positive, following on from stronger signs
of growth at the end of 2016. However, event-specific data is tending to have an initial emotive effect on markets;
followed by a rational review and subsequent readjustment.
Australia
Earlier in the quarter, the Reserve Bank of Australia’s (RBA) Financial Stability Review indicated an improving
environment for household debt, as lending standards tightened and credit-growth has slowed. It was also positive
on the ability of Australian banks’ to weather market shocks. There was concern expressed, however, over excess
apartment supply in east-coast capital cities. Despite these fundamentals, house prices continued to rise through the
quarter, and building-approvals remain close to record levels.
Against this backdrop, banks also began to slowly increase their mortgage rates (despite some still dropping their
interest rates for savers), further contributing to speculation of when a residential property downturn could occur.
The RBA left interest rates on hold throughout the quarter as inflation remained in line with target, though economic
growth figures released in December surprised on the downside and pushed in negative territory, increasing fears of
a recession. Broad based weakness is being experienced in housing, business investment, public demand and net
exports. Overall employment figures were also generally subdued. Offsetting this however, public spending projects
are on the increase, consumer spending is strengthening and various gas and mining projects are moving into the
production or export phase, which should all provide some degree of support to growth.
Concerns over Australia’s ability to keep its AAA credit rating also came back to the fore during the quarter. An overreliance on foreign capital and continuing loss of credibility on Australian economic policy and ability to reduce the
deficit has seen S&P issue a negative watch on the sovereign credit rating.
Australian dollar
With the US experiencing stronger growth, and the Fed finally raising rates in December, as well as slightly
steepening their trajectory for further increases through the year, the Australian currency trended lower against its
US counterpart. Against other major international currencies, including the British pound, Euro, Chinese Yuan and
Japanese Yen the Australian dollar generally remained relatively strong. While the currency’s fall against the US
dollar is positive for Australia from an exports-perspective, this is being somewhat offset by a relatively weaker
Chinese Yuan, particularly given Australia’s reliance on the resource sector.
International shares
An air of optimism was palpable across many global equity markets through the quarter. A number of factors
contributed to this, such as solid US growth (confirmed by the Fed finally raising rates again), slowly improving
European growth, improved corporate earnings, generally higher resource prices and a sense of ‘political-renewal’
exemplified by Brexit and then the Trump victory. As measured by the MSCI World ex Australia Net Index in local
currency terms, global equity markets rose by 4.7%. In Australian dollar terms the return was around 7.7%.
Emerging markets fell slightly (down by 1.44%) as measured by the MSCI Emerging Markets Accumulation Index in
local currency terms). Japanese equities had a particularly strong period on the back of unprecedented monetary
easing measures and improving business confidence, returning 15% (as measured by the TOPIX 100 Accumulation
Index in Japanese Yen terms.)
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Australian shares
Australian shares were again very strong through the quarter, as positive sentiment emanating from the US election
results, improved resource prices and generally improving global growth drove markets higher. Australia’s S&P/ASX
200 Accumulation Index finished up by more than 5.2%. Many Australian businesses however are still struggling to
achieve top-line growth, and are finding it difficult to reinvest in order to internally compound profits at reasonable
rates of return on equity (and thus creating meaningful value appreciation for shareholders). Small-caps broke their
trend and underperformed the broader equity market, returning -2.5% (as measured by the small S&P ASX Small
Ordinaries Accumulation index). Many small-cap companies have rallied strongly over the previous year and were
subsequently beaten back down throughout the December quarter as investors preferred larger cap yield-plays over
future earnings growth – a strategy that could come into re-examination should bond yields continue to rise.
International bonds
Global bonds markedly sold-off over the December quarter, with yields continuing to reverse their long term trend
and rise from recent record-lows. While some commentators believe a large bond-bubble is finally beginning to
deflate, others suggested this was simply due to improving confidence and investors shifting some of their portfolios
into growth assets. US ten year bond yields ended higher (at 2.44%) as did their UK equivalents (closing at 1.24%)
and Japanese ten-year yields returned to positive territory, closing at 0.05% amidst Japan’s ‘yield curve-control’
policy.
Australian bonds
Similar to their international counterparts, Australian bonds have been quite heavily sold-off, and yields have broken
their circa 30 year downtrend, rising quickly from recent record-lows. Three-year and ten-year Australian government
bond yields both closed up, finishing the month at 1.96% and 2.77% respectively.
Cash
Australia’s cash rate remained at the record-low rate of 1.50% during the December quarter. Underlying inflation is
running below the RBA’s target, and growth is low, though the RBA is cognisant of Australia’s white-hot property
markets and forthcoming oversupply of dwellings, particularly in Sydney and Melbourne. Both three and six-month
bank bill rates closed slightly higher, at 1.80% and 2.04% respectively.
Australian Listed property securities
The Australian listed real estate market weakened in the early stages of the December quarter as the market was
driven lower by the steep rise in Australian government bond yields that increased from 1.91% to 2.77% over the
quarter. This move reflected the sell-off in the US bond market upon increased expectations of the US Federal
Reserve raising interest rates. The rise in bond yields contributed to the downward pressure on Australian listed real
estate company valuations. The market recovered later in the quarter as focussed real estate funds bought stocks
that appeared to have been oversold by general investors that were exiting interest rate-sensitive sectors right
across the wider equity market. Valuation evidence continued to see capitalisation rate compression; however this
trend now appears to be slowing.
Direct property
Direct property recorded a solid final quarter of sales and leasing activity despite rising bond yields and talk of a
recession in the wake of the third quarter fall in Australian GDP. Geographically, strongest performance continues in
Sydney and Melbourne, but the quarter has seen improvement in momentum in Canberra, and parts of the
Queensland and SA markets. Perth continues to be the laggard but there are signs fundamentals are starting to
stabilise.
In the office sector, all CBD markets except Adelaide saw an improvement in tenant demand during the quarter.
Melbourne and Sydney CBD are still the stand out star performers, but the rebound in commodity prices has helped
Brisbane and Perth.
Australian retail sales improved in the latest quarter after a soft run of growth earlier in the year. As per the national
economic trend, NSW and Victoria continue to see strongest retail sales growth, with the ACT starting to join them
as consumer confidence settles in the wake of the Federal election. JLL Research reported a much quieter quarter
for rental growth, mostly reflecting a lag from the slowdown in retail sales momentum earlier in the year.
In the industrial space, JLL Research reported that occupier demand was robust in Melbourne, Sydney and Brisbane
in quarter four, with over half a million square metres of space taken up in the quarter collectively. Despite the
positive effect this has on reducing vacancy rates, rental growth on average has remained fairly flat in most markets
except Perth in Q4, where rents have continued to fall.
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Contact Us
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What you need to know
This publication has been prepared by AMP Life Limited ABN 84 079 300 379, AFSL No. 233671 (AMP Life). The information contained in this publication has been
derived from sources believe to accurate and reliable as at the date of this document. Information provided in this investment option update are views of the underlying
Investment Manager only and not necessarily the views of the AMP Group. No representation is given in relation to the accuracy or completeness of any statement
contained in it. Whilst care has been taken in the preparation of this publication, to the extent permitted by law, no liability is accepted for any loss or damage as a
result of reliance on this information. AMP Life is part of the AMP Group. In providing the general advice, AMP Life and AMP Group receives fees and charges and
their employees and directors receive salaries, bonuses and other benefits.
The information in this document is of a general nature only and does not take into account your financial situation, objectives and needs. Before you make any
investment decision based on the information contained in this document you should consider how it applies to your personal objectives, financial situation and needs,
or speak to a financial planner.
The investment option referred to in this publication is available through products issued by AMP Superannuation Limited ABN 31 008 414 104, AFSL No. 233060
(ASL) and/or AMP Life. Before deciding to invest or make a decision about the investment options, you should read the current Product Disclosure Statement for the
relevant product, available from ASL, AMP Life or your financial planner.
Any references to the “Fund”, strategies, asset allocations or exposures are references to the underlying managed fund that the investment option either directly or
indirectly invests in (underlying fund). The investment option’s aim and strategy mirrors the objective and investment approach of the underlying fund. An investment in
the investment option is not a direct investment in the underlying fund.
Neither AMP Life, ASL, any other company in the AMP Group nor underlying fund manager guarantees the repayment of capital or the performance of any product or
particular rate of return referred to in this document. Past performance is not a reliable indicator of future performance.
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