Investment market update, Q3 2024-25

Leroy D’Souza (Investment Manager, Investments) provides commentary on the economic conditions on the third quarter of the 2024-25 fiscal year, plus some more up to date commentary.

Transcript

Transcript 

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You're listening to Exploring Super, the exclusive podcast for ESS Super members. 

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Welcome to Exploring Super, the exclusive podcast for ESS Super members. 

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I'm Felicity Brasher, the Group Executive of Member Engagement. 

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And I'm Christian Kueng the Manager of Member Education. 

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Today we're joined by Leroy D'Souza, who's an investment manager here at ESS Super. 

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Leroy's here to provide an investment market commentary, starting with the third quarter of the 24-25 financial year. 

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Welcome, Leroy. 

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Thanks for having me. 

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So Leroy, what have been some of the key movements we've seen in the investment markets in the third quarter of the 24-25 financial year? 

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Yeah, it's a good question, Christian. 

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So the third quarter of the financial year, investment markets have shown us a blend of volatility and cautious optimism. 

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Now, particularly, Aussie bond yields experienced a slight uptick compared to early May, but they remained elevated relative to a month ago, which translates essentially into lower prices for our bond investments. 

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This movement reflects shifting market expectations around central bank policies. 

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So in Australia, that's the Reserve Bank of Australia, which exhibited a more dovish stance following its recent rate cuts. 

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Now, equity markets have shown some resilience, 

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largely because of easing inflation concerns and modest downward revisions to growth forecasts. 

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Unfortunately, global uncertainties ranging from ongoing trade tensions to broader geopolitical risks continue to weigh on investor sentiment, contributing to fluctuations across growth-exposed asset classes. 

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Okay. 

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Leroy, there's been a lot of talk about tariffs with the new administration in the US. 

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It seems to be causing a bit of upheaval in global trade. 

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What have been some of the flow-on effects here? 

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Yeah, that's just probably putting it a little bit lightly for the city. 

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So the recent tariff policies implemented by the US administration have caused significant disruptions. 

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to global trade flows. 

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Now, their impact on our growth-exposed investments have been relatively muted. 

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Elevated tariffs, particularly on Chinese imports, have led to retaliatory measures from several countries, which has resulted in increased trade costs and contributed to heightened uncertainty for many businesses across the globe. 

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Now, global supply chains have experienced considerable disruption, which has undermined business confidence and may translate into reduced 

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investment and consumption in affected regions. 

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For Australia in particular, the RBA or the Reserve Bank of Australia's economic modeling suggests that if these trade tensions keep going on, then our GDP could be reduced by approximately 3%. 

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And a large part of that is because of the confidence shock that would come through impacting both consumption and investments. 

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Now, although the RBA expects that these tariffs might lead to a short-term increase in inflation abroad, the impact on the Australian economy is anticipated to be disinflationary, which means it'll lead to lower prices. 

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And all of this is primarily because of who we trade with. 

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and the slowdown that we expect to happen in our domestic economic activity. 

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Right. 

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Okay. 

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So Leroy, you've mentioned inflation there a few times. 

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So what have we seen with inflation rates in Australia and also around the world? 

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Yeah, it's a good question, Christian. 

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So inflation rates in Australia have shown clear signs of easing. 

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So the RBA expects core inflation to stabilize around 2.6% around middle of 2025, which sits comfortably within the RBA's target range of 2 to 3%. 

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Now this improvement reflects the fading impact of temporary price pressures alongside the impact of the recently higher interest rate environment. 

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On the global front, inflation trends remain mixed. 

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So some economies continue to face elevated inflation, 

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driven by ongoing supply chain challenges and energy price volatility. 

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On the other hand, we've seen some other countries that have started to see inflation ease. 

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largely driven by the central bank's tightening monetary policy. 

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Okay. 

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On the whole, the RBA's view is that the upside risks to inflation have diminished now compared to what it looked like 12 months ago. 

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That's pleasing. 

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Leroy, we've also seen US Treasury bond yields increase recently. 

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What could be the underlying reason or reasons for something like this? 

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So the recent rise in US Treasury yields have been driven by a number of different factors. 

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So first and foremost, investor optimism about the US economy has reduced expectations that the Federal Reserve will implement aggressive interest rate cuts. 

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Right. 

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Now, fewer rate cuts typically lead to higher bond yields. 

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Right. 

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But at the same time, 

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Inflation remains somewhat elevated, and investors have adjusted the prices that they're willing to pay for bonds to account for the erosion of returns caused by inflation. 

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All else being equal, higher inflation means higher bond yields. 

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Additionally, ongoing geopolitical tensions between U.S. 

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and China, combined with the growing U.S. 

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fiscal deficit, have increased uncertainty about future demand for government debt. 

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This is reflected in softer demand for longer-term U.S. 

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Treasuries, with fewer bids at the recent bond auctions. 

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Again, this has the effect of increasing bond yields. 

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Right. 

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So Leroy, you've mentioned there there's obviously an awful lot going on in the world at the moment. 

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Have you seen all this translate to a E double Soup as investments? 

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Yeah, I mean, that's a really important question, Christian. 

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So most of our investment options have performed well against their inflation objectives over the year ending April. 

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That's good. 

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When we look at the three-year returns, they're slightly below inflation targets for a number of our options, largely because this period includes the 

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post-COVID surge in inflation, which was unusually high. 

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Now, relative to our competitors in the super ratings survey, we've seen some softer returns in the fairly frothy markets over the one year ending April 2025. 

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But it's important to highlight that our longer term performance remains fairly strong compared to the same peers across most of our investment options. 

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And this reflects our disciplined approach to investments. 

00:06:33 

Excellent. 

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That's very comforting to hear. 

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Very much so. 

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Leroy, thank you so much for coming in today and sharing your insights. 

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We'll look forward to speaking with you again one day. 

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Thanks so much for having me, Felicity and Christian. 

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So that wraps up today's episode of Exploring Super, the exclusive podcast for ESS Super members. 

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We look forward to producing more content for you at ESS Super, proudly serving our members. 

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