What were the key events in investment markets last year? MLC Portfolio Specialist John Owen reviews the highs and lows.
2017 was a very favourable year for investors with all major asset classes delivering positive returns.
Developments in the global economy were particularly beneficial for share markets. As the year progressed, the global economy improved as did expectations for company earnings. A welcome feature, something we haven’t seen for some years, was that all the major economies were growing at the same time. Economic conditions across the Eurozone improved markedly and signs of more sustainable growth emerged in Japan while the economies of China and the US remained strong. Stronger global conditions and trade also saw better growth from emerging economies.
As a result, hedged global shares returnedan impressive 21.4 per cent for the year. The unhedged return was lower though still substantial at 15.4 per cent because the Australian dollar strengthened against the US dollar and Japanese yen.
Along with the economic upturn in Europe, markets were reassured by the failure of extremist anti-eurozone political parties to achieve political success in crucial national elections. France and Italy’s share markets gained 12.7 per cent and 13.6 per cent respectively while Germany’s share market gained 12.5 per cent despite the post-election stalemate. In the UK, continuing uncertainty about Britain’s withdrawal from the European Union failed to constrain the FT100 index which returned 11.9 per cent.
In Asia, Japan’s Nikkei index rose 21.3 per cent in response to the economy’s marked improvement. In contrast, China’s Shanghai index increased by only 6.6 per cent in response to measures by the central bank to curb excessive credit growth in the economy.
In the US, the S&P500 index performed very strongly, gaining 21.1 per cent and achieving record highs late in the year. Aside from strong economic data, President Trump’s tax reforms, which became law late in the year,were considered favourable for company earnings.
Another significant development during 2017 was the gradual change in course by some central banks to a tightening stance after years of substantial monetary stimulus. Official interest rates went up in the US, the UK and China and in Europe monetary stimulus will be scaled back.As a result, bond market returns were modest.
Turning now to Australia, the economy picked up speed though signals were mixed. On the positive side, business investment and confidence improvedand substantial public sector infrastructure spending provided added stimulus. The jobs market was very strong with the creation of more than 380,000 jobs, most of them full time positions. However, there is still considerable spare capacity in the labour market.Unemployment is elevated at 5.4 per cent and 8.3 per cent of the workforce is working fewer hours than they would like. As a result, wages growth remained subdued. This created difficulties for many highly indebted Australian households grappling with sharply higher utilities costs. Not surprisingly, consumer sentiment and retail sales growth were soft.
Despite these mixed signals, Australia’s share market was a solid performer, returning 11.8 per cent. This was its best calendar year performance since 2013 and the sixth consecutive year of positive returns.
Looking forward, we believe that despite the positive outlook for the global economy, a degree of caution is justified. After sustained positive returns for a number of years, share and bond market valuations are stretched. Very low interest rates and large asset purchases by central banks have been significant contributors to market returns for a long time. But that stimulus is now being wound back and it’s highly uncertain how this policy reversal will affect financial markets and the real economy.
That’s why we continue to prioritise risk management in our diversified portfolios. We believethat managing risk is the sustainable way of generating returns for our investors and in this unpredictable investment environment it’s more critical than ever.