With the close of the financial year, it’s time to review what’s happened in investment markets. MLC’s portfolio specialist John Owen provided this comprehensive review.
John Owen: The Financial Year to the 30th of June was another favourable one for investors with all major asset classes delivering positive returns. However, market conditions were less favourable in the second half of the financial year due to rising global trade tensions after the Trump administration imposed tariffs on a range of products and explicitly targeted Chinese imports.
The global economy accelerated for much of the financial year. The US economy performed strongly with significant job creation pushing unemployment down to just 3.75%, a 48 year low. In expectation of sustained economic expansion, the US Federal Reserve raised interest rates on three occasions. The strong economy and generous tax cuts were favourable for company earnings. Not surprisingly, the S&P500 index gained 13.7% in local currency terms.
Europe’s broad-based economic recovery continued to unfold though there were signs late in the year that growth is tapered. Country specific economic conditions differed with Italy’s weak economy and the new Italian Government’s expenditure plans causing concerns late in our financial year. These issues did not deter the European Central Bank from continuing to wind down its monetary stimulus measures.
Growth in Asia remained strong, helped by China’s economy which grew 6.8%. However, after performing strongly in the first half of the financial year, China’s SSE Composite index lost considerable ground and closed 10.8% lower at the end of June. The imposition of tariffs and fears of a trade war between China and the US were clearly adverse for its market.
Elsewhere in Asia, Japan’s economy continued growing but at a sluggish pace relative to other economies. Japan’s Nikkei index still managed to rise by 13.5%.
The Australian dollar was weaker so global assets are worth more when converted back to Australian dollars. That meant the return from global shares that aren’t hedged to the Australian dollar was higher at 15% than global shares that were hedged which had a return of 10.8%.
Turning now to Australia, our economy picked up speed. The jobs market strengthened with over 300,000 new jobs created in the year. The unemployment rate fell to 5.4%, the lowest reading since 2012. Exports were a major contributor to the growth pickup, due in part to the higher iron ore price and growth in natural gas sales. The improvement in export performance and our terms of trade suggests Australia is finally benefitting from the acceleration in global growth and the lower Australian dollar. An added stimulus for the economy continues to be spending on infrastructure by state and federal governments.
However, considerable spare capacity remains in the labour market. With nearly 14% of the labour market either unemployed or underutilised, average annual wages growth was just 1.9%, a 20 year low. This has put many households, who are highly indebted, under pressure. Not surprisingly, retail sales grew by only 2.6%.
Unlike previous years, the housing market has softened. Regulatory restrictions on lending to property investors and higher interest rates for investor loans have caused Sydney and Melbourne house prices to fall or stagnate over the year.
Price pressures remain subdued with annual inflation at 1.9% for the March quarter. This has allowed the Reserve Bank of Australia to keep the cash rate on hold at 1.5%, where it has been for 22 months. Recent commentary by Reserve Bank officials suggest it will remain on hold well into 2019.
Australia’s share market was a solid performer, returning 13%. Much of this was due to strong returns by the resources, energy and healthcare sectors. This offset disappointing performances by the major banks and Telstra.
Looking forward, we continue to believe that the uncertain environment we are in requires us to defensively position our multi-asset portfolios. The era of substantial monetary stimulus that has been beneficial to markets is being withdrawn by central banks and it is being replaced by monetary tightening. It’s highly uncertain how this policy reversal will affect financial markets and the economy. This is occurring at a time of market confusion about the impact higher tariffs and growing protectionism will have on global and Australian economies. All this is happening while valuations of shares and parts of the bond markets are stretched.
That’s why we continue to prioritise risk management in our portfolios. We believe that managing risk is the sustainable way of generating returns for our investors and in this unpredictable investment environment it’s more critical than ever.