MLC Portfolio Specialist John Owen provides a comprehensive review of financial markets, some of the major themes and how the MLC multi-asset portfolios are positioned.
The financial year to 30 June was a more challenging period for investors compared to the previous year although some asset classes such as listed property, US and Australian shares still delivered good returns. While the global economy continued to grow, it did so at a much slower pace. This forced central banks to shift from a tightening bias to a much more accommodative policy stance in support of growth.
Evidence of the slowdown was widespread and it was not just because of the unresolved trade dispute between the US and China. Conditions in Europe weakened with inflation remaining well below the European Central Bank’s target. Low business confidence in the eurozone reflects the more difficult economic circumstances and also concerns the Trump administration could extend its tariffs policy to include European imports into America, notably cars. As a result, the return of Germany’s share market was barely positive at just 0.8 per cent in local currency terms although the French market wasn’t as badly impacted and increased 7.6 per cent.
Intense negotiations to reach a Brexit arrangement acceptable to both the UK Parliament and the European Union continued throughout the year, but with very little if anything to show for it. The European Union has agreed to extend the Brexit date to 31 October so this issue has a long way to go. The UK’s FT100 index returned just 1.5 per cent for the year.
In Asia, the unresolved trade dispute between China and the US was a dominant issue as China is a major export market for many nations in the region. Japan’s economy remains subdued with inflation at very low levels and minimal wages growth contributing to slow domestic consumption growth. Japan’s Nikkei index fell 2.6 per cent over the year. In China, tighter financial conditions that prevailed a year ago combined with the global economic slowdown and the impact of the tariff dispute has led to lower growth. However, China’s policymakers are responding to the slowdown with more stimulus measures. The MSCI China share index fell 1.8 per cent over the year.
The US economy was the standout performer for much of the year though the pace of growth moderated as the impact of the previous year’s fiscal stimulus and tax cuts faded and the Federal Reserve continued to raise interest rates into the first half of the financial year. An obvious sign of the economy’s strength was the progressive fall in the unemployment rate to a fifty year low of just 3.6 per cent. The US share market did well with the S&P500 index rising by 9.8 per cent.
The Australian dollar weakened against all the major currencies so global assets are worth more when translated back into Australian dollars. That meant the unhedged global shares return was higher at 11.3 per cent than the hedged return of 6.1 per cent.
A notable feature of the financial year was the substantial shift in US interest rate policy settings as the financial year unfolded. After raising interest rates four times in the 2018 calendar year, markets quickly took the view that the Fed was over-tightening, resulting in substantial share market falls in the December quarter. The Fed quickly changed course in the new year, first indicating its rate rise cycle was on hold, then later suggesting the possibility of the next move being a cut in interest rates.
In Australia, a marked economic slowdown, negligible wages growth and persistently weak inflation prompted the Reserve Bank to reduce the cash rate after leaving it on hold since August 2016. With economic growth well below potential and subdued inflationary pressures, the Reserve Bank appears set to reduce interest rates further in the coming months.
There is little doubt that the economy does need a helping hand. After beginning the new financial year with annualised growth of 3.4 per cent, growth slowed to an annual rate of just 1.8 per cent in the year to 31 March. Low wages growth and high average household debt continued to impact the retail economy.
Residential property prices were under pressure for much of the year although the pace of decline eased late in the financial year. National average residential property prices fell 8.0 per cent. Lower residential prices have translated into much weaker dwelling construction activity, especially for apartments as the rate of growth in lending to property investors has been close to zero for much of 2019.
On the positive side, Australia’s terms of trade improved, with the 68.5 per cent rise in the price of iron ore a significant positive for the economy. The lower Australian dollar, which was down 5.0 per cent against the US dollar was also beneficial for our exports. Domestically, continued high levels of infrastructure related construction provided support for parts of the economy.
Despite the economic clouds locally and offshore, Australia’s share market was a solid performer with the S&P/ASX200 Accumulation Index up 11.6 per cent for the year.
Looking forward, we continue to believe that the uncertain environment we are in requires us to defensively position our multi-asset portfolios. We’ve held more cash than normal, remained selective about the types of bonds we invest in, retaining a high exposure to unhedged global shares to improve risk control and employed innovative alternative and derivative strategies to provide risk control where necessary and another source of returns.