Market review

 

Market review - a strong year for investment markets 

With global economic growth faring well, investment markets were strong throughout the financial year, hitting double digits for most asset classes. From November 2016, markets rallied following the unexpected election of US President Donald Trump; with many believing that a Trump leadership would contribute significantly to the economy as a result of fiscal spending, tax cuts and the deregulation of the financial sector. The US economy remained resilient despite reduced intervention from the Federal Reserve, which commenced its path to interest rate normalisation in December 2016 and announced plans to begin reducing the balance sheet in late 2017.

In Europe, economic recovery continued to be supported by the European Central Bank’s Quantitative Easing program, which was extended by 9 months until December 2017. In the UK, equity returns were below the broader European market as uncertainty regarding the path towards ‘Brexit’ was compounded by the results of the snap election in June, which led to a hung parliament.

Australia’s economy expanded reasonably over the year. A sharp reversal of commodity prices contributed positively to the domestic recovery and boosted Australia’s monthly trade surplus to the highest ever on record in December 2016. The Reserve Bank of Australia (RBA) held a more constructive view on the economy as the year progressed. Interest rates have been on hold since August 2016, when the RBA cut interest rates by 0.25% to 1.5% in an attempt to further support economic recovery.

 

Australian shares, as measured by the S&P/ASX300 Index, performed strongly for most of the  financial year, returning 13.8%, buoyed by positive investor sentiment and expectations that the broadening economy would be supportive of the commodities markets. Market returns however weakened towards the end of the year, led down by the banking sector. The May 2017 release of the Federal Budget included a proposal to impose a new levy on major banks which led to a reduction in their returns.

There were pronounced differences in sector performance across the Australian market over the year, with the Materials sector rising (24.5%) on the back of a sharp recovery in commodity prices, while the Telecommunications Services (-21.2%) sector performed very poorly, primarily driven by stock specific issues.

International shares, as represented by the MSCI World ex-Australia Index, rose 21.2% on a hedged basis (in AUD) while the unhedged return was also very strong at 15.4%, following the Australian dollar’s appreciation over the year. Emerging markets outperformed developed markets, with the MSCI Emerging Markets Index rising 20.5% (unhedged) for the year.

The Japanese equity market was one of the best performing developed markets, rising 30.2% over the year. This was largely driven by a sharp depreciation of the Japanese Yen against the USD, which strongly increased the competitiveness of Japanese exporting companies in particular.

Australian unlisted property outperformed their listed counterparts to generate a strong 12.0% return over the financial year.

After several years of strong returns, fixed interest markets were subdued over the financial year. Global inflation linked bonds (3.0%, hedged into AUD) provided the best returns within the Fixed Interest asset class, while global government bonds (0.5%, hedged into AUD) and Australian government bonds (0.2%) performed poorly as global yields rose over the financial year.

The RBA lowered the cash rate by 0.25% during the year, which is currently 1.50%.