Market update – the year in review
Global economic growth was fairly stable in the first half of the financial year, but increasing trade tension between the US and China took its toll on share markets. With business and consumer confidence falling, many central banks reduced their cash rate, providing greater support for the economy and for financial markets. Shares responded positively, reaching new highs, while both bond yields and cash rates finished the year lower.
Although global share markets were up on average over the 12 months to 30 June 2019, there were several periods of heightened market volatility.
The US market was strongest, rising 10.4%, and analysts there expect earnings growth to be up 8-9% in the year ahead. This is potentially optimistic given the ongoing negative impact of the escalating trade war with China.
The fragile economic recovery in Europe was caught up in the slowdown in global trade, and the European Central Bank had to step in and pledge to provide further stimulus. European shares were subsequently up 6.5%. The UK remains in turmoil over Brexit, but a large component of the index is in global companies, so there’s been less of an impact than you might expect on UK shares, which rose 1.6%.
Japan has been somewhat of a laggard, with a decline of -8.2% for the year. A stronger currency has negatively impacted its exporters.
Australian shares had a strong year, rising 11.5%. The best performing sectors were those with higher yields, as investors sought income-producing shares to compensate for lower interest rates.
We’ve experienced the most severe fall in house prices in 10 years, with prices coming down 15% from their 2017 peak on a national basis. The negative impact on the economy has been partially offset by an increase in government spending on infrastructure. A boom in iron ore prices due to supply interruptions in Brazil has also boosted the resources sector.
Investment market performance from around the globe
Fixed Income and Cash
Responding to persistently low inflation, the Reserve Bank of Australia (RBA) cut the cash rate to a new low of 1.0% in July to support growth and drive the unemployment rate lower. This was the result of falling business and consumer confidence. The market anticipates one further rate cut in Australia before March 2020.
The shift in interest rate expectations is a global phenomenon, with around four interest rate cuts in the US expected over the next 12 months. As such, cash returns remain in low single digits, and are likely to fall lower, as central banks globally continue to take action to steady economic growth.
The yield on Australian government bonds has also come down considerably, falling a little over 1.0% to finish the year with returns of 9.6%. We’re not alone though. Bond yields globally have come down as investors factor in weaker growth expectations and the likelihood that interest rates will have to stay lower for longer.
The Australian dollar
The Australian dollar (AUD) declined against the USD, Euro, Yen and British Pound over the past 12 months. One factor that contributes to exchange rates is the relative attractiveness of interest rates, so with the RBA moving to cut rates here, our currency looks relatively less appealing to overseas investors.
Another driver is commodity prices, and as they’ve been quite strong, the dollar probably held up better than it would otherwise have done.