A great year for shares but exercise caution

2017 was a good story with a good ending. What about the next chapter?

Global share markets had a very strong run in the financial year 2017, with all major markets delivering double digit percentage gains. The MSCI World Index gained 18.9% in local currency terms. Financials and technology stocks were the best performing sectors.

The traditionally defensive sectors of telecommunications, consumer staples and utilities lagged, somewhat of a reversal of the trend of recent years.

And even though the ASX 200 index returned a solid 14.1%, it’s one of the weaker results for a major share market globally.

Looking forward we think it’s unlikely that shares will deliver similar returns over the next 12 months. While there’s no indication that a correction is due any time soon, we’d suggest it’s a good idea for investors to focus on rebalancing their portfolios to make sure they’re aligned to long term goals.

Remember that volatility is cyclical, don’t get caught out over-reaching

What’s been quite unusual over the last year has been that despite an increase in geopolitical uncertainty, markets have been remarkably calm.

We saw rising populism leading to Brexit and the election of Donald Trump, increased tensions on the Korean peninsula and a disturbing number of terrorist attacks. Despite all of this, volatility has generally been very low.

Sometimes investors extrapolate these benign periods and start to take on greater risk with their investments.

At these times we actually think it’s important to remain disciplined and not to over-reach for returns. We know that volatility will return at some point, and when it does, you don’t want to find that your portfolio is riskier than you bargained for.

A challenging year for fixed income

For fixed income it was truly a year of two halves. A year ago, investors were pricing in a fairly pessimistic economic outlook, with government bond yields in Australia and the US trading at all-time lows.

Over the year we’ve seen yields first rise rapidly by 1% only to gradually drift back by half a percent in the second half of the year. Investors in fixed income funds would have earned a small positive return for the full year, but at the half way mark in December they would have been seeing losses.

A resilient Aussie dollar

The Australian dollar spent the year in a five cent trading range against the US dollar, reaching a high of 77 cents, and getting as low as just under 72 cents in late December.

The range was a bit wider versus the British pound and the Euro, and our dollar rose nearly 13% against the Japanese yen.

Many pundits had been forecasting weakness in our dollar so the relative stability over the last year was surprising. A weaker dollar tends to have a positive impact on economic growth and inflation, so the Reserve Bank would probably prefer to see it go a bit lower from here.