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A year of two halves for diversified investors

2017-2018 Financial year in review

We take a look at how investment markets have done over the last financial year.

Volatility returns to share markets

Looking back on the last 12 months it’s actually been pretty good for share markets on average. But it was really a year of two halves. International shares including dividends returned 11% in local currency terms, and over 15% in Australian dollars.

Valuations on US shares have been quite elevated for some time, but with strong underlying economic growth driving earnings, and a big boost from tax cuts this year, investors have been richly rewarded.

International shares including dividends returned 11% in local currency terms, and over 15% in Australian dollars.

Almost all of the returns for global shares came in the first half of the year though. Since February we’ve seen volatility return to markets and a succession of setbacks as first inflation fears, and now trade wars, have captured the headlines and buffeted global markets.

US Shares (S&P 500 Total Return)

Locally, Australian shares also had a good year, returning 13.2%. The index return was driven by very strong performance from the resources sector, riding high on commodity prices and record export volumes. The financials sector really struggled though, as banks grappled with slowing credit growth and a succession of scandals.

Slow and steady for fixed income

A year of low, but still positive returns for fixed income, both domestically and globally.

US vs AU Government Bond Yields (%)

Bond yields in the US began to rise two years ago from record low levels, and that trend continued in FY18. Australian bond yields were rangebound, and in February fell below the level of US bond yields for the first time in 18 years.

We expect that yields will rise gradually over time from here, so these low returns from fixed income assets will probably continue. They should do well though if there’s an economic slowdown, so they’re worth having in a diversified portfolio.

Australian inflation has remained just below the RBA’s target range of 2 to 3%, and cash rates are expected to remain on hold here until late 2019.

A lower Aussie dollar

The Australian dollar rose to nearly 81 US cents in January but is now trading around 74 cents. A lower dollar is good for our exporters, and we’ve really seen tourist arrivals take off since the Aussie fell in 2014.

While there can be an inflationary impact on traded goods, we’ve not really seen this come through to date.

A good year for property

Property overall has had a good year, listed property trusts returning 13.2% in Australia and 6.4% globally. Institutional investments in unlisted property also did well, but the residential market has had a more difficult time, registering a small drop in prices on a year on year basis to May.

Where to from here?

In the medium term, we expect lower returns on growth assets as the rate of global economic growth slows and asset prices trend back to long-run averages.

Over the longer term, a diversified portfolio should still deliver solid outcomes.

Income-oriented assets like cash and fixed income will probably continue to deliver low positive returns. Over the longer term though, a diversified portfolio should still deliver solid outcomes.

Your financial planner can help you construct a portfolio with the right strategy and defensive mix to smooth out the ride.

Aware Super Pty Ltd ABN 11 118 202 672, AFSL 293340, the trustee of Aware Super ABN 53 226 460 365. Financial planning services are provided by our wholly owned financial planning business Aware Financial Services Australia Limited, ABN 86 003 742 756, AFSL No. 238430.

This information is of a general nature only and is not specific to your personal objectives, personal situation or needs. Before making any decisions based on this information you should consider its appropriateness to you. Every effort has been made to ensure the information is accurate. We strongly recommend that you consult a financial planner before taking action and review the relevant Product Disclosure Statement.

Past performance is not an indicator of future performance and future performance is not guaranteed.

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