Investment commentary July 2016
- The financial year ended 30 June 2016 was a difficult year for growth assets
- Political instability has been on the rise globally
- Future returns are likely to be lower than historic averages and some defensive assets are vulnerable if growth or inflation increase above expectations
- Management of portfolios by professional fund managers can reduce risk and improve returns
A challenging year for growth assets
As financial year 2016 drew to a close there was yet another bout of volatility in markets, bringing the return on Australian shares back to just short of +1% for the year. The return for international shares was worse, saved only by a fall in the Australian dollar, which took an unhedged investor slightly into positive territory.
Defensive assets had a much better result, fixed interest delivering a +7% return locally and +9% internationally as bond yields made new lows around the world. One bright spot for growth assets was the performance of real assets such as property and infrastructure, both of which had returns around +12%.
From Grexit to Brexit and increased volatility
At the start of the financial year the markets were focused on the potential for Greece to leave the euro zone. Instead we finished the year with a referendum result supporting the departure of the United Kingdom from the European Union (Brexit).
Political risk is on the rise elsewhere in Europe but also notably in the United States. A backlash against establishment candidates there has seen Donald Trump seize the Republican nomination. It seems unlikely today that he will win the presidential election in November, but this has been a year of unexpected political results, including here in Australia. We think that political instability will continue, and this could drive bouts of volatility in markets in the year ahead.
A ‘goldilocks’ scenario of not too little and not too much inflation would be the best outcome