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What can we learn from 2017?

The year in review and what we can expect for future investment returns

As we start thinking about 2018 it’s a good time to look back and reflect on the 12 months that’s been, the big picture economic and market developments, and how these trends might impact on our investment portfolios in the future.

The global economy is ticking along nicely

2017 has been a good year overall for most investors. We saw improving levels of growth across most economies and relatively calm investment markets, despite continuing geopolitical uncertainty.

Shares performed strongly in this environment, as company earnings lifted on the back of a recovery in global manufacturing and global trade.

Central banks have maintained supportive policy settings, although this is likely to unwind if underlying growth in the economy continues to improve from here.

Shares have performed strongly, central banks have maintained supportive policy settings, and stronger growth has led to falling unemployment rates.

Stronger growth has also led to falling unemployment rates.

Even though jobless rates in most countries are around the lowest in a generation, we haven’t yet seen that translate into much of an improvement in salaries.

It’s been a bit puzzling actually, but we do expect to see wage growth come through in time and for this to gradually push inflation higher.

So why is the Aussie economy lagging?

The Australian economy continues to muddle through. Consumption and retail sales have been disappointing, and unless we see wage growth improve, will likely limit the upside to growth in the economy.

The arrival of Amazon may further affect an already beleaguered retail sector. While consumers should benefit from lower prices in time, the entry of this aggressive new competitor will have an impact on profits for the incumbent retailers, which could impact on employment.

The arrival of Amazon may further affect an already beleaguered retail sector and a slowdown in housing construction activity is expected.

A slowdown in housing construction activity is expected, following the introduction of policies to limit the growth in investor borrowing.

This slowdown will probably have a negative impact on GDP growth of around 0.2 per cent, over the next three years.

But this is offset, to an extent, by a lift in public investment and the infrastructure programs of state governments, particularly in Victoria and New South Wales.

There’s also the prospect of tax cuts on the horizon so the outlook’s not all bad.

Where are interest rates heading?

The RBA has kept interest rates on hold at 1.5% to support the economy’s transition, and to assist the over-indebted household sector.

While the next move is likely to be upwards, it won’t happen for some time. And if the economy does start to slow, then we’d expect the RBA would change course and cut rates further.

All eyes on political developments

As share markets make new highs we continue to cast a watchful eye over the political scene. While the level of political volatility has come down recently, the Trump administration continues... well, it just continues to surprise.

Political developments remain potential triggers for market volatility in 2018.

It’s still not clear how Britain will navigate it’s exit from the European Union. Russian belligerence and North Korean missile testing add an element of tension.

Financial markets, however, have seemed relatively unfazed by all of this so far. None of these issues seem likely to be resolved in the near term, and so they do remain potential triggers for market volatility in 2018.

What’s the outlook for future investment returns?

So, what do we think the new year will hold for investment portfolios?

Economic growth is expected to remain above average, and this will continue to support earnings and share prices.

The pace of growth will probably slow a little compared to 2017, though.

It’s been a theme for some time now, but given this year’s stronger growth trajectory, it’s expected that central banks will pull back some of their stimulatory policy settings.

After a period of above-average returns, we should expect future returns to be a bit lower.

While this is not expected to derail markets, it does present challenges for some assets given their elevated levels of valuation.

Short-term outcomes are always hard to predict, but experience tells us that after a period of above-average returns, we should expect future returns to be a bit lower.

As always, it’s a good idea to work with your financial planner to rebalance your portfolio and make sure it’s aligned to your long-term goals.

We wish you all a safe and happy festive season, and we’ll be back early next year with the next update.

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.

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