The year was a challenging one for investors, with continuous volatility throughout the year. The roller coaster was fuelled, for the most part, by the US political landscape, US-China trade relations, concerns over an impending recession and uncertainty in the residential property market in Australia.
Australian Shares had a relatively tough year, with the ASX 300 starting at 6,023 and ending at 5,604. The result is a fall of 2% – 4%. The big four banks were major contributors to these losses, with CBA falling from $81 to $72 over the year and at one stage trading at $66. It’s easy to underestimate how the big four impact the overall Australian share market, however, keep in mind that together they represent 25% of the ASX200. Auscap Asset Management recently published a graph that shows the top 12 listed Australian shares represents over 50% of the entire ASX200 index.
The market lost some confidence in the banks due to a combination of the Royal Commission and of course the housing market.
The lending landscape has drastically changed, with the regulators pressuring lenders to tighten lending standards and take greater ownership in their investigations into affordability of repayments for their customers. This pressure when combined with a lower thirst for residential real estate among Australians has meant that the banks most profitable service line has seen less activity than in previous years.
International shares also experienced losses, particularly in Emerging Markets. While the share market provided moderate returns (+1.52% for the MSCI World ex-Australia (with net dividends reinvested).
Infrastructure Funds delivered great returns (10% + in some cases), providing a welcome boost to the calendar year performance and enabled a partial offset of losses elsewhere for those with exposure.
Australian and International Property funds were a positive contributor over the calendar year, adding 3%+ and 4%+ respectively. This is a positive outcome given the challenges faced by the retail sector and the increasing popularity of online shopping.
Finally, Australian and International fixed interest delivered reasonably well given the general consensus that bond prices were on the move upwards. The Vanguard Australian Fixed Interest Fund delivered a 4.56% annual return while International provided a 2.73% contribution.
What’s in store for 2019?
2019 has started off with a bang, with the Australian Share market providing solid gains (S&P/ASX300 now over the 6,000 mark) with similar returns from international markets. While economic indicators remain positive we’re conscious that we have events and circumstances that will cause further volatility, including:
US-China trade: There has been some news in January that suggests China and the US may come to an agreement, or at the very least that they are more open to negotiations. If this ongoing issue is resolved, we believe investor confidence will improve. This certainly appears to be the case at the time of writing, with the S&P 500 index on-track for its best monthly gain since March 2016.
Brexit: With the British exit from the EU due 29 March many market speculators are trying to decide whether it will have a positive or negative impact on financial markets. With the FTSE 100 falling 12.5% in the 2018 calendar year, then rising steadily in January 2019 market commentators are predicting a ‘soft’ landing in April thanks to returning investor confidence. The only reasonable approach here is ‘wait and see’.
Interest rates: Some of the volatility in global shares during the 2018 financial year was attributed to the US Federal Reserve’s interest rate increases and more importantly the schedule of interest rate increases they believed would be required to steady economic growth. While some of the rhetoric from the Federal Reserve has been less ‘gung-ho’ about future rate rises in recent times we still believe there’s a disparity between investor expectations and the Fed’s outlook. We believe this could be a source of increased volatility in 2019.
Australian real estate: If house prices weren’t the number one BBQ conversation topic before they certainly are now. Everyone from real estate agents to economists have their eye on the stats and strong opinions are forming as to ‘how much further they’ll drop’ and where. In a recent article published by the Financial review, all 5 economists surveyed agreed that housing prices would fall in 2019. The general opinion from industry experts is to expect a drop of between 5% to 10%.
As always, we encourage investors to take a diversified approach that represents the level of risk they’re comfortable with and to ensure a long-term approach is taken.
To further discuss the impact that the issues in this article may have had on your investment portfolio, or to discuss making adjustments to your financial strategy, give our team a call for a confidential conversation regarding your personal circumstances
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