In this week’s Oliver’s Insights, Shane Oliver shares his review of the overall investment returns of the past financial year and takes a look at the outlook for the current financial year.
The key points are as follows:
- 2017-18 saw strong returns for diversified investors, but it was a story of two halves with strong December half returns but more volatility in the past 6 months.
- Key lessons for investors from the last financial year include: turn down the noise around financial markets, maintain a well-diversified portfolio, be cautious of the crowd and cash continues to provide low returns.
- Returns are likely to slow and the volatility of the last six months is likely to continue. Global growth is good, this should underpin profit growth and there are minimal signs of economic excess that point to a peak in the global growth cycle. But rising US inflation and rates, Trump and trade war fears and the risks around China and emerging countries are the main threats.
The past financial year saw solid returns for investors but it was a story of two halves. While the December half year was strong as global share markets moved to factor in stronger global growth and profits helped by US tax cuts, the last six months have been messier and more constrained – with US inflation and interest rate worries, trade war fears, uncertainty around Italy, renewed China and emerging market worries and falling home prices in Australia. But will returns remain reasonable or is the volatility of the past six months a sign of things to come? After reviewing the returns of the last financial year, this note looks at the investment outlook for 2018-19 financial year.
A good year for diversified investors:
The 2017-18 financial year saw yet again pretty solid returns for well diversified investors. Cash and bank deposits continued to provide poor returns and the combination of low yields and a back-up in some bond yields saw low returns from bonds. The latter resulted in mixed returns from yield sensitive investments, but Australian real estate investment trusts performed well helped by the RBA leaving rates on hold.
Reflecting strong gains in the December half as investors moved to factor in stronger global growth and profits assisted in the US by tax cuts global shares returned 11% in local currency terms and 15% in Australian dollar terms. Australian shares also performed well with the ASX 200 rising to a 10-year high and solid dividends resulting in a total return of 13%. Unlisted assets have continued to benefit from “search for yield” investor demand and faster growth in “rents” with unlisted property returning around 12% and unlisted infrastructure returning around 13.5%.
As a result, balanced growth superannuation returns are estimated to have returned around 9% after taxes and fees which is pretty good given inflation of 2%. For the last five years balanced growth super returns have also been around 8.5% pa.
Source: Thompson Reuters, AMP Capital
Australian residential property slowed with average capital city prices down 1.6%, with prices down in Sydney, Perth and Darwin. Average returns after costs were around zero.