The financial year to 30 June 2018 has been another applauded year. Whilst geopolitical risks remain, investors are largely content with how the financial markets have performed in FY2017/18.
Another stellar year for the Australian sharemarket
Investors will have plenty to smile about as the All Ordinaries and ASX200 ended the year at 6,289.7 and 6,194.6, up 9.1% and 8.3% respectively. Total returns including dividends on Australian shares (All Ordinaries Accumulation index) rose by 13.7% over FY2017/18. So overall the Australian sharemarket had another solid year in FY2017/18, with returns on shares near record highs over the last decade.
The FY2017/18 sharemarket gains are made all the more remarkable considering the index has been dragged down by heavyweight companies in the likes of the big banks, Telstra, QBE Insurance Group and, of course, AMP. These losses have been offset to some degree by galloping gains for our market darlings like CSL, Wesfarmers and Macquarie Group. Mining and energy names have driven the FY2017/18 gains. The top contributors is a laundry list of big commodity players: BHP, Rio Tinto, Woodside Petroleum, South32, Santos, and Origin Energy. All have jumped by at least 25 per cent in share price terms – Santos has doubled!
Asset Class Returns to 30 June 2017
|Global Bonds (hedged)||1.9%||3.8%||5.0%||6.9%|
|Australian property securities||13.0%||9.7%||12.0%||6.0%|
|Global property securities (hedged)||6.4%||6.9%||8.8%||6.8%|
|Global shares (hedged)||10.8%||8.5%||10.8%||7.0%|
|Gobal shares (unhedged)||15.0%||9.6%||14.2%||8.6%|
|Emerging Markets (unhedged)||12.3%||7.0%||9.6%||5.0%|
* Annualised returns. Past performance is not a reliable indicator of future performance.
Sources: FactSet, NAB Asset Management Services Limited.
Global economic conditions have strengthened as the year unfolded. This underpinned corporate earnings, especially in the US where the economy was resilient and substantial corporate tax cuts became law.
The US economy continues to perform strongly. Economic activity grew at a solid rate and strong jobs growth has seen unemployment decline to just 3.75%, a 48 year low. The US sharemarket received a further boost as 2017 came to a close, when Congress passed a raft of tax reform measures in December.
Both developed (broadly North America, Europe, Japan and Australia) and emerging share markets performed strongly, as did most major asset classes.
Trade-war fears loom
With Trump as the president of the U.S., the threat of a full-blown trade war is always in the cards. Fears of a global trade war were kicked off in early March with Trump announcing a 10% tariff on aluminium imports and a 25% tariff on steel imports. There is a risk of escalation though as the affected countries retaliate.
There is still plenty of optimism left in the tank – if the US didn’t really want to negotiate, the tariffs could have been much worse. As evident in Trump’s meeting with North Korean leader Kim Jong Un, we can all believe that there could be trade negotiations to come.
The Chinese shares fall again (from its high), but not so badly this time
From its high in January 2018, the Chinese sharemarket has fallen around 22% and the Renminbi has fallen around 6% from its April high. Deja vu? Movements like these are inviting comparisons to the 2015-16 plunge in Chinese shares and the Renminbi. The weakness has been triggered by signs of slowing growth in China, worries that this will be made worse by a trade war with the US. However, it’s very different to 2015 when Chinese shares plunged nearly 50% amidst an unwinding of margin positions, government moves to support the market and a shift to a new way to manage the currency that led to capital outflows. This time around, despite the share market falling, there has been no panicky unwinding of margin positions, economic data is arguably more stable, and there is more confidence in how the currency is managed. In fact, the fall in the Renminbi is a mirror image of the rise in the value of the US$, which against a basket of currencies is up nearly 8% since April. For these reasons, the fall in Chinese shares and the Renminbi is less worrying for the global and Australian economies than it was in 2015-16, which is why Australian shares have not been falling at the same time.
As global growth remains solid (helping drive good earnings growth) and monetary policy remains easy, we are likely to see more volatility and weakness between now and the next year as the US trade threat could get worse before it (hopefully) gets better.
On the local end, the upbeat Australian sharemarket reflects solid fundamental underpinnings. The market has had a string of positive news in recent months, with economic growth accelerating, business conditions staying around peak levels and earnings expectations for this and the next financial year modestly lifted after the February reporting season.
Whilst there are some positives, some worries still remain – with concerns mainly around the Fed, President Trump in the run up to the US mid-term elections, the growth outlook of China and emerging markets, and property prices in Australia!