2019 Year in Review: A year of highs and lows

It was a year of extremes, with shares hitting record highs and interest rates at historic lows. Yet all in all, 2019 delivered far better returns than Australian investors dared hope for at the start of the year.

The total return from Australian shares (prices and dividend income) was 24 per cent in the year to December.i When you add in positive returns from bonds and a rebound in residential property, Australians with a diversified investment portfolio had plenty to smile about.

Humming along in the background, Australia entered a record-breaking 29th year of economic expansion although growth tapered off as global pressures mounted.

Global economy slowing

The US-China trade war, the Brexit impasse and geopolitical tensions weighed on the global economy in 2019. Yet late in the year optimism grew that US President Donald Trump would sign the first phase of a trade deal with Beijing. The re-election of Boris Johnson’s Conservatives in the UK also raised hopes that the Brexit saga may finally be resolved.

The US economy is in good shape, growing at an annual rate of 2.1 per cent. China has fared worse from the trade tensions, with annual growth of 6 per cent its weakest since 1992. In Australia, growth slipped to an annual rate of 1.7 per cent in the September quarter.ii

Despite the global slowdown, Australia continued its run of healthy trade surpluses thanks largely to a 29 per cent increase in iron ore prices.iii

Interest rates at new lows

The Reserve Bank cut the cash rate three times in 2019 to an historic low of 0.75 per cent. The US Federal Reserve also cut rates to a target range of 1.50-1.75 per cent. This was the main reason the Australian dollar lifted from its decade low of US67c in October to finish the year where it started, around US70c.iv

Rate cuts flowed through to yields on Australian 10-year government bonds which fell to just 1.37 per cent.v Total returns from government bonds (yields plus prices) were up by around 8 per cent.vi

Retirees and others who rely on income from bank term deposits had another difficult year, with interest rates generally below 2 per cent. After inflation, the real return was close to zero. It’s little wonder many looked elsewhere for a better return on their money.

Bumper year for shares

The hunt for yield was one reason Australian shares jumped 18.4 per cent in 2019, the best performance in a decade.vii The market climbed a wall of worries to hit a record high in November on optimism about a US-China trade deal, then eased back on concerns about slowing economic growth.

Despite low interest rates and personal tax cuts, consumers are reluctant to spend. The Westpac/Melbourne Institute survey of consumer sentiment fell to 95.1 in December – anything below 100 denotes pessimism.viii

Property prices recovering

Australian residential property prices rebounded strongly in the second half of 2019, driven by lower mortgage interest rates, a relaxation of bank lending practices and renewed certainty around the taxation of investment property following the May federal election.

According to CoreLogic, property prices rose 2.3 per cent on average, led by Melbourne and Sydney, both up 5.3 per cent. When rental income is included, the total return from residential property was 6.3 per cent.ix

Looking ahead

Property prices are expected to recover further this year but with shares looking fully valued and bond yields near rock bottom, returns could be more modest.

The Australian government is under pressure to do more to stimulate the economy in the short term to head off further rate cuts by the Reserve Bank. More fiscal stimulus could inject fresh life into the local economy and financial markets.

Overseas, the US-China trade war is far from resolved and could remain up in the air until after the US Presidential election in November. There is also uncertainty over the Brexit deal and its impact on trade across Europe.

The one thing we do know is that a diversified investment portfolio is the best way to navigate unpredictable markets.

i Econonomic Insights: Sharemarket winners and losers, CommSec Economics, 2 January 2019

ii Trading Economics, viewed 1 Jan 2020, https://tradingeconomics.com/indicators

iii https://dfat.gov.au/trade/resources/trade-statistics/Pages/australias-trade-balance.aspx

iv Trading economics, as at 31 Dec 2019, viewed 1 Jan 2020, https://tradingeconomics.com/currencies

v RBA, https://www.rba.gov.au/statistics/tables/#interest-rates

vi Economic Insights: Year in Review; Year in Preview, CommSec 2 January 2020.

vii Trading economics, viewed 1 January 2020 https://tradingeconomics.com/stocks

viii https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/economics-research/er20191211BullConsumerSentiment.pdf

ix https://www.corelogic.com.au/news/corelogic-december-2019-home-value-index-strong-finish-housing-values-2019-corelogic-national

Artificial Intelligence: the future of finance

We often like to think of artificial intelligence as some fantasy of the distant future, the stuff of sci-fi movies. But the reality is, it’s already here. From flight comparison websites to predictive text, AI is everywhere, but what is it exactly?

AI is the development of computer systems that have the ability to perform tasks normally requiring human intelligence. These processes include learning, reasoning, and self-correction. The first AI algorithms were in fact written way back in the fifties, but it’s only been in the last twenty years, with huge advances in computer processing power, that we’ve really been able to see the tangible effects of AI in our lives and on our finances.

Big data, changing legislation and technological advances are feeding an AI revolution in the finance sector that is having wide-ranging repercussions for stock market trading and our personal finances.

Impact on trading

Since the late 90s when electronic trading became widespread, the proliferation of AI has totally changed the functioning of the global economy. Most of this is done through algorithmic trading, which, though nothing new, has been enhanced by huge advances in computational power.

Advocates of this sort of trading talk about how it eradicates human error, and removes emotion from investment decisions. While others argue that if algorithms aren’t thoroughly back-tested over a long enough period—or if the input data is somehow compromised—people’s assets are at risk. Many point to the inability of AI to predict the GFC as an example of this. The 2010 Flash Crash is another, wiping nearly $1 trillion USD from the market in seconds because of spoofing algorithms (which have since been banned), before rapidly rebounding.i

The truth is, as AI has developed so has its regulation, meaning hiccoughs experienced even ten years ago are less likely to occur today. And you need only look at changing rules around data sharing and instant transactions occurring globally, or the massive returns last year on quantitative hedge funds—which employ algorithms and machine learning to inform their investment decisions—to know that this sort of trading is here to stay.ii

Personal Finances

AI has already had a big effect on how we manage our personal finances. The credit card industry for example has benefited from increased data security and reductions in fraud as a result.

Similarly, banks are now able to analyse the data of billions of transactions to predict the spending of consumers and market their products accordingly. This same technology allows individuals to automate their expenditure, with many banking apps now sorting purchases by type and alerting users when they’re reaching their limits.

AI is also changing processes around lending and borrowing. This is especially true in the developing world, where credit scores might not be available. Startups such as LenddoEFl in Singapore are tracking people’s behaviours on their smartphones to glean the likelihood of them meeting their repayments.iii The algorithm they’ve developed recognises behaviours indicative of financial responsibility and therefore can advise lenders, with a high degree of accuracy, on whether the loan should be approved. This technology will be interesting to watch as banks tighten lending standards and start to look not just at salary but also spending habits to determine if a loan is approved.

The robots aren’t coming… yet

In the world of AI, scholars often make the distinction between Artificial Intelligence, which is now common place in many industries, and Artificial General Intelligence (AGI), the sort that might mimic a human brain and create links between disparate ideas and deal in abstract notions.iv We are still a long way from achieving the latter. And it has been argued that there are some aspects of the human experience that can’t be replaced by code, however clever it is.

When it comes to your financial life, technology can certainly provide us with useful tools. There is no substitute however for knowledgeable advice that takes into consideration your unique circumstances, goals and dreams. We can help you navigate this brave new world, while also assisting you in a way that no algorithm is yet capable of.

i https://www.reuters.com/article/us-usa-security-fraud/uk-speed-trader-arrested-over-role-in-2010-flash-crash-idUSKBN0NC21220150421

ii https://www.getsmarter.com/blog/career-advice/algorithmic-trading-hedge-funds-past-present-and-future/

iii https://www.marketwatch.com/story/ai-based-credit-scores-will-soon-give-one-billion-people-access-to-banking-services-2018-10-09

iv https://www.theguardian.com/future-focused-it/2018/nov/12/is-ai-the-new-electricity

Benefits of a super long engagement

Superannuation is a long-term financial relationship. It begins with our first job, grows during our working life and hopefully supports us through our old age.

Throughout your super journey you will experience the ups and downs of bull and bear markets so it’s important to keep your eye on the long term.

The earlier you get to know your super and nurture it with additional contributions along the way, the more secure your later years will be.

Like all relationships, the more effort you put into understanding what makes super tick, the more you will get out of it.

Check your account

The first step is to check how much money you have in super and whether you have accounts you’ve forgotten about.

You can search for lost super and consolidate all your money into one fund if you have multiple accounts by registering with the ATO’s online services. Having a single fund will avoid paying multiple sets of fees and insurance premiums.

The next step is to check what return you are earning on your money, how it is invested and how much you are paying in fees.

The difference between the best and worst performing funds could fund several overseas trips when you retire, so it’s worth checking how your fund’s returns and fees compare with others. You can switch funds if you are not happy, but it’s never wise to do so based on one year’s disappointing return.

State your preferences

Default options are designed for the average member, but you are not necessarily average. Younger people can generally afford to take a little more risk than people who are close to retirement because they have time to recover from market downturns. So think about your tolerance for risk, taking into account your age, and see what investment options your super fund offers.

As you grow in confidence and have more money to invest you may want the control and flexibility that come with running your own self-managed super fund.

Also check whether you have insurance in your super. A recent report by the Australian Securities and Investments Commission (ASIC) found that almost one quarter of fund members don’t know they have insurance cover, potentially missing out on payouts they are entitled to.ii

Insurances may include Total and Permanent Disability (TPD) and Income Protection which you can access if you are unable to work due to illness or injury, and Death cover which goes to your beneficiaries if you die.

Building your nest egg

Once you understand how super works you can take your relationship to the next level by adding more of your own money. Small amounts added now can make a big difference when you retire.

You can build your super in several ways:

• Pre-tax contributions of up to $25,000 a year (including SG amounts), either from a salary sacrifice arrangement with your employer or as a personal tax-deductible contribution. This is likely to be of benefit if your marginal tax rate is higher than the super tax rate of 15 per cent.

• After-tax contributions from your takehome pay. If you are a low-income earner the government may match 50c in every dollar you add to super up to a maximum of $500 a year.

• If you are 65 and considering downsizing your home, you may be able to contribute up to $300,000 of the proceeds into your super.

You could also share the love by adding to your partner’s super. This is a good way to reduce the long-term financial impact of one partner taking time out of the workforce to care for children. You can split up to 85 per cent of your pre-tax contributions with your partner. Or you can make an after-tax contribution and, if your partner earns less than $40,000, you may be eligible for a tax offset on the first $3,000 you put in their super.

Before you make additional contributions, adjust your insurance, or alter your investment strategy, it’s important to assess your overall financial situation, objectives and needs. Better still, make an appointment to discuss how you can build a positive long-term relationship with your super.

i https://download.asic.gov.au/media/4861682/rep591- published-7-september-2018.pdf

Plugging in to technology stocks

On August 2, Apple became the world’s first company to reach US$1 trillion in market value. It took 42 years to get there from humble beginnings in an LA garage, but a handful of younger technology companies are already nipping at its heels. Collectively they are known as the FAANGs – Facebook, Amazon, Apple, Netflix and Google. 

What do they have in common? All have used innovative technology to create new markets, often beginning with a single product or service. Think Apple’s early desktop computers, Amazon’s online book retailer, Netflix’s streaming service, Facebook’s social network and Google’s search engine. 

According to Forbes magazine, these tech giants have become so much a part of everyday life that their products or services are regarded almost as utilities, as essential to modern living as power or water.(i) They have also used technology and digital transformation to redefine customer experience in a way that is leaving traditional companies behind. 

While their products and services may be cutting edge, their investment appeal is old school. Legendary investor Warren Buffett has been a major Apple shareholder for some time. He is known to look for stocks with reliable, long-term earnings at an attractive price with a strong ‘moat’. A moat might be a brand name, key products or high barriers to exit. Switch your iPhone for another brand for example, and you lose your iTunes music library and countless apps you downloaded. 

China unleashes BATs

While the FAANGs are US-based, they face stiff competition in the global tech stakes from China’s BATs. Baidu, Alibaba and Tencent may not be household names in Australia, but they deserve to be on investors’ radar because they are a dominant market force not just in China but increasingly elsewhere as well. 

Hong Kong-listed Tencent Holdings is known as China’s equivalent of Facebook. Tencent was the first Asian company to reach the US$500 billion stock market valuation mark. It’s WeChat social media platform recently reached an eye-popping one billion members and it’s also involved in online gaming, music, e-commerce and smartphones. 

Alibaba (China’s Amazon plus eBay) is the world’s biggest retailer. It’s New York Stock Exchange (NYSE) listing in 2014 was the world’s biggest and this year it became the second Asian company to be valued at more than US$500 billion. 

Baidu (China’s Google) is the second most widely used search engine in the world. It’s also moving into mapping, artificial intelligence and autonomous vehicles. And these are just the biggest of many emerging Chinese tech stocks. 

Opportunities and challenges

The tech giants are also beginning to expand into new business areas such as cloud storage, music and video streaming. Some are also growing by acquisition, with Facebook buying What’s App and Microsoft buying LinkedIn. 

Yet big does not necessarily deliver success. Facebook’s share price recently fell 19 per cent in a day. The sell-off was due partly to concerns about the company’s ability to deal with privacy issues, but also to a flattening out of user numbers. China’s BATs also face challenges from the worsening trade dispute with the US. 

So how can Australian investors participate in the dynamic technology sector without getting burnt? 

Getting down to business

Diversification is the key to investing in the world’s leading tech stocks, while minimising the risk of individual companies performing poorly. The simplest way to gain exposure is via a traditional managed fund or an exchange-traded fund (ETF) which can be bought and sold on the Australian Securities Exchange (ASX) like individual shares. We've written about ETFs previously.

For the broadest exposure there are global technology funds. A popular way to access the FAANGs plus Microsoft and others is to choose a fund that tracks the Nasdaq 100 Index. Although the US-based Nasdaq exchange is home to a wide range of companies, it is well known for tech stocks. 

Tech companies are often seen as exciting, but investors would do well to follow Buffett’s lead and make sure that the fundamentals are sound, looking at their financial health and ability to deliver sustainable returns. If you would like to talk about your investment strategy, give us a call. 

i ‘Apple and the rise of the trillion dollar firm’, 6 August 2018, https://www.forbes.com/sites/dantedisparte/2018/08/06/apple-and-the-rise-of-the-trillion-dollar-firm/#6eecde0c631d

2017 Year in Review: Fair winds guide investment returns

Investors had plenty to smile about in 2017, despite a world of worries on the geopolitical stage from the Middle East to North Korea and the South China Sea. The global economy continued its steady improvement and financial markets produced some excellent returns. 

The year began with the inauguration of President Donald Trump, whose populist policies on issues such as trade and energy have impacted the global economic agenda. As the year closed the Trump administration’s corporate tax cuts were approved by Congress, which should boost US economic activity. 

The US Federal Reserve lifted its benchmark interest rate three times in 2017, with more expected this year as the economy strengthens. 
 

Positive economic growth

The global economy grew steadily throughout 2017 with the US and other G7 leading industrial nations growing at around 2.2 per cent. China’s growth has slowed, but at 6.8 per cent it’s still a global powerhouse and a major customer for Australia’s natural resources, education and other goods and services.i

Australia’s economy grew by 2.8 per cent in the year to September, marking 26 years without a recession. The biggest contributor was private sector investment as business profits posted their strongest gains in 15 years. 

Unemployment fell to 5.4 per cent, but sluggish wage growth remains an issue for the Reserve Bank.ii A jump in consumer confidence to 103.3 on the Westpac Melbourne Institute scale – anything above 100 is viewed as optimism – was good news for retailers leading into Christmas.iii
 

Mixed signals on financial markets

The Australian dollar finished the year at US78c, up 8.6 per cent, due mostly to strong commodity prices. The cash rate held steady at 1.5 per cent all year while interest rates on government 10-year bonds fell from 2.77 per cent to 2.64 per cent.iv The consensus is that the next interest rate move will be up although perhaps not until later this year. 

Commodities were a mixed bag. Global oil prices rose 12.5 per cent to US$60 a barrel as OPEC members agreed to extend production restrictions. Iron ore fell 3.3 per cent on lower demand from China, while coal rose 5.7 per cent.v

The shooting star award of 2017 goes to Bitcoin. The value of one Bitcoin soared from around $1300 in January to a high of over $22,000 before dropping to around $17,000 at year’s end. 
 

Shares surprise on the upside

Global shares powered ahead, fuelled by economic growth, strong corporate profits and low interest rates. 

US shares rose to record highs, up 19 per cent partly in response to the weak US dollar. The low dollar and Brexit uncertainty were a drag on the UK market, but it still managed a 7 per cent lift. Eurozone leaders Germany and France posted gains of 12 per cent and 9 per cent respectively. Asian and emerging market shares were also among the top performers, with the Japanese market up 19 per cent.vi

 

Property cools

Australian home prices rose 4.2 per cent last year compared with 5.8 per cent in 2016, dragged down by the cooling Sydney market which was up just 3.1 per cent. Hobart (up 12.3 per cent) and Melbourne (up 8.9 per cent) were the strongest capital city markets, followed by Canberra (4.9 per cent), Adelaide (3.0 per cent) and Brisbane (2.4 per cent). Darwin fell 6.5 per cent and Perth was down 2.3 per cent.vii

Most observers predict subdued growth rather than a market bust in the year ahead. 

 

Looking ahead

There is every reason for cautious optimism in the year ahead, although there are risks too. Continuing investigations into Donald Trump could destabilise his leadership and global markets, while closer to home the Reserve Bank is keeping a watchful eye on wages, inflation, the Aussie dollar and property prices. 

Even so, local economic growth is on track, interest rates are likely to remain low for some time yet and first home buyers have their best chance in years to get a toehold in the market. Australian shares look fair value although global equities are likely to continue to provide higher returns. 

i Trading economics, https://tradingeconomics.com/country-list/gdp-annual-growth-rate?continent=america
ii Reserve Bank of Australia, http://www.rba.gov.au/snapshots/economy-indicators-snapshot/ 
iii Westpac Melbourne Institute Consumer Confidence, 13 December 2017, https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/economics-research/er20171213BullConsumerSentiment.pdf
iv RBA, rba.gov.au
v Trading economics, https://tradingeconomics.com/commodities
vi Trading economics, https://tradingeconomics.com/stocks
vii CoreLogic, 2 January 2018, https://www.corelogic.com.au/news/national-dwelling-values-fall-03-december-setting-scene-softer-housing-conditions-2018#.WlKzW1WWZhE

Lessons from the GFC - 10 years on

It’s been a decade since the market crash known as the Global Financial Crisis rocked the investment world. At the time investors could only watch in disbelief as 50 per cent was wiped off the value of their shares. Arguably, the actions those investors took are still reverberating today. Which begs the question: what are the key lessons of the GFC and did we pay attention? 

Predictably, there were warning signs before the eventual market crash. Just as predictably, no-one could predict the exact timing or the magnitude of the crash. 
 

What happened?

Ground zero of the GFC was in middle America. A lengthy period of low interest rates and poor home lending practices left homeowners vulnerable when rates began to rise and house prices fell below the amount they owed the banks. When whole neighbourhoods walked away from their homes and their debts, the liability shifted to the banks. 

Compounding the housing bust was the proliferation of new financial products that packaged up sub-prime loans along with higher quality debt and sold them on to global investors. These derivative products with names like collateralised debt obligations (CDOs) were sold as cutting edge but few investors understood the risks. 

When in 2007 investors tried to dump their CDOs the investment banks that issued them were unable to finance redemptions. The crisis led to a credit crunch and the eventual collapse of major investment firms like Bear Stearns and Lehmann Bros. 

The shock impacted markets around the globe. The Australian sharemarket followed Wall Street, falling around 50 per cent from its peak in November 2007 until it hit rock bottom in March 2009. 

What lessons did we learn?

Ten years is a long time on global markets. The US sharemarket is experiencing its second-longest bull run in history – eight years and still going strong. Australian shares have also had eight good years, although prices are still below the 2007 peak. All of which makes this a good time to ask if investors still remember the lessons of the GFC. Judging by a recent investor survey by Deloitte Access Economics for the ASX, it could be time for a refresher. (i)

Overall, 21 per cent of investors said they had little tolerance for risk but still expect annual returns of 10 per cent plus. Worryingly, less than half have diversified portfolios. But the real surprise was that older investors who lived through the GFC were less risk averse than younger investors who have no direct experience of a market crash. 

 

Be aware of market cycles

Perhaps older investors have learned what goes down comes back up, albeit with some twists and turns along the way. Time in the market also makes investors aware that one year’s best performing asset class can be next year’s worst. The best way to avoid timing the market is to have a diversified portfolio and ride out the short-term volatility. 

These lessons were borne out recently when Vanguard looked at the outcome for three investors with a diversified investment portfolio of 50 per cent shares and 50 per cent bonds when the GFC hit.(ii) When the market bottomed in March 2009 one sold the lot and switched to cash. One sold all their shares and put the money into bonds. And one stayed put in a balanced portfolio. 

Fast forward to 2016 and the investor who fled to cash was sitting on a cumulative return of 27 per cent. The investor who put everything in bonds had a return of 71 per cent. But the investor who sat tight with a mix of shares and bonds enjoyed the best return of 93 per cent. 

While each boom and bust cycle is slightly different, investors who understand the trade-off between risk and return, hold a diversified portfolio and stay the course are best placed to ride out market cycles for long-term success. 

i ASX Australian Investor Study 2017 by Deloitte Access Economics 
ii ‘Lessons from the GFC 10 years on’ by Robin Bowerman, 4 October 2017

High-frequency trading on regulators' radar

High-frequency trading is one of the biggest developments on global share markets since tickertape machines were replaced by computers. While traders and regulators argue the merits of the trend, the challenge for private investors is to understand what it means for them.

High-frequency trading – or HFT for short - uses powerful computer algorithms and high-speed cable networks plugged directly into exchanges’ computer systems to exploit small price differences.

Critics say this has the potential to manipulate the market while supporters say it results in greater market liquidity and lower fees. The truth probably lies somewhere in between.

On any given day HFT accounts for more than half the turnover on the New York Stock Exchange. There are no reliable figures for the Australian market but it is estimated to be much less than that.

High speed, high volume, low margin

High frequency traders make money by moving millions of shares a minute, aiming to earn a fraction of a cent on each share traded. The sheer volume and speed of the trades, executed in milliseconds, is why ordinary investors can be left flat-footed when computers malfunction or the algorithms are faulty.

This is what happened during the so-called ‘flash crash’ of May 2010 when the US sharemarket plunged 10 per cent in minutes, bringing a shadowy corner of the market into the open.

Controversy around high-frequency trading has simmered ever since but it recently reignited following the release of the book Flash Boys by Michael Lewis. He claims high-frequency traders have rigged the market at the expense of investors.

The head of the Australian Securities Exchange, Elmer Funke Kupper says regulatory settings and structural differences between Australia and the US mean that concerns about the practice are not relevant here.

But not everyone is convinced. Industry Super Australia has accused high-frequency traders of skimming $2 billion a year from local investors.

Increased regulation

Regulators have begun to respond to the trend but a comprehensive and co-ordinated response will take time. The US Securities and Exchange Commission is investigating the practice amid accusations that it is little more than insider trading.

Closer to home, the Australian Securities and Investments Commission (ASIC) is concerned that high-frequency trading has the potential to undermine trust and confidence in the market.

ASIC has threatened to introduce a pause on trades for half a second before being executed. This has been introduced successfully in the US by the IEX exchange in an effort to remove the speed advantage exploited by high-frequency traders.

ASIC also has its eye on so called “front running”, where high-speed traders test the market to see what price buyers and sellers will accept then jump in ahead of them with large transactions.

The human touch

The one advantage mere mortals have over computers is judgement. If a company’s share price plummets then rebounds faster than a bungee jumper, the cause is more likely to be a computer glitch in a remote trading room than any fundamental problem with the company.

Extreme volatility is a feature of modern financial markets and is probably here to stay. But the challenge for investors is the same today as it was decades ago.

If you focus on the fundamental value of an investment, diversify your holdings and ignore the swings and roundabouts of daily price movements, you will reap the rewards in the long run.

Along the way you may even profit from market fluctuations by picking up quality stocks that have been dumped by traders who focus on price not value.

If you would like to discuss any of these issues in light of your investments, don’t hesitate to contact us.

Global markets navigate a sea of uncertainty

It’s almost a decade since the global financial crisis created havoc in financial markets. While the global economy continues to show signs of recovery, political uncertainty in Europe and the United States is creating fresh confusion on global markets as investors wait to see how current events play out.

It started just over a year ago when Britain voted to leave the European Union. ‘Brexit’ was followed by the surprise election of President Trump in the United States. Then the relatively unknown Emmanuel Macron won the French Presidential election. And most recently, UK Prime Minister Theresa May gambled on a general election to strengthen her hand going into the Brexit negotiations with the EU, only to end up with a hung parliament.

That’s a lot of unpredictable outcomes for one year. As every investor knows, markets don’t respond well to uncertainty. So what can we expect in the months ahead?
 

Brexit talks begin

Brexit negotiations are finally underway but Britain’s lack of political unity may prolong talks and weaken its hand. The process involves two stages – first there are technical negotiations over who gets what in the divorce. This will be followed by trade talks about the nature of Britain’s relationship with the EU and its 27 member states going forward.

Whichever way the talks go there are likely to be financial winners and losers. The early market response has been to sell down the value of the British currency and shares, although a weaker pound is good news for companies with foreign earnings.

The market has responded more positively to President Macron’s victory and the success of his new party’s candidates in France’s June elections. Macron has promised market-friendly reforms to boost the sluggish French economy.
 

As the Trump trade deflates

The market’s early positive response to the election of President Trump has lost momentum as key policy changes including tax cuts and infrastructure spending which were intended to boost economic growth now look in doubt.

With the focus on political uncertainty on both sides of the Atlantic, the US Federal Reserve’s latest rate rise barely registered on financial markets. The Fed raised its key interest rate for the third time in six months to a range of 1 per cent to 1.25 per cent, with one more rise anticipated this year. This signalled the central bank’s ongoing confidence in the slow but steady economic recovery.

Markets appear to be playing a waiting game, with no clear signal to push the US dollar or bond yields higher. After a record-beating run, US shares have held onto their gains but drifted sideways in recent months. The S&P 500 index rose about 18 per cent in the year to June.i
 

Australia’s growth continues

Closer to home, Australia’s record-breaking economic run continues. While growth slowed to 1.7 per cent in the March quarter, it was a far cry from the recession some pundits were predicting.

The residential property boom in Sydney and Melbourne is also cooling, with prices barely moving in the three months to May.ii While this is good news for homebuyers, it also gives the Reserve Bank more room to lower interest rates if needed. In recent months, the Aussie dollar has traded in a narrow band around US75c. This is up from its low of US68c in January last year, but longer term the trend is likely to be down as the gap between local and US interest rates closes and foreign money looks for better returns elsewhere.

Australian shares have performed well, up more than 11 per cent in the year to June.iii But to put this in perspective, along with the US market rise of 18 per cent, French, German and UK shares rose around 27 per cent, 34 per cent and 22 per cent respectively while Japanese shares were up 29 per cent.iv
 

Looking ahead

For local investors, Australian shares remain attractive for their yields but global shares are likely to continue to provide superior returns going forward.

If you would like to discuss your investment strategy in the light of current world political and economic events, don’t hesitate to give us a call.
 

i All market figures as at June 27.

ii https://www.corelogic.com.au/news/multiple-indicators-point-to-softer-housing-market-conditions

iii http://www.marketindex.com.au/asx200

iv https://tradingeconomics.com/stocks