The end of the financial year saw another well-above average year for investment markets overall especially for investors in shares - both Global and Australian – with the median “Balanced” super fund (60% to 76% in growth assets) looking to close the Financial Year with a 12.6% gain as shown in the chart below.
This was despite a range of challenges and crises, both economic and geopolitical, which unsettled financial markets, with individual asset class returns summarised in table 1 below.
Sources: Datastream, MLC Investment Management. *Annualised returns except for 3 month.
Another strong year for global shares
World share markets delivered their second consecutive financial year of double-digit returns and for the second year running, markets in the developed world outperformed emerging share markets.
Reviewing the performance of the major world share markets in local currency terms for the year to June 2014, European shares were the stand-out performer this year, followed by US shares.
Japanese shares underperformed other markets this financial year, after posting a return above 50% in the 2013 financial year.
For Australian investors, returns from shares remained robust
For Australians with overseas investments, returns from global shares were very strong on both a hedged basis (that is, when the foreign currency exposure is hedged to the Australian dollar) and an unhedged basis. However, as Table 1 shows, a recovery in the Australian dollar did detract from unhedged global share returns over the year, but the Australian dollar still remains over-valued by most measures.
Here in Australia, share prices enjoyed good gains, although resources significantly underperformed other sectors of the market due to concerns about the impact of slower growth in China. In an environment of very low interest rates, companies that investors viewed as offering sustainable and attractive dividends – especially in banking and telecommunications – were highly sought after.
Bond returns overseas were stronger than at home
Fixed income returns improved on the 2013 financial year, as bond markets in the eurozone performed very strongly. Non-government bonds significantly outperformed government bonds.
In Australia, fixed income returns underperformed global markets over the year. In line with international developments, non-government bonds produced higher returns than government bonds. After reducing official interest rates in August 2013 to just 2.5% – the lowest in living memory – the Reserve Bank of Australia left interest rates unchanged for the rest of the financial year.
Developed economies seem to be recovering gradually
The global economy has generally improved over the course of the year, largely due to progress in the major developed economies. While extreme winter weather conditions saw the US economy stall in the first quarter of 2014, the underlying trend of US growth is still positive, particularly as fiscal policy is likely to impact growth significantly less than previously.
Economic conditions in the eurozone have improved over the last 12 months, although some more recent growth data were a little weaker than expected, and inflation readings remain worryingly low. Fears that the eurozone could still fall into deflation prompted further monetary policy easing steps by the European Central Bank (ECB) over the year. However, the ECB is yet to embark on the large-scale QE programs seen elsewhere.
In Japan, a massive QE program has boosted share prices, lowered bond yields and contributed to bouts of weakness in the yen.
Still, it isn’t clear that the policy measures adopted by the Japanese government and the Bank of Japan will prove to be the cure-all the Japanese economy needs.
Some emerging markets have suffered
Economic and financial conditions in some key emerging economies have been more challenging.
Growth in China and India has slowed. Economies such as Brazil, Indonesia and Turkey, which previously attracted strong capital inflows, have found conditions more difficult, especially since the Fed began signalling it would wind back QE.
As a result of the Fed’s tapering program, there’s less money circulating in the US economy, so less to invest overseas.
Australia needs growth outside the mining sector
In Australia, overall economic growth has accelerated over the past year, but it’s clear that the best of the mining boom is largely behind us.
Further, it’s not yet clear that the non-mining sectors are improving fast enough to offset a likely drag on future growth from the mining sector. Although the volume of mining exports is likely to remain very strong, lower prices for our key resource exports (like iron ore) will adversely impact the income we receive from these.
We’re also likely to see substantial falls in mining investment activity in coming years as construction projects reach completion.
Overall, the investment environment remains unpredictable
Improvements in both the Australian and world economies and very solid investment returns are welcome news for investors. However, many important issues remain unresolved and the investment environment uncertain.
The actions of policy makers – either in withdrawing economic stimulus measures too quickly or leaving them in place for too long – are a key source of uncertainty for both the world economy and financial markets, despite the best efforts of central bankers to give guidance on future policy developments.
Geopolitical risks have heightened over the last year: in addition to the ongoing conflict in Syria, developments in the Ukraine and recent events in Iraq continue to cause concern. Iraq, keeper of the world’s fifth-largest oil reserves, is teetering on the brink of collapse, and oil prices have jumped to their highest levels for around nine months.
What does this mean for investors?
It is important to remain focused on managing risk and finding even better ways to insulate against adverse events.
With future developments in the global environment so uncertain, it’s more important than ever portfolios have resilience in a wide range of conditions, meaning that portfolio need to remain widely diversified, risk-aware and well positioned for many market environments.
For more specific help and guidance with your own investment strategy or asset selection, please don’t hesitate to contact Michael Rees-Evans CFP® in our office on 02 9299 7044 or by email at email@example.com