Despite a range of economic and market “challenges” during the year, markets have delivered good returns, especially for global shares and Australian listed property investors.
Central bank policy stimulus remained an important influence and source of support for asset prices around the world. Several central banks, including the Bank of Japan and the European Central Bank, were forced to implement or upscale their own versions of quantitative easing (QE) in response to weakness in their respective economies.
In contrast, widespread signs of economic recovery enabled the US Federal Reserve (the Fed) to taper and eventually conclude its own massive QE program in October 2014. Market concerns over the impact of QE withdrawal have been replaced by uncertainty about when the Fed will begin to raise interest rates, which is widely expected to be in the second half of the 2015 calendar year.
Interest rates are providing added stimulus
Interest rates remain at or near historic lows, providing on-going stimulus and much needed support to the global economy. In Australia, below-trend economic growth, higher unemployment and low inflation prompted the Reserve Bank of Australia (RBA) to reduce interest rates on two occasions. China has been responding to weaker than expected economic growth in a similar way with the People’s Bank of China cutting interest rates and implementing bank lending reforms.
Another strong year for global share markets
Global shares delivered their third consecutive financial year of double-digit returns. The performance of emerging share markets also recovered despite a challenging year economically for many nations.
For the year to 30 June 2015, in local currency terms, most of the major developed markets recorded positive returns. Japan was the stand-out performer with the Nikkei Index reaching an 18 year high.
Economic and financial conditions in some key emerging economies have been more challenging. Most notably, growth in China has slowed significantly while commodity based economies like Brazil also struggled.
Australian shares provided modest returns
While Australia’s share market recorded a modest gain, there were pronounced differences in industry sector performances. Increasing supply coupled with slowing demand in China combined to push iron ore prices lower. Rising shale oil production and a breakdown in the Organisation of Petroleum Exporting Countries (OPEC) cartel weighed heavily on oil prices. As a result, resource and energy companies underperformed other sectors of the Australian market.
In an environment of very low term deposit and interest rates, the best performers tended to be sectors and companies with sustainable and attractive dividends, such as listed property trusts and Telstra respectively. Companies with offshore earnings which are likely to benefit from the weakness in the Australian dollar versus the US dollar also performed well.
Bond investors enjoyed another positive year of returns
High yield and Australian bonds provided the best returns, while hedged global government bonds also performed well.
Interest rates remained at historically low levels around the globe for much of the year as the priority for many countries and regions was to provide much needed economic stimulus, especially in Europe where deflation has been a real risk. The return on cash in Australia was small, forcing many investors reliant on term deposits for income to consider other investments.
Australia’s economy has needed a ‘helping hand’
Australia’s economy continued to grow but at a pace that the RBA described as below trend. It is clear the economy is experiencing conditions that are far from normal with numerous signs the transition from the ‘mining boom’ is proving to be a complex and lengthy one. Unfortunately, weak capital spending and business investment by the non-mining sector means there has been little or no offset to the significant decline in mining sector investment. Australia’s terms of trade has weakened as prices for our key mining exports (especially iron ore) are lower. In contrast, housing construction enjoyed strong growth while consumer spending, despite low wage growth, also improved.
Overall, the investment environment remains unpredictable
Improvements in both the Australian and world economies and solid investment returns are welcome news for investors. However, many important issues remain unresolved and the investment environment is uncertain. While markets are already anticipating US interest rates will rise at some stage, the impact is difficult to gauge with certainty. There is concern that share market valuations rest on the tenuous foundations of ultra-low interest rates.
At the close of the financial year, Greece and the risk of default was back in the headlines. Economic growth in important parts of the world (Europe, Japan) is modest at best and fragile. Slower growth in China as it transitions to a more sustainable, consumer oriented economy has important consequences for Australia, especially as we are now at a point in the commodity price cycle that is less favourable.
