Investment Markets Year in Review

With yet another financial year over, we take the opportunity to look back on the past twelve months and review what it has meant for investors.

A year of surprises… and growth

The financial year just ended on 30 June 2017 had a little bit of everything; first surprise and dismay, then rejuvenation through the back end of 2016, followed by an unusually tranquil period of ever rising share markets in the first half of 2017.

The 2016/17 financial year began with the repercussions from the UK’s surprise Brexit ‘leave’ referendum result in June 2016 still troubling European financial markets. No sooner had July commenced when the Australian federal election almost resulted in an unexpected change in government, as the Liberal/National coalition scraped back into government with a one seat majority, much to the bewilderment of most political pundits who foresaw a far easier victory.

In November it was the turn of the US to experience the unexpected, as Donald Trump was elected the 45th President of the United States.

It’s safe to say that 2016 wasn’t a great year for election forecasters.

So how did financial markets react to all this political uncertainty?

With a collective “meh” for the most part, as news of the various elections caused no more than a temporary hiccup in an otherwise relentless drive northward.

Markets take election outcomes in their stride

Financial markets are nothing if not ruthlessly efficient at incorporating new information into investment valuations.

Every piece of information that can impact a security’s price (and let’s face it, that’s pretty much all information) is anticipated before the fact, and incorporated almost immediately after it is known.

And so the results are in. 2016/17 was a financial year in which those willing to bear greater investment risk have been amply rewarded.

Let’s now look at how the various major investment markets did over the year, based on the most commonly used index benchmarks in each case.

Australian Shares: 9.3%

The Australian share market ended the year up a strong 9.3%. Most of that return was, however, delivered between July and December last year, with the return for the first half of 2017 being a much more benign to date.

The healthcare and utility sectors contributed the most to the robust Australian share returns, while discretionary retailers fared worst, on the back of concerns over the continued rise of online retailing over the ‘bricks and mortar’ retailers.

Index used: S&P/ASX 200 Index

International Shares: 12.5%

International developed share markets returned 12.5% (currency unhedged), a strong result given the initial uncertainty in the wake of both the Brexit vote and the US election.

The S&P500, the most widely followed US share benchmark, returned 15.3% on the back of strong gains among technology companies.

The UK share market well and truly shook off any Brexit jitters it might have had, posting a return of close to 12% while European economic powerhouse Germany generated a return of nearly 27%.

In our region the Japanese Nikkei 225 share market index posted a return of almost 27%, while Hong Kong’s Hang Seng index generated a 22% return.

Index used: MSCI World excluding Australia Index

Global Emerging Market Shares: 17.5%

Global emerging markets are countries that are considered to be in a transition phase toward developed market status; the four most notable being Brazil, Russia, India and China (the so-called “BRIC” economies).

Global emerging share markets had a stellar year, with the benchmark MSCI Emerging Markets index returning 17.5% over the financial year, with strong contributions from China, Taiwan and India.

Index used: MSCI Emerging Markets Index

Australian Listed Property (A-REITs): -10.6%

Investors getting exposure to Australian property via the share market didn’t have such a great time of it during the last financial year. These vehicles provide exposure primarily to commercial rather than existing residential property, encompassing office , industrial and retail property, together with an element of large-scale residential property development.

For the year to 30 June, the A-REIT sector generated a -10.6% return. While the office and industrial sectors were generally stable, the retail sector, incorporating shopping centre owners and developers, continued to struggle with falling sales.

Australians continue to direct more of their discretionary spending online, with this shift in consumer preferences severely impacting fashion and apparel retailers. The demise of retailers including David Lawrence, Marcs, Pumpkin Patch and more recently Topshop Australia, highlight the seismic shift occurring in apparel retailing in Australia.

Index used: S&P/ASX 200 A-REIT Index

Australian Fixed Income (Bonds): 0.25%

Australian bonds, incorporating those issued by the commonwealth government and large companies (mainly banks), had a broadly flat year.

Australian bonds struggled in part due to the movement of international interest rates over the course of the year. As it became increasingly apparent that the pace of economic recovery in the US was accelerating, official interest rates there were lifted three times during the financial year. This had a ripple effect on global bond markets.

As interest rates rise, the price of existing bonds fall in response, and Australian bonds were similarly impacted.

Index Used: Bloomberg Composite Australian Bond Index 0+ Years

Cash: 1.8%

Cash, in professional investment circles, refers to a range of short-term instruments that generally trade for period as short as overnight to no more than six months. These securities are priced off the official cash rate set by the Reserve Bank of Australia, which has held the rate unchanged at 1.5% since August 2016.

As a result of the low level of official interest rates, Cash returned 1.8% for the year to 30 June. Inflation is currently running at 2.1% per year, which means that the majority of Australians with money in the bank are effectively having the value of their savings account eroded, once inflation and taxes are taken into account.

Index Used: Bloomberg AusBond Bank Bill Index

On a more personal note…

The 2016/2017 financial year was a pretty incredible time for Clover. Since our public launch in December we’ve been overwhelmed with the interest and support we’ve received.

We’re grateful for the many clients who have chosen Clover, and we continue to work hard on your behalf: helping you invest smarter with less complication, less stress and lower fees.

There’s a ton we have planned for this new financial year, including some cool new features. We dream big at Clover, and much of that involves creating savings and investments technology to help yours come true.

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