Four key insights from the 2017 financial year
As we’re now immersed in the new financial year, it’s timely to reflect on how global markets played out over the 2017 financial year (FY17) by examining the performance of key asset classes and reviewing major stories and investment drivers. Here are our takeaways from FY17.
Our market rallied despite concerns over poor key economic indicators
Australia performed strongly with the ASX 200 returning 14.1 per cent (including dividends). Materials and financials sectors were the strongest performers – the latter despite a large pull back in our major banks following the bank levy announcement in May’s Federal Budget, which saw financials down 7.7 per cent in May. Meanwhile our dollar remained relatively stable, trading between 72 and 78 US cents. The only change to the official cash rate was a 25-basis point reduction to 1.5 per cent back in August 2016.
Difficulties came from rising underemployment, reduced interest rates, and weak wage growth. Underemployment (whereby workers are employed in less than fulltime roles despite wishing to work more) hit its highest levels since records began in 1978 – a core reason for stubbornly low wage growth. This trend contradicted the unemployment rate, which reduced towards the end of the year to 5.5 per cent.
Meanwhile, residential property prices continued to surge amid growing concerns of a bubble. The CoreLogic Hedonic Home Value Index rose 9.6 per cent1 and its ongoing growth – spurred by double digit growth in Sydney and Melbourne – has led to increased debate on the existence of a bubble. Income-to-debt ratios and weak wages growth both contributed to these concerns. House price-to-income ratios reached all-time highs, as did household debt-to-GDP ratios, while record low wage growth stagnated to under two per cent.
Political uncertainty did not appear to mute global equity returns
Major elections were held in large developed economies. The unexpected election of Donald Trump to the US Presidency prompted immediate panic from global markets. However, sentiment almost instantly rebounded on a more enthusiastic interpretation of his policies. Following the initial Trump-ignited surge, the US economy and equity markets continued to show positive signs. The US Federal Reserve raised rates three times, prompted by strong key economic indicators, including robust employment data, which outperformed expectations on multiple occasions. These strong economic signs were mirrored in equity results.
European voters also faced major political decisions. UK Prime Minister Theresa May took a huge post-Brexit risk announcing an early UK election, narrowly avoiding defeat. May is now negotiating Brexit with a hung parliament. Despite the disruptive political environment, the British equity market continued to deliver positive returns. Meanwhile across the Channel, centralist, pro-EU candidate Emmanuel Macron was victorious in the French election. Similar, pro-EU results in the Dutch elections suggest more positive sentiment and stability for the region. And the EU unemployment rate gradually reduced alongside a strong performance in equity markets.
Asian and emerging markets continued to record strong growth
Asian markets (excluding Japan) delivered strong growth led by China. China’s growth rate over the 2016 calendar year may have been the country’s slowest recorded rate in 26 years, but remained considerably above that of other major economies. Meanwhile, India’s Prime Minister Narendra Modi continued his focus on implementing reforms with continued strong support evidenced by his party’s convincing win in a key state election in March. This suggests he is a favourite to win the national election in 2019 and provides confidence in his ability to continue to implement reform. In fact, as the new financial year began, Modi passed one of the largest tax reforms in the country’s history, introducing a goods and services tax that replaces more than 12 federal and state levies.
Outside Asia, other emerging markets performed strongly with the MSCI Emerging Markets Index recording total returns of 20.0 per cent in Australian dollar terms.
Governments focused on infrastructure spend as the shift towards renewables continued
Global infrastructure assets were sold down heavily early in the financial year as concerns rose around the potential impact of reflation of the global economy on valuations; however, the sector recovered in the second half of FY17. This was spurred on by many global leaders promising increased infrastructure spend, as we saw in Australia and the US, as well as a more benign rates outlook.
Support for solar infrastructure continued to gain traction. Despite Donald Trump reneging on the Paris climate accord, progress continued with large corporates voicing support as prices continued to fall. Telstra inked a deal to build a solar farm in north Queensland in a bid to cap energy costs, and AGL Energy announced its long-term plan to exit coal. Solar investment was also strong in emerging nations – an Indian solar power company won the tender for a 200-megawatt project at a cost equating to around just AUD0.05 per kilowatt2. This is below the average cost of coal-fired plants by India’s largest power utility. While solar currently comprises only one per cent of electricity generated in India, unsurprisingly it increased by 81 per cent3 during the year from this contribution.
At this stage of FY18, traditional assets continue to look expensive, and for now we expect policy interest rates to remain on hold in Australia. As we continue into the 2018 financial year, it’s important to consider maintaining a strong focus on quality diversification in your investment portfolio.
This insight may contain general financial advice and was prepared without taking into account your objectives, financial situation or needs. Before acting on any advice, you should consider whether the advice is appropriate to you. Seeking professional personal advice is always highly recommended. Any forward looking statements are based on current expectations at the time of writing. No assurance can be given that such expectations will prove to be correct.