|1 mth (%)||3 mth (%)||FYTD*||1 yr % (pa)||3 yr % (pa)||5 yr % (pa)||7 yr % (pa)||10 yr % (pa)|
Note: The 1, 3 and 5-year figures are rolling, reflect an annualised compound rate and are after tax and fees. Past performance should not be regarded as an indication of future performance.
After solid returns in prior quarters, markets fell sharply in the December quarter, eliminating most of the gains achieved during the rest of 2018. At a high level, poor performance in share markets over the quarter can be mostly attributed to increasing fears that the US Central Bank would raise interest rates too far, continuing US/China trade tensions and the ongoing saga of Brexit negotiations.
The Australian share market returned -8.2% over the quarter, resulting in a return of -2.8% for 2018. Global shares (unhedged) also had a bad quarter returning -11.1%, but managed to remain positive for the year at 1.5%. Over the quarter, bonds showed their value as a diversifying asset with the Australian bond market returning 2.2% for the quarter and 4.5% for the year. Unlisted property assets also provided diversified portfolios with positive outcomes with the Australian commercial property market returning 2.2% for the quarter and 9.7% for the year.
The suggestion by US Federal Reserve Chairman Jerome Powell that US rates are a “long way” from neutral spooked investors in early October. Powell later softened his comments by highlighting that interest rates would only rise if economic data warranted it. Anxiety over the speed of US rate hikes is nothing new, but with the federal funds rate now having been lifted nine times since 2015 and four times in 2018, the current level of 2.25% is the highest rate amongst developed countries. For context, the Reserve Bank of Australia’s (RBA) target cash rate remains at its lowest on record at 1.5%.
Fears of higher US interest rates had a material impact on the US share market over the quarter with the market being down 11% in local currency terms. However, the Australian dollar falling 3% over the quarter provided a buffer for Australian investors.
Signs that the profitability of US companies may be peaking also hurt markets. The energy and technology sectors fared particularly poorly over the quarter with the energy sector hampered by low oil prices and technology companies such as Apple experiencing bouts of volatility due to weaker than expected sales.
Ongoing China/US trade tensions was another source of anxiety, however late in the quarter tensions eased a little with agreement to continue discussions over the first quarter of 2019.
Meanwhile, the US, Canada and Mexico reached a relatively quick compromise to save the North American Free Trade Agreement (though under the new name of the United States Mexico Canada Agreement). This is unlikely to mean a significant boost to the region but the comparatively quick resolution will be appreciated.
If not for the focus on trade, Brexit would otherwise be the main factor driving markets. During the quarter a draft agreement between the European Union (EU) and UK officials was met with mixed reactions. British Prime Minister Theresa May’s cabinet approved the deal, however there was strong dissent from other members of the Conservative Party resulting in a delay to the parliamentary vote set for 11 December. At the time of writing it was unclear how things will pan out, but volatility in currency and European share markets will likely continue until the issue is resolved.
The Australian economy continues to perform at a moderate rate with the main concern being falling house prices in Sydney and Melbourne. Recent falls are not a major concern given how much housing appreciated over recent years. While the RBA appears to be comfortable leaving rates steady and waiting to see how the housing market develops over the first half of 2019 their next move may be to lower rates if falling house prices lead to lower consumer spending.
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