The fourth quarter saw outstanding gains across global share markets. The Australian market was aided by the strength in commodity prices, returning a solid 7.6%. International share markets returned a healthy 5.8% in Australian dollar terms, largely due to the strength of the Japanese and US markets. Global listed infrastructure also had a positive quarter returning 1.9% in Australian dollar terms. The Australian bond market was constrained as interest rates remain at historically low levels, returning 1.4% for the quarter. The Australian dollar was volatile over the quarter, but ended the year at a reasonably strong 78.1 US cents.
The Australian economy remains in sound condition overall, growing by 0.6% in the third quarter with unemployment falling to a four-year low of 5.4%. Employment growth was stronger than any other time since the Global Financial Crisis, but wage growth remains muted. As a result, inflation remained below the Reserve Bank of Australia’s (RBA) 2-3% target range. The lack of wage growth is not unique to Australia, but it is one of the economy’s more interesting indicators which has put downward pressure on the cash rate. The RBA left the cash rate on hold at 1.5% during the quarter, and markets expect it to stay there until at least the second half of 2018. The RBA’s ‘steady as she goes’ path saw bond yields fall, which helped bond markets marginally over the quarter.
Key indicators such as retail sales were encouraging, with sales picking up after a number of disappointing months. The sector has attracted attention in recent years, due to a decline in the year over year sales growth and the threat of ‘online’ competitors such as Amazon, which recently launched in Australia. Amazon is seen as a large threat due to its scale and disruptive business model (wider selection of products and faster delivery), which far exceeds that of a traditional retailer. It’s still very early days for Amazon in Australia and only time will tell how much the entrance of new competitors of its kind will affect local retailers.
The US economy remains solid. Economic growth accelerated at 0.8% over the quarter and unemployment fell to a new low of 4.1%. US consumer confidence remains very high and with the combination of the announced tax cut and little bad news to concern investors, the US share market hit a new all-time high. A key focus for markets remains the US Federal Reserve (Fed) which raised interest rates by 0.25% during the quarter. The Fed is expected to gradually increase interest rates over the coming year to around 2.0% to avoid inflation getting out of hand, but this should not have a negative impact on share markets in the near term.
It’s a similar story in the Eurozone, with strong manufacturing indicators and record consumer sentiment painting a positive picture. Risks to the European recovery are present, but our medium term view is positive as the region arguably has plenty more ‘fuel in the tank’ in terms of potential growth. The UK on the other hand remains a concern for investors, with the potential fallout from ‘Brexit’ (the UK’s decision to exit the European Union) still largely unclear. Since the 2016 referendum the British Pound has weakened significantly against the Euro, causing inflation to rise to more than 3.0%, (up from around 1.0% a year earlier). This prompted the central bank to raise the bank rate for the first time since 2007 from 0.25% to 0.50%. The uncertainty surrounding the negotiation of terms between the UK and the European Union is depressing investment in the UK economy which is unlikely to be good for the labour market.
One of the more interesting developments during the quarter was the spectacular appreciation of cryptocurrencies, with the most popular, Bitcoin, more than tripling over the quarter. Cryptocurrencies have gone from mere curiosities a year ago to now being investible assets. EISS Super does not invest in any cryptocurrencies (due to their lack of regulation and high risk), but the frenzy and excitement around them makes for an interesting case of investor behaviour.
Financial markets showed significant volatility in early February. To help members understand why this happened and what it means for their investments we provided a special email update earlier this month. If you missed the update it’s not too late to catch up visit the news section of our website.
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