Despite share markets falling for the month of December, calendar year returns for 2019 were exceptionally strong. The Australian share market returned 23.4% and international shares (unhedged in Australian dollars) returned 28.0% for 2019. This is a significant turnaround from 2018 where Australian shares returned -2.8% and international shares returned just 1.5%. Combined with good returns from property and bonds these strong share markets resulted in very strong outcomes for superannuation funds in 2019. While it’s always pleasing to see such good returns, investors should be aware that markets are unlikely to be as strong in 2020 given the high point from which they are starting.
Several key developments in December have helped 2020 get off to a positive start. Most notably, we saw agreement on a so-called ‘Phase 1’ trade deal between the US and China, and a stunning victory by Boris Johnson and the Conservative Party in the UK general election held on 12 December. Both these developments reduced risks in share markets heading into the end of 2019, and although the Australian share market didn’t see a rally in December, both the US and UK markets provided positive returns for the month of 3.0% and 2.8% respectively (see chart of Australian and US share market returns below).
Even before the deal was made official, investment markets responded enthusiastically to the news of a Phase 1 trade deal. Perhaps because of the drawn-out nature of the negotiations which entailed a great deal of toing and froing, investors were eager for news of a deal and around the middle of the month they got it.
Phase 1 will involve the cancellation of a new 15% tariff which was scheduled for December and the halving of an already-imposed tariff to 7.5%. This is expected to coincide with an increase in the export of US goods and services to China, narrowing the US trade deficit on which President Trump has been focused since he took office three years ago.
The trade deal is a significant positive development, but as this is only the first phase of negotiations it’s also apparent that there is still some way to go before the issue can be put behind us.
Those weary of the seemingly never-ending Brexit saga were pleased that the Conservative Party’s victory in the UK general election last month at least provides some certainty. Boris Johnson’s party increased its numbers in the lower house, with Labour leader Jeremy Corbyn announcing that he will step down.
The UK Parliament is expected to pass the legislation required to leave the European Union in January, while policymakers will have the remainder of 2020 to enter trade agreements in order to achieve a ‘soft Brexit’. This contrasts with a ‘hard Brexit’ which would involve an exit without any trade deals in place. The share market reacted positively and at the end of the month it was 2.8% higher while the British pound also strengthened.
In Australia, optimism spurred by encouraging strength in the housing market, has seen Sydney property prices rise by more than 5% for the year. This was however offset by the tragic bushfires that raged over the course of the month. Although the full impact of the fires will be unclear for some time, in the near term we would expect some negative impact from reduced tourism and agriculture industries, but in the longer term the re-building phase will boost economic activity.
The returns we saw in share and bond markets in 2019 were truly remarkable, resulting in double-digit returns for a typical balanced investment option. As for 2020, we remain optimistic that global growth will continue and that despite the devastating impact of the bushfires, the Australian economy will not fall into recession. The RBA is expected to cut interest rates one more time to 0.50% and while we don’t expect share markets to be as strong as 2019, they should remain positive for 2020.
While risks such as a flare-up in US-Iran conflicts remain, the overall persistence of a relatively strong global economy should offset some of the instability caused by any further negative political developments.
A well-diversified investment approach remains the key to maintaining decent returns while limiting downside risks.
1 Bloomberg Finance L.P. Past performance should not be regarded as an indication of future performance.
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