After solid returns and relatively low volatility in 2017, many investors entered 2018 fairly optimistic, however we expected returns would be more constrained and more volatile than they were last year.
Looking at the big picture, global growth was good, we saw relatively low inflation globally and the Australian economy grew at a reasonable rate.
Five big fears
But five big concerns came together to deliver a surprisingly tough year and rough ride for investors in 2018.
- Fear of the Fed. The first was what I’ve coined ‘fear of the Fed’. From around February, investors began to fear that the US Federal Reserve would keep raising interest rates until it caused the US economy to fall into recession. The impact was a lot of market volatility.
- President Trump’s trade war: We had the ongoing US-China trade war which started fairly calmly but escalated as the year continued. We recently had a bit of good news on that front with China and the US agreeing at the recent G20 meeting to pause tariff increases until March 1 next year as they continue to negotiate. But fears about the trade war caused a lot of volatility and angst amongst investors and this continues despite the truce.
- China slowdown: Chinese growth slowed to 6.5% because of tighter credit, but investors also worried the trade war with the US would slow it further. Concerns around China added to worries about global growth.
- Global desynchronisation: Investors became concerned that while the US economy was strong, the rest of the world, including Europe, Japan, China and emerging markets, have slowed down.
- US dollar strength: Finally, while a rising US dollar wasn’t that surprising – and it didn’t eclipse its 2016 highs – it has put a lot of pressure on parts of the world that are sensitive to a stronger US dollar, such as emerging market and Asian shares (because of their US dollar-denominated debt).
Those five factors came together to give us quite constrained returns out of the major asset classes over 2018 for the year to date to November, as illustrated by the table below.
While the table shows global shares rose, this was mainly because the Australian dollar fell. Other share markets had a pretty rough ride. Australian shares fell 2.7%. Emerging markets and Asian shares fell well into negative territory, with declines of 7.8% and 10.8% respectively.
Investors also received restrained returns from bonds, with bond yields rising as the US Federal Reserve raised interest rates. Rising rates and yields, of course, also impacted interest-sensitive parts of the share market like Real Estate Investment Trusts (REITs), which returned just 1.2% for the year (shown in the table as Australian listed property trusts).
The only areas providing good returns were unlisted commercial property and unlisted infrastructure which saw another year of strong returns.
If we come back to Australia, the big drag for property investors was quite sharp falls in Sydney and Melbourne property prices.
Some cause of optimism
Add all that together and it’s been a volatile and pretty constrained environment for investors in 2018.
But to end on a note of optimism, I think there is some light at the end of the tunnel. Despite Australia posting GDP growth of just 0.3% in the September quarter I don’t see us falling into recession, and I believe global growth will hold up, and investment returns should bounce back in 2019.
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