The financial year has ended quite well for investors, despite early expectations to the contrary.
If you think back to Christmas Day last year, you may have woken and been disappointed to find the US share market down 19.8 per cent from its high in September to its low on Christmas Eve. Not a great Christmas present.
Things changed a few days later, however, as share markets rebounded, concerns about the global economy started to recede, and concerns about trade started to fade a little – though this did return later.
Most importantly though, central banks, starting with the US Federal Reserve, became a lot more dovish, indicating they are conscious about these threats to global growth. Consequently, we’ve since seen central banks globally move towards easier monetary policy. Australia, NZ and China have all done this, and although we’re still waiting for the US and Europe to follow, they have indicated they are moving in that direction.
What does this mean for investment markets?
This has provided a nice environment for investment markets. What’s more, globally inflation actually fell in this time, which allowed for the easier monetary policy, and that in turn underpinned a rally in bond markets.
When you put all this together; declining bond yields that result in capital growth for bonds - and pretty good returns out of government bonds- the decline in interest rates and the abatement of concerns about the global economy, we have fairly strong gains in share markets over the last six months, and over the last financial year as a whole.
Other asset classes that benefit from low interest rates and bond yields, such as listed real estate, listed infrastructure and unlisted commercial real estate all performed well over the year too.
Despite cash deposits having fairly low returns over the financial year, if you were a well-diversified investor, you should have had a pretty good year. We estimate that a typical balanced superannuation fund returned as much as 7 per cent, after taxes and fees, over the last 12 months.
Will this continue?
We believe it is likely the markets will continue to trend up, providing the trade war issue between the US and China is resolved. But the environment of low interest rates, low bond yields and reasonable global economic growth should all underpin some economic gains in investment markets. Expect that it may be a bit slower than we have seen over the last 12 months, and of course for volatility to remain.
Subscribe to SMSF News below to receive my latest articles straight to your inboxDr Shane Oliver, Head of Investment Strategy and Chief Economist
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