Investment market update

Investment Market Update

30 June 2016


An up and down year for share markets
The past 12 months have been a volatile period for many economies and asset classes. Issues that have affected markets have included:

  • The ongoing Greek debt problems threatening Greece's position in the Eurozone
  • A slow-down in Chinese economic activity
  • The US Federal Reserve (the Fed) raising interest rates for the first time in nearly a decade
  • A recovery in commodity prices since the start of 2016 and
  • Britain narrowly voting in a referendum in June to leave the European Union

However, despite these issues the Water Corporation Superannuation Plan's investment options were able to deliver positive returns for the year.

Overseas shares: +4.4% for the quarter and
+0.4% for the year (on an Australian dollar basis)

Overseas shares had a volatile year declining in the September quarter, recovering in the December quarter, declining again in the March quarter and then rallying in the June quarter to end the year slightly ahead (+0.4%). Unhedged returns were assisted by the decline of the Australian Dollar over the course of the year (from US$0.77 to US$074).  Ignoring the impact of currency, overseas shares returned -1.4% for the year.

US equities returned +2.5% over the twelve months to 30 June 2016. The renewed confidence in the US economy has alleviated some of the market jitters and led to the expectation that the Fed will move slowly to increase interest rates in the near future. Confidence was also boosted by positive results from stress tests carried out on US banks that indicated that most banks were well-capitalized and financially stable.

Meanwhile, Chinese and Japanese equities did not fare as well, returning -23.3% and -23.7% respectively. Slowing manufacturing activity weighed on the Chinese economy due to weaker demand and industrial overcapacity. Japanese equity markets were hurt by GDP growth contracting and low inflation. The yen has strengthened almost 20% against the US dollar this year, hurting exports and forcing the Bank of Japan to consider additional rounds of stimulus.

Global markets were also hit hard in the second half of June when Britain narrowly voted in a referendum to leave the European Union. The markets initially panicked based on fears of a recession in the UK and a downgrade to the UK’s credit rating, but within a week recovered to previous levels and UK equities recovered to return +3.4% for the twelve months to 30 June 2016.

 

Australian shares: +4.0% for the quarter and
+0.9% for the year

The Australian share market ended the year to 30 June 2016 relatively flat, returning +0.9%. This included a sharp decline of -6.5% in the September quarter, a strong recovery of +6.5% in the December quarter, a decline of -2.6% in the March quarter, followed by a strong recovery of +4.0% in the June quarter.

A combination of difficult economic conditions, volatile commodity prices and external events in international markets weighed on the Australian share market.

There was significant dispersion of returns between sectors within the Australian equity market. Energy was one of the worst performing sectors, returning -21.8% for the twelve month period. Utilities and Healthcare performed strongly over the twelve months returning +24.4% and +21.1% respectively.

Other investment markets

Australian Listed Property was the top performing asset class over the year, returning +24.6%, driven by continued demand from investors for listed property yields.

Unlisted Property, Private Equity and Infrastructure also performed strongly returning +13.1%, +9.5% and +17.9% respectively over the financial year to 30 June 2016.

Australian fixed interest returned +7.0% while overseas fixed interest returned +10.9% over the financial year to 30 June 2016, both supported by falling interest rates in most regions.

Inflation continues to be low, with CPI rising 1.0% over the year.

Since June 2016 (looking forward)

Equity markets and commodity prices have continued their recovery from the Brexit decision in June and commodity price lows earlier this year.  For the month of July 2016, Australian equities returned +6.4%, while overseas equities returned +2.0%.  Within the Australian equity market, Metals & Mining was the strongest sector, returning +9.1% for the month.

There are a number of other issues which are likely to influence the level of volatility and performance of investment markets in the coming months.  These issues include:

- Brexit – 52% of British voters voted in a referendum to leave the EU in June.  The results came as a surprise to most, and financial markets were thrown into turmoil in the days following the decision.  The process of exiting the EU is likely to take several years to negotiate and finalize.

- US Election – The 2016 Presidential Election is going to be a showdown between Hillary Clinton and Donald Trump. Both Clinton and Trump have struggled to gain support within their own parties.  However, whoever gets elected to the White House will be a first for the United States, whether it be the first female or the first person who hasn’t previously held public office or a senior military position.

- Australian Election – After almost a week of counting votes, the Liberal/National coalition narrowly defeated the Labor party in the national elections.  Prime Minister Malcolm Turnbull now faces challenging times ahead as smaller parties and independents that saw greater voter support in the elections could cause gridlock in Canberra.

* All market returns shown above are before tax and investment costs.

General Advice Only
This information is general advice and has not taken into account any individual’s particular objectives, financial situation or needs.  Because of this, you should seek appropriate financial advice before acting on this information.