31 July 2017
Over the past week Australian shares fell slightly, down 0.3%, while small company shares rose 0.3%. Shares in developed countries rose slightly, up 0.1%, with the US share market flat. Shares in emerging markets gained 0.3%. The Australian dollar was 0.9% higher at 79.87 US cents. The 10 year bond yield in Australia was 0.01% lower at 2.68%, while in the US the 10 year bond yield closed the week 0.05% higher at 2.28%. The oil price gained 8.6% to 49.71 US dollars per barrel.
With the end of the financial year behind us, it’s time to have a look at how different asset classes performed through the year. The table below lists the yearly returns for various asset classes. All returns are for the accumulation index meaning that share dividends and bond interest payments are reinvested.
| Asset class ||2015-16 financial year return || 2016-17 financial year return |
|Australian shares |
|0.56% || 14.09% |
|Australian small company shares |
|14.4% || 7.01% |
International shares (ex. Australia) - hedged1 in Australian dollars
|-1.42% || 20.54% |
|International shares (ex. Australia) - unhedged2 in Australian dollars |
|0.40% || 14.73% |
|Emerging market shares - unhedged |
|-14.2% || 21.18% |
|Australian listed property shares |
|24.57% || -6.26% |
|Global listed property shares - hedged in Australian dollars |
|12.26% || 2.22% |
|Australian bonds |
|7.02% || 0.25% |
|International bonds |
|8.57% || -1.67% |
|Australian cash |
|1.96% || 1.52% |
The returns from unlisted assets such as property are not available as it takes longer to calculate these numbers.
Last year provided a diverse range of outcomes. Maintaining a high exposure to traditional shares, Australian or international, was the key driver of returns. Most other assets struggled. Global share markets performed very strongly over the 2016-17 financial year, particularly when compared to the previous financial year. A number of factors contributed to this strong share market performance:
- Signs of economic growth in many developed economies.
- Strong economic growth in China.
- Rises in commodity prices, notably copper and iron ore.
- Risks were not realised surrounding Brexit and Trump’s election.
- Expectations of lower company taxes and expansionary fiscal policy in the US.
International shares delivered double-digit returns. Hedged international shares outperformed unhedged international shares by more than 5% on the back of the Australian dollar rising against most currencies during the year. Global emerging markets were most affected by copper and iron ore price rises, posting very strong positive returns.
Australian shares performed well over the year with large company shares outperforming small company shares, a reversal of their fortunes in the previous financial year. The Resources, Health Care and Consumer Staples sectors performed strongly while the Telecommunications sector performed poorly.
Global listed property shares delivered a low return and Australian listed property shares delivered negative returns over the year. Both of them delivered very strong returns in the previous financial year. While we don’t have the final numbers for unlisted property shares, which makes up the bulk of our property investments, the performance has been better than that of the listed property shares.
Bonds didn’t perform well over the year, with Australian bonds delivering a small positive return and International bonds delivering a small negative return. Interest rate rises, expectations of further future rate rises and the unwinding of ‘quantitative easing’ in the US, Japan and Europe all contribute to this near-flat result. Quantitative easing is when a government buys bonds on the open market thereby lowering long term borrowing rates and supporting economic growth.
Cash returns were low and are expected to remain low compared to inflation over the next few years.
How is the future shaping up? Share market valuations are stretched but we are careful to say that we are not yet in a market ‘bubble’ for shares. Our long term seven year forecast is for modest positive returns but don’t expect the stellar performance of 2016-17 to be repeated on a yearly basis.
We’re more concerned about the long term outlook for cash and bonds. For both of these asset classes our view is that it will be difficult to achieve any positive real returns of note. The ‘real return’ is the return net of inflation and is a measure of whether the purchasing power of your savings is increasing or decreasing.
The 2016-17 financial year demonstrated that performance of one particular asset class can fluctuate considerably from year to year, while some have moved in opposite directions. Investing in concentrated, rather than diversified portfolios, results in outcomes that are more volatile over time. This is the benefit of diversification, a lesson we should never lose sight of.
Estelle Liu | Quantitative Analyst
Sean Anthonisz | Senior Quantitative Analyst – Asset Allocation
Susan Chau | Senior Investment Analyst