Cash rates and bond yields globally are low and are likely to remain lower for longer, while equity market returns over the 2016 fiscal year have been generally poor. In this article we look at what’s been driving weaker returns and consider the outlook for returns over the medium term.
Sharemarkets were volatile during 2015/16 and delivered poor returns for the period. Sharemarket performance was adversely impacted by a number of concerns, including falling commodity prices and lacklustre global growth. Of particular note, economic growth in China has been weaker than expected; while in Europe, growth has been so sluggish that policy makers in many European countries have turned to negative interest rates to stimulate growth. In June, Britain’s decision to leave the European Union, or ‘Brexit,’ also contributed to market volatility and pushed most global share markets lower.
Australian equities ended the financial year with an annualised return of 0.6%. International sharemarkets delivered an annualised return of -1.4% on a fully hedged basis.
On the positive side, Australian listed and global listed property continued their positive trend, benefiting from the chase for yield, delivering annualised returns of 24.6% and 18.7% respectively. Australian and international bond returns also delivered solid positive returns.
Past performance is not a reliable indicator of future performance
Source: Bloomberg, AMP Capital, as at 30 June 2016; Australian shares: S&P ASX 200 Accumulation (AUD); International shares (unhedged): MSCI World ex AU Accumulation (AUD); International shares (hedged): MSCI World ex AU Accumulation Hedged AUD; Australian listed property: S&P ASX 200 A-REIT Accumulation; Global listed property (hedged): FTSE EPRA/NAREIT Developed Rental Hedged AUD; Global listed infrastructure (hedged): Dow Jones Brookfield Global Infrastructure Net Accumulation Index Hedged (AUD); Australian bonds: Bloomberg AusBond Composite 0+ Yr Index; International bonds (hedged): Barclays Global Aggregate Index Hedged AUD; Cash: Bloomberg AusBond Bank Bill Index.
Looking ahead – expect lower for longer
With cash rates and bond yields already so low, sharemarkets are likely to be a key source of return for investors.
However, as global growth and inflation are likely to remain subdued for some time, investment returns are likely to remain relatively muted. We anticipate that single-digit super returns are likely over the next few years.
Keep your focus on what really matters
With market volatility expected to continue in the near term, investments in well-diversified, actively managed portfolios will help to smooth out returns.
We expect active positions in the Australian dollar will be important going forward, but so too will investment in alternative assets, such as infrastructure, absolute return strategies and private equity, which have a low correlation with mainstream markets, such as shares.
Recent market volatility has made it more important to review your investments and ensure they are still delivering against lifestyle and retirement objectives while being mindful that long-term – not short-term – performance needs to be the focus.
Article by D Alliston – Head of Multi-Asset Portfolio Management AMP