2015 has seen another long worry list for investors. Some of these – such as terrorist attacks in Paris and tensions in the South China Sea – have not had a lasting impact on investment markets.
However, worries about deflation, falling commodity prices, fears of an emerging market (EM) crisis led by China and uncertainty around the Fed’s first interest rate hike have had a more lasting impact.
In Australia focus remained on the rebalancing of the economy after the mining boom as well on property bubbles. While it has not been a bad year for investors, overall returns have been constrained.
Total return %, pre fees and tax | 2014 Actual | 2015 Actual* | 2016 Forecast |
Global shares (in Aust dollars) | 15.0 | 14.4 | 15.0 |
Global shares (in local currency) | 10.0 | 4.5 | 9.0 |
Asian shares (in local currency) | 5.8 | -5.7 | 6.0 |
Emerging mkt shares (local currency) | 5.2 | -4.7 | 5.0 |
Australian shares | 5.6 | -0.2 | 7.0 |
Global bonds (hedged into $A) | 10.4 | 3.5 | 2.0 |
Australian bonds | 9.8 | 2.3 | 2.3 |
Global listed property securities | 28.2 | 5.8 | 7.0 |
Aust listed property trusts | 27.0 | 9.9 | 7.0 |
Unlisted non-res property, estimate | 8.5 | 12.0 | 9.5 |
Unlisted infrastructure, indicative | 12.0 | 14.0 | 10.0 |
Aust residential property, estimate | 9.0 | 10.0 | 4.0 |
Cash | 2.7 | 2.1 | 1.9 |
Avg balanced super fund, ex fees & tax | 8.5 | 4.0 | 7.5 |
* Yr to date to Nov. Source: Thomson Reuters, Morningstar, REIA, AMP Capital
There are good reasons to believe we will simply see a continuation of the constrained uneven global growth that we have been seeing over the last few years.
There are no signs of the economic or financial overheating which usually precedes major economic downturns and no major global bubble in real estate or business investment. Inflation remains low, share markets are not overvalued and global monetary conditions are easy.
If Fed raises rates, it’s likely to be a gradual process reflecting constrained US growth and still low inflation. Monetary easing is set to continue elsewhere, which will also limit the extent of Fed tightening as it puts upwards pressure on the value of the $US. So, apart from a left field shock, it is hard to see what will drive a major global economic downturn at present.
However, it is also hard to see what will drive a sharp acceleration in economic growth. The combination of slower population growth, a more cautious approach to debt and structural problems in the emerging world will keep a lid on global growth.
For Australia, the economy is likely to continue to rebalance away from mining. With a further fall in mining investment, falling national income, a slowing contribution from housing and upwards pressure on bank mortgage rates from increasing capital requirements, further RBA interest rate cuts and a lower $A are likely to be needed.
If this occurs then improving conditions in sectors like consumer spending, tourism, manufacturing and higher education should see GDP growth move up to around 3% by year end.
At the same time inflation is likely to remain benign. The RBA is expected to cut the cash rate to 1.75% early in the year.
The combination of okay global growth, still low inflation and easy money remains positive for growth assets. But ongoing emerging market uncertainties combined with Fed rate hikes and geopolitical flare ups are likely to cause volatility.
The main things to keep an eye on in 2016 are:
Source: Edited extract from AMP Capital.
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