The start of any New Financial Year is a time to step back from the tsunami of economic and investment data which swamps us on a daily basis, take a deep breath and assess the big picture performance.
It’s half time in your 12 months financial strategy and a good opportunity to regroup.
As usual the last 6 months has had its fair share of political uncertainty (Trump in America, threats from North Korea, unexpected election outcomes in Britain and France), big drops in oil and iron ore prices and stuttering economic growth here in Australia.
But the big picture shows, despite a series of ongoing concerns, we are still travelling pretty well financially and economically.
Here’s our mid-year investment review.
You don’t need us to tell you the economy isn’t exactly roaring at the moment but it does seem to be stable… and we broke the world record for the most consecutive years of positive economic growth.
Growth is stumbling along at 1.7 per cent but in the last 6 months was affected by a raft of elections, here and overseas, and bad weather which hit exports and consumer confidence hard.
What gives us confidence that economic momentum will bounce back and accelerate over the next 6 months is business confidence is at 9 year highs and good jobs growth has pushed unemployment down to a 4 year low of 5.5 per cent.
Inflation isn’t a problem at 1.7 per cent (well below the Reserve Bank target range of 2-3 per cent) but wage growth remains subdued at 2 per cent.
The Aussie dollar is up 5 per cent against the US currency which is interesting against a really mixed result when it comes to the performance of commodity prices. Australia is seen globally as a strong hedge against commodity prices and the performance of our biggest trading partner, China.
Oil, gold and sugar prices have dropped significantly while base metal, beef and coal prices have risen strongly. Interestingly iron ore prices are 2 per cent aheads as most of the big falls were the end of 2016.
2. Share markets
Over the last six months the sharemarket’s bell weather, the All Ordinaries index, is up just over one per cent and among the worst performing in the world… in line with most other commodity based markets.
But when you factor in record dividend payouts, which are included in the All Ordinaries Accumulation Index, share returns are much healthier 12.7 per cent. That’s a pretty good result.
In fact, bonds, shares and property have all risen in value for the fourth consecutive year.
However, as usual, share performance has been inconsistent. Share values of the major banks have taken a hit on a number of fronts… new taxes, exposure to a softening property market and a limping economy. As have energy producers from the falling global oil price coming from the production war between major oil producing countries. And the global oil glut doesn’t look like ending anytime soon.
Retailers have also been under pressure from low inflation, low wage growth and fears the entry of Amazon will smash local companies.
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With shares, property and bonds all making gains, superannuation funds are looking good with the median Balanced fund returning 10.3 per cent for the financial year to May… the top 3 funds returned 12 per cent and the 5 year average return is just over 10 per cent.
With superannuation such a big part of the average Australian’s wealth, a double digit average 5 year return is a terrific result.
“Global shares have been the big driver of returns over the past year, supported by a fall in the Australian dollar through early 2017,” said SuperRatings Chairman Jeff Bresnahan.
“Market momentum has been strong, and in the US and Europe we are still seeing markets pushing to record highs. “
But there is some concern about whether this performance momentum can be maintained. Just a couple of weeks ago we had the biggest one day sharemarket fall of the last 7 months on the back of a major slide in the oil price.
Plus a slowing property market could also affect superannuation fund performance.
There is no doubt the sting is coming out of the property booms in Sydney and Melbourne as a result of regulatory authorities making it more expensive and more difficult for investors (particularly from offshore) to compete with first home buyers and local owner occupiers.
Most banks now charge a premium interest rate on investor and interest loans which is having an impact. Auction clearance rates have fallen from the mid-80 per cents to the low 70s.
But despite constant doomsday warnings from overseas, this property slow down doesn’t look as though it’s heading for a crash.
Why? Well part of the answer came from last week’s Census figures from the Australian Bureau of Statistics… we’ve seriously under estimated out population growth.
Strong immigration means we’d underestimated population growth by 37,000 with most of those moving to Melbourne and Sydney and, naturally, wanting a roof over their head.