The year to 30 June 2019 was an interesting period for investors. The majority of asset classes, from fixed interest to equities, delivered positive returns for the year – although there were many ups and downs along the way.
The global economy continued to grow at a reasonable rate over the period although towards the end of the year it started to show signs of slowing. Cash rates are a good example of this slowdown in the market playing out. After a period of consolidation and in some instances increases in short term interest rates, reserve banks around the world went back to their toolkits and either implemented or prepared markets for a resumption of measures to stimulate their respective economies which included interest rate cuts.
After a long period of interest rates remaining stable in Australia, the Reserve Bank of Australia moved hard to support the economy late in the financial year. The Reserve Bank of Australia cut the official cash rate to just 1.00% two days after the end of the financial year and again on 1st October to 0.75% – this is a new record low in Australia for official cash rates.
Moving into the new financial year, cash and fixed interest yields are at historically low levels which presents a challenging environment for investors seeking an income stream from defensive assets.
The main driver of the uncertainty around future economic growth has been the increase in geo-political conflicts surfacing around the world. Tariffs and trade threats have arisen between a number of nations in a move towards protectionist policy not seen globally for decades.
The US and China sit as the centrepiece of this new trend and during the year markets were ultra-sensitive to any positive or negative commentary coming out of this dispute between the two largest economies in the world. Equity markets locally and globally remain fixated on how this structural dispute plays out and the outcome is expected to have a significant impact on global economic growth, the markets broadly and the performance of specific industries and geographic regions.
The Australian share market returns were above average for the year recording double-digit returns, propelled by the election result and official cash rate reduction. However, the uncertain economic growth conditions affected the Australian small companies sector with a return of less than 1% for the period. This showed that despite some of the stimulus measures, investors remained concerned about the ability of companies to grow their earnings significantly and looked for the relative safety of stocks from large companies.
The major international share index also recorded double digit returns (unhedged) for the period. Significant weakness in the Australian dollar over the year saw unhedged returns materially outperform its hedged counterpart. The concerns around growth domestically were mirrored on a global scale with the global small company sector posting 2.3% over the period, with them only positive due to Australian currency weakness assisting unhedged returns.
The Australian & international fixed interest sector also performed well with returns being boosted by increasing bond prices and reduces yield. Low inflation and heightened geopolitical risks kept yields at extremely low levels with 10 year Australian Government bonds yielding only 1.3% at the end of the year.
Australian (Real Estate Investment Trusts), global property and infrastructure also benefited from the flat fixed interest yields and were the standout categories in terms of returns.
The reduction of official interest rates to unpreceded low levels has caused asset prices to increase and the yield or income from these assets to decrease. Any reversal of interest rate movements will likely have a detrimental effect on asset prices. Although the returns on almost all investments have been positive, in particular the last 9 months, a keen eye on risk management is required to ensure portfolios continue to meet their objectives.