With only three more sleeps to go, Hedge Clippings can almost hear Santa's sleigh as 2017 draws to a close. Looking back over the year it was one of persistent and declining low volatility from an equity market perspective as low interest rates, low inflation, low wages growth, and steadily improving employment numbers underwrote business conditions and confidence, and thus market returns.
Conversely, Australian consumer confidence failed to follow suit. Low interest rates continued to fuel a surging real estate market - some would call it a boom - and massive household debt, but with no to low wages growth. As a result consumers aren't sharing the joy.
In spite of dire predictions from some quarters at the beginning of the year that investors would have to accept mid to low single digit returns in this environment it looks as if that may not be the case. To the end of November the ASX200 Accumulation Index has risen 9.81%, although less than half that of the S&P500's total return of 20.49%. Volatility, as measured by the VIX in Chicago spent most the past 6 months below 10, with a 52 week low of just 8.56. Not even three tightening's from the US FED, tensions on the Korean peninsula, or chaos in the Canberra sandpit managed to disrupt the market's party.
So where to from here in 2018? It seems dangerous to say it, let alone go to print, but probably more of the same. Improving business conditions in the USA will enable the FED's gradual tightening policy to continue. In Australia low inflation, low wages growth will see rates on hold probably until at least the 4th quarter. In that environment, all things being equal, markets should remain stable, or at least continue their current course.
The danger is that all things rarely remain equal. While it is difficult to predict what might occur to upset the apple cart, the risk remains. Our best guess is something political, be it global or local. So while the weight of inflows remains firmly in the passive funds sector, so does the risk.
And why not? Active equity funds in AFM's database have outperformed the ASX200 YTD to November, returning 11.59% compared to the market's 9.81%. Of those almost 20% have doubled the return of the ASX200. Most importantly, with a couple of exceptions, they have done so with lower volatility than that of the market, even in the current "low vol" environment.
