With a new year beginning it is no doubt time to consider what's in store? Whilst tempting to think there's more of the same, things rarely work that way, but before we start looking into the crystal ball, let's take a look at the year that was:
From an Australian equity market perspective it started and finished well, but sagged in the middle before finishing up 11.8% on a total return basis. That's a reasonable return vs. cash, but it was the exceptionally low interest rate environment which helped explain a significant proportion of the equity market's performance.
Overall (allowing that some funds are yet to report their December results) the average return of all funds in AFM's data base broadly matched the market at +11%, while local equity based funds fared better at +13.97%.
From a strategy perspective Long Only funds provided the best returns at +17.46%, followed by Long/Short and Equity 130/30 at +15.04 and 13.84% respectively.
Australian small caps with the big winners in 2017, particularly as the big banks and Telstra struggled. As a result those funds returning over 20% per annum tended to be focused on the small cap sector, or had a global or Asian geographic mandate.
On a global basis the Australian market significantly underperformed the S&P500's total return of almost 22%. One big difference between the two markets was that on average the ASX200 provided investors with a dividend return of 4.75%, compared with the S&P500 of 2.4%.
Looking forward: Undoubtedly on a global basis after 10 years of falling interest rates and central-bank support, equity markets have been, if not propped up, at least well supported. This environment however is coming to an end with interest rates in the US starting to rise in a (hopefully) measured fashion, whilst locally interest rate rises would seem to still be a few quarters away at least.
There's been much discussion in the media over the past couple of weeks with forecasts of more of the same for 2018, or alternatively the end of the dance party as interest rates increase. While there is certainly potential for that, provided the slow unsteady measured approach continues we would expect that equity markets, even though their valuations are stretched on a historical basis, will remain supported. However that won't go on forever, and at some stage there will be a switch in asset allocation. As ever, keep a watchful eye on the bond market, many times larger and more powerful than its attention seeking equity market cousin.
So if interest rates remain stable, or at least rise gradually, where do the risks lie looking forward? We would expect them to be political, both in Australia and overseas. Whilst Trump has reduced corporate tax rates to 21% in the US, he remains somewhat of a loose cannon - or should that be finger - either tweeting, or on the button. In the short term North Korea seems to have stepped back from the brink, but how long that may last is anyone's guess. In Europe Germany is not as stable as it was, and the whole Brexit fiasco is a distraction and has a long way yet to play out on both sides of the English Channel.
Closer to home, aside from political issues, it would seem that property prices will remain both a talking point and a significant risk, with household debt at record levels leaving the RBA with the challenge of a fine balancing act as and when the inevitable tightening cycle commences.
