Looking back, overall 2019 shaped up to be a very good year for equities and debt. While 2018 had a few bumps along the way and ended with a few negative returns, 2019 has seen the markets largely bounce back.
All options were positive, and most were very strong, except for the Cash option (which was still positive but not strong). Vision Super’s ‘Balanced growth’ option for accumulation members returned 14.7% and ‘Balanced growth’ in pension phase returned 16.25%. The DB LASF plan returned 12.4% for 2019 and the VBI estimate as of 30 September was 107.3%. There have been a few factors contributing to this turnaround both nationally and internationally which have helped increase returns for our members.
Interest rates lowered
Central banks played a large role in the turnaround, lowering interest rates and signalling they will keep interest rates low for some time. Lower rates help borrowers and boost company valuations. In Australia, the central bank cut interest rates three times, taking the cash rate to historic lows. During the same period, the US Federal Reserve made three interest rate cuts. This was a change in course from 2018 where rates were raised four times in the USA.
While central banks cutting interest rates is positive news, it is important to note that this was in response to weakening economic data. Most economies in the globe continued to grow, but at a slowing rate. China’s economy is crucial to global and Australian growth. Trade tensions with the US initially escalated with new tariffs, increasing tariffs, and threats of more, but ultimately ended on a calmer note. This occurred while Chinese authorities were already having to carefully manage slowing economic growth. Prior slowdowns have been solved by boosting debt. Chinese authorities didn’t use this strategy again to avoid the risks associated with too much debt.
Overall, growth remains relatively fragile. While interest rate cuts have reduced the likelihood of a downturn in the near term, they have also used up some of the policy tools to fight a recession if one does come.
Australia was not immune to the global slowdown. The economy muddled through 2019, which can be illustrated by our labour market: unemployment remains very low, but there is very little wage growth. Concerns about Australian consumers having too much debt had been rising, exacerbated by housing market weakness. One brighter note is that the housing market stabilised in 2019.
The year was marked by several major political events. However, the ultimate impact on investments was relatively benign. The re-election of the Coalition government in May helped bank share prices recover as this removed the fear that ALP policies may have hurt an already soft housing market. The US Congress’s vote to impeach President Donald Trump was big news, but the process remains controlled by the President’s party, who are unlikely to remove him from office. In the UK, the process to leave the European Union had been impacting UK investments. With the re-election of PM Boris Johnson, some of this uncertainty faded. Oil prices saw some spikes with a strike on Saudi Arabian oil fields and increased US/Iran tensions. Since Oil remains a key input for the global economy, markets are watching this closely.
The outlook for investment markets is always difficult to predict in the short term. Interest rate cuts helped boost share and bond market returns last year. However, 2020 remains a tug of war between soft economic fundamentals and the support provided by low interest rates.
Over the long term, very low interest rates make it harder to achieve strong investment returns, particularly in more defensive options. As we saw this year, these low rates can boost share market valuations. However, this makes it harder to achieve strong returns, so returns in the next ten years potentially could to be weaker than in the last ten years.
Investors should be aware that returns may go up and down, so past returns are not a guarantee of future performance.