The 2018-19 financial year was a good year overall and all of our options performed positively. The default ‘Balanced growth’ option for our super members returned 7.4%, ahead of its return objective of 3.5% above inflation.
The headline numbers are positive, though it was a year with ups and downs. In fact, shares performed quite poorly in the December quarter, before turning around and recovering back this underperformance and more.
The global economy had two key themes that affected markets over the financial year – a slowing global economy and an abrupt turn in central bank policy.
Slowing global economy
The slowing global economy contributed to the initial weakness, particularly centered on China. This was exacerbated during the year by the ongoing trade war between China and the United States. As tariffs (taxes on imports) were exchanged and rhetoric escalated, share markets faltered as hope of a quick resolution faded. It also became clear that more is at stake than simply trade. Both countries have stated goals to grow their economies internally, and direct controls on technology and supply chains have been ratcheted up.
Central bank policy
During this time the US central bank, the Federal Reserve, had been indicating a continued path of higher and higher interest rates. In recent years, US interest rates have slowly been lifted from the emergency levels that were set during the financial crisis. Last year share markets became fearful that US interest rates would be lifted too sharply and this coincided with weakening economic growth and led to large share market sell offs.
In late December the Federal Reserve changed course suggesting it would be “patient” in raising interest rates, and over 2019 to date has suggested there is room to cut interest rates. Financial markets have now fully priced in falling global interest rates and this led to a large recovery in share markets.
Domestically the Australian economy continued to show decent growth. Over the year there were concerns about the very high level of debt held by Australian households, particularly given recent falling property prices. Australian shares were also affected by the global change in sentiment in the December quarter. However, the second half of the year was exceptionally strong for Australian shares. Our central bank, the RBA, signaled it may cut interest rates, and ultimately did. The pricing of Australian iron ore producers leapt when global supply fell sharply. There was also a surprise win by the Coalition in the federal election, which has led to a short term boost to markets from the effect of forthcoming tax cuts, as well as many in the share market considering this reduces the risk of a domestic recession due to a housing market bust.
Economies and investment markets move in cycles and it has been a long run of good global growth and strong returns for our members. While the decline in interest rates has helped support short-term pricing across all asset classes, some of this decline has brought forward some of tomorrow’s return to today. For example, investors have already priced in lower interest rates for high-yielding shares. We still expect decent returns over the next ten years, but not as strong as the last ten.