Despite the relentless media “noise” about some of the challenges faced by world markets we have seen positive returns for the financial year across major asset classes. It might surprise you to learn Listed Property and Global Shares boasted strong double-digit returns (for consecutive years) and performed best. The Australian market lagged most other sectors (as it did in 2013) outperforming only Cash and fixed interest investments. While Australian investors should, as always, look to include international equities and listed property in their portfolios to ensure they are appropriately diversified, investing to chase last year’s best performer, historically, has not been wise.
Let’s take a closer look at the year that was…
Global shares performed well, reaching double figure returns for the third consecutive year, largely as a consequence of the stimulus being provided by both Governments and Central Banks. Recent issues in China and Greece have resulted in increased market volatility, however this has not stopped most international share markets outperforming their long term averages.
A falling Australian Dollar also provided a windfall to Australian based investors holding unhedged international shares by improving performance numbers substantially. We embraced this strategy 3 years ago and our client portfolios have enjoyed the benefit of this move with excellent returns on their international investments.
The podium finishers for returns in the developed world markets were China, Japan and Germany.
Australian Listed Property had a standout year outperforming the broader market by a sizeable margin. Returns of 20%+ were common in the sector and this provided healthy contributions to many diversified portfolios with exposure to listed property. Pleasingly for investors, the sector has generated these returns without the need to borrow aggressively – it appears the sector has learnt its lesson from the GFC and will continue to manage gearing levels and payout ratios prudently, defensively and transparently.
On the home front Australia’s share market recorded modest gains with the resource and energy sectors weighing down performance. A slowing Chinese economy has weakened demand for Australian resources and when combined with an increased supply, the iron ore price has declined along with the profits of mining companies. It is a similar story for energy producers. However it’s not all bad news with a weaker Australian dollar benefiting exporters and those companies with income derived from overseas sources.
Despite all time low interest rates it appears many companies are cautiously feeling their way through what has been called the ‘mining boom transition’ resulting in lower than anticipated capital expenditure. Whilst the returns offered by local shares were not record-breaking, they were enough to keep food on the table – which can’t be as easily said for returns on money held in the bank or under the bed.
We find most investors have a ‘home country bias’ toward their own stock market, but Australian investors could be forgiven for this more than most.
The tax benefits of franking credits – which flow from companies’ Australian-derived income – generally add more than 1%pa to the after-tax return from Australian equities for Australian investors. A ‘free kick’ of that magnitude is not to be sneezed at.
The return profile in the fixed interest was bankable but bland – as it should be. Typically fixed interest investments form the bedrock for diversified portfolios so the return profile needs to be stable and consistent. Whilst low interest rateshave not provided significant returns above inflation, current pricing in the fixed interest sector captures an economy that is likely to muddle along for some time and then revert towards its longer term potential.
What does this all mean for investors?
You might have said this to your children, but the adage still remains true … Turn down the noise!
The advent of social media has provided constant talk of one problem after another. Inevitably investors seek to obtain a lot of information quickly and in its most simplified, digestible form. This impulse creates the biggest problem of all, delivering investors to the tender mercies of journalism. For the harried part-time manager of his own finances, the more information he gets, the more he acts on it, the more behavioural mistakes he inevitably makes.
Financial security, by itself, cannot bring anyone genuine peace, but we know that the converse is also true: peace is near impossible when your home is haunted by financial worry.
If you have determined an appropriate asset allocation, you have broad portfolio diversification, and are able to rebalance as necessary, you should be well-positioned to weather periods of uncertainty, and the inevitable market dislocations.
Keep on enjoying life as we continue to look after your financial future to the best of our ability.