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Shares at record highs and interest rates at record lows. One of the defining aspects of 2019 was the flight to higher risk assets in pursuit of higher returns.
And it certainly paid off. Despite the US-China trade war, the Brexit impasse and a slowing global economy, investors with a diversified portfolio finished 2019 in surprisingly good shape.
Australian shares had their best year in a decade. The All Ords Accumulation Index, which measures the total return from Australian shares (prices plus dividends), finished the year up a smidgeon over 24%. This is more than twice the long-term average of 9.9%.
Excluding dividends, the All Ords Index was up 19.1% and the ASX 200 rose 18.4%, but it was a roller coaster of emotions.
Most of the gains came in the first half year, slowing only in the lead-up to the May Federal election. The ASX 200 hit a record high in July, retreated, then reached a new high on November 28 as hopes grew of a resolution to the US-China trade war.
Many global bourses performed even better. In the US, the S&P 500 was up 28.9% while the technology-stock laden Nasdaq Index was up 35.2%. The New Zealand market (NZ50 Gross) was up 30.4% while French (CAC 40) and German (DAX 30) shares were up 26.4% and 25.5% respectively.
Across the channel, the UK market was weighed down by uncertainty over Brexit, with the FTSE 100 up 12.1%.
China was a tale of two cities. The Shanghai Composite lifted 22.3% while Hong Kong’s Hang Seng rose just 9% as the increasingly desperate struggle for democracy caused widespread disruption.
While shares soared, Australia’s residential property market began to recover from cyclical lows.
Property recovery begins
Australian residential property prices rebounded strongly in the second half of 2019, driven by lower mortgage interest rates, a relaxation of bank lending practices and renewed certainty around the taxation of investment property following the May federal election.
According to CoreLogic, national property prices rose 2.3 per cent on average, led by Melbourne and Sydney, both up 5.3 per cent. But the market was patchy. Hobart (3.9 per cent), Canberra (3.1 per cent) and Brisbane (0.3 per cent) all rose, while Darwin (-9.7 per cent), Perth (-6.8 per cent) and Adelaide (-0.2 per cent) remain weak.
When rental income is included, the total return from residential property at a national level was 6.3 per cent. Not a patch on shares but light years ahead of returns from some traditional income investments.
Interest rates fall …
Retirees and others who rely on income from bank term deposits had another difficult year.
In an (ultimately vain) attempt to stimulate a sluggish economy, the Reserve Bank of Australia (RBA) cut the cash rate three times to a new low of 0.75%. Interest rates for term deposits are generally well below 2%, which means in real terms (after inflation) investors are going backwards.
Lower official rates flowed through to bond markets. In Australia, 10-year government bond yields fell from 2.32% to 1.37% by the end of December. But as yields fall, bond prices rally taking total returns from government bonds to around 8%.
In the US, 10-year treasury bonds finished the year at 1.92%, while in Japan and much of Europe bond yields remain negative.
The differential between Australian and US bond yields also helped keep the Aussie dollar low. It ended the year close to where it began at US70c.
More than a decade after the financial crisis, monetary policy in the form of interest rate cuts and quantitative easing are still the main tools being used to crank up national economies.
While the RBA became more vocal in its calls for more government spending to boost growth, it also indicated it is prepared to cut the cash rate to as low as 0.25% if necessary. However, it appears this may have spooked consumers and business from spending an investing, rather than the reverse.
… as the economy loses momentum
While Australia is closing in on its 29th successive year of economic expansion, the annual rate of growth slipped to 1.7% in the September quarter.
Inflation is stubbornly low at 1.7%, short of the RBA’s target of 2–3%, and unemployment is stuck around 5.2%. The RBA would like to see the jobless rate fall to around 4.5% to give employees more power to win a wage rise and more incentive to spend.
Despite low interest rates and personal tax cuts mid-year, Australian consumers remained gloomy in the lead-up to Christmas. The Westpac/Melbourne Institute consumer sentiment survey for December fell to 95.1 points, where anything below 100 denotes pessimism.
The US economy is in relatively good shape, with annual growth ticking along at 2.1% in the September quarter. Whereas China appears to be coming off second best in the ongoing trade war, with growth falling from 6.2% to 6%.
While growth of 6% may be the envy of the western world, it is China’s weakest performance since 1992. As China is Australia’s major trading partner, we also have a lot to lose from a protracted trade war.
As luck would have it, Australia’s trade position was buoyed by rising prices for some of our major commodity exports.
Commodities mostly positive
Prices for our biggest export earner, iron ore surged 28.4% last year to US$92 a tonne after reaching a high of US$124.50 in the wake of Vale’s iron ore mine disaster in Brazil in January.
The price of gold, another major Australian export and a ‘safe haven’ investment in uncertain times, rose 18.9% to around US$1520 an ounce.
Crude oil prices also surged on supply constraints, with the benchmark Brent Crude up more than 20% to US$66 a barrel. As Australia is a net importer of oil, higher prices flowed through to motorists at the petrol pump.
Among the biggest price drops were thermal coal (down 34%) and liquefied natural gas (down 44%).
In the agricultural sector, beef prices leaped 44%, wheat, rice and sugar were also up while prices for wool and cotton fell.
Annual % change
All Ords Accumulation
Australian 10 Year Bonds
US 10 Year Bonds
The year ahead
Looking ahead, many of the issues facing investors in 2020 are an overhang from 2019.
Despite US President Donald Trump announcing he would sign Phase One of a trade agreement with Beijing, the trade wars are far from resolved. From Australia’s point of view, the impact on China’s economic growth, and hence our own, needs to be monitored.
The possible impeachment of President Trump and the US election later in the year adds another element of unpredictability to existing Middle East tensions and the ongoing trade wars.
While Brexit should be resolved one way or another, there is uncertainty over the outcome of trade negotiations between the UK and European nations.
In Australia, keep a watch and act on interest rates. Many economists expect the RBA will cut rates again, which will result in more pain for investors with bank deposits and support the flight to equities, which are already looking at or near full value.
On the fiscal front, the Morrison Government has signalled it is prepared to drop its focus on delivering a Budget Surplus as it rolls out aid for bushfire affected individuals, farmers and businesses. While the terrible human cost of the bushfires is already apparent, it will take time to comprehend the economic costs to the nation.
As always with investments, there will be financial winners and losers in the year ahead. The best course for investors is to stick to your plan, diversify your assets and stay informed.