2017 was another rewarding year for share market investors, although the recent market decline (February 2018) is a reminder that investment in share markets is not a one-way ride. It is useful to reflect on the strength of recent gains for a broader context on the recent market volatility.
The Australian share market returned 11.8% in 2017, including dividends. International shares returned a more impressive 21.4% on a hedged basis. The 14.1% unhedged return was lower due to the Australian dollar appreciating against the US dollar and Japanese yen during the year.
The following chart shows the one-year and annualised five-year returns in local currency terms for global markets to 31 December 2017:
Source: S&P; MSCI; Nikkei.
The US share market declined sharply in February, with global markets following suit. As at 14 February, the S&P 500 is down 7.3% from the peak in January, which has also seen the ASX 200 fall 4.1% this month. This pullback was overdue, particularly for the US market, after a record breaking winning streak. The S&P 500 is back to December 2017 levels, while the ASX 200 has erased gains since October 2017.
In our view, the investment environment remains supportive for risk assets given a strong global economy driving earnings growth. Investors will, however, need to recalibrate their expectations for future returns given the headwind of rising global interest rates. The effect of ultra-low interest rates over recent years has been to push up asset prices (including shares), effectively pulling future returns forward to the present. In other words, prospective returns are likely to be lower than if asset prices were starting from lower levels than today.
Despite the recent market volatility, clients should stay focussed on their long-term investment strategy as shares remain one of the best ways for investors to build wealth over the long term.
Why did Australia under-perform global markets in 2017?
Healthcare (up 26.4%), Information Technology (up 26.0%), Energy (up 23.3%, mainly due to higher oil prices) and Materials (up 22.9%) were the best performing sectors of the ASX 200 in 2017. Even Consumer Discretionary delivered a 13.6% return, despite the challenging retail environment and Amazon’s much talked about arrival in Australia.
The overall market was held back by Telstra, with its share price down 29% over the year. The Financials sector (driven by the Big 4 banks) also under-performed, returning just 5% due to tougher market conditions for banks, including the new bank levy, slowing demand for credit, competitive pressures and the Royal Commission into bank conduct.
With the top ten companies of the ASX 200 (which includes the big 4 banks and Telstra, together with BHP, CSL, Wesfarmers, Woolworths and Macquarie) comprising 45% of the index, the market return tends to be skewed by these stocks. The level of concentration in the Australian market reinforces the benefit of investing both outside the top 20 on the ASX 200 and globally to access a broader range of sectors and companies to achieve appropriate diversification.
If you would like to discuss your portfolio, please feel free to contact your BDO adviser.
The information in this document reflects our understanding of existing legislation, proposed legislation, rulings, etc., as at the date of issue. In some cases, the information has been provided to us by third parties. While it is believed the information is accurate and reliable, this is not guaranteed in any way. The information is not, nor is it intended to be, comprehensive or a substitute for professional advice on specific circumstances.
The financial product advice or information in this document is of general nature only and has not taken into account the investment objectives, financial situation or particular needs of any particular person. Before making an investment decision on the basis of the advice above, a prospective investor needs to consider, with or without the assistance of a professional adviser, whether the advice is appropriate in the light of their particular investment needs, objectives and financial circumstances.