17 Jan 2018
Quarter in review - Q4 2017
The December quarter was a fruitful one with all asset classes posting positive returns, led by equities and Australian listed property. Australian bonds posted a solid return on the back of falling bond yields, which in turn boosted returns for yield hungry investors in Australian listed property.
The Australian equity market produced very strong returns for the quarter boosted by a 15% return from the resources sector and a 13% return from small companies. Global equities were also up strongly, led by Japanese, emerging markets, and US stocks. The Aussie dollar finished flat against the US dollar.
Other factors at play included:
- Volatility fell to the lowest levels ever recorded – part complacency, part central bank support, part global economic growth upswing.
- The oil price rose strongly, boosted by rising economic growth and a reduction in supply courtesy of both OPEC and US shale.
- US company reporting season was strong, allaying some fears regarding the US equity valuations.
- A surge in merger and acquisition activity towards the back end of the quarter, both locally and globally, led by Disney’s takeover of Murdoch’s 21st Century Fox and the Lowy’s agreeing to sell Westfield Corporation to a European property heavyweight.
On the economic front, largely positive news across the board with the uptick in global economic activity continuing during the quarter. US economic data continued to impress with manufacturing, employment (unemployment at a 16 year low), retail sales, and consumer confidence all higher. Inflation also pushed higher but at a continuing slow pace.
In other economic news:
- The US Fed got a new Chair, who is expected to largely follow the previous Chair’s approach.
- We saw a December US rate rise and the flagging of further rate rises in 2018.
- The strong turnaround in Europe continued with retail sales, trade, credit growth, and sentiment and confidence all higher.
- Trade data out of China impressed whilst other indicators remained strong, even in light of the government’s focus on curbing credit growth.
- Australian economic data remained mixed with retail sales continuing to disappoint whilst labour market data showed strong signs of improvement.
- The RBA remains on hold, mindful of the risks in the housing market but also mindful that they will need to start raising rates from current emergency levels at some point, especially if the Aussie dollar begins to fall from here.
On the political front, the US government passed a very large tax reform bill, which will significantly lower the corporate tax rate at the expense of middle income America and the budget deficit.
On the political front:
- We saw political issues arise in Spain whilst the Japanese PM reinforced his power with a landslide early election win.
- The Chinese President also cemented his power, whilst the Germans were unable to form government following a divisive election result.
- The Australian government announced a banking royal commission.
- Geopolitical risks remained largely under control during the quarter.
Looking forward, it is important to ensure that investment Portfolios continue to be professionally managed and that they are well diversified both across and within asset classes, that profits are taken when they arise and portfolios are regularly rebalanced, that the chase for Yield with no regard for risk is avoided at this point in the cycle, and that the defensive part of the portfolio is truly defensive.
-Chris Lioutas, PSK Chief Investment officer
If you would like to discuss further or attend one of our regular Boardroom Economic updates please contact us