It was a year of extremes, with shares hitting record highs and interest rates at historic lows. Yet all in all, 2019 delivered far better returns than Australian investors dared hope for at the start of the year.
The total return from Australian shares (prices and dividend income) was 24% in the year to December.i When you add in positive returns from bonds and a rebound in residential property, Australians with a diversified investment portfolio had plenty to smile about.
Humming along in the background, Australia entered a record-breaking 29th year of economic expansion although growth tapered off as global pressures mounted.
Global economy slowing
The US-China trade war, the Brexit impasse and geopolitical tensions weighed on the global economy in 2019. Yet late in the year optimism grew that US President Donald Trump would sign the first phase of a trade deal with Beijing. The re-election of Boris Johnson’s Conservatives in the UK also raised hopes that the Brexit saga may finally be resolved.
The US economy is in good shape, growing at an annual rate of 2.1%. China has fared worse from the trade tensions, with annual growth of 6% its weakest since 1992. In Australia, growth slipped to an annual rate of 1.7% in the September quarter.ii
Despite the global slowdown, Australia continued its run of healthy trade surpluses thanks largely to a 29% increase in iron ore prices.iii
Interest rates at new lows
The Reserve Bank cut the cash rate three times in 2019 to an historic low of 0.75%. The US Federal Reserve also cut rates to a target range of 1.50-1.75%. This was the main reason the Australian dollar lifted from its decade low of US67c in October to finish the year where it started, around US70c.iv
Rate cuts flowed through to yields on Australian 10-year government bonds which fell to just 1.37%.v Total returns from government bonds (yields plus prices) were up by around 8%.vi
Retirees and others who rely on income from bank term deposits had another difficult year, with interest rates generally below 2%. After inflation, the real return was close to zero. It’s little wonder many looked elsewhere for a better return on their money.
Bumper year for shares
The hunt for yield was one reason Australian shares jumped 18.4% in 2019, the best performance in a decade.vii The market climbed a wall of worries to hit a record high in November on optimism about a US-China trade deal, then eased back on concerns about slowing economic growth.
Despite low interest rates and personal tax cuts, consumers are reluctant to spend. The Westpac/Melbourne Institute survey of consumer sentiment fell to 95.1 in December – anything below 100 denotes pessimism.viii
Property prices recovering
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, property prices rose 2.3% on average, led by Melbourne and Sydney, both up 5.3%. When rental income is included, the total return from residential property was 6.3%.ix
Property prices are expected to recover further this year but with shares looking fully valued and bond yields near rock bottom, returns could be more modest.
The Australian government is under pressure to do more to stimulate the economy in the short term to head off further rate cuts by the Reserve Bank. More fiscal stimulus could inject fresh life into the local economy and financial markets.
Overseas, the US-China trade war is far from resolved and could remain up in the air until after the US Presidential election in November. There is also uncertainty over the Brexit deal and its impact on trade across Europe.
The one thing we do know is that a diversified investment portfolio is the best way to navigate unpredictable markets.
If you would like to speak to us about your overall investment strategy, give us a call on 03 5434 7600.
i Econonomic Insights: Sharemarket winners and losers, CommSec Economics, 2 January 2019
ii Trading Economics, viewed 1 Jan 2020, https://tradingeconomics.com/indicators
iv Trading economics, as at 31 Dec 2019, viewed 1 Jan 2020, https://tradingeconomics.com/currencies
vi Economic Insights: Year in Review; Year in Preview, CommSec 2 January 2020.
vii Trading economics, viewed 1 January 2020 https://tradingeconomics.com/stocks