According to AMP Capital chief economist Shane Oliver’s latest investment outlook report, the 2017-18 financial year was a “story of two halves” that saw strong returns in the first half but higher levels of volatility in the second half.
“While the December half year was strong as global share markets moved to factor in stronger global growth and profits helped by US tax cuts, the last six months have been messier and more constrained – with US inflation and interest rate worries, trade war fears, uncertainty around Italy, renewed China and emerging market worries and falling home prices in Australia,” Mr Oliver said.
He pinpointed a number of key takeaways for investors from the past financial year.
“Turn down the noise around financial markets, maintain a well-diversified portfolio, be cautious of the crowd; and cash [will] continue to provide low returns.”
Mr Oliver added that although global growth may have “passed its peak”, the outlook for growth “remains solid”.
For instance, business conditions indicators and surveys were strong, and “solid economic growth” would likely “continue to underpin solid profit growth” from 7 per cent domestically to over 10 per cent globally.
There was also a “little sign” of the excesses that typically precipitate an economic downturn, Mr Oliver said, with some further global spare capacity.
Global monetary policy was also still “very easy” and share valuations were “not excessive”.
“Against this, though, there are a few storm clouds,” he said.
The US economy looked “at risk of overheating” with the Fed looking to continue hiking rates given that unemployment was a low point and wages growth and “inflationary pressures” looked to rise.
Global liquidity conditions were tightening, and the US-China trade war was having a dragging effect on global growth, Mr Oliver said.
“Our base case remains that some sort of negotiated solution will be reached but trade war worries could get worse before they get better,” he said.
Emerging countries (Turkey, Brazil and South Africa) in particular were also confronted with a number of challenges, while growth in China was slowing.
A number of other geopolitical risks also lingered, such as the US Mueller inquiry, the country’s mid-term elections, and a “conflict” between the EU and Italy regarding fiscal policy.
“Given these conflicting forces it is reasonable to expect some slowing in returns after the very strong returns seen in the last two years,” Mr Oliver said.
“In Australia, falling home prices in Sydney and Melbourne along with tightening bank lending standards will be drags.
“Returns are likely to remain okay over 2018-19 as conditions are not in place for a US/global recession.
“But expect more constrained returns (say around 6 per cent for a diversified fund) and continued volatility,” Mr Oliver concluded.
