INVESTING IN ASIA:
CALENDAR YEAR 2018 INVESTMENT RETURNS IN REVIEW
By Paul Nicol
Unlike calendar years 2016 and 2017 which were relatively uneventful, 2018 proved to be a far more difficult investment year with investors absorbing a growing “worry list” which impacted on investment sentiment and ultimately share market returns. Investor concerns reached a crescendo in the December quarter which turned decidedly negative. All market asset classes were “hit” which wiped our gains generated earlier in 2018.
Market index results for the 2018 calendar year were as follows:
|December Quarter 2018||Half Year to December 2018||Calendar Year 2018|
|Australian Shares (S&P/ASX 200 Accumulation Index)||-8.24%||-6.83%||-2.84%|
|International Shares (MSCI World ex-Aust in AUD)||-11.10%||-4.56%||1.52%|
|A-REITs (S&P/ASX 200 A-REIT Accumulation Index)||-1.91%||-0.08%||2.91%|
|S&P/ASX Small Ordinaries Accumulation Index||-13.70%||-12.75%||-8.67%|
Sentiments towards share markets turned negative for a number of reasons including:
- Rising U.S. interest rates and the fear the US Fed would overtighten (lift US interest rates too high)
- Fears that the US-China trade war is likely to become prolonged and nasty
- Increasing concerns about global growth with weaker economic indicators recently coming out of China and Europe increasing fears that global activity is slowing
- Cooling sentiment around the digital giants or FAANGs (Facebook, Apple, Amazon, Netflix and Google) with recent earnings updates from (Google parent-company) Alphabet, Amazon and particularly Apple disappointing the market
Once again Australian shares (-2.84%) underperformed International shares in AUD (+1.52%) in 2018. However, returns for Australian investors in International shares in AUD were greatly aided by the strength of US Dollar against the Australian Dollar. Australian Small Cap shares were aggressively sold off in the December quarter falling by -13.70%, largely due to overvalued Australian Small Cap technology stocks significantly correcting.
Again, there was high dispersion among S&P/ASX 200 sectors in 2018 with nearly 30% separating the best performing sector (Health Care +19.25%) from the worst (Telecommunication Services -13.82%). Incredibly, Health Care was also the best performing sector and Telecommunications Services the worst performing sector of the Australian share market in 2017 as well.
Calendar year 2018 reminded us that geopolitics and Government policy remain a significant driver of markets and economic conditions, but we suspect there has been an overreaction to these factors in the December quarter. Investors seemingly continue to find it easy to fear the worst still bearing the scars of the GFC (which was now 10 years ago) although current Global economic conditions reflect no resemblance to the GFC.
Looking into 2019, Global growth is likely to weaken a bit further before stabilising. The biggest risk to the downside in Global growth is China. A continued slowing in China would be a major concern for Global growth and commodity prices. Domestically, the most significant fears are currently focused on the price falls in the Sydney and Melbourne residential property markets where falls of somewhere between -5% to -10% have occurred. Should the fall in residential property prices continue, it is not inconceivable that the RBA may drop interest rates to stabilise the residential property market.
On the flip side, Global inflation is likely to remain benign helped by the 2018 growth slowdown and fall in oil prices. Valuations are now improved and solid corporate profits should see a recovery through 2019. Pleasingly, at the time of writing, share markets in January have seen a decent recovery.
Periodic sharp downturns in share markets are not abnormal. During these periods, it is important to keep a cool head and turn down the noise on financial news by sticking to your long-term investment strategy and having the confidence to execute on opportunities that will inevitably rise.
All the best in 2019.
Senior Financial Planner
SMSF Specialist Advisor™
Barron’s Top Financial Adviser 2017 & 2018
Authorised Representative No. 230876
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