10 Jan 2018 year in review
Investors started 2018 full of hope, with the global economy and financial markets in good shape. But by year’s end they were uncertain and a little anxious about what lay ahead. Markets responded with last minute falls across all asset classes.
The issues that weighed heavily were the unresolved trade dispute between the US and China, confusion over Brexit, rising US interest rates, falling commodity prices and the US government shutdown. Australians were also distracted by political instability and falling house prices in Sydney and Melbourne. With so much uncertainty about, it was easy to lose sight of the solid progress we’ve made.
Positive economic growth
The global economy grew at a steady 3.1 per cent. However, the World Bank estimates global growth will ease slightly to 3 per cent this year and 2.9 per cent in 2020 as central banks remove monetary stimulus in place since the financial crisis.i
The US economy continued its strong recovery, expanding by 3 per cent in the year to September.
China’s growth slowed to 6.5 per cent, its lowest since 2010, as the trade dispute with the US began to bite.ii
Australia enjoyed steady growth of 2.8 per cent in the year to September after 27 years without recession. Corporate profits are at record levels, inflation is a tame 1.9 per cent, unemployment fell to 5.1 per cent.
Consumers remain cautiously upbeat. The Westpac Melbourne Institute rose a percentage point over the year to 104.4 – anything over 100 is regarded as optimistic.iii
Focus on interest rates
The Australian dollar fell 10 per cent in 2018 to finish at US70c, due largely to US dollar strength and a widening of the gap between local and US interest rates.
The US Federal Reserve lifted rates four times to 2.5 per cent but indicated there may be only two more hikes in 2019, not three as previously forecast, due to the slowing economy. By contrast, Australia’s cash rate finished the year where it started at 1.5 per cent.
At the other end of the yield curve, US 10-year government bond yields were barely changed at 2.7 per cent, reflecting market fears of economic slowdown. Yields on Australian 10-year bonds eased to 2.3 per cent.iv
The lower dollar is good news for our exporters and should soften the impact of falling commodity prices, caught in the cross-hairs of trade wars and fears about an economic slowdown.
Iron ore was down 3 per cent while oil, copper, aluminium, zinc and nickel prices dropped between 16 and 19 per cent. The one bright spot for local producers was wheat, up almost 20 per cent.iv
Global shares retreated as the year came to an end, with the MSCI World Index down 10.4 per cent.v
The US market fell 6.5 per cent, its worst performance in a decade. UK shares fell 12 per cent with no Brexit deal in sight while political and economic uncertainty also weighted heavily on share prices across the Eurozone. In Asia, Chinese shares fell 25.5 per cent while the Japanese market fell 12 per cent.iv
Australian shares tapped into the global mood, with the ASX 200 down 6.9 per cent, its worst year since 2011. However, the total return from shares was down just 3.5 per cent when dividends are added.vi
Property loses steam
The heat came out of Australia’s residential property market in 2018, with big falls in Sydney and Melbourne dragging the national market down 4.8 per cent, according to CoreLogic.vii
This is the biggest annual fall in a decade and follows tighter lending practices, rising supply, higher mortgage interest rate and falling investor demand.
The late market reversals of 2018 were driven by gloomy expectations rather than the reality of solid economic gains. Future performance will depend on US interest rates, the resolution of trade tensions and the negotiation of a workable Brexit.
In Australia, uncertainty will persist until the Federal election is out of the way. Then investors can get back to focusing on our solid economic growth, a strong corporate sector, resilient consumers, low interest rates and more affordable housing.
i World Bank, 5 June 2018, http://www.worldbank.org/en/news/press-release/2018/06/05/global-economy-to-expand-by-3-1-percent-in-2018-slower-growth-seen-ahead
ii Trading economics, as at September 2018, https://tradingeconomics.com/china/gdp-growth-annual
iii Westpac Melbourne Institute, 12 December 2018, https://melbourneinstitute.unimelb.edu.au/__data/assets/pdf_file/0009/2943036/PressReleaseCSI20181212.pdf
iv Trading economics.
v Financial Times, 1 January 2019, https://markets.ft.com/data/indices/tearsheet/summary?s=MS-WX:MSI
vi Year in Review 2018, CommSec Economic Insights, 2 January 2019
vii CoreLogic, 2 January 2019, https://www.corelogic.com.au/news/australian-dwelling-values-fell-48-through-2018-marking-weakest-housing-market-conditions-0
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