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The Year in Review

Australia’s economy continued to grow but at a pace that the RBA has described as ‘below trend’. The economy is experiencing conditions that differ from a normal business cycle with numerous signs the post ‘mining boom’ transition of the Australian economy could be challenging. Partly offsetting the downturn in mining investment, housing construction has recently seen strong growth while consumer spending has also improved.  Faced with economic growth (and inflation) on the weaker side of expectations, the RBA reduced the cash rate on two occasions in the second half of the financial year.  The impact of the lower rates have clearly contributed to the sharp rise in dwelling prices in some of Australia’s major cities.

Growth in the US and UK have been the most resilient of the developed economies. As a result, they are expected to be the first countries to begin lifting interest rates.

Elsewhere in the developed world, conditions in the Eurozone and Japan are showing early signs of improving but it is occurring slowly, underpinning the ongoing need for their respective QE programs. On-going issues in Greece create risks that the Eurozone’s growth recovery will falter. Growth in Asia continues at a reasonable pace, while in China growth has slowed more than expected, requiring policy stimulus measures such as lower interest rates and fewer restrictions on bank lending.

Global equities – Global equities as represented by the MSCI World ex-Australia index returned 11.6% on a hedged basis (in AUD) over the year while unhedged returns (in AUD) were much higher at 25.9% for the year as the Australian dollar depreciated against major overseas currencies, particularly against the US Dollar and Pound Sterling.

Australian equities – It was a volatile year for Australian shares but for the year, the S&P/ASX300 index returned 5.6%. Strong growth nearly pushed the index through 6000 points on multiple occasions, before a steady sell-off in Q4 dragged the index back to 5451 at the financial year end.

While Australia’s share market recorded a modest gain, there were pronounced differences in industry sector performances. Increasing supply coupled with slowing demand in China combined to push iron ore prices lower. Rising shale oil production and a breakdown in the Organisation of Petroleum Exporting Countries (OPEC) cartel weighed heavily on oil prices. As a result, Energy (-20.4%) and Materials (-6.8%) sectors underperformed other sectors of the Australian market.

A low interest rate environment and increased volatility drove investors into high yielding and defensive sectors of the Australian market. As such, the best performers sectors were Health Care (29.1%) and Telecoms (25.8%). Companies with offshore earnings which are likely to benefit from the weakness in the Australian dollar versus the US dollar also performed well.

Property – in the Property sector, Australian Real Estate Investment Trusts (AREITs) generated a strong return (20.2%), with performance primarily driven by investors searching for yield.   Australian unlisted property trusts generated more stable returns over the financial year at around 9%.

Fixed Interest – Inflation linked bonds (6.4%) and hedged global government bonds (6.2%) provided the best returns, while Australian government bonds (5.8%) also performed well.

Interest rates remained at historically low levels around the globe for much of the year as the priority for many countries and regions was to provide much needed economic stimulus, especially in Europe where deflation has been a real risk.

Looking Ahead

At this time, the major developed world economies in the U.S and Europe are at various stages of their post GFC (Global Financial Crisis) recoveries while growth in key emerging markets including China is slowing. As it has over the past year, we believe this divergence of growth outcomes and the related divergence of monetary policy settings between the major economies will continue to exert a strong influence on investment markets in the year ahead. We expect further episodes of volatility in equity, currency and bond markets as investors reset expectations for growth and interest rates across the major economies with a particular focus on the U.S. where the Federal Reserve is cautiously moving towards raising interest rates for the first time since the GFC.

Market Performance – 30 June 2015 1 Year 3 Years p.a.
Australian Equities 5.6% 14.7%
Australian Property (Unlisted)* – estimated 8.6% 8.6%
Australian Property (Listed) 20.2% 18.3%
Overseas Equities (Hedged into AUD) 11.6% 20.5%
Overseas Equities (Unhedged into AUD) 25.9% 26.8%
Australian Bonds 5.6% 4.8%
Overseas Bonds (Hedged into AUD) 5.6% 6.0%
Cash 2.6% 2.9%
Australian Dollars vs. US Dollars -18.6% -9.2%


*Estimate at 9/7/2015

Source – JANA, FactSet, S&P, MSCI, Mercer, UBS, Barclays

All investment information in this article was provided by JANA Investment Advisers Pty Ltd Market Performance indicators make no allowance for tax or investment fees.


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