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December 2017 Market Wrap

The Australian share market finished the 2017 calendar year on a positive note, with the All Ordinaries index closing the month 1.8% higher at 6,167.3 points. That increase marked a 7.8% gain (excluding dividend income) for the 2017 calendar year.

The Australian Dollar continued its surprise strength, and was steady in the month of December buying 78.03 US cents. Once again, the Reserve Bank of Australia (RBA) left the official Cash Rate on hold at 1.50% per annum.

Global share markets were stronger across the board in December. The United States Dow Jones index gained 1.8%, the London FTSE gained 5.0%, the Japan Nikkei 225 gained 0.2% and the Hong Kong Hang Seng Index gained 2.6% for the month.

Looking back, 2017 was a strong year for investors with global shares once again providing stellar returns.

Screen Shot 2018-01-07 at 6.40.28 pm

Source: Yahoo Finance

As shown above, the Hang Seng Index increased by more than 36% in 2017, the Nikkei 225 Index increased by more than 25%, the Dow Jones Index increased by more than 21%; with Australian and British share market indices providing more subdued returns of 7.8% and 6.4% respectively.

Somewhat of a surprise through the year was the strength of the Australian Dollar relative to the US Dollar.

Screen Shot 2018-01-07 at 6.41.46 pm

Source: Yahoo Finance

As shown above, the Australian Dollar gained 8.8% against the US Dollar throughout 2017, however it fell against both the British Pound and Euro.

As I have done in the past, I will once again make some predictions for the year ahead. However, before doing this it is worth looking back to review my predictions from 12 months ago.

This time last year, I predicted "double digit (i.e. 10%+) growth in 2017 for key developed share markets (poorer results for emerging markets), the Reserve Bank to 'test the waters' with a 0.25% per annum increase in the official Cash Rate and the Australian Dollar to fall by around 10% relative to the US Dollar."

Looking back, I was well off the mark in terms of the currency, somewhat correct for the predcited growth in key developed share markets and wrong on the prospects of an increase in interest rates. That said, any time share market returns are as strong as those experienced in 2017, I am happy to be wrong...

Looking ahead to 2018, I expect the trend of international shares to outperform to continue (especially when considered in Australian Dollar terms). That said, even the most optimistic investor would not expect the 20%+ per annum returns to continue indefinitely.

Specifically, I expect the current momentum of share markets to continue for at least another couple of months before things moderate in the middle of the year. My overall prediction is for share market returns in the range of 5 to 10% for the 2018 calendar year.

In relation to interest rates, I would be surprised if the RBA do actually increase interest rates this year. A cooling property market has the potential to become a serious concern (look no further than the US property market in the lead-up to the Global Financial Crisis for evidence of this). At the same time, wage growth remains at record low levels - meaning that inflation concerns should not be present in 2018.

In terms of where I see interest rates in 2018, I wouldn't be surprised if the RBA will actually cut the cash rate by 0.25% in 2018 (towards the end of the year) in an effort to simulate growth in the domestic economy and lower the Australian Dollar (to assist export industries). While I am happy to be wrong on this prediction, the sharp decline in property market conditions towards the end of 2017, if it were to continue as a month-to-month trend in 2018, is a concern.

Related to my view on interest rates is my view on the Australian Dollar. I have continually been wrong over the last three years when forming a view on the Australian Dollar. Nevertheless, I do expect it to fall by around 10% relative to the US Dollar in 2018, with US 65 cents to 1 Australian Dollar still a possibility in the medium term.

For more information, please contact Ryan Love on 1300 856 338.

This article is general information only and is not intended to be a recommendation. We strongly recommend you seek advice from your financial adviser as to whether this information is appropriate to your needs, financial situation and investment objectives.