Key investment markets took-off towards the end of 2016, with the All Ordinaries index gaining 3.9% to close the month of December at 5,719.1 points. For the 2016 calendar year, the All Ordinaries index gained 7.0%.
International markets were generally stronger in December (and for the 2016 calendar year for that matter). In December, the United States Dow Jones index gained 3.3%, the London FTSE gained 5.3% and the Japan Nikkei 225 gained 4.4%.
Bucking the trend was the Hong Kong Hang Seng Index that declined by 3.5% in December. This marked the second consecutive month of decline for the Hang Seng Index, driven largely from anti-China Trump policies.
2016 was an unusual and challenging year on several fronts for investors. The health of China’s economy and its share market stability were significant concerns at the beginning of the year, though these concerns dissipated as the year progressed.
Central banks’ attempts to stimulate growth continued to be a key influence on markets, distorting the prices of many assets. Politics delivered some big surprises. Despite this, investors enjoyed a year of positive returns as demonstrated below.
Source: Yahoo Finance
Britain’s surprising decision to exit the European Union in June and Donald Trump’s success in the United States presidential election in November caused considerable turbulence in financial markets. The British Pound has taken a massive hit, as demonstrated in the chart below.
Source: Yahoo Finance
A New Year usually marks a time to make new predictions for the year ahead. Before I do this, let’s review my predictions from 12-months ago…
My view this time last year was that the Australian Dollar was going to fall relative to the US Dollar (as low as 65 US cents), I expected the Reserve Bank of Australia to keep interest rates on hold at 2.00% per annum and for the All Ordinaries index to finish the 2016 calendar year between 5,750 and 6,000 points.
Unfortunately, the above predictions did not come to fruition (albeit my expectation for the All Ordinaries index was very close).
The strength of the Australian Dollar throughout most of 2016 was a surprise (especially given the Reserve Bank cut 0.50% per annum from the official Cash Rate). However, looking ahead, I do expect the Australian Dollar to trade towards 65 US cents in the medium term
It also appears that we are at the bottom of the interest rate cycle (with a recent hike in global bond yields in anticipation of Trump stimulus), with the next move likely to be a rate rise (perhaps only one modest 0.25% increase though).
The above key indicators of interest rates and currency, like the performance of global share markets, will be widely influenced by the Trump factor (will he be a success or failure) as well as the manner upon which Great Britain can exit the EU.
My personal view is that the impact of low interest rates (i.e. cheap money) must eventually be followed by a period of inflation. I expect the United States to lead the way in this regard. It will come on the back of Trump stimulus policies and the Republicans controlling both houses of the United States parliament (for better or for worse, things will get done).
In context of the above, I predict 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.
A change in the direction of interest rates, plus the completion of several hundred apartment developments, will in my view curtail the extraordinary appreciation of house prices seen in Sydney and Melbourne in recent times. Although, I am of the view that a soft landing (i.e. zero growth) will occur rather than a sharp decline in values (as predicted by other commentators).
For more information, please contact Ryan Love or Michael Clapham 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.