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Investment commentary January 2017

The big picture in 2017: rising bond yields and positive economic outlook

2017 started on a positive note for Australian investors. Surging commodity prices drove Australia to record a trade surplus of $1.2 billion late last year. The iron ore price finished the year rising just over 100%, after falling early in 2016, and oil was up 45%. Earnings for resources companies have benefited enormously and if these prices are sustained, it should result in a boost to corporate taxes – positive news which will give the Government a bit of relief in this year’s budget.


Earnings for resources companies have benefited enormously and if these prices are sustained, it should result in a boost to corporate taxes.

The US Federal Reserve raised rates by 0.25% in December, as they did 12 months previously. The market expects that a tightening labour market and decent economic growth will see a few more hikes in 2017, just as it did at the start of 2016.

Last year, of course, those optimistic expectations were soon set aside and we had to wait until December before the Fed had the confidence to move. There’s plenty that could go wrong again, of course, but this year we’re likely to see the US economy gain a big boost from fiscal stimulus, which we expect will make the case for rate hikes much stronger.

All eyes on Trump

Donald Trump will be inaugurated as President of the United States on 20 January. His administration is expected to be business friendly and since his election success, share markets have had an extraordinary run. Given his penchant for surprising statements and policy backflips, it’s not too far-fetched to imagine that at some point in 2017, the market could run out of confidence in the new President and reverse these recent gains.

What you should know about rising bond yields

From about the middle of last year government bond yields began to rise in pretty much all countries around the world. The outlook for global economic growth is looking much better these days and the market is anticipating that Central Banks will begin to remove the extraordinary stimulus measures that have been in place since the Global Financial Crisis.


Looking forward we expect that yields will probably continue to rise.

Rising yields mean falling prices, so returns on some fixed interest investments were slightly negative for the second half of 2016. Looking forward we expect that yields will probably continue to rise, but maybe not as quickly as they have done over the last 6 months. If this happens then returns for some defensive assets will continue to be under pressure, but it’s important to be diversified with your investments and if growth turns out to not be so great then it’ll be these defensive assets in your portfolio that do well.

Asset class performance

Data as at 31 December 2016
  1 month
(%)
CYTD
(%)
1 year
(%)
5 year
(% pa)
10 year
(% pa)
Australian Shares
S&P/ASX 300 Accumulation
4.34 14.93 11.79 11.64 4.39
Australian Bonds
Bloomberg AusBond Composite
-0.17 5.58 2.92 4.96 6.17
International Shares - hedged
MSCI World, excluding Australia, Hedged $A
2.73 11.20 8.91 12.78 4.34
International Shares - unhedged
MSCI World, excluding Australia, $A
4.48 20.65 7.92 18.58 4.71
Cash
Bloomberg AusBond Bank Bill
0.15 4.45 2.07 2.79 4.13
International Bonds
Barclays Capital Global Aggregate, Hedged A$
0.36 8.76 5.24 6.13 3.29
Global High Yield
BAML Global High Yield Constrained, Hedged A$
2.03 17.32 17.41 10.61 9.89
Emerging Markets
MSCI Emerging Markets, A$
2.26 6.91 11.72 8.57 2.71
Global Property
FTSE EPRA/NAREIT Developed, Hedged A$
3.58 10.52 5.99 14.11  
Global Infrastructure
FTSE Global Core Infrastructure 50/50, Hedged A$
4.74 14.29 11.40 16.26  

Key indicators

  Level 1 month (%) or bps +/- 1 year (%) or bps +/- 52 week Low/High
Australian Govt 10 yr bond yield  2.76 2.9 -6.0 1.82 2.87
United States Govt 10 yr bond yield  2.44 5.8 17.6 1.36 2.60
German Govt 10 yr bond yield 0.20 -6.9 -42.5 -0.19 0.51
Chinese Govt 10 yr bond yield 3.07 14.0 17.0 2.63 3.38
Australian official cash rate 1.50 0.0 -50.0 1.50 2.00
United States official cash rate 0.75 25.0 25.0 0.50 0.75
Euro official cash rate 0.00 0.0 -5.0 0.00 0.05
Australian unemployment rate 5.7 0.1 0.0 5.6 6.0
AUD/USD 0.72 -2.00% -0.47% 0.68 0.78
AUD/JPY 84.46 0.32% -3.50% 74.71 87.17
AUD/EUR 0.69 -1.43% 2.50% 0.62 0.71
AUD/GBP 0.59 -0.91% 18.72% 0.48 0.63
Crude Oil (US$/barrel) 54.96 14.62% 50.12% 26.01 56.05
Gold (US$/Troy Oz) 1150.00 -1.78% 8.46% 1073.90 1364.90

Major share markets

  1 month
(%)
CYTD
(%)
1 year
(%)
5 year
(% pa)
10 year
(% pa)
S&P 500 (US) 1.98 13.51 11.96 14.66 6.95
FTSE-100 (UK) 5.37 17.50 19.07 9.09 5.24
DAX (Germany) 7.90 17.09 6.87 14.25 5.70
Topix (Japan) 3.47 12.41 0.31 18.26 0.97
CSI300 (China) -6.44 -2.71 -9.26 9.53 6.65

Data as at 31 December 2016.
Source: Factset. Asset Class and share market indices are accumulation or total return unless otherwise stated.
A$ – performance denominated in A$, includes currency movements.
Hedged A$ – hedged performance denominated in A$, removes currency movements.




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