2017 Year in Review

Key Themes

  • Strong performances for global equity markets
  • Emerging markets lead gains; best year since 2009
  • Strong performance of Australian small company stocks vs large company stocks
  • IMF upgrades global economic outlook
  • Factor we target for higher returns in fixed interest were strong

GLOBAL SUMMARY

Global equity markets posted strong performances in 2017, defying expectations among many analysts of a difficult year given the backdrop of major geopolitical events, uncertainty about global economic growth and rising US official interest rates.

Back in January 2017, one media outlet said strategists were more bearish on equities than they had been for any year since 2005.[1] As it turned out, the global economy strengthened through the year and share markets posted solid performances on low volatility. The mood defied earlier predictions that investors might hold back as the Trump presidency settled in, Brexit negotiations began, tensions rose over North Korea, and elections were held in many nations, including Germany, France, the UK, Japan and New Zealand.

Amid improving signs for the US economy, the Federal Reserve raised interest rates three times in 2017 and projected another three for 2018. Towards year’s end, the IMF said a global upswing was strengthening, with growth upgrades for the Euro area, Japan, emerging Asia, emerging Europe and Russia[2].

Emerging markets led gains in global equity markets, their best year since coming out of the GFC. Developed markets also delivered 20%+ returns for the year.  Australia’s benchmark ASX300 index approached its highest levels in 10 years and within 10% of its October 2007 record highs.

Despite the improvement in the global economy, wage growth and core inflation remained very low in many countries. The takeout from 2017 is that it makes more sense to employ an investment approach based on diversification and discipline than one based on making predictions and timing markets. After all, this latter approach requires that you not only accurately forecast future events, but also anticipate how markets will react.

12 month returns to 31 December 2017 in AUD

Australian stockmarket[1]                            11.94%

Global stockmarket (exc Australia)[2]        13.38%

US stockmarket[3]                                       12.79%

UK stockmarket[4]                                      13.22%

European stockmarket (exc UK)[5]            17.41%

Emerging Markets[6]                                  27.09%

REITS – Australia[7]                                      6.44%

REITS - International[8]                               -0.81%

EQUITY MARKETS BREAKDOWN

Among developed markets, using the MSCI World Index (IMI) as a proxy, the overall gain for the year was a bit over 13% in AUD terms. All 23 members posted positive returns, ranging from more than 40% in Austria to just under 3% in Israel.

European markets led gains across developed equity markets over the year. Policymakers noted improving sentiment about the earnings outlook, with economic growth in the 19-nation euro zone the strongest in almost seven years and unemployment falling[11]. In the US, the benchmark S&P-500’s near 22% return in local currency terms was its best calendar year since 2013 and placed 2017 in the top third of best performing calendar years in the index’s history. While developed markets performed strongly, they lagged emerging markets. The MSCI Emerging Markets index returned more than 27% over the year, its best performance since 2009. China was one of the top performers, jumping almost 40%.

With many markets at or near record highs, a common question in the media was whether a downturn was due. However, history tells us that a market index being at an all time high generally does not provide actionable information for investors. In sectoral terms, information technology stocks, materials and consumer discretionary stocks were among the best performers in both developed and emerging markets.

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AUSTRALIAN MARKET

The Australian share market gained almost 12% in 2017 on a total return basis, its sixth consecutive year of gains and bringing it to its highest levels in nearly a decade.

The best performing sectors for the year were health care, information technology and energy. Telecommunications services was the only sector with negative returns, although this was heavily impacted by the poor performance of Telstra.

In December, the Reserve Bank of Australia (RBA) said the local economy was growing around its trend rate of 3%, with employment and investment strengthening. Activity was being supported by low interest rates and public investment in infrastructure [12].

The RBA said one continuing source of uncertainty, however, was the outlook for household spending, with income growth slow and household debt levels remaining high.

On foreign exchange markets, the Australian Dollar was mixed over the year, gaining against the US Dollar (+7.51%) and Japanese Yen (+3.97%), but falling against the Euro (-5.52%).

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TAKEOUTS

The performance of markets in 2017 underscored once again the dangers of basing one’s investment strategy on the news cycle or of acting on opinions and forecasts of media and market pundits.

It also highlighted the importance of investors diversifying across different assets and different countries, while staying disciplined within the plan designed for them.

The chart below highlights some of the year’s most prominent news events in context of broad market performance, as measured by the MSCI All Country World IMI Index in Australian dollar terms.

By the way, these headlines are not offered to explain market returns, but to remind investors of the importance of viewing events from a long-term perspective and to avoid making investment decisions based solely on the news.

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[1] “Wall Street’s 2017 Forecast is the Most Bearish Annual Outlook in 12 years“, CNBC, 3 Jan 2017.

[2] “World Economic Outlook“, Oct 2017, International Monetary Fund

[3] ASX 300 Index (Total Return)

[4] MSCI World ex Australia Index (net div AUD)

[5] S&P 500 Index

[6] MSCI UK Index (net div)

[7] MSCI Europe ex UK (net div)

[8] MSCI Emerging Markets Index (net div, AUD)

[9] ASX 300 A-REIT Index (Total Return)

[10] S&P Developed REIT Index (AUD, net div)

[11] “Euro Area Activity Accelerates to Fastest Pace Since Early 2011“, Bloomberg, Jan 4, 2018.

[12] Statement by the Governor, RBA, 5 Dec 2017.

With thanks to DFA Australia

 

Rick Walker