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Looking back at the FY

As we end another financial year, we have seen good returns once again, despite the big drag from ultra-low interest rates.

If 40% of your portfolio is earning 2.5% you need almost 12% on the rest of your portfolio to get an 8% return. Add in a few early stage unlisted property investments and we are very glad to have chosen to greatly increase our recommended US exposure. We are not suggesting this is a time for risk taking as some higher yield options are not worth the risks, but we are pleased to have been able to generate solid returns in this environment.

After a surge in the last two weeks of June (we are not quite sure why, other than a fall in the $A as no other markets were strong) the Australian equity market managed a good financial year. Excluding the US, the Australian market did better than other major markets such as Europe, China and Japan.

Many of the big questions still remain unanswered from an economic perspective:

  • Australia’s property market has certainly come off the boil, but so far the landing has been soft and we have not seen anything to create forced sales of any magnitude;
  • Interest rates are rising in the US;
  • Inflation is still low, but is unlikely to be going lower unless the economy is much weaker than expected;
  • Europe is improving, but still troubled;
  • Trump could push the bluff and bluster too far and cause a trade war he really does not want;
  • Will China stumble?

At the same time there appears to be too much debt in emerging markets and we do not see any US budget surpluses on the horizon.

The bigger news this financial year was around politics. Trump is a blessing to the perpetual news networks and his inconsistent style is making friends of enemies (or at least acquaintances) and enemies of friends. In the short term, from an investment perspective it is just noise and a lot of it. You can’t jump around on what is said as it may change tomorrow. Markets are now more used to Trump’s tactics, so react less, but remain uncertain none the less. Most people now understand that Trump is actually pro free trade and this is his style of positioning, before negotiations start.

It was a pleasant change and has raised a few eye brows recently when Albanese, the Labor number two, made a speech about the different groups in the economy and society working together, and that Labor needed to move back towards the Hawke / Keating style of listening and bringing groups together. While we understand that politics is a touchy issue, as it impacts on the investment world, it is not something that can be ignored. Policy and culture have huge impacts over time. Often far greater impact than the smaller things the markets frets about, but less quantifiable and longer term.

If you step back, it is not too hard to understand that apart from the government, the economy is just the sum of the businesses that operate in it (people that work for themselves have small businesses). If we have no businesses, there are no jobs, no output, no economy. Business requires risk takers, in some rare cases even visionaries, who are the creators of activity and should be encouraged at least and generally rewarded. We know there are people that do the wrong thing and certainly some of them are in business, but to constantly portray business and financial success in the worst light is dangerous. 

People will always argue about where the tipping point is, whether tax or welfare will hurt incentives, and how wealth should be divided. What makes no sense is to set the two sides against each other, to oppose everything and ridicule each other. They would achieve the most if they could work together, as at the end of the day Democracy claims to be a system that represents the people, not to set them against each other or for the slight majority to enforce their will on today’s minority. We may hope for too much, but if we had someone who would stand up and actually take a position and action for the benefit of the majority of Australia that lie somewhere in the middle, that would be one of the most important factors for Australia’s long term success as an economy and a society.

For further information or to discuss how we can help you, please speak to your advisor.

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