The previous financial year “turned out far better” than people expected 12 months prior, according to AMP Capital’s chief economist Shane Oliver, and provided strong returns for investors with diversified portfolios.
This came despite a large number of fears prompted by events such as the UK voting to leave the European Union, China slowing its growth efforts to curb increasing debt levels, and Donald Trump’s victory at the US election, Mr Oliver said – highlighting the importance of filtering out “noise” when examining markets.
However, the drivers of this success are unlikely to continue as strongly in the coming financial year, Mr Oliver said, and “some slowing is likely” after the previous year’s strong results.
“Share markets are no longer universally cheap and the crowd is not as negative as a year ago” Mr Oliver said.
“However, putting short-term worries and uncertainties aside, with reasonable economic and profit growth, continuing relatively easy monetary policy and some asset classes still benefiting from a chase for yield, returns from a well-diversified portfolio are likely to be reasonable this financial year – but more like 7 per cent as opposed to 10 per cent.”
Bob Baur, the chief global economist for Principal Global Investors, shared Mr Oliver’s view that many asset classes will continue to offer positive returns, though changing market conditions will have an impact, especially on bonds.
“Undoubtedly, the world economy is in the midst of a synchronised economic upturn. With that in mind, it makes sense that central bankers are now talking about reducing the massive monetary accommodation put in place since the financial crises,” he said.
“It will take a delicate balance to communicate the eventual end of monetary accommodation. Officials stressed that inflation remained subdued and that they clearly wanted to avoid pushing up rates and the currency, which could jeopardise economic growth. Despite the disclaimers, investors saw that policy support might soon start to fade and bond markets awakened to higher rates.”
Mr Baur said the gradual increase in interest rates around the world could even prompt a market correction as rates have been so low for so long that “many assets are already at full value with little room left for advance unless rates stay low.”
“Global stock markets could rally another 5 per cent to 10 per cent before an interest rate-driven correction sets in, if indeed it does,” he said.
“If we’re correct about long-maturity sovereign bond yields having to work gradually higher over the next several quarters, this may be the last phase of the long stock-market surge that began in March 2009.”