As we look back on the last financial year we have seen Australia face numerous challenges with the decline in our mining sector, rising unemployment, a political stalemate over the budget and below trend growth. Yet with all of these forces at play it was a year when bonds, residential property and shares all posted positive gains. This has happened for the second year in a row and is generally seen as a rare sequence of events.
Government bond returns were 5.8 per cent, residential property saw returns of around 13.3 per cent (largely driven by the Sydney market), and shares grew by 5.7 per cent over the year (including dividends). The ASX 200 finished at 5,459 points. Had it not been for a shocking performance in June stemming from the crisis in Europe surrounding Greece, shares would have been on track to post returns of well over 10% with the index threatening to break 6,000 back in April. This also means that the average return for most superannuation balanced fund options will full shy of double figures as well.
There has been much debate about a bubble in Sydney house prices being fueled by low interest rates, an improving NSW economy and a flood of buyers from overseas. As a result, regulators are now placing significant pressure on the banks to curb loans to investors. The strong rise in house prices are unlikely to continue at the same pace, but it is also difficult to see affordability improving in the short to medium term unless there is a severe deterioration in economic conditions.
Interest rates are at a record low and the Reserve Bank is playing a wait an see approach based on how economic data plays out in the months ahead. The case for further cuts has diminished with the unemployment rate recently dropping to 6% on steady jobs growth and stronger than expected March quarter economic growth. That said, our terms of trade are still declining and there are risks overseas. The year ahead is not looking like smooth sailing as Europe tries to hold together the Euro, interest rates increase in the US and China continues with efforts to rebalance their economy. All of these factors pose potential headwinds for Australia.
So it was a good year, but looking ahead investors will need to ensure their portfolios are well diversified and not overly exposed to to a single type of asset. With more ups and downs (or volatility) driven by headline grabbing events overseas, investors should also be ready to take advantage of opportunities when markets panic.
Rob Gilmour is the Managing Principal of Wealth Simplicity. The information provided should not be considered personal financial advice as it is intended to provide general advice only. The content has been prepared without taking into account your personal objectives, financial situations or needs. You should seek personal financial advice before making any financial or investment decisions.