Most share markets were up sharply in 2013.

For Australian investors, 2013 was a very good year provided you had meaningful exposure to share markets, both domestic and offshore.  The Australian market provided a return of 20% using the accumulation index as the relevant measure, though obviously banks did better than that and mining stocks worse. The US market was up over 30% in 2013 but for Australian investors in un-hedged managed funds the returns were not far short of 50% because of the falling AUD. That was a spectacular result unlikely to be equaled anytime soon.

Research house Morningstar produce a chart that shows the returns from various investments (shares, cash, bonds, listed property, etc) year by year and what is abundantly clear is how the winners and losers changes every year. This is one reason why I believe diversification makes sense for most investors.

Low interest rates hurt more conservative investors in 2013

Returns in 2013 were not so good if you were largely invested in Cash, Term Deposits & Bonds as returns were low, typically around 3-4%. There is little likelihood of returns in 2014 being significantly better as the Reserve Bank seems comfortable with interest rates remaining low for some time.

Housing prices strengthened in 2013, particularly in inner areas of Sydney.

Low interest rates and a lack of supply in many areas have seen some upward movement in housing prices generally. Sydney, in particular, has seen strong growth with areas like the inner west recording price increases of 10% or more. Prices increases have generally been much more modest in outer areas and in other states, such as Western Australia. Of course, what’s good for existing owners is not good news for others trying to upgrade, buy a first property or acquire an investment property.

Investment Markets… where to from here in 2014?

Even though stocks provided excellent returns in 2013, the last thing you want to do is to let recent performance drive your decision-making. Again I refer you to the Morningstar chart mentioned above. If you do not have a portfolio built on a plan (for example, diversified among Australian and international stocks, bonds, cash and so forth), then it is time to do that. You should be clear about your goals and willingness to accept investment risk and ensure you have a portfolio that will get you through both the ups and the downs that inevitably hit the market.

What happens in Australia will be largely determined by events offshore, such as whether the US recovery gathers pace and whether China continues to grow at above 7%. Developments in Japan and the Eurozone are also important because of the size of those economies whereas what happens in places like Turkey, Thailand & Argentina, currently in the press, are ultimately of much less significance. Greece and Cyprus got considerable attention in recent years and did impact sentiment, but because of their comparatively small size the long term impact of their failure or success was very limited. Domestic policies In Australia can make a difference to us, but only at the margin in most circumstances.

Martin Wolf, Financial Times Columnist, says the high-income economies (the US, UK, etc) are achieving modest recoveries from devastating slumps, despite extraordinarily accommodating monetary policy. That remains the depressing truth. The forecast for the euro zone is grim: the 1 per cent growth this year would follow a decline of 0.7 per cent in 2012 and 0.4 per cent in 2013.

In 2014 financial markets will be less supported by central bank policy and driven more by the underlying fundamentals. As the real economy becomes the key driver of market performance rather than monetary stimulus by central banks, the big question is will equity markets  pause to wait for the real economy to ‘catch-up’ or will they correct (fall) to bring them  back to ‘fair-value’ measures. No-one really knows but a market correction (say a 10% fall in equity markets from their highs) in the near future would not surprise after the stellar performance in 2013.  A crash (a 30 – 40% fall) similar to what was experienced in 2008 seems unlikely given the improving US economy. Anything is always possible but for a market crash to occur something truly unexpected and unforeseeable would need to occur; see below.

Australian Property in 2014

Australians are always interested in what is happening in the housing market but I can’t offer much insight other than to note that the old adage “location, location, location” will still apply. Low interest rates, limited supply and a growing population will be supportive of the market but against that the jobs market looks weak, we may be in for a tough Budget in May and our housing prices are already very high by global standards. Do your homework if you are considering a new purchase as not all properties will be good investments.

Global Risks that could impact us in 2014

Respected fund manager, Magellan, says that “the major current investment risk is what will happen when the Fed ends QE (quantitative easing). The endgame for QE presents a risk for equity and other asset markets (particularly currency and bond/credit markets) due to the likely redistribution of global money flows and rising bond yields”. …. “Overall, we assess the risk of a disorderly unwinding of QE to be a “fat tail” or low-probability, scenario. Unfortunately, as we have repeated on many occasions, low probability does not mean zero probability”. I agree with that.

 

If you want a broader perspective, The World Economic Forum has recently published their 2014 report on the major risks facing the world. Obviously these are things that have the potential to impact investors in Australia, though there are always risks so these are not necessarily a reason to be overly cautious or gloomy, just realistic and watchful.

Ten Global Risks of Highest Concern in 2014

No.

Global Risk

1

Fiscal crises in key economies

2

Structurally high   unemployment/underemployment

3

Water crises

4

Severe income disparity

5

Failure of climate change   mitigation and adaptation

6

Greater incidence of extreme   weather events (e.g. floods, storms, fires)

7

Global governance failure

8

Food crises

9

Failure of a major financial mechanism/institution

10

Profound political and social   instability

This newsletter is not advice and provides information only. It does not take account of your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision. 

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