2017 has been a year dominated by international equities, mainly from strength in emerging markets. Australia has lagged global equities, but is on track to deliver a total return of about 10% after strong performances in the healthcare, consumer staples, industrials and resources sectors. International fixed income markets have been well behaved, but the returns have been more moderate than last year as central bank tightening in some regions has curbed gains. In macro news, broad-based economic growth upgrades and prospects of US tax reform have outweighed tensions in the political arena.
Below are some of the highlights from 2017 at time of writing:
1. International equities over fixed income – Equities have been the best performing asset class in the year to date. International equities have been the main driver, up 16.3% in Australian dollar (AUD) terms, buoyed by a broad-based acceleration in economic growth and prospects of US tax reform. Along with improving labour markets, this has prompted several central banks to tighten monetary policy. The US Federal Reserve has raised rates three times this year, the fastest pace since the global financial crisis, and it plans to reduce the size of its balance sheet. The Bank of Canada and Bank of England have both raised rates this year, while the European Central Bank has extended its bond buying program to late 2018, but halved the size to €30bn per month. Fixed income assets have delivered positive returns, but the extent of gains in international fixed income has been minimised by the aforementioned fine-tuning of central bank policy, which has led to higher sovereign bond yields in Europe and short-end US treasuries. On the other hand, a less rosy economic picture in Australia has kept the Reserve Bank on hold during the year, which has assisted the local equity and fixed income markets. Hedge funds and commodities have been the laggards, with commodities showing gains in industrials metals and oil, offset by falls in agricultural and natural gas prices. Ultimately, the commodities index has been lower on translation back into AUD. In US dollar (USD) terms, the commodities index has been flat. Similarly, hedge fund returns have been impacted by the translation back into AUD. In USD terms, hedged funds have returned 7.6%.
2. Regional equities – Further reinforcing that the growth recovery has been quite broad-based this year, gains in equities have been strong across a number of regions, not just the US. Emerging markets (EM) gains have been led by double-digit returns in Brazil, China, India, South Korea and Taiwan. In most cases those returns have been enhanced by an appreciation in EM currencies as well. EM equity funds saw strong inflows this year on the back of improving fundamentals in the region and broad USD weakness. In developed markets, Japan and Europe outpaced the US, which was weighed down by its currency. Australia had a slow start to the year, but a second-half rally in small caps and resources has put it on track for a respectable total return of about 10%.