From Jonathan Bayes, Chief Investment Officer, Partners Wealth Group.
So, this will be our final missive for 2017. We will return in print on Friday the 12th January 2018. Obviously, this is a great chance to thank you all for reading, and particularly to thank all the clients for again affording us your goodwill in 2017.
We would like to wish you and your loved one’s a very ‘happy holidays’ and the best of health, wealth and happiness in the year to come.
2018 YEAR AHEAD
I fully intend to do our ‘year-ahead’ piece in mid-January upon everyone’s return from summer break, but perhaps a brief precis of our thoughts for the 12-months to come –
a) The local Australian economy is finally on the improve, and we would expect 2018 to see improved business and consumer confidence translating to continued jobs growth
b) Australian and global share-markets can push higher in the 1H of 2018 as optimism around U.S. tax cuts further fuels economic growth
c) Bond-yields will rise as expansionary fiscal policies and contracting monetary policies clash, making interest-rate sensitive assets prone to volatility and underperformance. Rising bond-yields will ultimately curb the performance of equity markets mid-2018, but will contribute to increased volatility in the interim
d) The AUD will weaken back to 70c due to slowing export momentum (China) and stronger relative economic growth ex-Australia
e) We will continue to advocate for more active asset management as bond and equity indices reach higher valuation levels and enter their 10th year of a bull-market. We will continue to reduce our ‘passive’ index holdings to mitigate against asset-market risks.
f) Some of Australia’s unloved major stocks and domestic cyclicals can recover well – bank stocks could actually perform OK in the first half of 2018 as the market around it gets more expensive, and as fears of a housing correction ameliorate
g) Share-markets will focus on politics from the second quarter of 2018 as the U.S mid-term congressional elections loom, and as Australia’s 2019 Federal Election comes into focus.
As I have conveyed in recent weeks, I am undeniably more optimistic on Australia’s domestic economy than I have been in 18 months, and think the improving outlook for capital investment will reflect itself well certain industries. We have long advocated for SEEK (SEK), but feel confident we will be adding other domestic cyclical exposures in the months ahead.
A RE-CAP of MAJOR TRENDS YEAR-TO-DATE IN 2017
To give you all a guide for the sorts of returns across various asset classes and portfolios, I thought I would summarize them as follows below –
a) The PWG Balanced model portfolio as a proxy for portfolio returns is +12.61% for 12-months to November 2017 (Morningstar peer benchmark is +9.12%)
b) ASX200 Accumulation index is +11.8% year-to-date to the close of business yesterday
c) Within the Australian market, large-caps are +7.2% only, mid-caps +22.2% & small-caps are +19.1%
d) As a guide for International equity performance, the S&P500 +20% (+12% after AUD adjust), NASDAQ +29% (+21% after AUD), Euro-stoxx 50 +8% (+14% after AUD), Hang Seng +33% (+24% after AUD) & Nikkei +19% (+15% after AUD)
e) 3-month term deposit rates are now 2.4%, Australian 10-year government bonds yield 2.6% and the average Australian 5-year investment grade corporate bond yields 3.62%
In a nutshell, being invested purely in Australian ‘blue-chips’ would have seen serious underperformance in 2017.
Small-caps dominated performance locally, and offshore equity performance was stronger even despite a rise in the Australian Dollar.
THE WEEK GONE
The Liberals (and the market) had a win with the outcome of the Bennelong by-election, and markets globally enjoyed the US tax legislation that will see an earnings upgrade of as much as 10% for the US stock-market as the corporate tax rate is cut from 35% (though the effective tax rate is 28%) to 21%.
Interestingly, Australia has now got the 3rd highest corporate tax-rate amongst all OECD nations, and this will surely rapidly become an election issue in 2018 – a positive no doubt for markets and the economy if the Liberal Government can drive this as a new theme.
The mid-year economic and financial outlook was constructive since corporate tax take was better than expected, smoothing the glide path back to supposed budget surplus in 2021.
THE COMING MONTH TO COME, AND A BUSY Q1 EXPECTED
It will be extremely quiet obviously over Christmas and New Year (pending outlier events like North Korea or the Mueller investigation into Russia’s election meddling), but we are watching a couple of Australian portfolio names lest they reach price targets of ours.
Woolworths (WOW) is probably the main one given it is within 3% or so of our $28 target price.
We are also watching share prices in SEEK (SEK) to add, IOOF (IFL), and some of the domestic economic cyclicals we think might benefit in 2018.
As a heads up, the first quarter of 2018 will be extremely hectic since we have several new issues likely to come to the market (venture capital, fixed income, multi-asset, international equity, small-caps and Australian long/short equity). All of the issues we are looking at are of a high quality and we think can play a meaningful portfolio role for investors.
For more information on the above please contact your Partners Wealth Group advisor directly or on 1800 333 143.