REST’s Core Strategy finished 2017 on a strong note, with another quarter of positive returns (+3.97%) for the period ending 31 December 2017.
Over the last 12 months, the Core Strategy has returned +10.68%, well above its return objective of CPI + 3%.1
Overseas and Australian shares were the largest contributor to returns followed by property and growth alternatives.2
December quarter investment update
with Brendan Casey, REST’s General Manager, Investments
Buoyant sharemarkets continue
A strong December quarter topped off yet another stellar year for global sharemarkets.
Thanks to a continuing run of favourable global economic indicators such as robust growth and low inflation, International shares as measured by the MSCI All Country World ex Australia Index (unhedged in AUD), surged a further +6.2% over the December quarter, and an impressive +15.2% for the 12 months ending 31 December 2017.
While US and Japanese sharemarkets dominated the headlines for hitting new records, it was Asia (excluding Japan) and emerging markets such as Argentina and Turkey that proved to be the best performers this year. Historically, a weak US dollar is good news for emerging markets and this certainly proved to be the case in 2017.
Advancing Australia
Anchored by an attractive dividend yield (around 4% on average), respectable earnings growth, and a Reserve Bank outlook for an extended period of record low interest rates, Australia’s S&P/ASX300 Accumulation Index, gained +7.7% over the quarter, and +11.9% for the 12 months ending 31 December 2017.
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China powers on
The recovery in commodity prices (notably copper), as Chinese activity accelerated during the year also helped the Australian sharemarket.
China’s rapidly mounting debt levels (estimated at around 300% of GDP) did not agitate global markets as earlier feared. Over the quarter, China’s 19th National Congress outlined a plan for curbing financial risks while focusing on delivering slightly lower, but still very substantial GDP growth.
This suggests the risk of a China ‘hard landing’ remains low and a collapse in commodity demand unlikely.
Trump’s tax triumph
In the US, the optimism that followed Donald Trump’s election win returned with the passing of tax reforms, which are expected to support corporate earnings and the take-home pay of lower and middle-income households.
US corporate taxes falling from 35% to 21% brings the US more in line with the global average. This may lead to increased consumer and business spending combined with even lower unemployment (already at 17-year lows), which in turn could stoke inflation and lead the US Federal Reserve to lift interest rates faster than expected.
Looking ahead
2017 overall proved more resilient than many were expecting. And while much political uncertainty lingers across the world, solid prospects for global growth continue to be supportive of global sharemarkets.
Following strong returns over the past 12-18 months however, valuations across major global markets range between ‘fair’ and ‘elevated’ with most trading above pre- global financial crisis (GFC) levels on a range of measures. And, as the monetary policies put in place by global central banks after the GFC become less supportive, record low levels of volatility may end.
Reflecting this increased uncertainty, REST has been positioning the Core Strategy more defensively. This means re-allocating a greater share of the portfolio from shares and property into lower risk asset classes such as cash. This will provide the opportunity to purchase assets at more attractive valuations when markets correct as interest rates around the world rise and/or other significant risks materialise.
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