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12 December 2016 ~ found in Investments

A look back at 2016

Source: Dr Shane Oliver, Chief Economist, AMP Capital

2016 – A messy but okay year

2016 started badly for investors with worries about global growth and deflation. But global growth turned out okay &, despite political events, rising bond yields & disappointing Australian growth, the end result has been a constrained but okay year for diversified investors.

US share market analyst Joe Granville once observed that 'if it's obvious, it's obviously wrong'. 2016 was perhaps remarkable for the things that many thought were obvious at the start of the year but did not happen: the global economy did not see plunging growth and deflation; the Fed did not blindly raise interest rates; commodity prices did not continue to crash; the Brexit vote did not plunge the world into a growth slump; the election of Donald Trump did not cause a share market crash; China did not hard land (again); Europe did not break apart; tensions in the South China Sea did not bubble over into war; and the Australian property market did not collapse.

What did happen was far more mundane:

- The global economy continued to muddle along, at around 3% growth. The good news is that growth indicators stabilised and improved through the year helped in particular by stronger growth in the US after a slow start and a stabilisation in Chinese growth.

- Fading deflation risks. While talk of deflation was all the rage early in the year this faded as commodity prices bottomed, spare capacity was gradually being used up and as the policy focus shifted from monetary to fiscal stimulus.

- Rising commodity prices. An upswing in industrial commodity prices surprised many and was driven by a combination of better than feared demand and supply cuts.

- Politics turned populist. The Brexit vote, the US election, the Australian election and some say the Italian referendum highlighted to varying degrees the rising support for populist solutions and a backlash against globalisation.

- Another year of easy money. While growth fears and politics saw the Fed scale back its planned rate hikes, central banks in Europe & Japan remained in easing mode as did the People's Bank of China during much of the year.

- The great policy rotation. While monetary conditions remained ultra easy the realisation that monetary policy could only do so much combined with populist political pressures saw more talk of a shift towards fiscal stimulus. President elect Trump is at the pointy end of this move.

- Low inflation saw more rate cuts in Australia and growth disappointed. Australian growth started off strong but weakened in the second half. Rebalancing is continuing, with NSW and Victoria continuing to do well, but a dip in inflation well below target saw the RBA continue cutting interest rates. Meanwhile, the risks continued to build around the Sydney and Melbourne housing markets.

While the macro environment turned out okay – the growth scare early in the year along with political events made for a constrained and at times interesting ride in investment markets.

* Yr to date to Nov. Source: Thomson Reuters, Morningstar, REIA, AMP Capital

- In contrast to 2015 that saw share markets start well and end badly, share markets started 2016 badly on growth and deflation fears before rebounding as such fears faded. The Brexit vote, the US election and the Italian referendum caused only short lived scares.

- 2016 saw a classic reversal of some of the relative share market performances that had been seen into 2015, with: US shares outperforming in developed markets as the Fed paused, the US earnings recession ended and investors anticipated stimulus under a Trump presidency; resources shares outperforming as commodity prices rebounded helping the Australian share market to perform relatively well; and emerging markets doing well led by Brazil.

- After a huge rally in the first half of the year bonds then gave up their gains spurred along by anticipation of fiscal stimulus under Donald Trump. So bond returns were subdued.

- Real estate investment trusts surged in the first half of the year, but fell as bond yields rose, constraining their returns
Unlisted commercial property and infrastructure continued to benefit as investors sought decent income yields.

- Australian residential property returns were solid but slowed and remained concentrated in Sydney and Melbourne.
Cash rates and bank term deposit returns were poor reflecting record low RBA interest rates.

- After several years of falls, the $A fell actually rose 3% as the Fed delayed and commodity prices rose.

- Balanced superannuation funds returns were subdued, but better than cash and bank deposits.

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