Investment insights of the past financial year
by Michael Collins, Investment Commentator at Fidelity International
July 2016
Australian were little changed and global stocks fell over 2015-16, a financial year when the return of deflation prompted the Reserve Bank of Australia to cut the cash rate to a record low, political risks irked global investors, the probability of a global downturn rose, the Federal Reserve raised interest rates for the first time in nine years and the question mark over China’s economy grew bigger.
Australian stocks
Australia’s S&P/ASX 200 Accumulation Index rose 0.6% over the 12 months but there was plenty of movement over that time.
The share market performed best at the start of the financial year, rising 4.5% by July 21 from its June 30 close, but only because investors decided the recent decline had gone too far. (The benchmark had slumped 6.6% over the preceding three months.)
The more telling movement was the low for the financial year set on February 12 when the index fell 10.4% below where it ended on June 30 last year. Stocks slumped early in 2016 after concerns about China’s economy undermined commodity prices, companies downgraded earnings forecasts due to the bleaker economic outlook, bank stocks dropped due to tougher capital requirements and a higher-than-expected reading on inflation for the December quarter made it harder for the Reserve Bank to cut interest rates.
Stocks recovered in the final months of the financial year after a shock report showing consumer prices fell 0.2% in the first quarter prompted the Reserve Bank to cut the cash rate to a record low of 1.75% in May, higher commodity prices boosted resources stocks and better readings were released on Australia’s economy. Reports showed Australia’s economy expanded 3.2% in the year ended March. The jobless rate stood at 5.7% in May compared with 6.1% 12 months prior. While prices dropped in the March quarter, consumer prices rose 1.3% over the 12 months to March.
The financial year was marked by the underperformance of the largest stocks by market capitalisation – the top-20 stocks, as tracked by the S&P/ASX 20 Index, stocks fell 7.0% over the fiscal year while the S&P/ASX Mid Small Index surged 16.3%. Large miners such as BHP Billiton and Rio Tinto were battered by falling commodity prices. The big banks dived after regulators stiffened capital requirements to lower the risk of a housing bubble and consequent bust. The large retailers slumped as foreign competitors increased their presence. Smaller stocks rose, in contrast, because they were most exposed to technological advancements.
Global stocks
Global stocks fell as odds rose for a global downturn, political risks increased as highlighted by the UK vote to leave the EU, the US economic expansion showed signs of waning, the eurozone political and financial crisis deepened and emerging countries struggled as the prices on their material and energy exports dropped. A decline in the Australian dollar narrowed losses for unhedged investors. The unhedged MSCI All Country World Index lost 1.1%, while the MSCI All Country World Index hedged in Australian dollars shed 3.7%.
US stocks rose as the US economic expansion entered its eighth year, the jobless rate fell to a nine-year low of 4.7% in May, companies beat earnings expectations and the Federal Reserve only raised interest rates once over the 12 months when as many as three rate increases were priced in at the start of Australia’s fiscal year. Concerns about the hit to profits from a higher US dollar that prompted downgrades of earnings forecasts, reports released in 2016 pointing to a slowdown in economic activity and angst about a Donald Trump presidency limited gains. The S&P 500 Index rose 1.7%.
European equities dived after the UK voted to quit the EU, populist candidates emerged as threats across Europe, deflation gripped the eurozone, Italian banks wobbled, squabbles resurfaced over Greek’s bailout and the eurozone economy’s growth proved lacklustre. The STOXX Europe 50 Index shed 14.4%.
Japanese shares slumped as the country failed to shake off its two-decades-long stagnation even though the Bank of Japan introduced negative rates on banks deposits and upped its asset buying. The economy contracted in the fourth quarter while deflation proved stubborn – consumer prices fell 0.4% in the 12 months to May. A high yen hurt exporters while upper house elections set for July injected political uncertainty. The Nikkei 225 lost 23%.
Emerging stocks sagged as doubts grew about China’s debt-heavy economy, a corruption crisis shook up Brazil, the drop in oil prices and sanctions battered Russia and the decline in material and energy prices hammered commodity-dependent emerging countries and oil exporters. The MSCI World Emerging Markets Index dived 10.1% in US currency and -4.6% in Australian dollars.
