Financial markets have seen a fair share of volatility in recent months. The most recent was the unexpected Brexit vote which sent currencies both soaring and plummeting as well as creating renewed interest in gold. When all the dust settled, as it has in the last few days, markets returned to where they were before the event, the exception being currency relationships with the UK Pound.
The 2016 financial year surprised on many different fronts. US interest rates rose, but only by a quarter of a percent, and the long awaited economic recovery which was the premise for interest rate rises, has remained as elusive as ever. As a result, the interest rate sensitive sectors continued to outperform. The Australian Bloomberg Composite Bond index rose 7.02% which created another year in which investors who are dubious of the value of investing in bonds with interest rates at 500 year lows were wrong again. Other big beneficiaries were Utilities, with that sector up 25.5% over the last twelve months. Australian listed property trusts (A-REIT’s) also had a tearaway year gaining 24.5%. A little truism to keep in mind here is that ‘trees don’t grow to the sky’ and there does reach a point where some of these asset classes that have had their day in the sun, might well have many a year in the shade.
Meanwhile, with the global economy sputtering and profits falling, equity markets generally have finished the year where they started. The S&P/ASX200 Accumulation index was up a mere 0.56% for the year, and the MSCI World index in AUD was up only 0.96%. Those seemingly benign numbers though mask the intra year volatility, which has seen an 18% range for the ASX, and a 16% range for the US markets.
Our strategy has not changed. Seek out the quality. Invest in assets that are appropriate for your time frames. Ignore the noise. Don’t get spooked out of markets at the very bottom. (easier said than done – but see our Brexit update for an example of that advice) Don’t get too carried away when markets have a good run. Remember the proverb – ‘this too shall pass’.