As discussed last week investors who maintained diversified portfolios and weren’t intimidated by alarming headlines did well in financial year 2016-17.
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The average growth style portfolio earned 9.46 per cent. There appears a good chance of another sound performance in the coming year.
There was plenty to worry about a year ago: an indecisive Federal election, the Brexit vote, and then the election of US President Trump promising protectionism and barriers to the flow of goods and people. However the free market system got on and did its job.
The headlines meant little. Ultra-low inflation and interest rates made capital available at low cost enabling corporate profits to increase and most financial markets to perform well. However it was important to be diversified.
For the future the underlying conditions haven’t changed much. Interest rates have begun to edge up in the US and other places but movements have been very small so far, and future increases will be gradual.
The US economy and financial markets have absorbed the small rate rises so far without ill effect. The next move is probably several months away. The RBA is unlikely to lift rates this year but its first hike could be early next year.
Australia is benefiting from improved commodity prices. While they are well below their levels of three years ago they have recovered from their lows, so the worst of the mining slump is behind us. Several agricultural commodities are also selling very well.
China, our largest trading partner, is continuing to grow its economy at over six per cent per annum. The US economy is doing well, and Europe and Japan are showing signs of improvement. These trends should provide many Australian companies with opportunities to increase profits.
We can now be reasonably confident that the more extreme elements of Mr Trump’s policies won’t be enacted. Senior government officials and members of his own party will ensure there won’t be huge tariffs on imports or walls to entry.
AMP Chief Economist Dr Shane Oliver says share valuations are not excessive and company profits should improve. Price to earnings ratios are above average but that is usual when inflation and interest rates are very low. Cash pays little and corporate finance is cheap.
Oliver also points out that there are few signs of the excesses that usually precede a slump or recession. These can include full utilisation of production capacity, rapid growth in debt, high and rising inflation and a boom in speculative investment. These signs of excess are not evident globally.