Australian sharemarket returns were positive in the month of December, with the All Ordinaries index gaining 2.4% to close the month at 5,344.6 points. The rally has been short-lived however, with volatility remaining a feature of invesmtent markets as we enter into the New Year.
In contrast, global investment markets were weak in December. The US Dow Jones Index declined by 1.7%, the London FTSE declined by 1.8%, the Japan Nikkei 225 Index declined by 3.5% and the Hong Kong Hang Seng Index declined by 0.4%.
The chart below shows the price return for key global markets over the 2015 calendar year.
As shown above all major markets (with the exception of the Japan Nikkei 225) declined on a price return basis (i.e. excluding dividends) in the 2015 calendar year. Investment markets were particularly weak in the second half of 2015.
December saw the Federal Reserve in the United States finally increase interest rates. The 0.25% per annum increase was the first increase since June 2006. US interest rates were drastically cut in 2008 and have been low ever since. At the same time that interest rates were being held at or around zero, the Federal Reserve expanded its balance sheet from 5% to almost 25% of the US economy. This was a controversial policy known as quantitative easing (or QE).
Investment markets initially responded positively to the December increase in US rates, although they have subsequently retreated. The increase in US interest rates was hardly a surprise, however just who will be damaged by an increase in US rates (and who will benefit from this) is somewhat of a guessing game.
At the same time investment markets have been dealing with a change of US monetary policy, the Chinese sharemarket has started the New Year in terrible fashion (falling more than 10% in the first week of 2016). The selloff can be traced to a range of economic, regulatory and fiscal reasons. Nevertheless, it does reinforce the volatility associated with investment markets at present.
A New Year generally signals a time to make predictions in relation to returns for the year ahead. This time last year, I wrote that I expected the Australian Dollar to continue to fall, the Australian sharemarket to be volatile (but close moderately higher) and domestic interest rates to potentially be cut. Once again, two out of three aint too bad...
Looking forward, the investment landscape is looking increasingly difficult. Sharemarket valuations in context of the global economic outlook are best described as "fair". However, if Chinese authorities can display effective fiscal policy, the Australian sharemarket has the potential to rally from its current levels. Furthermore, additional government policy invervention (such as QE or similar in either the US, Europe or China) cannot be ruled out. Therefore I will repeat my target for the All Ordinaries Index for 2016 (i.e. to close between 5,750 and 6,000 points by the end of the 2016).
I do expect the Australian Dollar to continue to slide (especially if the Chinese economy continues to stall) with the Australian Dollar to be buying 65 US cents at some stage in 2016. It is hard to mount a case for the Reserve Bank to increase interest rates any time soon. Consequently, I expect domestic rates to remain at 2.00% per annum throughout 2016.
As I wrote last year (and the year prior), diversification amongst an investors' assets will continue to remain key in ensuring that returns are insulated from any hiccups that may occur in the year ahead. This proved to be correct in 2014 and 2015, and I see no reason why it will not be the same for 2016 and beyond.
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This article is general information only and is not intended to be a recommendation. We strongly recommend you seek advice from your financial adviser as to whether this information is appropriate to your needs, financial situation and investment objectives.