How did property stack up as an investment option this past financial year: Deborah Alliston

EXPERT OBSERVER

For the 12 months to 30 June, equity markets posted solid gains both in Australia and offshore, up 13.7% and 15.4% respectively.

Returns were also positive across other asset classes such as direct property and infrastructure, and bond returns, although modest, were much stronger than the previous year.

Overall, global growth conditions helped to drive earnings and although the US Fed continued to raise rates over the past 12 months, monetary policy conditions both in the US and globally remained accommodative.

In this article, we look at what’s been driving these returns and consider the outlook for returns over the medium term.

2017/18 was characterised as a year of two halves where volatility featured heavily over the second half.

Equity markets were particularly weak at the start of 2018 due to concern that inflation was emerging in the US and that growth had reached a cyclical peak.

These fears quickly settled, and the markets were able to recover but volatility resumed on the back of rising geopolitical tension, specifically the threat of a global trade war between the US and China.

Looking forward, we are mindful that the market may be underestimating inflation and the threat of additional interest rate increases in the US.

We are coming to the end of a long expansion period and there is uncertainty as to how far interest rates can rise before they become negative for equities and how central banks will respond once inflation shows signs of life.

These factors alongside ongoing geopolitical uncertainty suggest that trading conditions could be less supportive over the year ahead and returns in this environment are likely to moderate.

Volatility will continue to feature over the medium-term and while often viewed in a negative context, it can create trading opportunities for our super portfolios that have a longer-term investment horizon.

That said, we are mindful of building portfolios that can better withstand downside volatility. Not only does investing across a broad combination of assets achieve this but actively managing within and across asset classes can also deliver a better risk and return outcome.

Deborah Alliston is the head of Multi-Asset Portfolio Management for AMP Capital in Sydney, Australia.