Here’s what caused the market downturn
Mark Rider explains that companies’ expectations of lower earnings were a key force in pushing the sharemarket down.
Returns on sharemarket investments were lower in the last three months of 2018 than the rest of the year. That was a result of the ‘correction’ in global markets at the end of 2018.
After the impressive investment returns of 2017, more modest returns in 2018 were to be expected. However, the large correction in late 2018 was driven by downgrades in market expectations of listed companies’ earnings growth, most importantly in the US.
Snapshot of market performance
US shares, which performed strongly for most of 2018 on the back of a buoyant economy and large tax cuts, fell sharply, ending the year down 6.2 per cent. This correction was caused by slower global growth, lower oil prices, the impact of higher rates, a stronger US dollar, and the drag from the trade war and higher tariffs. Given these conditions, the US central bank will likely pause rate hikes at least through the first half of 2019, to give the economy some breathing room.
European growth slowed earlier than the US, due to softer Chinese growth and the impact of trade wars. Brexit issues remain unresolved even as the deadline looms, with Britain scheduled to leave the European Union in March, 2019. The shift in Italian politics has added to debt concerns. And France is dealing with ongoing protests from the gilets jaunes (yellow vests) – a grassroots movement calling for economic justice.
China’s growth has continued to slow and is a significant drag on global growth. US President Donald Trump’s trade war has likely escalated the slowdown. While the Chinese government is now trying to stimulate its economy, the country’s elevated level of debt will likely mean the effect of any stimulus effort will be much more modest than a similar effort in 2015.
In Australia, credit conditions have tightened and house prices have fallen substantially in Sydney and Melbourne, with further falls expected in 2019. We expect economic growth to slow, but remain solid. With the Reserve Bank of Australia putting any interest rate rises on hold, it is the performance of the global economy that remains the key risk to the Australian economy.
The Australian dollar ended the year fractionally above US70¢, which is down 10 per cent from where it was a year ago. The decline in the Aussie reflected weaker Chinese and global growth and the possibility of further US rate hikes throughout 2019. However, reduced expectations for US rate hikes have seen the Australian dollar drift higher.
For the year ahead, ANZ’s Chief Investment Office expects a ‘gradual slowdown’ of global growth, but not a global recession. In this environment we expect shares to generate below-average returns, potentially not a lot better than bond markets.
Talk to us about superannuation
Performance
OnePath Custodians Pty Limited (OnePath Custodians) ABN 12 008 508 496, AFSL 238346, RSE L0000673 is the trustee of the Retirement Portfolio Service (ABN 61 808 189 263, RSE R1000986) (Fund) and issuer of the interests in “ANZ Smart Choice Super”, a suite of products consisting of ANZ Smart Choice Super, ANZ Smart Choice Super for employers and their employees and ANZ Smart Choice Super for QBE Management Services Pty Ltd and their employees.
ANZ Smart Choice Super is issued by OnePath Custodians, and the ANZ Smart Choice Super and Pension product is distributed by Australia and New Zealand Banking Group Limited (ANZ) (ABN 11 005 357 522). ANZ is an authorised deposit taking institution (Bank) under the Banking Act 1959 (Cth). OnePath Custodians is the issuer of this product but is not a Bank. Except as described in the relevant Product Disclosure Statement, the obligations of OnePath Custodians are not deposits or liabilities of ANZ or its related group companies. None of them stands behind or guarantees the issuer or the capital or performance of any investment. Such investment is subject to investment risk, including possible repayment delays and loss of income and principal invested. Returns can go up and down. Past performance is not indicative of future performance.
This information is subject to change. You should read the relevant ANZ Financial Services Guide (FSG), PDS, product and other updates (for open and closed products) available at ANZ.com.au/super and consider whether the product is right for you before making a decision to acquire, or to continue to hold the product. Updated information will be available free of charge by calling Customer Services on 13 12 87.
Taxation law is complex and this information has been prepared as a guide only and does not represent tax advice. Please see your tax adviser for independent taxation advice.
The information on insurance cover is a summary only of the terms and conditions applying to the insurance cover. To the extent there is any inconsistency with the terms of the insurance cover provided by the insurer, the terms of the insurance policy will prevail.
The information provided is of a general nature and does not take into account your personal needs, financial circumstances or objectives. Before acting on this information, you should consider the appropriateness of the information, having regard to your needs, financial circumstances or objectives. The case studies used in this article are hypothetical and are not meant to illustrate the circumstances of any particular individual. Opinions expressed in this document are those of the authors only.
ANZ does not represent or guarantee that access to the ANZ Internet Banking or the ANZ App will be uninterrupted. Temporary service disruptions may occur. ANZ recommends that you read the ANZ App Terms and Conditions available at anz.com and consider if this service is appropriate to you prior to making a decision to acquire or use the ANZ App.
In addition to their salary, ANZ staff members may receive monetary or non-monetary benefits depending on the product they are selling or providing advice on.
Apple, the Apple logo, iPhone and iPad are trademarks of Apple Inc., registered in the US and other countries. App Store is a service mark of Apple Inc.
You need Adobe Reader to view PDF files. You can download Adobe Reader free of charge.