Since January global sharemarkets have delivered modest to flat returns, revealing what I consider to be a weakening spirit, in line with our forecast back then that the good times for equity investors were fading.
In the past five months both international and local shares have delivered flat to small positive returns, with the weaker Australian dollar resulting in stronger returns for unhedged international shares.
Compared to the roar of the high-return markets of recent years, this subdued state reveals the more challenging environment markets will continue to contend with in 2018.
And what’s causing the headwinds to sharemarkets?
- Trade friction, primarily between China and the United States
- Slow increasing of the US federal funds rates, which is pushing up interest rates (and talk of more to come)
- General signs that the solid global growth we’ve experienced is easing
That middle point is the real one to watch. For example, in early May, the US Federal Reserve left interest rates unchanged but noted that inflation is close to target and the economy warrants further gradual rate increases. This is not unexpected, and we believe gradual rate rises from the US will prove challenging for markets as the year progresses particularly if wages and inflation were to accelerate.