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Winners & losers in 2018Financial market perspectives
Exchange rates: Of 120 currencies monitored, only nine have lifted against the greenback in 2018. The Aussie dollar has fallen 8.5 per cent against the greenback, putting it in 99th place of the world’s currencies.
Sharemarkets: Of 73 global sharemarkets monitored, only 17 stand in positive territory for 2018. The Aussie sharemarket is actually mid pack, in 39th position with the All Ordinaries down around 8 per cent.
Interest rates: The cash rate was unchanged in 2018. But 10-year yields are now at 18-month lows. The report puts Australian financial market trends in a global perspective for investors.
What do the figures show and what does it all mean?Currencies
The Aussie dollar started the year around US78 cents and is finishing the year around US 72 cents. At face value that may suggest that somehow the Australian economy has under-performed. But rather the fall reflects the strength of the greenback rather than weakness of the Aussie dollar. In short, US interest rates have risen and Aussie interest rates have been stable.
In fact of 120 currencies monitored by CommSec, only nine have risen against the greenback, the strongest being the Albanian lek, up 2.4 per cent. Of major currencies, the Japanese yen has edged 0.1 per cent higher. But the Euro has lost 5.5 per cent and the UK pound has lost 6.5 per cent.
When measured in terms of Aussie dollars per US dollar the Aussie has fallen 8.5 per cent in 2018 (when measured as US dollars per $A, the Aussie has lost 7.7 per cent). That puts the Aussie in 99th place of the 120 currencies. The weaker Aussie dollar has been positive for Australian businesses. It has served to support inbound tourism, assisted in keeping Aussie exports competitive, and has ‘encouraged’ Aussie consumers to spend more money at home rather than overseas.
The weakest currencies in 2018 include the Argentine peso which started the year at 18.59 pesos per US dollar and fallen to 38.36 peso per US dollar. The currencies of Turkey, Pakistan, Brazil, Russia, India and South Africa have also been amongst the weakest in 2018 against the greenback. Of course that means these countries have become attractive destinations for Aussie travellers given that the currencies have fallen further against the greenback compared with our dollar.
Sharemarkets
Not only have most countries seen the value of their currencies fall against the greenback, they have also seen their sharemarkets go backwards in 2018.
Of 73 global sharemarkets monitored, only 17 stand in positive territory for 2018. In fact if sharemarkets ease another 2-3 per cent in coming days, we may be left with only nine markets in positive territory for 2018.
The world sharemarket (world MSCI less Australia) has fallen by 9.1 per cent so far in 2018.
The Aussie sharemarket is actually mid pack, in 39th position with the All Ordinaries down around 8 per cent. Total returns on Aussie shares (dividends and share prices) have fallen 4.5 per cent so far in 2018.
Out-performing global sharemarkets include Ukraine (up 79 per cent, although inflation is 10 per cent), Qatar, Brazil, Saudi Arabia, India and New Zealand. Under-performers include Venezuela, Ireland, China (down 22 per cent), Greece, Turkey and Germany.
The German sharemarket has fallen 16.9 per cent in 2018 with the UK down 12.8 per cent, Japan down 7.2 per cent. The Australian All Ordinaries has fallen by 8.2 per cent with the ASX 200 down 7.8 per cent. In the US the Dow Jones has lost 4.2 per cent with the S&P 500 down 4.8 per cent and Nasdaq down 1.7 per cent.
Interest rates
The Reserve Bank has left the cash rate at an “emergency” level of 1.50 per cent for 28 months. But while the cash rate was stable in 2018, other rates moved over the year – up and down.
Ninety-day bank bill yields continue to hold above the 1.5 per cent cash rate. Ninety-day bills held between 1.76- 2.12 per cent over 2018 and yields are currently near 2.05 per cent. At the other end of the yield curve, 10-year bond yields held between 2.39-2.92 per cent over 2018. Yields on 10-year bonds are ending 2018 at 18-month lows.
What are the implications for interest rates and investors?
The past year has been dominated by increases in US interest rates and, as a result, a stronger greenback. But in 2019 the expectation is that the US Federal Reserve will have less work to do – the federal funds rate is now close to where the central bank wants it. But other central banks don’t look like rushing in with their own rate hikes. Economies are in good, not great shape. And inflation still remains contained.
The Aussie dollar is expect to creep higher against the greenback, perhaps reaching US75 cents later in the year. We continue to pencil in a rate hike by the Reserve Bank, but not until November at the earliest.
The year 2018 has also been a year when global sharemarkets generally lost ground – especially after October. The US-China trade dispute has raised fears about future global economic growth. And the expectation that the US rate hiking cycle is drawing to a close has caused uncertainty in investor minds about what comes next.
Fear rather than fundamentals has driven sharemarket action in the latter months of 2018. In Australia, with companies in good shape and profits at record highs, 2019 looks a better year for sharemarket investors.
The Australian ASX 200 share index is expected to rebound by 10-12 per cent in 2019 after a decline of around 6-8 per cent in 2018. Including dividends, total returns are tipped to lift by 14-17 per cent in 2019.
While above-normal growth of total return on equities is expected, this must be seen in the context of the belownormal performance in the latter part of 2018. The forecasts naturally assume that the US and China make progress on reconciling their trade disagreements.
Published by Craig James, Chief Economist, CommSec