December 28, 2016

Season’s Greetings to you all.


Mark Causer


As the year 2016 draws to a close and the pace of life slows just a little, it is probably as good a time as any to reflect on some of the key market and non-market events that shaped the year.

Well 2016 was an interesting year, but perhaps every year is interesting!

As the year 2016 draws to a close and the pace of life slows just a little, it is probably as good a time as any to reflect on some of the key market and non-market events that shaped the year.

Well 2016 was an interesting year, but perhaps every year is interesting!

Anyway, it was a horrible start to the year for investment markets. The local index started off at 5,270, only to fall as low as 4,765 or just over 9% to February, dragging the Australia dollar down with it to $0.68c against the US dollar, before embarking on a slow recovery to land into positive territory for the year – around 7.5%. The AUD managed to reach a high for the year of $0.78.

We would suggest our dollar is still too high.

The US market did not start 2016 well either, they were down 8% and the Nasdaq was down 10% for the first couple of months.

On the commodities front (we love our iron ore), the little red rock started the year off hovering around the $40 mark, only to experience a strong return to the front page, breaking through $80 in November – a 100% increase. Thermal and coking coal was also in the spotlight, rising over 300% during the year (and 42% in October). What’s going on?

These price levels would appear not to be sustainable. It is very possible that a meaningful policy mistake coming out of China has delivered an artificial price rise in both coal and iron ore and that prices will retreat during 2017.

Time will tell.

Interest rates also dominated the news. Will the prolonged period of falling interest rates be finally finished in 2016? We saw the US raise rates last week – how many more will we see in 2017, two or maybe even three - Trump wants more! Closer to home, most recently, the RBA has left the cash rate alone, but many are still divided on what direction the next rate decision will take – UP (the economy is improving) or DOWN (the economy is not improving) – the ever increasing Budget deficit might suggest that rates aren’t moving higher anytime soon.

Across to Japan, they remain in all sorts of bother. In February, they issued for the very first time, a 10 year Bond with a negative yield. We simply didn’t study this potential outcome back in school / university. By doing this, bondholders are effectively paying the Japanese Government for the privilege of lending it money. They managed to sell $19.5 billion of the stuff! 2016 was not without the normal ‘one-offs’ or ‘1 in 10 year event’, market shocks.

In June this year we saw Brexit, the UK sticking it to the EU and taking the first steps to leave the union. Then more recently, Italians voted against the establishment, causing the Italian Prime Minister to follow the same path as the UK minister and resign, further adding to the instability inside the second largest economy in the world (EU). We expect further volatility in 2017, what with the elections planned in Germany and France. The question on many people’s lips is will Europe survive? Ensuring that Brendan and I and the investment team will be again kept very busy in 2017.

In November, the second of our ‘1 in 10 year’ events, we saw Donald Trump voted into the highest office in the land – investment markets around the world reacted immediately, like they did with Brexit – the volatility continues.

Financial Keys will continue to monitor global and domestic markets and draw on all our partners to ensure we remain as informed as we can and to then make the appropriate changes to our preferred portfolios and strategy that might apply to each of you individually.

On a more sombre note, 2016 saw many well-known names leave us. In no order of hierarchy, we saw Ziggy Stardust AKA David Bowie, that man from UNCLE, Robert Vaughan, the golfing great, Arnold Palmer, Professor Snape/Hans Gruber, Alan Rickman, Willy Wonka, Gene Wilder, Prince, some might argue ‘The Greatest’, Muhammad Ali, George Michael and Princess Leia, Carrie Fisher.  

May they all rest in peace. 

In rounding out 2016, we have clawed our way back to be ranked number two in the cricket world behind India - we are still the most successful Test team in cricketing history. We won’t talk about the Rugby this year….. Andy Murray finally won at Wimbledon, Chris Froome won the Tour de France, again (and hopefully drug free), the Chicago Cubs won the world series (first time since 1908) and the Cronulla Shark’s 49 year wait is over as they proudly lifted the NRL trophy.

So where will the challenges come from in 2017?

  • Finding growth in the Australian market
  • Will inflation creep back into markets, Australia and the rest of the world
  • Australia continuing to rebalance away from mining investment
  • Apartment supply in Australia – specifically Sydney / Melbourne market
  • Growing deficits
  • US policy under Donald Trump
  • China V USA
  • Instability in the EU off the back of 2017 elections

From all the team at Financial Keys, we would like to wish you all a very Merry Christmas, a happy New Year and all the very best for 2017.

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