• Cash and term deposit returns are likely to remain poor at around 2%. Investors are still under pressure to decide what they really want: if it’s complete capital stability then stick with cash or if it’s a decent stable income flow then consider the alternatives with Australian shares and real assets such as unlisted commercial property likely to continue to offer more attractive yields than bank deposits.

Source: RBA, AMP Capital

  • Still ultra-low sovereign bond yields and a likely gradual rising trend in yields, which will result in capital losses, are likely to result in another year of poor returns from bonds.
  • Corporate debt should provide okay returns. A drift higher in sovereign bond yields is a mild drag but with continued modest global growth the risk of default should remain low.
  • Unlisted commercial property and infrastructure are likely to benefit from the ongoing “search for yield” (although this may slow a bit) and solid economic growth.
  • Residential property returns are likely to be mixed with Sydney and Melbourne slowing, Perth and Darwin bottoming and other cities providing modest gains. Very low rental yields are not good, particularly in oversupplied units.
  • Expect a potential share market correction in the seasonally weak period out to October, but the rising trend in shares is likely to continue as shares are okay value, monetary conditions are likely to remain relatively easy (albeit becoming less so) and continuing reasonable economic growth should help profits. We continue to favour global shares (particularly outside the US) over Australian shares.
  • Finally, while the $A has proved far more resilient than I expected and may push up into the low $US0.80s in the short term, the downtrend in the $A is likely to resume at some point in the next 12 months enhancing the case for unhedged global shares.

Things to keep an eye on

The key things to keep an eye on over the year ahead are:

  • Global business conditions PMIs – these currently point to good, but not booming, growth.
  • Risks around President Trump – we see Congress passing tax reform but there’s a risk the noise around Trump will overwhelm.
  • The US Federal Reserve’s likely winding down of its balance sheet (reversing quantitative easing) along with a possible transition to a new Fed Chair could cause volatility.
  • The Italian election due by May 2018 could reinvigorate Eurozone break up fears.
  • The European Central Bank is likely to slow its monetary stimulus next year.
  • North Korean risks could escalate.
  • The Sydney and Melbourne property markets – where a sharp downturn (which is not our view) could threaten Australian growth.

Concluding comments

This financial year will likely see the usual worry list and bouts of volatility and returns may slow from 2016-17, but the combination of reasonable global growth, solid profit growth and still easy monetary conditions suggest solid returns for diversified investors.