01/07/2014

“Buckle up and Brace for a Volatile Ride!” That was the headline in The Australian newspaper as the 2013/14 financial year got underway 12 months ago. Well, how did that forecast turn out?

The view in much of the financial media in July 2013 was that Australian markets faced a difficult 12 months amid global economic uncertainty, a peaking commodity cycle, slowing domestic growth and political volatility.

Sentiment at the time was swinging back and forth over the future of the US Federal Reserve’s monetary stimulus. As well, China was grappling with rebalancing its economy away from exports and Europe was still seen as a mess.

Here in Australia, the local dollar was broadly viewed as likely to continue on a slippery slide as commodity prices fell, the Chinese economic juggernaut slowed and Australia’s interest rate advantage narrowed.1

Added to this difficult mix were a febrile domestic political climate and the prospect of a change of federal government.

The upshot of all this was a volatile start to the 2013/14 financial year. In the first three days of the year, the Australian benchmark S&P/ASX 300 index had consecutive falls and rallies of around 2% – hence the excitable headlines.

Twelve months on, though, the picture looks a little different than what was forecast by many. Yes, many of the same uncertainties are still with us. But in the meantime, the Australian share market has posted double-digit gains for the year. In developed markets globally, we have seen returns of 20% or more.

The Australian dollar, far from continuing on a slippery slope downwards, rose back to around 97 US cents last October, before declining to a three-and-a-half-year low of around 87c in late January and then moving back to the mid-90c levels.

Now, as the new financial year gets underway, you should get set for another round of speculation about the economy and markets in the coming 12 months.

The media runs these annual “outlook” supplements because it’s easier and cheaper to muse about what hasn’t happened yet than to look at what actually has happened. It doesn’t involve any actual time-consuming research or interviews.

Looking to 2015, you can be sure that there will be much sage musing about how after two solid years of gains, it is now a climate for canny stock pickers.

Speculation about what happens when monetary stimulus is withdrawn is another hardy media perennial, as is conjecture about geopolitical risk, the rebalancing of growth, the impact of ageing populations and the search for yield.

This isn’t to deny that many of these issues aren’t real and the subject of some uncertainty. The real point, though, is whether individual investors can do anything about them beyond diversifying and focusing on their own circumstances and goals.

The fact is nothing we do as individuals is going to have any bearing on the outcome of the big issues. In reality, all the uncertainties you read about in the newspapers at the beginning of every financial year are already reflected in prices.

Some people will have a gloomy outlook. Others will see opportunity. They will meet somewhere in the middle and agree on a price. That’s just the way it works.

Of course, it’s fun to speculate about markets and the economy and politics. Everyone has an opinion. And there’s nothing wrong with that. But you shouldn’t let somebody else’s opinion dictate your long-term investment objectives.

In the meantime, happy financial new year!