Banking inquiry, global market rout among key influences of 2018
The banking royal commission, pronounced falls in global markets and continuing ETF tail-winds are among the stand-outs of 2018, say Morningstar experts.
Glenn Freeman: As 2018 draws to a close, I've spoken with some of the analysts and experts across Morningstar Australia to get their thoughts on what they see as some of the most impactful and surprising events across various asset classes during the year. They have also given us their views on how they think individual investors might respond in 2019.
David Ellis: What surprised me the most in this year in my coverage, the financial sector, particularly the major banks, was the impact of the royal commission. When it was announced approximately 12 months ago, I didn't think it was going to have such a damaging outcome for the major banks and key financial services businesses, particularly AMP and IOOF. But when the hearing started in March, it was obvious right from the beginning that it was going to be very, very tough for the major banks and the other entities that fronted up to the Commission. A lot of damaging revelations, a lot of damaging evidence and a lot of executives from the financial institutions were put under a lot of pressure, extreme pressure at the hearings.
Peter Warnes: The big surprises in 2018 no doubt were the Hayne Royal Commission and the fallout from it has been quite devastating for the financial services industry. Banks have been 30 per cent to 35 per cent of our market and they have taken an absolute pounding and that's one of the reasons why the Australian market has struggled through 2018 in spite the fact that the resources have done very, very well. The speed with which the FAANGs, those five companies in the US, drove the markets to record levels in both January and September, how quickly they have come back in the last quarter. All of them back over 20 per cent, Facebook and Netflix about 35 per cent. And it's very, very difficult now to find people who wanted to buy at the dip. It's more seller rally rather than buying at the dip. And I think that they are the two big surprises for 2018.
Brian Han: In telecom, the two biggest influences were, one, the unprecedented competitive intensity in mobile and two, the margin-crunching impact of the NBN. Now, competition was so bad in mobile that it led to a couple of profit warnings from Telstra and it may have even possibly led TPG Telecom to rethink its ambition to become the fourth mobile operator in Australia and deciding instead to merge with Vodafone Australia. As for the NBN, the economics for the resellers are such that we don't think the pricing model for the NBN is sustainable because all the players are making so little money out of it.
Sarah Fox: In global equities, I think what investors will remember the most was how it ended. The market environment was very difficult for investors and for a lot of managers in October. I heard an interesting stat the other day from a manager that said 90 per cent of all global asset classes posted negative returns year-to-date through November in 2018. The last time that happened was in 1920. And if you compare that to 2017, it was 1 per cent of global asset classes that posted negative returns to November. So, it's been a really difficult environment. And while I think managers, sort of, saw the volatility late in September, I think the magnitude of the loss was a surprise. There were a few things that were playing out there. Trade wars and tariffs and Brexit, which hurt a few industrials and energy sectors. But even hawkish Fed's rhetoric around rising interest rates hurt financials.
Alexander Prineas: Well, I cover a lot of passive funds and ETFs. So, for many years, we've talked about the structural tailwinds behind those areas, so things like investors wanting low costs, regulatory forces driving out, investors wanting transparency and control over their portfolios. So, I think, those tailwinds remain in place and in particular, the royal commission provides probably an acceleration of some of those trends. So, I think, that could result in a continuation in 2019 of flows going into ETFs and perhaps even an acceleration over time.
Peter Warnes: But I think the worse is over for the banks. I'm not looking for V reversals, but you could get a relief rally in the banks, which would give some support to the Australian market early.
Freeman: From my own perspective, 2018 has genuinely been a really interesting year. We've had the changing relationship between the US and China and also North Korea. We've also seen Brexit, which has entered a new phase in recent weeks. And closer to home, we've had the final at long last a shift and downturn in the Australian property market, particularly within the eastern states of Australia, which will continue to impact the markets and the financial services sectors and investors into 2019 and beyond.
And I'd just like to wish you all a happy and safe Christmas and we'll see you all back here in 2019.