Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 365

How did shares perform in FY20 and where to from here?

At the end of another financial year, this article reviews performance of major investment asset classes over the past few cycles.

The 2019-20 financial year was poor across the board for diversified investors as each of the major asset classes posted lower than historical average returns. ‘Risk’ assets like shares and property were hit by the sharp coronavirus sell-off in February-March 2020, from which most shares and bonds have not yet fully recovered. In the case of ‘defensive’ assets like cash, term deposits and bonds, the low returns for the year were due to ultra-low interest rates in Australia and across the world.

Poor year follows a good run

Bad years happen from time to time, but we need to look at this in context. The calendar years 2012 to 2017 constituted an extraordinary run of six consecutive years of above average real returns from all of the main asset classes - something that had never happened before in history. We said at the time that this could not continue. Calendar 2018 was a negative year thanks to the ‘global growth scare’ in the December quarter, but markets rebounded strongly in 2019 to over-priced levels once again. Something had to give, but what we didn’t know was the trigger, until the coronavirus shut-downs.

The chart below shows total returns (price gains plus reinvested income) for each financial year since 1999-2000 for the broader Australian share market (top chart) as well as the main segments popular with investors – banks, resources, and small companies. The bar to the far right shows the average compound annual total return over the past 20 years.

On the whole, Australian shares posted their worst financial year return since the GFC, just pipping 2011-2012.

The biggest drag on the market for the latest year was the banks (second chart above). Three of the big four banks were down by one third, with CBA down 16%. Macquarie lost 5%. 

The big miners also lagged the broad market but by less than the banks. Fortescue was the star (up +53%) thanks to the surging iron ore price after the mine disasters in Brazil. BHP was down 13% and RIO down 6% on collapsing prices of coal, oil and most industrial metals in the global slowdown. The right bar on the Resources chart shows how they have beaten the banks and also the broad market over 20 years by a margin of +2% per year.

Small companies are speculators’ perennial favourites but they are also perennial disappointments on the whole. This year some small stocks did well, riding the global shift to e-commerce and on online services, which has been accelerated by the coronavirus shutdowns.

The last 12 months has seen a rather mild share market compared to the past two major recession sell-offs – the 2001-2002 ‘tech wreck’ and the 2008-2009 ‘GFC’. Those were very mild economic contractions compared to the current much deeper coronavirus contraction but share prices on both occasions suffered much deeper and longer set-backs than we have seen in the current coronavirus crisis thus far.

Part of the difference is the monetary and fiscal support measures have been much larger and more extensive this time around, but even these extraordinary stimulus measures will probably not be enough to prevent company profits and dividends being cut by as much as they were in the tech wreck and the GFC.

Dividends from Australian shares

The next chart shows returns from the broad Australian share market over the past 60 years, highlighting the sources of total return each calendar year. ‘Total returns’ are a combination of price gains or losses, plus dividend income. The green bars in the lower section show the dividend yield each year and the pink bars show the change in the share price index each year. The price movements (pink bars) are very volatile from year to year. For example, see the -43% price drop in 2008 (GFC) and -32% in 1974 (credit squeeze and property/finance crash).

While the wild share price index moves make great media headlines, and they are important for short-term traders and speculators, they are not important for diversified investors unless they have to sell.

For long-term investors, dividends pay the bills, not share price gyrations. The green bars show that the returns from dividend yields from the broad share market have been relatively consistent over time despite inflation (red dotted line) swinging wildly – up to 17% in 1975 and down to 0% and even briefly negative in 1962 and 1997.

The average returns per decade are highlighted at the right of the above chart, and these are expanded in the chart to the left.

Dividend yields were slightly higher in the 1970s, and that was also when inflation was highest. Yields were higher mainly because share prices were lower (inflation hurts share prices much more than it does dividends). Share prices then recovered strongly in the 1980s but dividend yields remained relatively constant, meaning the dollar amounts of dividends grew along with share prices.

Dividends do vary from year to year of course – companies increase dividends during booms but reduce them in slowdowns and recessions to preserve capital. Aggregate dividends across the Australian market have fallen by around 8% over the past year (mainly from the banks for reasons unrelated to the coronavirus shutdowns) and they are likely to fall by at least that much again as the shutdowns hit profits, but it will probably still leave returns from dividends near 4% over the coming year.

The above charts do not include the benefits of ‘franking’ credits for Australian owners of Australian shares. Franking credits (off-settable against other tax payable) were introduced from July 1987, and then refunds on franking credits were introduced from July 2000. This has added an average of +1.7% to yields since 1987 (it was +1.9% in 2019), bringing ‘grossed-up’ yields to above 6% for Australian residents.


Register here to receive the Firstlinks weekly newsletter for free

The three big factors lying ahead

There are now three factors in play.

First is the coronavirus itself.  The crisis has reminded us that some countries (like the US and Australia) are essentially just loose federations of States which can and do make their own rules and set their own path. This cycle of waves of infections and restrictions may continue until a cure or vaccine is found – perhaps next year. The US is the largest investment market and the most important for global investors, and infection rates there have now re-spiked up to twice the level of the first wave in April.

Second is government spending and borrowing. Formerly capitalist governments everywhere have now turned into welfare states in which they have become lenders, spenders, employers, and owners of last resort to try to directly or indirectly ‘save’ jobs and votes.

Investors will need to keep a close eye on how much governments can borrow before something pricks the confidence bubble. In Australia the Commonwealth was carrying a low debt level of around $50 billion before the GFC. Then to counter the GFC it borrowed an average of $50 billion per year net for next 10 years, taking the level of debt to $560 billion before the virus hit. Since the virus shutdowns, it is now borrowing around $35 billion per month to fund all of the welfare programs.

Third is central banks. Since the GFC, they have become buyers of last resort of government bonds, mortgage bonds, corporate bonds and even shares and property trusts (in the case of Japan). Our own RBA has spent $51 billion buying up government bonds since the March crisis. They say it’s tiny, but it is the same amount as the entire stock of government debt before the GFC. 

Meanwhile, in the coming months we will be keeping an eye on the virus numbers, as well as the unemployment numbers and loan arrears rates, and how governments react to them. The big question in the short term in Australia will be whether the government can turn off the welfare taps by September and also lift the ban on evictions and the temporary holidays on residential and commercial rents, and on mortgage repayments.

Magically ending all of these policies smoothly by September without dire consequences will need a miracle.

 

Ashley Owen is Chief Investment Officer at advisory firm Stanford Brown and The Lunar Group. He is also a Director of Third Link Investment Managers, a fund that supports Australian charities. This article is for general information purposes only and does not consider the circumstances of any individual.

 

banner

Most viewed in recent weeks

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

Three all-time best tables for every adviser and investor

It's a remarkable statistic. In any year since 1875, if you had invested in the Australian stock index, turned away and come back eight years later, your average return would be 120% with no negative periods.

The looming excess of housing and why prices will fall

Never stand between Australian households and an uncapped government programme with $3 billion in ‘free money’ to build or renovate their homes. But excess supply is coming with an absence of net migration.

Five stocks that have worked well in our portfolios

Picking macro trends is difficult. What may seem logical and compelling one minute may completely change a few months later. There are better rewards from focussing on identifying the best companies at good prices.

Let's make this clear again ... franking credits are fair

Critics of franking credits are missing the main point. The taxable income of shareholders/taxpayers must also include the company tax previously paid to the ATO before the dividend was distributed. It is fair.

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

Latest Updates

Investment strategies

Joe Hockey on the big investment influences on Australia

Former Treasurer Joe Hockey became Australia's Ambassador to the US and he now runs an office in Washington, giving him a unique perspective on geopolitical issues. They have never been so important for investors.

Investment strategies

The tipping point for investing in decarbonisation

Throughout time, transformative technology has changed the course of human history, but it is easy to be lulled into believing new technology will also transform investment returns. Where's the tipping point?

Exchange traded products

The options to gain equity exposure with less risk

Equity investing pays off over long terms but comes with risks in the short term that many people cannot tolerate, especially retirees preserving capital. There are ways to invest in stocks with little downside.

Exchange traded products

8 ways LIC bonus options can benefit investors

Bonus options issued by Listed Investment Companies (LICs) deliver many advantages but there is a potential dilutionary impact if options are exercised well below the share price. This must be factored in.

Retirement

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

Investment strategies

Three demographic themes shaping investments for the future

Focussing on companies that will benefit from slow moving, long duration and highly predictable demographic trends can help investors predict future opportunities. Three main themes stand out.

Fixed interest

It's not high return/risk equities versus low return/risk bonds

High-yield bonds carry more risk than investment grade but they offer higher income returns. An allocation to high-yield bonds in a portfolio - alongside equities and other bonds – is worth considering.

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.