Australian equities have soundly beaten property in 2017 as our market delivered double-digit gains at a time when our property market is softening.
Most super investors will see a return of around 10.5% in the last year for their share portfolio compared to a 9.1% average return from property across Australian capital cities, according to the Australian Financial Review.
This is the first time in five years that the average superannuation fund has produced double-digit returns for investors, although most experts do not believe our market can do this again in 2018.
The All Ordinaries (Index:^AXAO) (ASX:XAO) is up 6.5% over the past 12-months and would have generated a total return of around 11% once dividends are included. This of course does not include franking credits, which has the potential to add close to two percentage points extra on top.
Large cap names that have contributed more than their fair share to the gains on our market include gaming machine marker Aristocrat Leisure Limited (ASX: ALL), blood products company CSL Ltd (ASX: CSL) and building and construction giant Cimic Group Ltd (ASX: CIM).
That is a tough act to follow given that the average return on our market over the past decade is closer to 6%. Statistically at least, this means our market is likely to start returning to the mean.
Further, if you bought investment properties in Melbourne or Hobart, you might be able to boast of a light lead over equities as these two property markets have outperformed.
However, shares are likely to beat property again in 2018 even if our market fails to sustain its double-digit return as the fundamentals for equities are more positive than for property.
For one, property prices are expected to cool further this year as foreigners (particularly cashed-up Chinese investors) withdraw from the market and as credit conditions tighten.
In contrast, company earnings have been robust and are expected to remain strong. This is a particularly important tailwind that justifies our market valuation as shares are moving into the "expensive" zone after a strong year of performance.
Investors will be comfortable paying a premium for equities as long as business conditions remain upbeat, and the outlook for equities look positive for the first half of 2018 at least.
But I don't think buying the market will work quite as well this year as it had in 2017. Investors will need to be far more selective in picking stocks if they want to enjoy another year of solid gains.
I have written before that our miners like BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) are well placed to lead the charge, but I am getting a little concerned that this will soon become a crowded trade.
When I was bullish on the sector, there weren't many who shared this view. But now it appears that most experts are recommending an overweight position on miners and history has taught me that consensus is often an early indicator of a market turn.
I'm still sticking to my bullish call but the risks have increased.
Another sector that I think will do well is engineering and construction. Stocks with exposure to both mining capex and infrastructure building as particularly well placed to outperform. This includes the likes of Downer EDI Limited (ASX: DOW) and NRW Holdings Limited (ASX: NWH).
Technology should also see another big year ahead. The experts at the Motley Fool are particularly bullish about one niche sector of this market.
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