AuthorMichael Scott

Investing

At first glance, investing can seem daunting. So much complex information and so little time to absorb and act on it when you’re busy getting on with life. It’s little wonder that so many of us put it in the too hard basket for longer than is good for our wealth.

The good news is that investing doesn’t need to be hard. The basic rules of investing are surprisingly simple and timeless.

Set your objectives

“Before beginning a hunt, it is wise to ask someone what you are looking for before you begin looking for it.” Winnie the Pooh was on the money with this wise observation. If you want to reach your personal and financial objectives, first you must define what they are.

Ask yourself where you want to be in 5, 10, 20 years’ time. Perhaps in a new home, kids settled into good schools, with your money working hard for retirement at 60. You may want to start a business or spend a year in Provence with the family. Be specific, put some dollar figures beside each goal and then start planning how you will get there. We can assist you in your goal setting and in mapping out a strategy to achieve your goals.

The genius of compounding

Albert Einstein said compound interest was man’s most powerful discovery, but it doesn’t take a genius to put it into practice. Compound interest means you not only receive interest on the money you invest but interest on your interest. Over time, this simple concept becomes a powerful wealth creation tool.

Say you invest $10,000 today at 5 per cent; with all interest reinvested, it will grow to $27,126 in 20 years. Now look what happens if you spend your interest payments, earning what is called simple interest. Your $10,000 will earn $500 a year and will be worth just $20,000 in 20 years.

That’s the genius of Australia’s superannuation system which locks away your savings and all investment earnings until you retire. Even if you’re on a modest salary, time allows compound interest to weave its magic.

Take your time

We all know we should take an active interest in our super and other investments, but is there such a thing as too much interest? Yes, according to a study by US fund manager, Fidelity Investments. A review of clients over a decade found the best performing accounts were for investors who were dead! Next best were investors who had forgotten they had accounts. The thing both groups had in common was that they were not actively trying to time the market.i

A landmark study of 66,000 investors by the University of California reached a similar conclusion. The most active investors underperformed the overall sharemarket return by 6.5 per cent a year, leading the researchers to conclude trading is hazardous to your wealth.ii

The lesson is not to do nothing. Instead, be patient and stick to your plan.

Reduce risk with diversification

As sayings go, ‘don’t put all your eggs in one basket’ is an oldie but a goodie. Shares, property, bonds and cash all have good years and bad. Even though shares and property provide the best growth in the long-term, prices can fall or move sideways for years at a time and you don’t want to be forced to sell in a downturn because you need the cash.

The way to reduce the risk of crystallising losses or losing everything on one dud investment is to diversify across and within asset classes. The right mix will depend on the timing of your goals and your risk tolerance. Think about investments that provide capital growth in the long run and income when you need it – from bank deposits, bonds, share dividends or rental income from investment property. And don’t forget to build a cash buffer for emergencies.

Follow the cycle, not the herd

Markets tend to rise above true value when investors join the stampede to get in quick for fear of missing out. Prices also tend to fall too far when a wave of panic selling grips the market and everyone tries to sell at once.

Long term asset class returns

1801_SS_graph_Golden_rules_of_investment

Source: AMP

Following the herd is a risky strategy, but you can profit from keeping an eye on the herd’s behaviour; buying when investors are fearful and selling when they’re greedy. When you take a long-term perspective, and have clear investment goals, it’s easier to sit back and watch market cycles unfold. Then when you see an opportunity to buy quality assets at a low price, or sell an investment that no longer meets your objectives at a high one, you can pounce.

As the chart above shows, investors who panicked during the 2007-08 financial crisis and switched out of shares into cash and bonds would have done better to sit tight and ride out the volatility. And investors who took the opportunity to top up their holdings when the market was gripped by pessimism would have done even better.

Successful investing doesn’t need to be over-complicated. Give us a call to help map out a plan and let time, diversification, compound interest and our knowledge of the investment landscape do the rest.

i ‘Fidelity’s best investors are dead’, The Conservative Income Investor, 26 May 2015, http://theconservativeincomeinvestor.com/2015/05/26/fidelitys-best-investors-are-dead/

ii ‘Trading is hazardous to your wealth’ by Brad Barber and Terrance Odean, Journal of Finance, University of California Berkeley, 2 April 2000, http://faculty.haas.berkeley.edu/odean/papers%20current%20versions/individual_investor_performance_final.pdf

2017 Year in Review

Investors had plenty to smile about in 2017, despite a world of worries on the geopolitical stage from the Middle East to North Korea and the South China Sea. The global economy continued its steady improvement and financial markets produced some excellent returns.

The year began with the inauguration of President Donald Trump, whose populist policies on issues such as trade and energy have impacted the global economic agenda. As the year closed the Trump administration’s corporate tax cuts were approved by Congress, which should boost the US economy.

The US Federal Reserve lifted its benchmark interest rate three times in 2017 with more expected this year as the economy strengthens. Higher rates could trim the sails of US equities while putting upward pressure on global bond rates and the US dollar.

Positive economic growth

The global economy grew steadily throughout 2017 with the US and other G7 leading industrial nations posting growth of around 2.2 per cent.

China’s growth has slowed, but at 6.8 per cent it’s still a global powerhouse and a major customer for Australia’s natural resources, education and other goods and services.i China now accounts for 36.7 per cent of Australia’s exports, more than any other country.ii

Australia’s economy grew by 2.8 per cent in the year to September, marking 26 years without a recession. The biggest contributor was private sector investment as business profits posted their strongest gains in 15 years. Low interest rates and low inflation of 1.8 per cent remain supportive for business and consumers. Unemployment fell to 5.4 per cent, the lowest jobless rate in four years, but sluggish wage growth remains an issue for the Reserve Bank.iii A jump in consumer confidence in December to 103.3 on the Westpac Melbourne Institute scale – anything above 100 is viewed as optimism – was good news for retailers leading into Christmas.iv

Australian Key Indices as at
31 December 2017
Share Markets (% change)
Jan – Dec 2017
GDP annual growth rate 2.8% Australia ASX 200 +7.0
RBA cash rate 1.5% US S&P 500 +19.4
Inflation 1.8% UK FTSE 100 +7.6
Unemployment 5.4% China Shanghai Composite +6.6
Consumer confidence index 103.3 Japan Nikkei 225 +19.0

*Year to September 30, 2017 Sources: RBA, Westpac Melbourne Institute, Trading Economics

Mixed signals on financial markets

The Australian dollar finished the year at US78c, up 8.6 per cent due mostly to strong commodity prices. The dollar firmed despite a lack of movement on the local interest rate front. The cash rate held steady at 1.5 per cent all year while interest rates on government 10-year bonds fell from 2.77 per cent to 2.64 per cent.v The consensus is that the next interest rate move will be up although perhaps not until the end of 2018 at the earliest.

Commodities were a mixed bag. Global oil prices rose 12.5 per cent to US$60 a barrel in December as OPEC members agreed to extend their production restrictions. Iron ore fell 3.3 per cent to US$74 a tonne on lower demand from China, while coal rose 5.7 per cent to US$100 a tonne.vi

The shooting star award of 2017 goes to Bitcoin. The value of one Bitcoin soared from $1300 in January to more than $22,000 in December before dropping to around $17,000 at year’s end. The question as to whether it’s a 21st century tulip bubble or a new paradigm has been exercising minds from the world’s central banks to the local pub.

Shares surprise on the upside

Global shares powered ahead, fuelled by economic growth, strong corporate profits and low interest rates. Despite ongoing geopolitical turmoil, volatility on equity markets was relatively low.

US shares rose to record highs, up 19 per cent partly in response to the weak US dollar. The greenback has remained lower for longer than expected due to stubbornly low inflation and the long delay in lifting interest rates. The low dollar and Brexit uncertainty were a drag on the UK market, but it still managed a 7 per cent lift. Eurozone leaders Germany and France posted gains of 12 per cent and 9 per cent respectively. Asian and emerging market shares were also among the top performers, with the Japanese market up 19 per cent.vii

Property cools

The residential property boom ran out of steam in 2017, as tighter lending criteria and higher interest rates for investors began to bite while state government incentives encouraged first home buyers back into the market.

Australian home prices rose 4.2 per cent last year compared with 5.8 per cent in 2016, according to CoreLogic. Property values in Sydney rose 3.1 per cent in 2017, a far cry from the annual increase of 17 at the height of the boom. Hobart (up 12.3 per cent) and Melbourne (up 8.9 per cent) were the strongest capital city markets, followed by Canberra (4.9 per cent), Adelaide (3.0 per cent) and Brisbane (2.4 per cent). Darwin fell 6.5 per cent and Perth was down 2.3 per cent.viii

Most observers predict subdued growth rather than a market bust in the year ahead.

Looking ahead

There is every reason for cautious optimism in the year ahead, although there are risks too. Continuing investigations into Donald Trump could destabilise his leadership and global markets, while closer to home the Reserve Bank is keeping a watchful eye on wages, inflation, the Aussie dollar and property prices.

Even so, local economic growth is on track, interest rates are likely to remain low for some time yet and first home buyers have their best chance in years to get a toehold in the market. Australian shares look fair value although global equities are likely to continue to provide higher returns.

i Trading economics, https://tradingeconomics.com/country-list/gdp-annual-growth-rate?continent=america

ii ABS International Trade in Goods and Services, Australia, October 2017, http://www.abs.gov.au/ausstats/abs@.nsf/mf/5368.0

iii Reserve Bank of Australia, http://www.rba.gov.au/snapshots/economy-indicators-snapshot/

iv Westpac Melbourne Institute Consumer Confidence, 13 December 2017, https://www.westpac.com.au/content/dam/public/wbc/documents/pdf/aw/economics-research/er20171213BullConsumerSentiment.pdf

v RBA, rba.gov.au

vi Trading economics, https://tradingeconomics.com/commodities

vii Trading economics, https://tradingeconomics.com/stocks

viii CoreLogic, 2 January 2018, https://www.corelogic.com.au/news/national-dwelling-values-fall-03-december-setting-scene-softer-housing-conditions-2018#.WlKzW1WWZhE

 

Summer 2017

It’s December and the countdown to Christmas and the summer holidays has begun. But before we tuck into our Christmas turkey (or prawns), switch on the cricket and head for the beach, there is always work to complete and loose ends to tie up.

The Australian economy sent mixed messages in November. The Reserve Bank’s statement of monetary policy early in the month forecast economic growth will gradually pick up from the current annual rate of around 1.8 per cent to 3.5 per cent by the end of 2019. Inflation, currently 1.8 per cent, is expected to remain low and while the next movement in interest rates is likely to be up, the Reserve is in no hurry to act.

The improving economic outlook is reflected in business profits, with the NAB business conditions and profitability indices at record highs in October, at 21.1 points and 26.2 points respectively. The jobless rate also continues to fall, from 5.5 per cent to 5.4 per cent in October, the lowest since February 2013. Wage growth, however, still lags at 2.0 per cent in the year to September, only just ahead of inflation at 1.8 per cent. Consumer confidence hit a four-month high in November before easing back slightly; the ANZ/Roy Morgan consumer confidence index finished the month at 115.0 points, above its long-term average. This has yet to translate into retail sales which were up just 0.1 per cent in the September quarter while retail prices fell 0.4 per cent. The Australian dollar finished the month around US76c, up almost 6 per cent so far this year.

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Opportunities in the cooling property market

Things are looking up for first home buyers for the first time in years as house price growth begins to slow across the country. While prices have been on the slide for some areas in the West and the North since the end of the mining boom, the housing market in Sydney and Melbourne also appears to be losing steam.

At a national level, house prices were unchanged in October and up just 0.3 per cent over the quarter according to the latest figures from property research group CoreLogic. Significantly, the over-heated Sydney market fell 0.6 per cent over the three months to October, joining Perth and Darwin which have been falling since 2014.i

Hobart is the top performing market, fuelled by mainlanders searching for more affordable housing. Prices for Hobart dwellings rose 12.7 per cent over the past year, although price growth slowed to 0.09 per cent in October. It’s easy to see why people are flocking to the Apple Isle; the median… Read more

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Tax Alert December 2017

Employers on notice over SG payments

Employers who fail to pay their employees’ super on time are likely to find themselves on the receiving end of some unwelcome attention after the tax man was given more resources. Here’s a roundup of the latest tax news:

Super payments under the microscope

New funding for the ATO will give it more resources to tackle non-compliance with the requirement for regular employee superannuation guarantee (SG) payments by some employers. In addition, legislation will be introduced to close the legal loophole allowing employers to deduct salary-sacrifice contributions made by their employees from their SG payments.

According to the Government, the new money is designed to give the tax man “near real-time visibility” over employer SG compliance, with super funds required to report at least monthly all contributions received on behalf of employees.

Single Touch Payroll for super information will be rolled out to employers with 2… Read more

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The 12 tips of Christmas

“On the third day of Christmas, my true love gave to me,
Three declined cards,
Two cash advances,
And thirty days in-te-rest freeeeee!”

Ever wonder what Christmas carols would sound like if they were written today? There’d probably be a lot less about piper’s piping and partridges in pear trees, and a bit more about the madness of trying to put on the perfect Christmas without breaking the bank – or going a bit mad. Perhaps an urban legend of a parent who braved a Westfield on Christmas Eve and lived to tell the tale.

If this sounds familiar, here are a few steps you can take to help reduce the financial stress of the silly season.

  1. Make a list

Every time you hit the shops (because let’s be honest, it’ll take more than one go), make a list before you leave (but after you’ve eaten, to avoid hunger-based snack purchases). This goes for everything from gifts and Christmas Day food, to decorations and extra furniture/linens for holiday guests.

Read more

The Big Lesson of the GFC

It’s been a decade since the market crash known as the Global Financial Crisis rocked the investment world. At the time investors could only watch in disbelief as 50 per cent was wiped off the value of their shares. Arguably, the actions those investors took are still reverberating today. Which begs the question: what are the key lessons of the GFC and did we pay attention?

While investors who lost money would probably rather forget, it’s worth recapping what caused the crisis and how it unfolded for a new generation of investors.

Predictably, there were warning signs for some time before the eventual market crash. Just as predictably, no-one could predict the exact timing or the magnitude of the crash.

What happened?

Ground zero of the GFC was in middle America. A lengthy period of low interest rates and poor home lending practices left homeowners vulnerable when rates began to rise and house prices fell below the amount they owed the banks. When whole neighbourhoods walked away from their homes and their debts, the liability shifted to the banks.

Compounding the housing bust was the proliferation of new financial products that packaged up sub-prime loans along with higher quality debt and sold them on to global investors. These derivative products with names like collateralised debt obligations (CDOs) were sold as cutting edge but few investors understood the risks.

As early as 2002 Warren Buffett, the world’s most famous investor, referred to derivatives as ‘financial weapons of mass destruction’ that would ultimately cause great damage. He was right, but it took the market five years to catch on.

When in 2007 investors tried to dump their CDOs the investment banks that issued them were unable to finance redemptions. The crisis led to a credit crunch and the eventual collapse of major investment firms like Bear Stearns and Lehmann Bros.

As investors from Detroit to Dubbo lost confidence, the shock impacted markets around the globe. The Australian sharemarket followed Wall Street, falling around 50 per cent from its peak in November 2007 until it hit rock bottom in March 2009.

Australian shares

October 2007-October 2017
1711_GFC_graph_SS_800px

Source: Australian Stock Exchange

What lessons did we learn?

Ten years is a long time on global markets. The US sharemarket is experiencing its second-longest bull run in history – eight years and still going strong. Australian shares have also had eight good years, although prices are still below the 2007 peak.

All of which makes this a good time to ask if investors still remember the lessons of the GFC. Judging by a recent investor survey by Deloitte Access Economics for the ASX, it could be time for a refresher. i

Overall, 21 per cent of investors said they had little tolerance for risk but still expect annual returns of 10 per cent plus, which is unlikely in the current low interest rate environment. Worryingly, less than half have diversified portfolios even though they say they understand what diversification is.

But the real surprise was that older investors who lived through the GFC were less risk averse than younger investors who have no direct experience of a market crash. Four out of five investors aged under 35 said they looked for stable or guaranteed returns while 41 per cent of investors over 55 were comfortable with some volatility.

Be aware of market cycles

Perhaps part of the reason for the discrepancy is that older investors have learned what goes down comes back up, albeit with some twists and turns along the way. Time in the market also makes investors aware that one year’s best performing asset class can be next year’s worst, and vice versa. The best way to avoid timing the market is to have a diversified portfolio and ride out the short-term volatility.

These lessons were borne out recently when Vanguard looked at the outcome for three investors with a diversified investment portfolio of 50 per cent shares and 50 per cent bonds when the GFC hit.ii When the market bottomed in March 2009 one sold the lot and switched to the relative safety of cash. One sold all their shares and put the money into bonds. And one stayed put in a balanced portfolio in the hope that the market would recover.

Fast forward to 2016 and the investor who fled to cash was sitting on a cumulative return of 27 per cent. The investor who put everything in bonds had a return of 71 per cent. But the investor who sat tight with a mix of shares and bonds enjoyed the best return of 93 per cent.

The big lesson of the GFC, and all the market crashes that preceded it, is that markets move in cycles. While each boom and bust cycle is slightly different, investors who understand the trade-off between risk and return, hold a diversified portfolio and stay the course are best placed to ride out market cycles for long-term success.

If you would like to discuss your investment strategy, give us a call.

i ASX Australian Investor Study 2017 by Deloitte Access Economics

ii ‘Lessons from the GFC 10 years on’ by Robin Bowerman, 4 October 2017

 

October Snapshot

One of the golden rules of investing is diversification, but that can be difficult to achieve when you are just starting out or have limited funds to tap into a world of opportunities. Which is why investors have been flocking to exchange-traded funds (ETFs) and listed investment companies (LICs).

ETFs and LICs are like managed funds in that your money is pooled with other investors to create a large portfolio of assets which is professionally managed. Not only do they provide diversification, but they can be bought and sold on the Australian Securities Exchange (ASX) as easily as shares and have lower fees than traditional managed funds.

In the six years to July, the market value of LICs has more than doubled from $16 billion to almost $34 billion. In the past year alone there have been 11 new listings, taking the total to 101.i

LIC Market Growth

graph_

Source: http://www.asx.com.au/documents/products/ASX_Funds_Monthly_Update_Aug_17.pdf

ETFs have also grown strongly. There are now 212 exchange traded products (ETPs) on the ASX, including ETFs. From a standing start 15 years ago, ETFs have a market value today of about $31 billion.ii

Yet despite their popularity, there is confusion about the technical differences between these products which can make it difficult to decide which, if any, is appropriate for you.

What are LICs and ETFs?

LICs are the great grandfathers of the listed managed investment scene, with a history going back almost 100 years. Trailblazers such as the Australian Foundation Investment Company (AFIC) and Argo Investments have provided investors with steady returns for decades, mostly from a portfolio of Australian shares selected by the fund manager.

While Australian shares still account for 83 per cent of total LIC assets, these days 16 per cent are in global equites through well-known fund managers such as Platinum. Newer LICs also offer exposure to micro-caps, infrastructure, private equity and absolute return funds.

By contrast, ETFs invest in a basket of shares or other investments that generally track the performance of a market index such as the ASX 200 Index or the US S&P 500. You can buy an ETF to give you exposure to an entire market, region or market sector, such as global health or technology stocks. They also offer investments in a wider range of asset classes, from local and international shares to bonds, commodities, currency, listed property and cash.

Structure and tax

As the name suggests, LICs use a company structure while ETFs are unit trusts.

Like other companies, LICs are governed by the Corporations Act. This means they pay company tax on their income and realised capital gains which they can hold onto or pay out as dividends plus any franking credits. Investors are then liable for tax at their marginal rate.

By contrast, ETFs are not required to pay tax on their income or realised capital gains. Instead, they pass on all tax obligations to investors who pay tax at their marginal rate. Despite these differences, the after-tax position for investors is similar to LICs.

Another key difference between the two is that LICs are closed-ended investments, which means they have a fixed number of shares on issue and new shares can only be created or cancelled via a rights issue, placement or buyback.

This structure means LICs tend to trade at a premium or discount to the value of their net tangible assets (NTA). Like all companies trading on the ASX, it’s the market that determines the share price, not the value of the company’s underlying assets.

ETFs, on the other hand, are open-ended which means units in the fund can be created or redeemed according to investor demand without the share price being affected. As a result, ETFs always trade close to their NTA.

Why now?

The growing interest in LICs and ETFs can be traced back to the growth in self-managed super funds (SMSFs). SMSF investors are not only keen to keep investment costs down, they are also on the lookout for simple, effective ways to create a diversified portfolio tailored to their personal needs.

The expansion of products on offer has also made it easier to take advantage of market trends, such as improving global growth or geopolitical tensions. For example, the best performing ETF categories in August were gold mining and resources. The biggest money flows went into international equities, fixed interest, Australian listed property, cash and currency.

LICs were also given a shot in the arm following a change in the Corporations Act in 2010 that altered the way dividends can be paid out. This allowed them to pay a regular stream of franked dividends to investors seeking higher yields at a time of historically low interest rates.

It’s important to understand how different investment vehicles work and whether they are appropriate for your personal circumstances and appetite for risk. If you would like to discuss your investment strategy, give us a call.

i ASX Investment Products Monthly Update August 2017

ii BetaShares Australian ETF Review August 2017

Spring 2017

Spring is finally here and it’s not just nature showing signs of growth; the Australian economy is also bearing fruit.

Most of the top 200 ASX-listed companies have now announced their results for the 2017 financial year and the overall report card is good. According to CommSec, 90 per cent of companies reporting full-year results turned a profit while 91 per cent paid a dividend. Earnings were up a combined 67 per cent on a year ago, dividends were up 10 per cent and cash levels rose 27 per cent to almost $108 billion. The strongest sectors were mining, which benefited from stronger commodity prices and cost cutting, followed by food companies, REITs and companies dependent on the housing market. Dragging the chain were consumer-focused and media companies.

A healthy outlook for the job market was reflected in a fall in unemployment from 5.7 per cent to 5.6 per cent in July, although wage growth is still sluggish – up just 0.5 per cent in the June quarter for an annual rate of 1.9 per cent. The NAB business conditions index rose to a 9-year high of 15 points in July while the business confidence index also firmed 8.4 points to 11.7. Consumers are less positive, with the weekly ANZ/Roy Morgan consumer confidence rating lifting off a 12-month low to finish August at 113.5. The Australian dollar remains a challenge for exporters, firming to end the month close to US80c.

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How to prepare for climbing interest rates

Interest rates have been low for so long it’s tempting to think low rates are the new normal. So when the Reserve Bank suggests that a cash rate of 3.5 per cent is the new ‘neutral’, people take notice. Even the Prime Minister warned Australian householders to prepare for higher interest rates ahead.i

The official cash rate has been held at a record low of 1.5 per cent since August 2016, but in recent months the Reserve Bank has begun preparing the ground for higher rates. The Reserve Bank says it now considers the ‘neutral’ cash rate to be 3.5 per cent. Neutral is central bank-speak for the sweet spot where growth is supported without pushing inflation too high.

Then in a speech on July 26, Reserve Bank Governor Philip Lowe made it clear that rates will only rise once there’s a gradual lift in wages growth and inflation.ii As things stand, he’s in no hurry.

Wages, inflation keep rates low

Annual wages growth is currently… Read more

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Tax Alert September 2017

SMSFs face new tax report

Following the flurry of new tax rates and super changes that commenced on 1 July 2017, the ATO has moved back into more traditional territory with its announcements in the new financial year.

Here’s a roundup of what’s new in the tax world:

SMSFs to prepare for more reporting

The ATO has announced additional information on its new SMSF ‘event-based reporting’ regime. With a planned start date of 1 July 2018, the regime will require SMSFs to file a new report called a Transfer Balance Account Report (TBAR).

Where an SMSF member is also a member of an APRA-regulated super fund, the new reporting requirements took effect from 1 July 2017.

TBARs are separate to the traditional SMSF annual return and are designed to allow members who are close to their $1.6 million transfer balance cap to get timely information to help them make any necessary adjustments.

The new report will cover credits and debts affecting SMSF members’… Read more

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The joys of life in the slow lane

Have you ever caught yourself getting frustrated at your internet speed, or how long someone is taking to respond to an email, or the snail’s pace of a delivery?

In the era of instant gratification, it’s hard to remember that it was not always this way. Those emails and files that are cluttering up your outbox? Not that long ago they would have taken weeks to get to the other side of the world, not seconds. And unless you were part of the upper crust, there was no such thing as having chef-made meals delivered straight to you at the press of a button.

Fast food, fast technology, fast conversations – while the pace of life speeds up, there is a growing movement that promotes the benefits of taking it slow for a change.

The slow movement

The ‘slow movement’ is a collective noun for groups of people who advocate a variety of ‘slow’ – i.e. manual, old-school, physical-effort-required – ways to do things. Slow advocates believe it’s the secret to… Read more

 

August Snapshot

Housing affordability continues to be a major concern in Australia and not just for would-be first home buyers. It also affects pre-retirees forced to work longer to repay bigger mortgages and older Australians unable to downsize from large family homes due to a lack of affordable options.

The latest 2016 Census revealed a gradual decline in home ownership over the past decade from 68 per cent of all Australian households in 2006 to 65 per cent in 2016. And those of us with mortgages are more likely to be stretched to the limit, with over 7 per cent of home buyers paying more than 30 per cent of their income on mortgage costs.

It’s not only homeowners feeling the pinch. Rising house prices mean more of us are renting in the private market. Almost 25 per cent of households are renting privately, up from 21 per cent a decade ago; a further 4.2 per cent are in public housing. This puts upward pressure on private rents and increases demand for public housing.

Price growth easing

The national debate about housing affordability is understandably loudest in Sydney and Melbourne where the median price of houses and units is $880,000 and $675,000 respectively.i But residential property is always a tale of many markets. (see table)

While the constant warnings from some quarters that Australia’s housing boom is about to bust has not yet come to fruition, the rapid price growth of recent years appears to be slowing.

According to the CoreLogic Home Value Index, annual price growth eased from 12.9 per cent in March to 9.6 per cent by the end of June. In Perth and Darwin prices actually fell, while Brisbane and Adelaide posted modest gains. Hobart remains our most affordable capital city with a median price of $355,000 despite annual capital growth of 6.8 per cent.

Home price movements as at June 2017
Region Quarter Annual Median dwelling price
Sydney 0.8% 12.2% $880,000
Melbourne 1.5% 13.7% $675,000
Brisbane 0.5% 2.0% $497,200
Adelaide -0.2% 2.4% $440,000
Perth 0.1% -1.7% $484,000
Hobart -1.3% 6.8% $355,000
Darwin -5.2% -7.0% $480,000
Canberra -0.4% 9.6% $625,000
Combined capitals 0.8% 9.6% $635,000
Rural and regional 0.0% 4.7% $390,000

Source: CoreLogic

Retiring with debt on the rise

The census also revealed that fewer of us own our homes outright. Mortgage-free home ownership is down from 32 per cent to 31 per cent over the same period. This could be due to more of us borrowing against the mortgage for renovations or investment, and higher home prices resulting in bigger mortgages that take longer to repay.

If this trend continues it could have implications for our retirement income system, which assumes that most people will retire with a home fully paid for. In a little over two decades the incidence of mortgage debt among people aged 55-64 has more than tripled from 14 per cent to 44 per cent.ii As more of us delay buying our first home until later in life, this trend is likely to continue.

To tackle housing issues at both ends of the age spectrum, the federal government announced some new measures in the May 2017 Budget.

New government incentives

The first of these is the First Home Super Saver Scheme. If the proposal is passed, first homebuyers will be able to make voluntary contributions of up to $15,000 a year to their super fund which they can withdraw to use towards a deposit, up to a maximum of $30,000. While the scheme is welcome, $30,000 doesn’t go far when a 10 per cent deposit on the median-priced Aussie home is already $63,500, and much higher in Sydney and Melbourne.

In a move designed to free up more housing stock for young families, the Budget proposed allowing people over 65 to downsize and put up to $300,000 of the proceeds into super without it counting towards existing contribution caps. Couples could contribute up to $600,000. This may make downsizing more attractive for some, but it may not be the best strategy for everyone because the family home is exempt from the age pension assets test while super is not. It also depends on the availability of affordable housing solutions for downsizers.

State governments have also stepped up assistance for first home buyers. For example, Victoria offers a grant of $20,000 for first home buyers purchasing a new home and stamp duty savings for existing homes valued up to $600,000.

In NSW, first home buyers will not have to pay duty on new and existing homes up to $650,000, and reduced duty on purchases up to $800,000. They can also access a grant of $10,000 for new homes up to $600,000, or $750,000 for owner builders.

Queensland has extended its $20,000 grant for first home buyers purchasing a new home to December 2017, while Western Australia offers a grant of $10,000 for new home purchases and reduced rates of duty.

It remains to be seen whether these measures will significantly improve housing affordability for first home buyers or encourage Baby Boomers to downsize to a smaller nest. It’s likely that more will need to be done to help Australians of all ages achieve home ownership.

Whatever your stage in life, we can work with you to help achieve your version of the Great Australian Dream.

i All housing prices from CoreLogic ‘Capital City Dwelling Values Rise 0.8% over June Quarter’ https://www.corelogic.com.au/news/capital-city-dwelling-values-rise-0-8-over-june-quarter

ii ‘Australians are working longer so they can pay off their mortgage debt’ http://theconversation.com/australians-are-working-longer-so-they-can-pay-off-their-mortgage-debt-79578

 

AUTUMN NEWS

It’s almost a decade since the global financial crisis created havoc in financial markets. While the global economy continues to show signs of recovery, political uncertainty in Europe and the United States is creating fresh confusion on global markets as investors wait to see how current events play out.

It started just over a year ago when Britain voted to leave the European Union. ‘Brexit’ as it became known was followed by the surprise election of President Trump in the United States. Then the relatively unknown and politically unaligned Emmanuel Macron won the French Presidential election. And most recently, UK Prime Minister Theresa May gambled on a general election to strengthen her hand going into the Brexit negotiations with the EU, only to end up with a hung parliament.

That’s a lot of unpredictable outcomes for one year. As every investor knows, markets don’t respond well to uncertainty. So what can we expect in the months ahead?

Brexit talks begin

Brexit negotiations are finally underway but Britain’s lack of political unity may prolong talks and weaken its hand. The process involves two stages – first there are the technical negotiations over who gets what in the divorce. This will be followed by crucial trade talks about the nature of Britain’s relationship with the EU and its 27 member states going forward.

As at April 2017, 47 per cent of the UK’s total exports and 51 per cent of imports were to and from the EU.i UK business leaders are calling for a ‘soft’ Brexit which would allow for the continuation of tariff-free trade in goods and services between Britain and the EU’s 27 members. But some conservatives are pushing for Britain to go it alone, or a ‘hard’ Brexit.

Whichever way the talks go, there are likely to be financial winners and losers. The early market response has been to sell down the value of the British pound and British shares, although a weaker pound is good news for companies with foreign earnings.

The market has responded more positively to President Macron’s victory and the success of his new party’s candidates in France’s June elections. Macron has promised market-friendly reforms to boost the sluggish French economy.

As the Trump trade deflates

The market’s early positive response to the election of President Trump has lost momentum as key policy changes including tax cuts and infrastructure spending which were intended to boost economic growth now look in doubt.

With the focus on political uncertainty on both sides of the Atlantic, the US Federal Reserve’s latest rate rise barely registered on financial markets. The Fed raised its key interest rate for the third time in six months to a range of 1 per cent to 1.25 per cent, with one more rise anticipated this year. This signalled the central bank’s ongoing confidence in the slow but steady economic recovery.

Markets appear to be playing a waiting game, with no clear signal to push the US dollar or bond yields higher. After a record-beating run, US shares have held onto their gains but drifted sideways in recent months. The S&P 500 index rose about 18 per cent in the year to June.ii

Australian and World Share Price Indices

Global-markets-navigate-sea-uncertainty-graph

Sources: Bloomberg; MSCI; RBA

Australia’s growth continues

Closer to home, Australia’s record-breaking economic run continues. While growth slowed to 1.7 per cent in the March quarter hit by bad weather, low wages growth and slow consumer spending, it was a far cry from the recession some pundits were predicting.

The residential property boom in Sydney and Melbourne is also cooling.iii In the three months to May Sydney prices were steady while Melbourne prices rose just 0.7 per cent. Prices in Perth, Hobart, Darwin and Canberra fell while Adelaide and Brisbane posted catch-up gains. While this is good news for homebuyers, it also gives the Reserve Bank more room to lower interest rates to stimulate the economy if needed.

In recent months, the Aussie dollar has traded in a narrow band around US75c. This is up from its low of US68c in January last year, but longer term the trend is likely to be down as the gap between local and US interest rates closes and foreign money looks for better returns elsewhere.

Australia shares have performed well, up more than 11 per cent in the year to June.iv But to put this in perspective, along with the US market rise of 18 per cent, French, German and UK shares rose around 27 per cent, 34 per cent and 22 per cent respectively.v In Asia, the Japanese market has been the standout performer with a rise of 29 per cent.

Looking ahead

Despite political challenges and uncertainty, global share markets continue to hit new highs while, as the graph shows, local shares are below their pre-GFC peak. For local investors, Australian shares remain attractive for their yields but global shares are likely to continue to provide superior returns going forward.

If you would like to discuss your investment strategy in the light of current world political and economic events, don’t hesitate to give us a call.

i https://www.uktradeinfo.com/Statistics/OverseasTradeStatistics/Pages/EU_and_Non-EU_Data.aspx

ii All market figures as at June 27.

iii https://www.corelogic.com.au/news/multiple-indicators-point-to-softer-housing-market-conditions

iv http://www.marketindex.com.au/asx200

v https://tradingeconomics.com/stocks

 

 

Winter 2017

As the days get shorter and we settle into the cooler months, the political heat is subsiding after the Federal Budget. The Budget provided an annual snapshot of the state of Australia’s economy: Treasurer Scott Morrison forecast a budget deficit of $37.6 billion this financial year, dropping to a deficit of $29.4 billion in 2017-18.

While stopping short of guaranteeing a return to surplus, the Treasurer projects the budget will be back in the black by 2020-21. The improving budget bottom line is predicated on an expected rebound in economic growth from 1.75 per cent this year to 2.75 per cent next year and 3 per cent beyond that, as the local and global economies pick up steam.

The government pledged to focus on good debt for productive purposes, with projects such as its $75 billion infrastructure program. While reining in recurrent spending, net debt is expected to peak next year at 19.8 per cent of GDP, falling to 17.6 per cent in 2020-21.

Inflation is expected to remain at the lower end of the Reserve Bank’s 2-3 per cent target band, due to a soft jobs market and low wages growth.

In Europe eyes will look towards the UK general election held on June 8, while in the US domestic demand is firming up, strengthening the case for the Federal Reserve to raise rates again.

1706_NL_Get_your_financial_house_in_order_AI

June 30: Get your (financial) house in order

Time is running out to get your financial house in order before June 30. This is especially the case for anyone who has funds available to make a large cash injection into their superannuation retirement savings before the rules change.

The 2016-17 financial year is your last opportunity to make a non-concessional (after tax) contribution of up to $180,000 to your super account, or as much as $540,000 under the ‘bring forward’ rule. This rule allows people under age 65 to make three years’ non-concessional contributions in the current financial year by bringing forward two years’ contributions.

From 1 July, the annual non-concessional cap reduces to $100,000 and $300,000 under the bring forward rule. What’s more, anyone with a total super balance of more than $1.6 million at the end of this and future financial years will not be able to make any more non-concessional contributions.

A golden opportunity

If you have recently sold… Read more

1706_AI_NL_A_Tax_Alert

Tax Alert June 2017

Major changes to the rules applying to both superannuation and business tax come into force on 1 July 2017, so taxpayers need to ensure they are prepared for the new regime. Here’s a roundup of the key tax changes:

Instant asset write-off ends

Small business owners should note the very popular $20,000 instant asset write-off scheme has been extended for another year to 30 June 2018. Under this scheme, small businesses can purchase items of capital equipment costing less than $20,000 and claim an immediate tax deduction.

Although originally due to end this financial year, the popular measure was given a reprieve in the May budget. The government has signalled that it will be tightening the rules to make sure that purchases made are for business use only.

New super contribution rules

The biggest tax changes to Australia’s super system in a decade will start on 1 July 2017. A host of new rules apply to both the contribution and retirement phases of the super… Read more

1706_NL_Escape-the-winter-blues_AI

Escape the winter blues – without breaking the bank!

Have you been feeling a bit sluggish as the winter weather sets in? Are you craving richer meals, sleeping in a bit more, and generally feeling a bit flat?

There could be a scientific explanation. Seasonal Affective Disorder (SAD), otherwise known as the winter blues, is a real condition. It’s more common than you might think in this country as it’s estimated that up to 54% have some of the symptoms.i

Even if you’re not afflicted by SAD, it’s pretty common at this time of year to feel a bit lacklustre as the days get shorter and the drizzle sets in. One thing guaranteed to put a spring in your step is the idea of escaping the cold weather and heading on holiday somewhere for days of endless blue sky and balmy warm nights.

Escape the grey skies by heading north

The good news is that Aussies have plenty of options when it comes to getting away to somewhere warmer. It doesn’t cost much for those on the southern and eastern… Read more

Getting the Right Balance

Treasurer Scott Morrison’s first budget of the Coalition’s second term in office marked a significant shift in tone from the tough stance of its three previous budgets. Gone is the mantra of debt and deficit. Instead the Treasurer has balanced the government’s resolve to live within its means with promises to tackle the cost of living and provide the services people need to get ahead.

The centrepiece of the budget is the use of ‘good debt’ to fund $75 billion worth of infrastructure projects to create jobs and promote economic growth. To achieve this along with a commitment to returning the budget to surplus it has also introduced measures to cut everyday spending on universities and welfare.

In line with the new distinction between ‘good debt’ and ‘bad debt’, the Treasurer announced that from 2018-19 the government will no longer borrow to pay for everyday expenses.

The Big Picture

The government forecasts an underlying budget deficit of $26.1 billion this financial year, which is lower than the $28.7 billion forecast in the Mid-Year Economic and Fiscal Outlook. The deficit is projected to rise to $29.4 billion in 2018-19. Treasurer Morrison chose not to promise a return to budget surplus, instead saying the budget is ‘projected’ to be back in the black in 2021.

The Government’s estimates are based on economic growth ‘rebounding’ from 2.5 per cent to 2.75 per cent next year and 3 per cent beyond that. Inflation is expected to hover around 2 per cent while unemployment will reduce slightly from 5.75 per cent this financial year to 5.5 per cent next year.

Roads, rail and runways

The government announced a multi-billion dollar infrastructure program, including the previously announced $5.3 billion second Sydney airport at Badgerys Creek. The government will form a new Commonwealth company to build the project over the next 10 years.

A further $10 billion will go to a National Rail Program to fund urban and regional rail projects over the next 10 years. $8.4 billion, meanwhile, will be spent on a Melbourne to Brisbane inland rail to allow freight to travel between the two cities in under 24 hours.

The government will also fund State infrastructure projects. These include $1.6 billion to West Australia for road and rail projects, $844 million towards Queensland’s Bruce Highway and $1 billion for regional rail upgrades in Victoria with a further $30 million for Tullamarine Airport rail planning.

More funds for education

Schools, early childhood education and skill training are also in for a boost in funding. Schools will get a $18.6 billion boost over the next decade. Under the plan dubbed ‘Gonski 2.0’, most schools will receive more money while some wealthier schools will lose some funding.

Early childhood education will receive an additional $428 million over two years while $1.5 billion will go to the States and Territories over four years for a new Skilling Australia Fund for apprenticeships and traineeships.

Offsetting this are revenue producing changes to university funding. Students will pay more for their bachelor degrees and will have to start repaying their student loans earlier once they enter the workforce.

Housing affordability

The news is better for younger Australians on the housing front. While the Treasurer says there are no ‘silver bullets’ to improve housing affordability, he unveiled a number of measures to help first home buyers and increase housing supply.

The government will help first home buyers build a deposit with the introduction of a superannuation-style salary sacrifice savings account. From 1 July 2017, individuals can make voluntary contributions of up to $15,000 per year and $30,000 in total to their superannuation account to purchase a first home.

At the other end of the housing market, people over 65 will be encouraged to sell their large family homes, downsize to something smaller and put up to $300,000 into superannuation as a non-concessional (after tax) contribution.

The ‘good debt’ infrastructure philosophy will be extended to housing with the introduction of a UK-style ‘bond aggregator’ as an intermediary to attract more private sector investment in affordable community housing. In another sweetener, the capital gains tax discount on the sale of investment property will increase from 50 per cent to 60 per cent for investments in affordable housing.

The government will also boost the supply of land for housing construction with the release of surplus Commonwealth land beginning with Defence land in Maribyrnong, Melbourne.

Health

In a surprise move, the Medicare Levy will be increased from 2 per cent to 2.5 per cent of taxable income from 1 July 2019. The proceeds will be used to ensure the National Disability Insurance Scheme is fully funded in two years’ time.

The government will encourage doctors to prescribe cheaper generic medicines rather than name brands. The saving will allow $1.2 billion to be used to fund the listing of new medicines on the taxpayer-funded Pharmaceutical Benefits Scheme.

As a sweetener for doctors, the freeze on Medicare rebates that GPs are paid for bulk-billed patients will be lifted from July 1 instead of 2020 as previously planned.

The government has also allocated $347.4 million to Veterans’ Affairs for programs including mental health and suicide prevention.

Business and banking

The government is seeking to raise $6.2 billion over the next four years by imposing a six-basis point levy on the five major banks. This new tax won’t be imposed on superannuation funds or insurance companies.

The government also plans to introduce a suite of measures to improve competition and transparency in the banking system. It will set up a one-stop shop for dispute resolution for consumers, small business and investors to be known as the Australian Financial Complaints Authority. This will replace three existing regulators.

After initial success by the Tax Office in its crackdown on multinational corporations not paying their fair share of tax, the program will be extended to include foreign partnerships and trusts.

Small business owners with turnover of up to $10 million will be able to write off up to $20,000 on assets purchased for their business for another year. The measure was due to end on June 30.

Welfare carrots and sticks

Younger Australians and families will face the brunt of cuts to welfare spending, with penalties including reduced or cancelled payments for not turning up for job interviews or accepting suitable work.

To balance this tough approach, programs to help young parents find jobs, childcare and training will be extended, while aged pensioners and disability pensioners will get a one-off payment to help with rising energy bills this winter.

Immigration and border protection

In a revamp of the heavily criticised 457 visa system, $1.2 million will be raised from a levy on foreign workers to help fund training for local apprentices.

Defence spending will increase to 2 per cent of GDP by 2021, three years ahead of schedule.

Looking ahead

The lift in infrastructure spending is welcome news for the construction industry in the short to medium term but it should also have long term social and economic benefits for the nation.

It needs to be remembered though that the budget announcements are just proposals at this stage. They need to be passed by both houses of Parliament before they become law.

The Turnbull government will be hoping a budget that balances productive spending on infrastructure, schools and health with cuts to everyday spending and help for people struggling with the cost of living will give it a fresh start with voters.