Category : Financial Updates

Housing Prices

The Australian housing market appears to have reached a turning point, with prices falling 2.2 per cent since peaking in September 2017. This is welcome news for first home buyers; not so much for sellers and investors.

However, national averages can be misleading. As always with residential property, it’s a tale of many markets with big differences between states, cities and even between suburbs. Before you make any property decisions, it’s important to look beyond the national figures to understand what is happening to prices in your neck of the woods and why.

A tale of many markets

As the table shows, price falls over the past year have been greatest in Sydney (-5.6 per cent), Darwin (-4 per cent), Perth (-2.1 per cent) and Melbourne (-1.7) per cent. The standout performer is Hobart (+10.7 per cent), followed by Canberra (+2.3 per cent), Adelaide (+ 1 per cent) and Brisbane (+0.9 per cent). Regional areas are still rising (+1.6 per cent) as buyers look beyond the big cities.i

Change in dwelling values

Annual Total return Median value
Sydney -5.6% -2.7% $855,287
Melbourne -1.7% -1.2% $703,183
Brisbane 0.9% 5.0% $493,922
Adelaide 1.0% 5.2% $438,466
Perth -2.1% 1.8% $454,007
Hobart 10.7% 16.2% $437,254
Darwin -4.0% 1.5% $439,718
Canberra 2.3% 6.9% $593,886
Combined capitals -2.9% 0.3% $646,020
Combined regional 1.6% 6.6% $368,336
National -2.0% 1.5% $552,141

Source: CoreLogic

There are a variety of factors at play. The Australian Prudential Regulatory Authority (APRA) has imposed tighter lending standards on the banks and encouraged them to restrict higher risk lending, which has slowed market activity. This is reflected in a 3.8 per cent fall in home loan numbers over the past year in all states except Tasmania.ii

There has also been a fall in foreign investment. Last year, Chinese investment in local residential property fell 25 per cent, although Australia still ranks second only to the US as a favoured destination.iii

With fewer buyers in the market and an oversupply of new apartments in Sydney and Melbourne in particular, sellers are having to drop their asking price to compete.

Mortgage rates on the rise

More recently, three of the big four banks and many smaller lenders have lifted mortgage interest rates due to the increased cost of funding. Lenders source much of their funding from overseas markets where interest rates are rising, unlike here where the cash rate remains at an historically low 1.5 per cent.

This raises the bar for first home buyers and puts added pressure on existing borrowers who are already stretched to the limit. But headline rates can be deceiving. Most lenders still offer discounted rates closer to 4 per cent for eligible borrowers.

Rates on interest-only loans, used mostly by investors, have been increasing for some time. Interest-only loans typically have a term of 1-5 years after which they revert to principal and interest payments. This has raised concerns that investors who took out loans at the peak of the housing boom may struggle to meet higher principal and interest payments. Forced sales could lead to further price falls.

However, as Reserve Bank Assistant Governor, Michele Bullock recently said, “borrowers have been transitioning to principal and interest loans for the past couple of years without signs of widespread stress”.iv
Affordability a worry

Despite falling prices, housing affordability remains an issue, especially for first home buyers in Sydney and Melbourne where home values have soared in recent years. The median home value in Sydney is $855,287, almost twice as much as Hobart ($437,254) and more than twice the regional average ($368,366). But prices are only part of the equation.

Affordability is measured by the share of income required for mortgage repayments. In June 2018, for borrowers with a 20 per cent deposit, the repayment required on the average mortgage amounted to 36.3 per cent of gross household income. Ten years ago, it was 51 per cent. That’s due largely to mortgage interest rates almost halving over the same period, according to CoreLogic’s latest Housing Affordability Report.v

Once again, they are national averages. Sydney and Melbourne are least affordable while Canberra and Darwin are most affordable due to relatively high incomes in Canberra and rising salaries and falling prices in Darwin.

What does it mean for me?

For first home buyers, the biggest stumbling block is often saving a deposit as rising prices push desirable properties further out of reach. But with prices expected to fall over the next couple of years, time is on your side.

Now that banks are tightening their lending criteria, self-employed people will need at least three years of tax returns and PAYG earners will have their expenses examined more closely.

Homeowners planning to downsize have an opportunity to sell now near the market peak and buy a smaller property in a falling market. What’s more, if you are over 65 you can put up to $300,000 of the sale proceeds into your super for a significant tax saving.

Families looking to upsize to a larger home also need to weigh up whether it’s better to sell and buy now or wait and see if prices of larger homes fall further. The decision will depend on knowledge of your local market.

As mortgage rates begin to edge higher, all borrowers are urged to stress test their capacity to make higher repayments and adjust household budgets where necessary.

If you are looking to buy or sell a home or an investment property and would like to discuss your options, give us a call.

i https://www.corelogic.com.au/news/augusthomevalueindexresults

ii https://reia.asn.au/media-release/housing-finance-numbers-continue-fall/

iii https://thenewdaily.com.au/money/property/2018/09/11/foreign-investment-real-estate/

iv https://www.rba.gov.au/speeches/2018/sp-ag-2018-09-10.html

v https://www.corelogic.com.au/housingaffordability

 

Australian Dollar

One of the major themes for local investors in 2018 is the fall in the Australian dollar, and it’s not just Aussie travellers heading overseas who are affected. Currency movements can have a big impact on your investment returns, but where there’s risk there’s also opportunity.

The Aussie dollar has dropped from a high of US81c in January to recent levels around US74c, its lowest in 18 months. So, what’s behind this decline and will it continue?

Australian dollar

27d232327096b68704244d15137c89ed893ac9e6-aussie-dollar_graph_1

Source: Tradingeconomics.com | OTC Interbank

The interest rate gap

There are two sides to every story, especially in currency markets where one currency’s loss is always matched by another’s gain. The US dollar has been rising against most other currencies this year, including ours. Part of the reason for this is the increasing interest rate differential between the US and the rest of the world.

The US Federal Reserve has lifted rates seven times since late 2015 from near zero to a range of 1.75-2.0 per cent. Federal Reserve chairman, Jerome Powell has said he expects to do so twice more this year and three times in 2019. The return to more ‘normal’ interest rates is due to solid growth in the US economy and unemployment below 4 per cent. The Fed forecasts economic growth of 2.8 per cent this year although inflation is still below its target of 2 per cent.i

By comparison, Australia’s official cash rate has fallen over the same period and sits at an historic low of 1.5 per cent. Commentators expect the next move will be up, but possibly not until late next year.

Higher US interest rates relative to Australia make the US a more attractive destination for yield-seeking investors. As foreign money flows into the US market, demand for the US dollar increases and its value rises.

Threat of trade war

Also weighing heavily on the Aussie dollar are the threat of an escalating trade war between the US and China and falling commodity prices, notably iron ore.

The tit-for-tat tariffs placed on imports by the world’s two biggest economies has the potential to impact the Australian economy more than most. Australia is viewed as a resources-based economy and any rise or fall in commodity prices tends to be reflected in the value of our currency.

When the first salvos in the trade dispute were fired in July, iron ore was trading at around US$63 a tonne down from a high of US$78 earlier this year and a peak of US$197 back in 2008. Australia is the world’s biggest exporter of iron ore, most of it headed to China for steel production.

China’s growth eased slightly in the June quarter to 6.7 per cent, the slowest in 21 months, along with slower than expected industrial output.ii If tariffs put a dent in China’s economic growth and demand for iron ore, our dollar could head lower.

While currency movements are just one factor influencing investment returns, it pays to understand the impact of a falling dollar in order to capitalise on the benefits and reduce currency risk.

Managing currency risk

For local share investors, a drop in the Australian dollar is good for exporters and companies with offshore operations because it improves their competitiveness in overseas markets. Companies in the agricultural and manufacturing sectors stand to gain as do mining companies with commodities priced in US dollars, although this would not be enough to offset falling commodity prices.

Surprisingly perhaps, the currency effect can also increase the appeal of global shares. Local investors who own ‘unhedged’ global shares have already enjoyed the double benefit of rising international share prices and a falling Aussie dollar. Some global share funds ‘hedge’ currency risk while others leave the risk ‘unhedged’. Hedged returns perform better when the Aussie dollar is rising or flat while unhedged returns do better when the dollar is falling.

To illustrate the impact of hedging, Vanguard’s International Shares Index Fund (hedged) returned 11.46 per cent in the year to June 2018 while its International Shares Index Fund (unhedged) returned 15.44 per cent.

Avoiding the cash trap

While currency risk can be a challenge for share investors to manage, one of the biggest risks when the Aussie dollar is falling is to leave all your cash in the bank. At a time when historically low interest rates have already reduced the amount you receive from cash investments, your purchasing power is further reduced when you buy overseas goods.

Given the ongoing uncertainties for global trade and the growing interest rate differential between Australia and the US, the Aussie dollar is unlikely to rise in the near to medium term. While investment decisions should never be based on currency factors alone, understanding the impact of a falling dollar can help you minimise currency risk and make the most of opportunities.

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

i ‘US Fed raises interest rates, expects 2 more hikes this year’, by Akin Oyedele, Business Insider Australia, 14 June 2018, https://www.businessinsider.com.au/federal-reserve-fomc-statement-and-interest-rate-decision-june-2018-2018-6?r=US&IR=T

ii ‘Asia shares fall as China data points to slowing growth’, Reuters, 16 July 2018, https://finance.yahoo.com/news/asian-shares-edge-lower-investors-005114413.html

 

Update

Australian motorists are not the only ones hoping that global oil prices have peaked after reaching four-year highs in 2018. Not only do high oil prices flow through to the price of petrol at your local service station, but they also increase the cost of doing business for everyone from farmers to airlines and push up the cost of living for households.

On June 22 the Organisation of Petroleum Exporting Countries (OPEC) plus Russia agreed to increase output by one million barrels a day, or about 1 per cent of world supplies, to relieve global shortages and lower oil prices. The price of Brent Crude rose to US$75.60 a barrel immediately after the announcement amid concerns the target may not be met. As at June 29, the oil price had surged 64 per cent in 12 months (see graph), but if OPEC and Russia succeed in lifting supply prices should begin to fall.

There are several international oil prices quoted in the media, including West Texas Intermediate (WTI), Brent, Tapis and Dubai crude oil, but the price of Brent Crude is considered the major global benchmark. Oil produced in Europe, Africa and the Middle East tends to be priced relative to Brent Crude which is sourced from the North Sea.

What’s going on?

OPEC’s latest turnaround follows four years of determined efforts to limit oil production and boost prices. The price of Brent Crude crashed from US$115 to US$30 a barrel in 2014 as cash-strapped producers including Russia and Venezuela increased supply. At the same time, the US expanded production from fracking.

Then early this year the freezing northern hemisphere winter pushed up the price of oil as demand spiralled. Brent Crude was trading at a sustained high of around US$80 a barrel until May, when US President Donald Trump withdrew from the Iran nuclear deal.

Under the 2015 deal, nations including the US, France, Britain, Russia, Germany and China agreed to lift international sanctions on Iran’s oil exports in return for OPEC’s third largest producer winding back its nuclear capability.

The prospect of renewed US sanctions against Iran raised concerns that the global supply of oil would be squeezed, putting upward pressure on prices. At the same time, the US threatened sanctions against Venezuela following its disputed Presidential election, a move that would further reduce OPEC output.

The first sign that oil prices may have peaked came on news that Saudi Arabia and Russia were discussing a possible increase in oil production. In late May the price of Brent crude eased back to levels around US$76 a barrel before settling at US$77 after the June 22 meeting sealed the deal.

oil-prices_SS_graph_1

Source: Tradingeconomics.com | OTC

Who’s affected?

Holidaymakers may feel the pinch after Qantas chief executive, Alan Joyce warned airfares could rise in response to this year’s oil price hikes. His comments came after the International Air Travel Association forecast the average cost of Brent Crude would be US$70 a barrel in 2018, 27 per cent higher than 2017 (US$55 a barrel) and 16 per cent higher than its own forecasts.i

Jet fuel costs have climbed 50 per cent in the past 12 months which will eat into airline profits, depending on how much of the cost they are prepared to absorb before lifting fares.ii

Rising oil prices also erode profits of transport companies and businesses that rely on the movement of goods or the use of heavy machinery. Australian farmers face the double-whammy of rising fuel costs on top of the effects of drought.

Consumers ultimately pay for higher oil prices as they flow through to the cost of food and other goods. This has raised concerns about the impact on inflation globally at a time when countries including the US, UK and Canada are already increasing interest rates.

There are some winners from constrained oil exports though. Australian gas producers stand to gain from increasing demand and high prices as they ramp up production and exports.

Relief ahead for motorists

Rising oil prices have inevitably been passed on to local motorists, although there is relief in sight. The national average price of unleaded petrol rose by 14.7 per cent in the three months to June to a four-year high of 153.3c a litre. Prices edged lower towards the end of June in response to the downward trend in crude oil prices.iii

Local retail fuel prices are determined by the price of Singapore unleaded petrol (Singapore is the most important oil trading and refining centre in the Asia-Pacific region), as well as the exchange rate. Rising oil prices have been exacerbated by the weaker Aussie dollar which has fallen from US81c earlier this year to recent levels below US74c.

Petrol prices vary enormously between regions, cities and even within suburbs. Australian Competition and Consumer Commission chairman, Rod Sims has urged motorists to use fuel price websites and apps to shop around (you could try MotorMouth or Compare the Market.)iii Sound advice at any time, not just when prices are rising.iv

If you would like to discuss this article in light of your investment strategy, give us a call.

i ‘Qantas warns higher fares on the way as oil spike hits airlines’, The Age, 4 June 2018, https://www.theage.com.au/business/companies/qantas-warns-higher-fares-on-the-way-as-oil-spike-hits-airlines-20180604-p4zjf2.html?platform=hootsuite

ii IATA, http://www.iata.org/publications/economics/fuel-monitor/Pages/index.aspx

iii Australian Institute of Petroleum as at June 24, 2018, https://aip.com.au/pricing/pump-prices

iv ‘Petrol prices stable to March but now hitting four year highs’, ACCC, 5 June 2018, href=”https://www.accc.gov.au/media-release/petrol-prices-stable-to-march-but-now-hitting-four-year-highs

 

Winter 2018

Australia’s national economic agenda in May was dominated by the Federal Budget and the promise of tax cuts. Consumers rode a wave of optimism until the final week of May when the ANZ/Roy Morgan consumer confidence index fell for the first time in 7 weeks, down 3.2 per cent to 117.7. Confidence is up 4.3 per cent this year, with the late pull-back attributed to a cooler sharemarket, rising fuel prices and on-again off-again US-North Korea peace talks.

The price of benchmark Brent Crude is up 13.5 per cent this year although the price dropped back to below US$75 a barrel late in the month on talk of OPEC and Russia increasing production to make up for losses in Venezuela and possibly Iran. Australian motorists are paying more at the pump, with average national wholesale petrol prices at a 3-year high of 138.7c.

At the same time, the housing market is cooling. The CoreLogic Home Value Index of capital city prices fell 0.3 per cent in April while the number of home loans to owner-occupiers fell 2.2 per cent in March, the sixth fall in 7 months.

Unemployment rose slightly from 5.5 per cent to 5.6 per cent in April but hours worked and the participation rate both rose.

The Australian dollar ended the month around US75c, down 3 per cent this year on US dollar strength.

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Ready…set… Are you good to go for the new financial year?

The end of the financial year is the cue for most of us to look at our financial position heading into tax time. Hopefully you’ve made progress towards your goals. But if you find that your expenses are trending higher than you’d like or—shock, horror!—higher than your income, this could be the perfect time for a fiscal makeover.

The starting point is gathering up as much information as possible, beginning with the household budget.

Take a budget snapshot

You can’t set realistic financial goals and savings targets without knowing how much money you have at your disposal. If you don’t already track your income and spending, then take an annual snapshot as you go through your records to prepare your annual tax return.

Deduct your total spending from total income and what’s left is what you have to work with. Any surplus could be used to kick start a regular savings plan. If you discover a budget black hole, identify areas… Read more

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Tax Alert – June 2018

Budget promises tax cuts now, more later

While the May 2018 Budget delivered modest personal tax concessions for the upcoming financial year to Australian taxpayers, the big news was a new long-term tax plan that will overturn the existing progressive tax system.

Here’s a roundup of the latest tax news:

Tax offsets for lower income earners

The headline announcement in the Federal Budget was immediate tax relief from 1 July 2018 for those earning up to $90,000. This low and middle income tax offset will provide relief of up to $530 a year. However, the tax cut will not affect weekly pay packets as it comes in the form of a tax offset, meaning taxpayers will not see any extra money in their hands until after tax time next year.

Another significant change from 1 July 2018 will be a lift in the threshold at which the 37 per cent tax rate applies, rising from $87,000 to $90,001. This means that those earning between $37,001 and $90,000 will be taxed at a rate of 32.… Read more

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Budget changes support a brighter retirement

With tax cuts grabbing most of the attention in the May 2018 Budget, some quiet tweaks to superannuation and retirement income were drowned out in all the noise. But these small changes could have a big effect on the amount of money that ends up in your nest egg when you retire.

Here’s a rundown of some of the more significant proposed changes:

Income opportunities for retireesi

The expansion of the Pension Loan Scheme will allow all Australians of Age Pension age to boost their income using the equity in their home. Under the scheme, retirees will be able to borrow up to 150 per cent of the Age Pension (currently 100 per cent), or $11,799 a year for singles and $17,787 for couples who are on the full Age Pension.

The loan is a reverse mortgage with an interest rate set at 5.25 per cent a year, about 1 per cent below the average commercial rate.ii The loan is typically not repaid until the home is sold and the Government guarantees that… Read more

 

Autumn 2018

Autumn is here, and not a moment too soon after a prolonged heatwave over summer. The Winter Olympics provided some welcome relief from the heat at home, and even though we failed to score gold at Pyeongchang we came away with two silver medals, one bronze and some promising young athletes to celebrate.

In the US, there was relief when the US Federal Reserve reported to Congress on February 23 that it was comfortable with the inflation outlook and not inclined to lift rates more than three times this year. Global shares stabilised after their recent volatility.

In Australia, the Reserve Bank has indicated rates are likely to remain on hold for some time to encourage wage growth. Reserve Bank Governor Phillip Lowe told the House of Representatives Standing Committee on Economics he would like to see wage growth of 3.5 per cent. Instead, the Wage Price Index rose 2.1 per cent in the year to December, just above inflation of 1.9 per cent, with public sector wages (up 2.4 per cent) growing faster than private sector (1.9 per cent).

On a positive note, corporate profits were solid in the six months to December, with a record 94 per cent of companies reporting a profit, although only 57 per cent lifted profit. Unemployment fell from 5.6 per cent to 5.5 per cent in January and consumer sentiment continues to recover. The ANZ/Roy Morgan consumer confidence rating rose 2.3 per cent in the final week of February to 117.9, well above the historic average. The strengthening US dollar saw the Aussie dollar fall from over US81c in January to around US78.5c by the end of February.

1803_AI_NL_Home_and_away_with_super

Home and away with super

Australians buying their first home or downsizing in retirement are about to receive a helping hand thanks to new superannuation rules which come into effect on July 1. From that date, first home buyers will be able to contribute up to $30,000 into their super fund towards a home deposit while downsizers can put up to $300,000 of the proceeds of selling the family home into super.

This new measure has been devised to assist first home buyers, many of whom have struggled to save a deposit as rising prices put even entry level properties out of reach.

At the other end of the scale, the change is envisaged to help older homeowners who frequently find themselves in large houses while trying to survive on a modest super balance or the aged pension.

Here’s how the Federal Government hopes to improve the situation at both ends of the property market.

Buying a home

Under the new First Home Super Saver (FHSS) scheme, individuals can arrange for up to $30,000 to beRead more

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Getting prepared for tax time

Are you a tax procrastinator? Putting off all thoughts of tax planning until the last week of June is not uncommon, but it’s likely to be a missed opportunity to reduce the tax you pay and maximise your income. The sooner you set your mind to organising yourself and your business for the end of the financial year, the better off you will be.

Whether it’s your personal income tax or company tax, there are strategies you can employ to improve your position.

Small business tax cut

The corporate tax rate for 2017-18 has been cut from 30 per cent to 27.5 per cent for businesses with a turnover of up to $25 million. The previous year this lower rate only applied to businesses with turnover less than $10 million.

While the new small business tax cut will provide some welcome relief, this year will be the last time you can qualify for an immediate tax deduction for purchases in your business worth less than $20,000.

This tax break is due to expire on June 30,Read more

18XX_NL_AI_The_cost_of_convenience

The true cost of convenience

“I should eat healthier… is that salad place in our delivery range yet?”

“Here, use my phone and just buy it on my account.”

If any of these quotes sound familiar – whether you’ve heard them, or said them yourself – you’re not alone. Thanks to technology, we have convenience at our fingertips. And we love it! Food delivery apps like Uber Eats and Deliveroo are amongst some of the most downloaded on both the App Store and in Google Play. Aussies take millions of Uber trips per month.i

For some of us, it’s still a bit of a novelty – tapping the screen a few times and having a driver, meal or groceries show up at the door in minutes. Or even a new outfit the same day. For many others, it’s become a part of our everyday lives. We can’t imagine fitting everything in to our busy schedules without the help of these services. And it’s true – many of these convenience services do save us a lot of time and stress. But it all comes at a cost. A cost that’s all tooRead more

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