2016/17 Review

The past financial year turned out far better for investors than had been feared a year ago. This was despite a lengthy list of things to worry about: starting with the Brexit vote and a messy election outcome in Australia both just before the financial year started; concerns about global growth, profits and deflation a year ago; Donald Trump being elected President in the US with some predicting a debilitating global trade war as a result; various elections across Europe feared to see populists gain power; the US Federal Reserve resuming interest rate hikes; North Korea stepping up its missile tests; China moving to put the brakes on its economy amidst ever present concern about its debt levels; and messy growth in Australia along with perennial fears of a property crash and banking crisis.

Predictions of some sort of global financial crisis in 2016 were all the rage. But the last financial year provided a classic reminder to investors to turn down the noise on all the events swirling around investment markets and associated predictions of disaster, and how, when the crowd is negative, things can surprise for the better. But will returns remain reasonable? After reviewing the returns of the last financial year, this note looks at the investment outlook for the 2017-18 financial year.

Read more here

Market Volatility

Three reasons not to be fussed...

For much of this year, there has been a surprising divergence between share and bond markets with shares up in response to improving growth and bond yields down in response to weak inflation.

Some feared that either bonds or equities had it wrong, but in a way it seemed like Goldilocks all over again – not too hot (ie benign inflation) but not too cold (ie good growth). However, the past week or so has seen a sharp back up in bond yields – mainly in response to several central banks warning of an eventual tightening in monetary policy.

Over the last week or so, 10 year bond yields rose 0.2-0.3% in the US, UK, Germany and Australia. This may not seem a lot but when bond yields are this low it actually is – German bond yields nearly doubled. This caused a bit of a wobble in share markets.

The big question is: are we seeing a resumption of the rising trend in bond yields that got underway last year and what does this mean for yield sensitive investments and shares? Since central banks are critical in all of this we’ll start there....  Read on

HEADLINE BLUES

It’s a tough gig being a nancial media pundit whose job requires making eye-grabbing calls on the outcomes of major world events. But at least the pundits rarely have to deal with the consequences of their bad predictions. Read more

GLOBAL POLITICAL RISKS

It's now 12 months since the British voted to leave the European Union, an event that some saw as setting off a domino effect of other European countries looking to do the same. This was also followed by a messy election result in Australia, Donald Trump's surprise victory in the US presidential election, increasing concern around North Korea and a steady flow of terrorist attacks.

The combination of which seemed to highlight that geopolitics is now more important, and perhaps more threatening, for investors than had previously been the case. But while political developments have figured highly over the last year, the impact on markets has been benign. Since the Brexit vote, global shares are up 22% and Australian shares are up 13%.

So what gives? This note looks at the main issues. Read more here

The perils of forecasting...

I am regularly called on to provide forecasts for economic and investment variables like growth, interest rates, currencies and the share market. These usually come in the form of point forecasts as to where the variable that is being forecast will be in, say, a year’s time or its rate of return. Such point forecasts are part and parcel of the investment industry. In fact, forecasts about all sort of things – from the environment to economics to politics to sport – have become part of everyday life....  Read more here

The July 1 Super Changes...

We're now only a few months away from sweeping changes to the superannuation and pension environment, but for most people, the impact of these changes will be either positive or neutral.

At the end of the day, super remains a very attractive place to save for retirement. So with all of the 'noise' surrounding the super changes coming on July 1st, its important to remember some basic super facts...

Fact 1:  While you are building your super, pre-tax contributions and investment earnings will generally continue to be taxed at the low rate of up to 15%, not your marginal tax rate of up to 49%. That alone is a massive advantage in favour of super versus other forms of savings.

Fact 2: When you eventually retire, you can still transfer a generous amount into a superannuation pension, where no tax is paid on investment earnings - and payments are generally tax-free from age 60.

The major changes the are occurring from July 1st, primarily revolve around 'limits' - limits on how much you can contribute to super (pre or post tax), and limits on how much you can start a super pension with (i.e. $1.6 million each).

In addition, the 15% contributions tax will be doubled if your income is greater than $250,000 - this single rule change is an unpopular one, and might be a 'game changer' for some higher income earners.

Moving closer to July 1, there is some work to do, especially if you run your own self-managed super fund. Please, contact your financial adviser asap to see if any of the upcoming changes will impact you, and if so, find out what action you need to take, before it's simply too late.

Rick Maggi

Global growth looking healthy

Despite numerous geopolitical threats (Eurozone elections, tensions between the US and China, North Korea, etc.), worries about the demise of the so-called "Trump trade" and shares being overbought and due for a correction at the start of the year, share markets have proved to be remarkably resilient with only a minor pull back into their recent lows. This despite a more significant fall back in bond yields. Partly this is because the geopolitical threats have not proven to be major problems (at least so far) and Trump remains focussed on his pro- business policy agenda (he has already embarked on deregulation and his tax reform proposals – while lacking in details – indicate that tax reform remains a key objective). More fundamentally though, markets have been underpinned by an improvement in global growth. This is likely to continue. 

Read more here

Trump Tantrum?

Since the US elections back in November, the 'Trump Trade' has sharply boosted global share markets, based on the promise of lower taxes, less regulation and other 'pro-growth' policies. After a lengthy period of economic 'stagnation' (not quite true), the prospect of Donald Trump ushering-in a thrilling, no-holds-barred period of Reaganesque optimism is an intoxicating idea, no doubt contributing to his election in the first place.

But is all of this about to come unstuck? Quite possibly.

With a Presidency already under fire for possible Russian collusion, bogus wiretapping claims and a myriad of other missteps, you could be forgiven for thinking that you've just stepped out of a time machine and it's 1974 all over again.

Nixon aside, Trump's massively eroded political capital and growing credibility problem points to short-term danger for the sharemarket. If Trump is no longer trusted, or even liked, his capacity to swiftly enact his pro-growth agenda is suddenly at risk, and with it, the quick sharemarket gains made since last November.

And Trump's first litmus test will be tonight's vote on his revised healthcare bill. If the vote doesn't pass or is post-postponed, markets will be rattled. Brace yourself, but don't forget the opportunities that come with uncertainty - we've been here before.

Rick Maggi

HOUSING OVERVALUED?

The cooling in the Sydney and Melbourne property markets evident in late 2015 in response to macro prudential tightening deployed by APRA has proved ephemeral.

Price gains have reaccelerated and auction clearance rates & lending to property investors have rebounded.

Over the last five years Sydney dwelling prices have risen a ridiculous 73% and Melbourne prices are up 47%. As a result the Australian housing market continues to cause much angst around poor affordability and high household debt. This note looks at the main issues.  Read more

GOODBYE EUROZONE?

The long running soap opera around whether the Eurozone will break up is now into its eighth year!

In 2015 all the focus was on the latest Greek tantrum and last year the big fear was that the populist/nationalist Brexit vote and Trump victory would lead to a surge in support for populist parties across Europe and drive a Eurozone break up.

There was no sign of this in Spanish and Austrian elections, but this will be put to the test again with elections this year in the Netherlands, France, Germany and maybe in Italy.

The fear is that a Eurozone break up will plunge the world’s third biggest economic region into recession and financial chaos, which would adversely affect the global economy and Australia. Such a fear may be exaggerated – the UK hardly imploded after Brexit – but that’s the worry. 

Read more

WILL THE SUPER REFORMS HURT?

From 1 July 2017, a range of super reforms announced in the 2016 Federal Budget will take effect.

For most people, the impact of these changes will be positive or neutral.

Super remains a very attractive place to save for retirement. And there may be opportunities to grow your super and retire with more.

If your income is below $250,000 (for 2017/18), while you build up your super, pre-tax contributions and investment earnings will generally continue to be taxed at the low rate of up to a maximum of 15%, not your marginal tax rate of up to 49%. 

Also, when you retire, you can still transfer a generous amount into a superannuation pension, where no tax is paid on investment earnings and payments are generally tax-free at age 60 and over.

Next steps...

Once you have read through this guide, you should consider making an appointment with your financial adviser. They can assess the impact the super reforms could have for you, as well as review your retirement savings plans and the strategies you are using. 

Beyond that, as we head towards the end of another financial year, now is a great time to see if there is anything else you could be doing to tax-effectively build and protect your wealth.

If you don’t have an adviser, you call us (Westmount Financial) on 9382 8885 to arrange an appointment. 

View a basic, 'at a glance' guide here.

Rick Maggi

China stabilises, iron ore surges

A year ago there was a long global worry list and high on that list was China. A nearly 50% collapse in Chinese shares, uncertainty about the Renminbi, slowing Chinese growth, fears of a massive oversupply of residential property and uncertainty about the intentions of Chinese policy makers had left many convinced China was heading for the long predicted “hard landing”. But since then it seems China worries have receded. So what happened? Put simply the Chinese economy stabilised. But what’s the outlook for China now? And what does this mean for investors and Australia? Read more

Where are we now?

It’s now a decade since the first problems with US sub-prime mortgages started to appear and nearly eight years since share markets hit their global financial crisis lows. From those lows in 2009 lows US shares are up 239%, global shares are up 167% and Australian shares are up 80% (held back by relatively higher interest rates, the absence of money printing, the plunge in commodity prices from their 2011 highs and the high $A).

An obvious question is how close the next downturn is, which ultimately relates to where we are in the investment cycle. 

Read more here

honeymoon over?

Since the US election last November, US and global shares rallied around 8% and Australian shares rallied around 12%. But with Trump now inaugurated as President we are at a point where that optimism is being tested. Read on...

Key Themes for 2017...

Despite a terrible start to the year and a few political surprises along the way, 2016 saw good returns for diversified investors who held their nerve. Balanced super funds had returns around 7.5% which is pretty good given inflation was just 1.5%.

2017 is commencing with far less fear than seen a year ago but there is consternation regarding Donald Trump's policies, political developments in Europe and the growth outlook.

this note provides a summary of key insights on the global investment outlook and key issues around it in simple dot point form.

Read more here.                           

IT HAPPENED

Today’s US election results were a surprise to most and are likely to have a short-term impact on global share markets. Locally, our markets fell by just under 2% today, erasing gains made over the last two days - yes, after all of the media hysteria today (ie $34 billion ‘wiped off’ the sharemarket etc) markets are merely back to Monday’s levels.

Looking ahead, US markets look as if they might fall by roughly the same percentage this evening as investors weigh the potential pros and cons of a Trump presidency.

As we’ve seen before, these kinds of knee jerk reactions are typically short term in nature, so I would strongly suggest just ignoring the ‘noise’ over the coming weeks, and even consider taking advantage of market weakness, as long as you’re prepared to accept some short-term volatility.

We’ll continue to monitor the situation closely.

Interesting reading...

Shane Oliver

Bloomberg                                                                                                                                    Rick Maggi

54.2 million worries

We are going through one of those periods where it seems there is a long list of things for investors to worry about: the US election; the Fed; ever present fears about a break of the Eurozone; and China. This article, from Dr Shane Oliver (AMP Capital) discusses some of the very real risks out there and how to manage the noise and worry. Definitely worth reading.

Read more here                                                                                                                                  Rick Maggi

The Australian Housing Market

Housing matters a lot in Australia. Having a house on a quarter acre block is part of the "Aussie dream". Housing is a popular investment destination. And the housing cycle is a key component of the economic cycle and closely connected to interest rate movements.

But in the last 15 years or so it has taken on a darker side as a surge in house prices that started in the late 1990s has led to poor affordability and gone hand in hand with surging household debt. Reflecting this, predictions of an imminent property crash bringing down the Australian economy have been repeated ad nauseam since 2003.

This note looks at the risks of a property crash, particularly given the rising supply of units, implications from the property cycle for economic growth and how investors should view it. 

Read article here

The US Presidential Election

The attached note looks at the US Presidential and congressional elections that are looming large, especially now that the polls between Donald Trump and Hillary clinton are neck and neck.

Read more here.

Interest Rates Steady

The RBA has resolved to keep interest rates on hold at 1.5 per cent ahead of a possible US rate hike on 21 September and the release of Australian CPI figures on 26 October.

As expected, RBA governor Glenn Stevens’ final meeting before handing over the reins to his successor Philip Lowe proved to be uneventful.

The decision to keep rates on hold was in line with market expectations, with the ASX 30 Day Interbank Cash Rate Futures September 2016 contract pricing in a 95 per cent chance of ‘no change’ to the cash rate.

UBS chief economist Scott Haslem said the RBA is likely to remain on hold for the “foreseeable future” given firm growth data, a likely lower trend in the Australian dollar and concern about financial stability.

“While inflation will remain low, core inflation is likely to drift modestly higher from here,” Mr Haslem said.

The ANU Centre for Applied Macroeconomics Analysis (CAMA) Shadow Board attached a 57 per cent probability to 1.5 per cent being the correct policy setting.

“The CAMA RBA Shadow Board clearly believes that the cash rate should not be cut any further,” said the Shadow Board. “After the RBA’s decision in August to cut the cash rate to a historic low of 1.5 per cent, there is good reason to pause.

“Unemployment fell slightly, but only because of a large increase in part-time employment. With consumer price inflation equaling 1 per cent year-on-year, well below the RBA’s 2-3 per cent target band, and wage growth a modest 2.1 per cent year-on-year, there exist little immediate inflationary pressures,” said the Shadow Board.

Rick Maggi