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...
Top 10 New Year Headlines
What will 2017 hold? Our natural curiosity about the future makes a ready-made market for speculative media articles about events likely to drive financial markets in the coming year.
But the assumption driving much of this seasonal coverage is that the mere turn in the calendar from one year to the next justifies overhauling your investment portfolio, generating significant turnover and unnecessary cost.
Against that background, here are 10 perennial New Year headlines to watch out for in the coming weeks...
1. “New Year, New Portfolio”
This journalistic boilerplate trades off our desire for reinvention as the calendar year turns. The presumption is you should completely change your investment strategy as if you were updating your wardrobe.
2. “Different Times, Different Strategies”
This assumes that the world has changed so dramatically that the rules of diversification and discipline no longer work. If you’re persuaded, look at last year’s forecasts.
3. “Brace for Uncertainty”
Saying the future is uncertain is a bit like saying night follows day. In the past year, there was Brexit and the US presidential election. In the coming year, there are elections in Germany and France. In other words, there is always uncertainty and there is always plenty of scope for speculation.
4. “Interest Rate Fears Mount”
Conjecture about central bank policy is a hardy perennial for financial media looking to fill space. Thee irony is that market expectations about these movements are already incorporated into current prices.
5. “Ten Stocks to Count On”
What if you could whittle your portfolio down to a handful of stocks and get rid of the rest? It might seem like a nice idea. However, it is also a dangerous one as the lack of diversification leaves you open to idiosyncratic influences.
6. “The World has Changed Forever”
Actually, the world is always changing. Economies rise and fall, businesses flourish and perish, some investments do well, while others languish. The rules for dealing with that haven’t changed at all.
7. “The Right Moves to Make Right Now”
This headline assumes there is a perfect time to invest and, equally, a perfect time to cash in. Problem is there’s no evidence you can reliably time the market. And in any case, everyone’s needs are different.
8. “Make Your Portfolio Bulletproof”
The idea that nothing you invest in should be falling in value is certainly an attractive one. The truth is no portfolio is likely to be completely bulletproof. Some parts of the portfolio may outperform, others may lag. Hence the need for diversification.
9. “Invest with the Stars”
No, this isn’t your horoscope for 2017. It’s a headline regularly attached to profiles of the top performing stock pickers of the previous year. But while everyone loves a winner, how many of them repeat?
10.“Take Charge of Your Wealth”
Who doesn’t love do-it-yourself stories? Just buy yourself some trading software and play the currency market from your spare room. Alternatively, you could hire an advisor and get your life back.
The truth about these holiday front covers is they are usually cooked up in an editorial meeting a few weeks out from the holiday season. They’re easy to write. They’re timeless. They’re clickbait. And, best of all, you can recycle them year-to-year.
In any case, what you do with your investments shouldn’t change according to the news, but according to your own needs, goals and risk appetite. Decisions are better made under the guidance of an advisor who understands your circumstances.
That’s a better foundation for a happy new year.
Jim Parker, 'Outside the Flags', Dimensional Australia
Capital Cities Rise (Except Perth)
The CoreLogic November Hedonic Home Value Index results out today show a rise in dwelling values across every capital city excluding Melbourne over the month.
On an annual basis, every capital city except for Perth is now showing a positive annual trend in dwelling value growth. The highest annual growth rate is evident in Sydney and Melbourne where dwelling values are now 13.1% and 11.3% higher respectively, reflecting a steeper upwards trajectory in growth over the second half of the year. The Hobart and Canberra markets have also seen some acceleration in growth rate trends with dwelling values up 8.5%, and 8.4% respectively over the past twelve months.
MARKETS REBOUND
Good afternoon,
Yesterday $34b was wiped off the Australian share market (down 1.9%) and today $58b was put back on (up 3.3%) as investors took heart with President-elect Donald Trump’s conciliatory victory speech. The major winners today were resources, with BHP and Rio jumping by 8.2% and Fortescue 10.2%, buoyed by Trump’s plans to invest in large ‘rebuild America' infrastructure projects (roads, bridges etc.).
But just as yesterday’s slump should have been taken with a grain of salt, the same logic needs to apply to today’s encouraging rebound, and until a clearer picture of Trump’s policies emerge, you should expect continued short-term volatility. However, there is little doubt that Trump’s policies (from what we know so far) will have an inflationary, higher earnings growth bent. And how bonds, property, shares and our currency might react to this new paradigm is hard to gauge at this point.
However at the end of the day markets will work through those uncertainties as they do with all news - all opinions will be accommodated in prices and there is little that any one person can do to change that.
Ultimately, when the news environment is at its hottest, successful long-investors must be at their coolest.
I’ll keep you posted.
Rick Maggi
US elections: implications for investors
Hillary's 11-point lead from just a few short weeks ago has since evaporated, with the two candidates now running neck and neck.
So what are the implications for Australian and global investors? Read more here
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.
Interest Rates On Hold
Now that the weekend's grand final sporting festivities have come to a close, I'd like to draw your attention to today's rate announcement and the thoughts on why the Reserve Bank of Australia has made this decision.
In making this call, the RBA has resisted temptation to further lower rates, opting instead to wait until the September quarter CPI data is released to allow it more time to measure the impact of the August rate cut.
Home values rise 1.1%
The CoreLogic Home Value Index recorded a 1.1% rise in dwelling values in August, with six of the eight capital cities recording a lift in dwelling values over the month. Performance of the combined regional areas remained comparatively soft, with dwelling values virtually flat at -0.1%.
The strong combined capital cities headline result masks the underlying movements associated with dwelling values which are trending differently from region to region and across the broad property types.
In Sydney and Melbourne, dwelling values continued to increase at more than 1% month-on-month, with the cumulative growth (June 2012 to date) now reaching 64% in Sydney and 44% in Melbourne. Outside of Sydney and Melbourne, the third highest rate of capital gain over the same period was Brisbane at 18%, and was as low as 4% for Darwin.
The most recent twelve month period has seen dwelling values rise by a lower 7% per annum, with Perth and Darwin the only capital cities to record a fall in dwelling values over the same period, dealing by 4.2% in both cities. Softer economic conditions and a significant fall in overseas migration rates, together with an increasing net outflow of residents to other states and territories, has made a substantial dent in housing demand, reducing values and rental returns.
Read the full report 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
7 Reasons for Optimism
a Trump presidency?
Interest rates cut to 1.5%
UK votes to leave
With UK voters narrowly voting to leave the EU markets, and Prime Minister David Cameron announcing his resignation, markets are reacting quite negatively to the news, as expected.
As outlined in the email the blog post below, the ‘Leave' vote will create a period of instability over the coming days and weeks, creating a potential buying opportunity in the short term. This may also add to the case for the RBA to cut interest rates, which was likely to happen anyway.
We’ll continue to monitor the situation, but in the meantime, it is important not to get too perturbed by the media frenzy as this is likely to be a storm in a teacup.
Enjoy your weekend (and stay away from the newspapers!).
For more information, contact Rick Maggi on 9382 8885 or rickmaggi@westmount.com.au.
Monthly Property Prices
With the exception of Hobart, all capital cities experienced an uptick in prices over the last month. View here
For more information, contact Rick Maggi on 9382 8885 or rickmaggi@westmount.com.au.
Budget SPECULATION RIFE
There will be added interest in the Federal Budget announcement next week (May 3rd) as it's likely to be the final major economic statement the Government makes before the election later this year, quite possibly July 2nd. With the opposition taking a strong stance on capital gains tax and negative gearing, we're looking at a focus this year on taxation. Corporate tax could be cut by up to 1.5% however, there is likely to be minimal, if any, relief in terms of personal income tax.
There may also be some changes to superannuation. Some potential changes might be reduced contribution caps, the concessional 15% tax on super contributions, an end to 'Transition to Retirement' pensions and taxes on superannuation pension payments.
Overall, the outlook is for minimal growth in government spending, with spending offset by savings elsewhere in the Budget.
Where sharemarkets are concerned, historically we have seen some sideways tracking in past election years, but there has been no evidence to date of a lasting impact caused by an election. In fact, Australian economic growth has actually been strong during election years since 1980.
We'll be watching the announcements closely next week and will keep our clients informed of any meaningful developments.
For more information, contact Rick Maggi on 9382 8885 or rickmaggi@westmount.com.au.
3 reasons to make your landlord rethink your lease...
You love your current office space but everywhere you turn, you’re hearing stories of how soft the office leasing market is in Perth. There are signboards all over the place and the super deals tenants are securing are approaching levels reserved for urban myths of old. You start getting excited because you can see yourself halving your rental expense overnight. And then you pull out your lease and your face drops; you’ve still got a few years left on your term.
The thing is, even if your lease expires in 2019, for example, you can still take advantage of the current market conditions.
The reason for this apparent paradox is that you can create a win-win outcome for both yourself and your landlord when you understand the factors that motivate them in the current market.
The first is that it costs the landlord more to find a new tenant than it does to keep you. This is because there is invariably a period during which a property remains vacant and this represents lost income for the landlord and additional expenses because they have to pay the building outgoings out of their own pocket. If that wasn’t bad enough for them, they also have to allow for generous incentives to lure new tenants and then pay the leasing agent’s fees on top. It can really add up, especially in the current market.
The second factor involves the outlook for the office leasing market in the medium term and whether your lease will expire in a stronger or softer market. If your lease expires during a period where everyone expects the market to be stronger then there is no motivation for your landlord to do anything now, because they’ll be able to get a better deal in a couple of years. But if your expiry is due to occur in a stagnant or softer market (the current consensus view for the next couple of years) then it’s in the landlord’s interest to do a deal now to protect themselves from this risk. In essence, the question here is whether the soft leasing market is projected past your lease expiry.
The third factor has to do with the impact of your lease term on the building’s Weighted Average Lease Expiry (WALE) which is a significant metric in the valuation of the property. The longer your unexpired term and the larger your floor area, the larger the impact you have on the building’s WALE and, by extension, on the building’s value. A healthy WALE that gets over the current softness is a good thing in an investment property and if you can contribute to this then your landlord will want to hear from you.
It all comes down to the numbers; if you can propose a solution that addresses the combined impact of the above factors then you are making things interesting for the landlord. At the same time, the proposal has to make sense for you too in terms of your business plan and growth prospects. If your solution ticks both boxes then you have a marriage made in heaven.
If you want a sanity check of your numbers – or just want to talk about the market – give me a call on 9261 6698 or email me at theo.smyrniotis@colliers.com
Alternatively, contact Rick Maggi on 9382 8885 or rickmaggi@westmount.com.au.
16/03/16: Why Australian property won't crash
Stronger than feared profit results and reasonable economic data in Australia, which are consistent with a rebalancing of the economy away from mining, are among the factors steering Australia away from a recession. Shane Oliver discusses this, along with the risk of a property crash and Australia’s declining negative gearing numbers.
Australian property update – negative gearing numbers Declining tax claims due to negative gearing in Australia are largely a result of low interest rates relative to rental yields. In other words, the benefit of negative gearing has somewhat declined. There is a broader issue at play however, which is the political debate proposing to restrict negative gearing tax concessions to only new properties.
Are we heading for a property market crash? Australian housing is expensive relative to incomes and rents. And household debt ratios are high. So yes, there is a risk of a sharp drop in property prices at some point. However, this is unlikely unless we see much higher interest rates or a surge in unemployment in the context of a recession. The foresight of the Reserve Bank and what has so far been a successful rebalancing of the economy in the face of the mining downturn mean that both of these scenarios seem unlikely at present. We’re going to see a 5-10% fall in property prices at some point in the next few years but at this stage it’s unlikely that we’re going to see a property crash.
How have company profit results turned out? The latest round of profit results reported by Australian companies related to the December half of 2015 and given recent sharemarket falls, these results have proven to be better than feared. Although resourcing companies saw big falls in profits and cuts to dividends, this was not surprising. More importantly, the remainder of results were reasonably good and showed decent profit growth.
For more information, contact Rick Maggi on 9382 8885 or rickmaggi@westmount.com.au.
11/02/16: IS THIS A BEAR MARKET?
Fear of fear itself or something more fundamental?
AMP Capital's Dr Shane Oliver weighs in on the market meltdown and asks the tough questions. A must for retirees and investors looking for a calmer, mature assessment of the current climate. Read Here
10/02/16: Are we there yet?
As the violent market volatility continues and emotions run high, I think this article, written by DFA Australia's Jim Parker ('Outside the Flags') manages to cut through the hysteria, helping to refocus the mind on what matters most when markets go awry. A good read for investors, retirees, and anyone looking for a little perspective. Read Are We There Yet?
01/02/16: DON'T LET A TOUGH START TO THE YEAR SET THE TONE
Last year global sharemarkets were hit by a range of worries including a slowdown in Chinese growth, rising US interest rates and slumping commodities prices.
However, despite the global market sell-off over the last few weeks, we expect conditions to somewhat improve during 2016, with global growth continuing and interest rates (monetary policy) remaining highly accommodative.
Interest rates... Interest rates are expected to remain low in 2016, and in Australia they might even go lower. The reality is that growth, while improving in some quarters, is still relatively constrained.
While the US Federal Reserve may raise rates a little further, they are likely to be extremely cautious as they wouldn't want to inadvertently derail the progress being made in the US economy.
Elsewhere around the world we're likely to see further easing, particularly in Japan, Europe and China. On the home front, Australia will continue to perform below potential and that is likely to encourage the Reserve Bank to cut interest rates again.
In short, there will be a lot of incentive for investors to look beyond cash and bank deposits where returns are going to remain very low for some time. For example, global share returns are expected gain in the vicinity of 7%-9%, according to AMP Capital.
Australian property market. The Australian property market is basically slowing down. However, the various capital cities and regions have been performing quite differently from each other, with price declines in Perth and Darwin, modest growth in Adelaide, Hobart, Canberra and Brisbane, and significant strength (at least in recent years) in both Sydney and Melbourne.
The slowdown has been in Sydney and Melbourne with negative house prices and lower auction clearance rates taking hold over the last three months, primarily due to the government's push to slowdown bank lending through tougher lending requirements and higher interest rates. These factors have combined to dampen investor sentiment and the downturn is expected to accelerate into 2017. That said, we don't see a property crash coming either.
Implications for investors? The combination of okay global growth, still low inflation and easy money remains positive for growth assets. But ongoing emerging market uncertainties combined with Fed rate hikes and geopolitical flare ups are likely to cause volatility.
> Global shares are likely to trend higher helped by a combination of relatively attractive valuations compared to bonds, continuing easy global monetary conditions and continuing moderate economic growth.
> For shares we favour Europe (which is still unambiguously cheap and seeing continued monetary easing), Japan (which will see continued monetary easing) and China (which will also see more monetary easing) over the US (which may be constrained by the Fed and relatively high profit margins) and emerging markets generally (which remain cheap but suffer from structural problems).
> Australian shares are likely to improve as the drag from slumping resources profits abates, interest rates remain low and growth rebalances away from resources, but will probably continue to lag global shares again as the commodity price headwind remains.
> Commodity prices may see a bounce from very oversold conditions, but excess supply for many commodities is expected to see them remain in a long-term downtrend, so patience is required.
> Very low bond yields point to a soft return potential from sovereign bonds, but it’s hard to get too bearish in a world of too much saving, spare capacity & low inflation.
> Commercial property and infrastructure are likely to continue benefitting from the ongoing search by investors for yield.
> National capital city residential property price gains are expected to slow to around 3-4%, moving into negative territory during 2017 as the heat comes out of the Sydney and Melbourne markets.
> Cash and bank deposits are likely to continue to provide poor returns, with term deposit rates running around 2.5%.
> The downtrend in the $A is likely to continue as the interest rate differential in favour of Australia narrows, commodity prices remain weak and the $A undertakes its usual undershoot of fair value. Expect a fall to around $US0.60.
This update is published by Westmount Financial/Westmount Securities Pty Ltd (ABN 42 090 595 289/AFSL 225715). It is intended to provide general information only and does not take into account any particular person’s objectives, financial situation or needs. Because of this, you should, before acting on any information in this document, speak to us and/or a taxation/finance professional.