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.
Rates: Where do we go from here?
The RBA provided no surprises following its April board meeting leaving the official cash rate on hold at 1.5%. The RBA remains more confident regarding global growth, see Australian economic growth as moderate, regards the labour market as being mixed, sees a gradual rise in underlying inflation and continues to see conditions in the housing market as varying considerably across the country, but sees recent regulatory measures as reducing the risks associated with high and rising household debt.
This note looks at the outlook for the cash rate, the impact of bank rate hikes and the implications for investors. Read more here
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.
Investment Shock Absorbers
Ever ridden in a car with worn-out shock absorbers? Every bump is jarring, every corner stomach-churning and every red light an excuse to assume the brace position. Owning an undiversified portfolio can trigger similar reactions. Read on
Rick Maggi
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.
Go Bankrupt & Lose Super?
Your three safe havens to protect assets from insolvency:
1. Low-risk spouse (eg. spouse is a teacher)
2.‘Clean skin’ Family Trusts (eg. no employees)
With the downturn in the economy the Trustee-in-Bankruptcy has its eye on Super. The latest case, Morris v Morris, shows how desperate the Trustee-in-Bankruptcy has become - such underhand tactics puts greater risk on the financial planner.
Sure, after bankruptcy, the Trustee-in-Bankruptcy can’t touch your Super received as a lump sum. However, the Trustee-in-Bankruptcy takes your Super where:
- you transferred assets into Super to defeat creditors; and
- you, as a bankrupt, get pension payments from Super
Ask your financial planner:
- Why is lump sum Super protected - but pensions are lost if the beneficiary in the Will is bankrupt?
- Why are reversionary Pensions dangerous for Will beneficiaries with few assets?
- Five ways parents can protect their Super at death.
Rates Remain On Hold
As expected, the Reserve Bank of Australia decided to keep interest rates on hold at 1.5%. But according to Macquarie, we can expect two more cuts this year before economic economic conditions begin to turn around. Watch here.
Rick Maggi
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.
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
The US Fed Hikes Rates
A year ago the Fed raised interest rates for the first time since the GFC began. However, its initial move combined with worries about just about everything to give us a bout of share market weakness into early 2016 before investors realised that there was indeed no reason to fear the Fed after which things got back on track.
Now as widely expected we have just seen the Fed move again – raising its Federal Funds target interest rate from a range of 0.25-0.5% to the range of 0.5-0.75%, begging the question whether we will go through another bout of market ructions. However, this time around the backdrop is very different to a year ago.
This note looks at the key issues.
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
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...
Bloomberg 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
Interest rates remain on hold
Happy Melbourne Cup Day!
The Reserve Bank Board met today and decided to keep official interest rates on hold at 1.5%.
The recently released September quarter inflation data confirmed that underlying inflation at 1.7% year on year was broadly in line with expectations, with fruit and vegetable price rises being offset by lower petrol prices on average. This release is probably the key determinant of the RBA's decision.
Macquarie Bank forecasts the most likely timing of further interest rate cuts to be February and May next year, as inflationary forces remain subdued.
The last RBA board meeting for 2016 will be held on Tuesday 6 December.
Next stop, US elections.
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.