Posts Tagged ‘Economic Update’

Insurance in super – is your cover adequate?

Friday, January 5th, 2018

If you’ve got super, you probably have some life insurance included. It’s an easy way to get a basic level of cover, but is it enough to give you and your family true peace of mind?

More than 70% of Australians hold life insurance policies, and more than 13.5 million separate policies, through their super funds.¹ Yet despite this, under-insurance remains a huge problem in Australia.

Rice Warner estimates that the median level of life cover in super meets only 60% of the basic needs for the average household, and less for families with children. The position is even worse where total and permanent disability (TPD) and income protection cover are concerned. The median level of cover in super will provide just 13% of TPD needs, and 17% of income protection needs.

Of course, some insurance is better than no insurance, and insurance in super is convenient to set up and pay for. But it comes with a couple of points to be aware of, and this is where professional advice is invaluable.

Limited cover

Firstly, a portion of your super is used to pay the insurance premium. This can help your cash flow if money is tight, but it also means you may not be contributing as much to your retirement savings as you thought.

It’s also worth keeping in mind that super funds offer standardised ‘off the shelf’ policies that may not suit your needs. This helps keep costs down, but that’s no consolation if your policy falls short when you need it most.

Because the insurer pays your super fund which then pays you, it may take longer to receive the money. What’s more, unless you make a binding nomination, the fund trustees have the ultimate say in who receives benefits when you die. Your beneficiaries may also be taxed more heavily than they would if you held the insurance outside super.

A tailored solution

Your insurance needs are as individual as you are, and should be reviewed regularly along with your other financial affairs. Whenever your circumstances change – if you marry, have a child, or buy a new home for instance – your life insurance should be reviewed.

It’s easy to underestimate what it would cost to ensure your family is able to maintain their current lifestyle, come what may. It’s important not to forget partners who don’t earn an income and may not necessarily have cover in their super, particularly where dependent children are involved.

Take the example of Mark, whose wife Suzy, 43, passed away suddenly after an illness. Thankfully, the couple had arranged a full suite of insurance cover in and outside their super. Mark claimed on Suzy’s life insurance which covered his mortgage, credit card and car loan repayments; it also allowed him to hire a part-time nanny to help with their two children.

Getting additional insurance outside super can be a little more expensive, but you will have access to a wider range of policies that can be tailored to your individual needs. Some policies, such as Trauma insurance, can only be bought outside super.

Even if you have some level of cover inside super, it’s important to do your sums to work out exactly how much your family would need to maintain your current lifestyle if you or your partner were to die or become seriously ill. It may take a little time, but with so much at stake, guesstimates won’t do, and we would be only too happy to assist. 

¹ Ricewarner, Insurance through superannuation, 20 April 2016.

Article by TAL

Economic Update – January 2018

Friday, January 5th, 2018

Within this month’s update, we share with you a snapshot of economic occurrences both nationally and from around the globe.

2018 shaping up as another good year for investors

– Global growth co-ordinated
– United States (US) tax reform
– Strong jobs growth in Australia

We hope you find this month’s Economic Update as informative as always. If you have any feedback or would like to discuss any aspect of this report, please contact your Financial Adviser.

The Big Picture

After almost a decade of economic woes around the world, all the major economies are starting to come good together.

China, as we expected, not only stayed strong, it also gathered a little pace towards the end of 2017. The US certainly gathered momentum finishing the year at a rate of 3.2% pa.
Even Europe is looking strong, but the big surprise is the way that the third largest economy, Japan, has at last put five strong quarters back to back.

When growth is co-ordinated like this, it is much harder for any individual country to fall into recession anytime soon.

But the prospects for 2018 became even better after Trump got his tax reform through at the eleventh hour. It is doubtful if analysts have yet fully digested the consequences. It may well be that macro and market forecasts will be revised upwards in the next few months.

Citi produces a ‘surprise index’ for many major countries. It is based on how often analysts’ forecasts are beaten by the actual events. The US index stands at a reading of +73 which is a six-year high. The Australian index stands at 10.9! We keep thinking things are better than they really are.

Global growth is likely to keep us well out of recession, but we are likely to continue to underperform. Our jobs creation has been strong all year – largely because of immigration. Our unemployment rate stubbornly stands at a moderately high 5.4%

The Westpac consumer sentiment index stands at just above 100, but that is only for the second month this year. NAB’s business conditions and confidence indexes however, remain consistently strong.

Major share markets did well around the world with Wall Street being the stand-out performer. But Australia didn’t do too badly after a bad reaction to various bank inquiries. The ASX 200 posted growth of over 13% over 2017 when dividends and franking credits are factored in.

There are a number of things to watch out for in 2018. The Brexit negotiations between Britain and Europe are progressing without any major problems so far. The new US Federal Reserve chairman looks set to make two or three rate hikes, while our RBA is not expected to move in 2018.

Our Royal Commission into Financial Services might cause some angst, depending how press releases are handled.

The more difficult possibility to assess is Trump’s wish to commence a big infrastructure programme. In the election campaign he was talking about a trillion-dollar deal, but that has since been scaled back to 200-300 billion dollars. With tax reform behind him, we should see some movement on this front in January.

The ASX 200 closed at the highest level since December 2007 on the penultimate trading day of 2017, and we see growth of about 5% in 2018 – but that means that the November 2007 peak is unlikely to be surpassed this coming year.

We see strong growth continuing on Wall Street in 2018. But, if analysts revise earnings forecasts upwards in January based on company tax cuts, we might see very strong growth in the first half of the year.

On the commodities front, copper, gold and oil prices did well in 2017. It would be sufficient for our resources sector to have a good 2018 if these prices just hold over 2018.

In conclusion, we see it unnecessary to take on extra risks in 2018 to chase returns. Volatility on share markets was unusually low in 2017, and that is expected to continue for the foreseeable future.

We wish you all a safe and prosperous New Year.

Asset Classes

Australian Equities

Our market was seemingly stuck in a tight range from mid-2017 but then it blasted through 6,000 at last – and it even finished 2017 above that psychological barrier.

The Resources sector led the charge in December to give the broader index a boost of 1.6% for the month.

The Financials sector was down slightly for the year, but there were outstanding double digit returns to be had in all other sectors except for Property, Telcos and Utilities.

The February reporting season is only just around the corner, so this is the time for companies to ‘confess’ if they are likely to miss their guidance for earnings. We found analysts have started revising their forecasts in an upwards direction for the last month or two. Therefore, we are expecting a good “report card” in February.

Foreign Equities

The S&P 500 index recorded another positive month in December making it 12 in a row for 2017 and the first time on record! We do not, however, think the market is over-priced by more than two or three percent.

2017 market growth has been dominated by the big tech companies. Some are looking to Amazon to become ‘master of the universe’ by establishing a major presence across a broad array of industries.

The strong Japan economy has supported its Nikkei index to record near 20% growth in 2017.

Bonds and Interest Rates

The RBA was on hold again and is unlikely to raise rates before the end of 2018. Indeed, another cut is quite possible before the next hike.

The Fed hiked rates in December, making it three for the year. Their so-called ‘dot plots’ show that they collectively expect three more hikes in 2018, but the market has only priced in two. The Fed is unlikely to want to risk too much so two is much more likely than four. US inflation is still below target.

Other Assets

Oil and copper prices were firmly higher in 2017. Iron ore prices were down on the year, but staged a very strong comeback, returning 36% from the lows experienced throughout the year.

Regional Analysis

Australia

Over 60,000 new jobs were created in November – the latest published data point – and two-thirds of them were full-time. However, the unemployment rate was stuck at 5.4%.

Around 1,000 jobs were created on each day of the year (on average), but it seems much of this was matched by immigration flows. Price and wage inflation are also stuck at below target rates. However, we at last got a better than expected growth in retail sales (+0.5% against 0.3%).

The government presented its mid-year report card (“MYEFO”) in December, which argues the deficit is better than that which had been previously expected.

China

China has reportedly been spotted exporting oil to North Korea which got Trump’s hackles up. But other than that, there is less reported bad news about China’s economy. Of course, any developing economy starts to slow gradually as it reaches economic maturity.

We do not see China’s economy being a problem for us in 2018.

US

After a bumpy ride, a tax reform bill passed through Congress giving Trump one victory for 2017.

The infrastructure programme could be even trickier to get through, as the size of it will require a public/private joint venture. That means the private sector will have a big say on which projects start first. That will put the Democrats off-side as they always want to lead with the public interest.

If the bill makes some progress in 2018, the US economy looks set for continued growth for a few years to come.

Europe

Greece finally came out of recession in December! While the European Union as a whole still has some problems to work through – notably Brexit – the general mood appears to be positive.

Rest of the World

Japan’s Q3 growth figure was revised upwards to 2.5% from 1.4%.

Article by Ron Bewley for Infocus Money Management

Economic Update August 2017

Monday, August 21st, 2017

Within this month’s update, we share with you a snapshot of economic occurrences both nationally and from around the globe.

Economic growth improves in key countries
– China economy shows strong signs of strengthening
– Australian employment data continues strength
– Rates on hold in Australia and the United States (US)

We hope you find this month’s Economic Update as informative as always. If you have any feedback or would like to discuss any aspect of this report, please contact Michael Berinson or his office.

There were some notable economic growth numbers released in July. After a few years of declining (but still stellar) growth numbers in China, the latest statistic was back up to 6.9%. The new China leadership team is about to be ushered in and the Chinese know how to throw a party. On top of that, the China Purchasing Managers Index (PMI) came in at 51.4 for manufacturing and 54.5 for services – both in the sweet spot. Throw in 11.0% for Retail Sales and 7.6% for Industrial Output and you have what Keating might call, ‘a beautiful set of numbers’.

Turning to the US, the anaemic growth in Q1 was overshadowed by the June quarter coming in at 2.6%. True it’s not the 3% that the Fed is aiming for or the 4% that Trump was dreaming of. But 2.6% is really solid. Unemployment is low at 4.4% and 222,000 jobs were created in June when only 180,000 new jobs were expected. It is true that wage growth was low at just 0.2% but you can’t have everything all at once can you?

Even Australia was looking good. We had some very nice jobs and unemployment data – against the trend of 2016. For whatever reason, the labour force data are looking better. But the RBA chimed in at the start of July saying that 3.5% is our ‘neutral’ interest rate. That is, rates should be at 3.5% when things are chugging along. Since we are sitting on only 1.5%, there are a lot of hikes in the pipeline!

It was a bit silly to advertise that opinion just now and an Assistant Governor had to come out and hose things down. Retail sales did come in at a biggish 0.6% for the month. We’re not cooking on gas but at least we are cooking again.

As we go around the world the United Kingdom (UK) is starting to struggle a little with its latest growth of only 0.3% for the quarter and Brexit looming large. Prime Minister Abe in Japan has gone from rock star status to a meagre approval rating of 29.9% in a few years. The Royal Bank of Canada bumped up rates to 0.75% from 0.5%.

So the dice are still rolling. Fortunes are rising and falling but there seems to be no basket cases anymore and there is lots of good news.

We became aware of a new expression this week. It’s been out but under the radar for a few years. It’s still worth sharing. On asking why stock markets – particularly in the US – remain strong – the new catch phrase is that it is a TINA market. Not as in Turner or Arena, but it is the acronym for ‘There Is No Alternative’. Money has to be invested somewhere when cash rates are so low.

TINA puts a safety net under markets for a while but we must be vigilant for when Tina starts singing.

So where to from her? Trump is floundering but his economy is doing well. The Australian economy seems to have stabilised. To us, it looks like a smooth ride ahead – until we see otherwise.

The current US reporting season has been unusually strong meaning that increases in earnings are supporting recent stock price strength. Can it go on? In a word, yes!

The big Tech Companies are having mixed results but they are looking strong. We should never be complacent but the second half of 2017 doesn’t look too bad at all. Perhaps we all deserve a break after the trials and tribulations of 2008 – 2015.

Asset Classes

Australian Equities

The ASX 200 was flat for the month of July. The Materials sector was the strongest on the back of some very strong commodity price movements. Healthcare took a beating at 7.5% with Utilities ( 5.3%), Telcos ( 4.3%) and Industrials ( 3.2%) not far behind. Financials (+1.2%) put in a creditable performance. A big sector rotation just took place.

Our August reporting season is just getting underway. As always, the companies’ outlook statements will be crucial for the future of our market. We have found some recent softening in broker forecasts of company earnings and dividends. At least that downgrade has resulted in our forecasts for capital gains to be only a tad under the long-run average.

Foreign Equities

The S&P 500 fared a bit better than us in July posting a solid +1.9% capital gain. The London FTSE also did well at +0.8%. Emerging Markets were particularly strong at +4.1% on the rising tide of commodity prices.

Our expectations for Wall Street are for a good finish for the year despite the strong first seven months of +10.3%.

Bonds and Interest Rates

With the “Fed” (US Federal Reserve) on hold again in July, the next chance for a hike is at the September meeting. But most forecasters are not expecting another hike this year. The odds of a rate hike by December are priced in at a little under 50%.

The Fed is widely expected to start its balance sheet repair in September. This amounts to gradually lowering the $4.5 trillion bond debt down to $2.5 trillion over a number of years. Since this policy will gradually raise long rates on its own, there is no reason for the Fed to also raise the underlying Federal Funds rate at the short end.

The RBA kept rates on hold again in July and August. The majority of pundits are expecting the next move to be up but not until at least the middle of 2018 – and possibly 2019.

Our view of needing a cut at home is on the back burner for the moment. We need a little more data to change our call. It all depends upon the next GDP growth number to be posted on September 6.

Other Assets

Commodity prices were on a flier in July. Iron ore was up +15.2%, Brent Oil up +9.8% and Copper up +6.2%. Our dollar was up +3.8% against the greenback.

The volatility index called the VIX was down 3.7% in July. This fear index is around all-time lows.

Since we are a commodity producing and exporting country, the restoration of solid commodity prices bodes well for our total exports and GDP growth.

However, not everyone wins from this sectoral rotation. Healthcare and a number of Industrials names are finding stronger headwinds after a good first half to 2017.

For example, our Healthcare sector is up +13.0% for the year-to-date including the poor 7.5% for July.

Regional Analysis

Australia

Our headline CPI inflation came in at only +0.2% for the quarter or +1.9% for the year. Since the RBA’s target range is 2% to 3%, this read gives the RBA no motive to raise rates anytime soon.

With total employment up around 170,000 in the first half of 2017 – with nearly all of them full-time jobs – we are back on track. During that period, the unemployment rate has been stuck at around 5.6% and wage growth is non-existent.

Europe

The focus in Europe is on what the implications of Brexit are for employment and trade. It will be nearly two years before we find out the full story so we cannot expect much good news from that region in the medium term.

However, the underlying economies are so much stronger than in recent times. We don’t have to waste much energy worrying about Greece and the other ‘PIGS’ countries anymore. Can you remember what PIGS stands for? Those days are gone!

China

The China data have been on a roll for quite a while. Without taking sides, it is hard to conclude after recent data that China is not undoubtedly doing well at the moment. Yes, there are political problems with the US and who would want North Korea as a neighbour – let alone an ally.

But what seems to be forming is a view that China has regained its role as a lead player in the world – as solid and dependable – at least in an economic sense.

US

Trump is hiring and firing quicker than he did on “The Apprentice” – but the West Wing is for real.

The US is facing a number of problems in a month or so but these ‘episodes’ on TV have not stopped US jobs and growth.

We don’t think anyone can reliably predict how this scenario will play out but, as annoying as the tweets and press releases are, the economy is marching on!

Rest of the World

With sanctions on Russia being on the front burner, and the woes of the Venezuelan leadership also up there on many news wires, some instability in oil pricing is likely. Both countries are big exporters.

Article prepared by Infocus Securities

Helping you navigate this year’s Federal Budget

Wednesday, May 10th, 2017

Last night the Australian Government handed down its Federal Budget for 2017. It’s important that you take the time to understand what the Budget proposals mean – and how they might affect you personally.
According to Federal Treasurer Scott Morrison, this year’s Budget is founded on the principles of fairness, security and opportunity. Mr Morrison claims that the government’s proposed measures will raise almost $21 billion in revenue over the next four years, returning Australia’s budget to surplus by 2021.Here are some of the key Budget announcements. Note that each of these proposals will only become law if it is passed by Parliament.

Additional non-concessional cap for retiree downsizers
From 1 July 2018, people aged 65+ will be able to contribute up to $300,000 into super from the sale of their principal home, if they’ve owned their home for at least 10 years. The existing restrictions for contributions over age 65 won’t apply for these non-concessional contributions.
What this could mean for you
You may be able to contribute an additional $300,000 to super (or $600,000 for couples), over and above your existing concessional and non-concessional caps. However, if you or your partner receives the age pension, this could cause your entitlements to be reduced.

Super savings scheme for first home buyers
From 1 July 2017, individuals will be able to make extra voluntary super contributions of up to $15,000 a year beyond their employer’s Super Guarantee payments, up to a total of $30,000. These contributions will be taxed at 15% and can be withdrawn to go towards the deposit on a first home. Withdrawals will be allowed from 1 July 2018.
What this could mean for you
When you withdraw your extra contributions to pay for a deposit, they’ll be taxed at your marginal tax rate minus a 30% tax offset. While the tax concessions for these contributions may allow you to save a larger deposit, you won’t be able to access your money until retirement if you decide not to buy a home.

A 0.5% Medicare levy increase from 2019
From 1 July 2019, the Medicare levy will increase by half a percentage point from 2% to 2.5% of an individual’s taxable income. The Medicare levy low-income thresholds for singles, families, seniors and pensioners will increase from the 2016–17 financial year.
What this could mean for you
The increased levy may also result in increases to many tax rates linked to the top personal tax rate, including fringe benefits tax and excess non-concessional contributions tax. Certain lump sum super payments that attract the levy may also be impacted, such as disability benefits paid to people under preservation age.

Extension of the deductibility threshold for small businesses
The government will extend the existing accelerated depreciation allowance for small businesses by 12 months to 30 June 2018.
What this could mean for you
If your small business has aggregated annual turnover below $10 million, you’ll be able to immediately deduct the purchase of eligible assets costing less than $20,000 where they are first used or installed ready for use by 30 June 2018. After that date, the immediate deductibility threshold will revert back to $1,000.

New levy for major banks
A major bank levy will be introduced for authorised deposit-taking institutions (ADIs) with licensed entity liabilities of at least $100 billion (indexed to Gross Domestic Product (GDP)). The levy will equate to an annualised rate of 0.06% – for example, the levy on a bank deposit of $500,000 will be approximately $300 pa. Superannuation funds and insurance companies won’t be subject to the levy.
What this could mean for you
It’s unclear at this stage how the levy will be implemented, and what the impacts might be on clients/customers and shareholders.

Incentives for investment in affordable housing
From 1 January 2018, resident individuals who invest in qualifying affordable housing will be eligible for an increase in the capital gains tax (CGT) discount from 50% to 60%. This increased discount will also apply to eligible Managed Investment Trusts (MITs) as of 1 July 2017.
What this could mean for you
To qualify for the higher discount, your residential property must be rented to low-to-moderate income tenants at a discounted rate and be managed through a registered community housing provider. You also need to hold the investment for at least 3 years. If you invest in an MIT, you’ll be eligible for the 60% discount if the trust invests in affordable housing that is available to be rented for at least 10 years, and you hold the investment for at least 3 years.

Restrictions on deductions for residential property investments
From 1 July 2017, depreciation deductions for residential plant and equipment (e.g. dishwashers and ceiling fans) will be limited to investors who actually incur the outlay – not subsequent owners. Also from that date, investors will be unable to deduct travel expenses related to inspecting, maintaining or collecting rent for a residential rental property.
What this could mean for you
If you’re a subsequent investor in a property, the acquisition of existing plant and equipment will be reflected in the cost base for CGT purposes. Grandfathering applies to plant and equipment that forms part of a residential investment property as at 9 May 2017 and will continue to give rise to depreciation deductions under current rules. The new rule around travel expense deductions applies to all property investors, including SMSFs, family trusts and companies.

Tax changes for foreign tax residents and property owners
Foreign or temporary tax residents will no longer have access to the CGT main residence exemption on properties acquired after 7.30pm AEST on Budget night (9 May 2017). Also from Budget night, foreign owners of residential property that is not occupied or genuinely available on the rental market for at least six months per year will be subject to an annual levy of at least $5,000.
What this could mean for you
If you’re a foreign of temporary tax resident and you held an existing property before Budget night, the property will be grandfathered and you’ll be able to continue claiming the CGT main residence exemption until 30 June 2019. However, from 1 July 2017, the CGT withholding rate that applies to foreign tax residents will increase from 10% to 12.5%.

New thresholds for HELP debt repayments
From 1 July 2018, income thresholds for the repayment of HELP debts will be revised, along with repayment rates and the indexation of repayment thresholds.
What this could mean for you
A new minimum threshold of $42,000 will apply, with a 1% repayment rate. A maximum threshold of $119,882 will apply, with a 10% repayment rate. Currently, the maximum repayment threshold for the 2017–18 financial year is $103,766 with a repayment rate of 8%.

Reinstatement of Pensioner Concession Card entitlements
Pensioners who lost their Pensioner Concession Card entitlement due to the assets test changes on 1 January 2017 will have their card reinstated. Those who lost their entitlement were instead issued with both a Health Care Card and a Commonwealth Seniors Health Card. However these cards provided access to fewer concessions than the Pensioner Concession Card.
What this could mean for you
If your Pensioner Concession Card entitlement is reinstated, you’ll have access to a wider range of concessions than those available with the Health Care Card, such as subsidised hearing services. Your Pensioner Concession Card will be automatically reissued over time with an ongoing income and assets test exemption. You’ll also retain the Commonwealth Seniors Health Card, ensuring you continue to receive the Energy Supplement.

Increased pension residence requirements
An individual currently needs to have at least 10 years’ residence in Australia (at least 5 of which are continuous) to qualify for the age pension or disability support pension. From 1 July 2018, they’ll need to have at least 15 years’ residence in Australia or either a) 10 years’ continuous residence including 5 years during their working life, or b) 10 years’ continuous residence and not in receipt of an activity-tested income support payment for a cumulative period greater than 5 years.
What this could mean for you
This measure may impact you if you have less than 15 years’ residence in Australia or less than 5 years’ residence between age 16 and age pension age. However, existing exemptions will be maintained for humanitarian reasons or if you became unable to work while you were an Australian resident.

Other proposals
• A new Jobseeker Payment will replace 7 existing working age payments from 20 March 2020
• Job seekers and parents who receive working age income support will have increased activity test requirements from 20 September 2018
• The maximum length of the Liquid Assets Waiting Period will increase from 13 weeks to 26 weeks from 20 September 2018
• A one-off Energy Assistance Payment of $75 for single recipients and $125 for couples will be paid for those who qualify on 20 June 2017
• Family Tax Benefit rates will not be indexed for 2 years from 1 July 2017
• A new upper income threshold of $350,000 pa will apply to the child care subsidy from 1 July 2018.

Article provided by Colonial First State

Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State) is the issuer of super, pension and investment products. This document may include general advice but does not take into account your individual objectives, financial situation or needs. You should read the relevant Product Disclosure Statement (PDS) carefully and assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision. A PDS for Colonial First State’s products are available at colonialfirststate.com.au or by calling us on 13 13 36. Taxation considerations are general and based on present taxation laws and may be subject to change. You should seek independent, professional tax advice before making any decision based on this information.

Supporting you through the changes
Depending on your circumstances, the Budget proposals could have an impact on your financial situation and your financial plans for the future. If you have any concerns, or would like to discuss your financial strategy, please don’t hesitate to get in touch with us on 08 93492700 or admin@activewealthmanagers.com.au to arrange an appointment.

 

Economic Update – November 2016

Wednesday, November 2nd, 2016

dollars-with-stethoscope-on-it

Within this month’s update, we share with you a snapshot of economic occurrences both nationally and from around the globe.

Global economic growth story strengthens!

– US, UK and EU economic growth surprise on the upside

– China growth strengthens

– Australian inflation strengthens

We hope you find this month’s Economic Update as informative as always. If you have any feedback or would like to discuss any aspect of this report, please contact our office.

The Big Picture

Last month we reported that Australian economic growth surprised with a more than solid +3.3% for the year. This month we can add that United Kingdom (UK) growth came in above expectations at +2.3% for the year – in spite of prior concerns about the negative impact of Brexit. United States (US) growth rounded off the month with a much better than expected +2.9% while the European Union (EU) delivered a more modest, but most welcome surprise on the upside, +1.6%.
China came in again at +6.7% growth but the partial indicators of Retail Sales and Industrial Output backed-up the story. Other indicators were even stronger.

What is really important is that, at last, interlinked growth is emerging as export markets open for each other. Sadly growth in Japan is still struggling but it has been struggling for more than two decades. Japan’s main problem is a falling population. Unlike many other countries, including Australia, net migration inflows help stimulate growth.

While one should never get too excited about one good month’s data, it is the co-ordinated growth that is starting the buzz. As a result, bond yields are starting to rise and that may put a bit of a dampener on our high-yield equities.

At home, inflation also surprised. It came in at +0.7% for the quarter or +1.3% for the year. But that, on its own, is insufficient to change the Reserve Bank’s (RBA) view on what to do with interest rates.

The new inflation data means that the RBA does not have to cut rates for that reason – nor does it have to hike to control inflation. It was a ‘Goldilocks’ number.

But our employment data continues to worry us. Jobs are increasing in a trend sense – and the unemployment rate is falling. But what continues to happen is a substitution of part time work for full time. Given that the average working week for full-time workers is 39 hours and only 17 hours for a part-timer, the individuals concerned are doing it tougher – but the collective, Australia is doing better!

The US is going to provide even more of a lead than normal in the coming months. The Trump v Clinton election is not as simple as previous elections. The FBI just weighed in by reopening the emails case on Clinton. Trump continues to take flak from all sides. Rightly or wrongly on each side, such a situation spells market volatility in the short run.
In the medium to longer term, even US presidents don’t have that much power. They need the backing of Congress.

The US Fed is possibly going to hike rates by 0.25% in December. Last December, when they hiked for the first time in nearly a decade, they predicted four rate hikes for 2016 but so far there have been none. While many economists, and some Fed members, are calling for the Fed to get the process moving soon the Chair, Janet Yellen, has left the door open for more of a wait and see approach. She has stated that she wouldn’t mind if the US economy ran a little too hot for a while.

So long run economic and market prospects are building strength and the so-called ‘earnings recession’ for listed companies on Wall Street seems to have already turned the corner. Once they have a new US President sworn in, we could have a nice settled, but growing, market. Until then, we might find the road a little bumpy.

Asset Classes

Australian Equities

The ASX 200 looked like having its worst month since January but a great last day made it a less severe 2.2% for October! Interestingly, the index started to ignore overseas leads towards the end of October. Some of this behaviour is probably due to global bond yields rising on signs of economic strength – and a possible hike in US rates by the Fed.

It is so important – particularly in the case of Australia – to note that sectors have been performing very differently at the moment. The so-called high-yield sectors [Financials, Property, Telcos and Utilities] are well down on the year to date by 2.9% – even after dividends are taken into account. But the other seven sectors have collectively experienced strong double digit growth – at +12.5%.

Foreign Equities

Wall Street’s S&P 500 fell a little less than the ASX 200 at 1.9% for the month. On the other hand, the London FTSE posted a gain of +0.9% and the Frankfurt DAX +1.5%. But it was left to Asia for some stellar results with the Tokyo’s Nikkei up +5.9% and the Shanghai Composite gained +3.2%.

Bonds and Interest Rates

The US Fed is the big game in town until we glide into 2017. We think there will be at most three 0.25% increases in the US before 2018. That is a very shallow trajectory indeed. The Fed will not do anything to interfere with the nascent growth story.

The RBA needs to, and probably will, give us one or two cuts down to 1% in the next couple of quarters or so. The government is not getting any fiscal stimulus programmes in place so the RBA is our only hope in the short term.

Our economic situation is far from dire but we do not have an atmosphere of wanting to invest in long-term, full-time jobs’ projects. Our official interest rate is so far above all of the major Western competitors (USA, Europe, Japan, etc.) and there is no reason to keep it there.

Other Assets

Commodity prices continue to stabilise and some big ‘houses’ are even predicting continued price rises in oil. What is important for us is that the dire predictions some analysts and commentators were peddling at the start of the year have vanished.

Commodity prices are unlikely to rise far enough to stunt growth. The important thing is that they are stable and viable for continued investment in the resources sector.

Regional Analysis

Australia

We have lost 54,000 full-time jobs in 2016 to date. With official estimates of population growth at +1.4% there are not enough full-time jobs to go around. As it happens, 47,000 of those 54,000 job losses are for men and only 7,000 job losses for women.

It doesn’t take an Einstein to work out the social impact of replacing full-time with part-time jobs. Data is not readily at hand to work out how much the people losing jobs are being paid in part-time employment – but it seems unlikely to be a good swap.

We will never get the old manufacturing jobs back but we are very good in so many other sectors, parliament needs to assist a solution and quickly.

China

China continues to pump out strong statistics on its economy. Of course some just say the numbers are fudged but there is increasing support from a number of independent sources to suggest China is even stronger than the official figures suggest!

China Retail Sales came in at +10.7% and Industrial Output at +6.1%. China’s inflation was +1.9%. This is an impressive set of numbers.

U.S.A.

The US non-farm payrolls (jobs) data have been slightly better in recent months than earlier in the year, but they are still well below the data recorded in 2014 and 2015. The US too has the problem of replacing ‘good traditional’ jobs with lower paying jobs in the services sector. It is a global problem.

The US economy is getting stronger but it is unlikely to ‘pop’ into overheated growth anytime soon – as it often used to do after a lean spell. But that is a good thing. Stability is something that helps investment planning.

Europe

The UK has not imploded after the Brexit vote. We never thought it would. Sensible discussions are taking place about the best way to exit – and not if they should exit. It is nice to see a mature political debate.

‘Rock star’ central banker, Canadian Mark Carney, has flagged he will step down from the top job at the Bank of England. He plans to exit in June 2019 when the UK is set to exit the EU. He believes in a united Europe and so does not want to work in an economic and social environment that he does not believe in.

The ECB President, Mario Draghi, needs to come up with a new plan soon for stimulus or see the bond-buying plan end. If his form is anything to go by, it will be a slow process of coming to make a plan.

Rest of the World

The conflicts in the Russia/Syria (and more) part of the world are going through major transitions. It is inappropriate in an economic report to comment on the rights and wrongs of the negotiations and struggles. But it does look like the impact on markets might start to subside soon.

OPEC seems to be trying to do something sensible about oil prices but some members – and others – are trying to get special circumstance agreements. Given that supply has been well in excess of the current agreement – for years – the impact of a new agreement is moot.

*Ron Bewley (PhD,FASSA) – Director, Woodhall Investment Research

Important information

This information is the opinion of PATRON Financial Services Pty Ltd ABN 32 307 788 137 908 AFSL No. 307379 trading as PATRON Financial Advice and may contain general advice that does not take into account the investment objectives, financial situation or needs of any person. Before making an investment decision, readers need to consider whether this information is appropriate to their circumstances.

Economic Update – September 2016

Monday, September 5th, 2016

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Economic Update

By Ron Bewley*.  

Within this month’s update, we share with you a snapshot of economic occurrences both nationally and from around the globe.
With Brexit fears cast aside:

– United Kingdom (UK) confidence bounces back
– United States (US) Federal Reserve claims economy strengthening
– Japan ready to add more stimulus

We hope you find this month’s Economic Update as informative as always. If you have any feedback or would like to discuss any aspect of this report, please contact your Financial Adviser.

The Big Picture

It is just a year since some reports on the China stock market sell-off last August predicted doom and gloom. As we suggested at the time, it wasn’t a major problem because that market was, and is, in its infancy. The market stabilised, and it is now comfortably above those 2015 lows.

At the end of 2015, some nerves were rattled about the prospects of Federal Reserve rate hikes in the US. While occasional bouts of uncertainty continue to cloud market movements, the successive Fed meetings have gone reasonably smoothly.

In January 2016, the Royal Bank of Scotland told us to ‘Sell everything’ and some other big houses made similar dire predictions. Markets are comfortably up and selling wasn’t the answer.

Oil and iron ore prices dived in February 2016. Iron ore prices dipped below $40 but later climbed to $70. Oil was predicted by some to get down to $20, or even $10, when it was $26. Instead, prices have more or less doubled. Another ‘crisis’ averted!

And then there was ‘Brexit’, and the dire predictions that went with it. The ‘leave’ vote won, but consumer confidence jumped 3% in the UK in the first month following the referendum. Markets are stable and the pundits got it wrong again.

Of course, at some point, an event will come along that will have a medium-term adverse impact on our investments, but most of these stories are simply overblown in quiet news periods. At this point we feel that all of those ‘scare stories’ are fading into oblivion and there are no new major known issues brewing.

At home, our labour force data isn’t great, but the mid-year fall in full-time employment seems to have turned around. Unemployment is stable at 5.7%. Our Reserve Bank is expected to cut rates again – from 1.75% to 1.50% sometime this year – but that is more to align our rate with the rest of the world rather than a reaction to avert major issues at home.

News in August was dominated by the Olympics. Australia was disappointed but ‘Team GB’ beat all expectations. There are big lessons for economic management to be learnt from these results.

Australian Olympic success was at a low in Seoul, 1988. Government funding was pumped in with increasing success to match – until, that is, at Beijing and after.
Great Britain (GB) hit its nadir in 1996 at Atlanta, with only one gold medal being won. The national lottery was born with substantial taxes going to sports’ funding.

In both cases it took time for athletes to respond, but pumping money into a venture alone is not an investment. Just like with migrants, the expression “The first generation makes it, the second builds on it, and the third loses it” might apply to economies and sports alike. But our athletes might now be doing as well – it’s just that others are rapidly improving.

Importantly, Australia was reported to have concentrated funding on our traditional sports. GB, on the other hand, looked for opportunities in sports they had not previously been good at. GB’s plan seems to have thrown up many unexpected successes.

The reaction to the GFC was for governments to cut back on fiscal spending around the world. Now we need well-tailored programmes to start the next phases of growth. Not pink batts, but spending on considered infrastructure projects and the like could be what we need now. But with our government system living on minority leadership for too many years, it is difficult to see from where such a programme will come.

In the meantime, growth might be a little below par but good enough. A shot in the arm for infrastructure could well be the start for a return to our desired long-run growth path.

Asset Classes

Australian Equities

The ASX 200 did lose 2.3% in August, but that followed a massive +6.3% gain in July. Virtually all sectors lost ground in August but market volatility remains reasonably low.

After reporting season in August our view of the fundamentals remains strong, we expect the 2016/17 financial year to be strong. The calendar year-to-date for 2016 posted a gain of +5.6% including dividends.

The high-yield sectors of Financials, Property, Telcos and Utilities continued to seriously lag behind the other sectors in 2016 y-t-d including dividends. Indeed, capital losses in high-yield have more than wiped out dividend payouts. The total returns of the ‘other’ sectors have exceeded +14% y-t-d.

Foreign Equities

Wall Street hit some new all-time highs in August. The VIX fear index reached quite low levels suggesting markets are quite settled even if August was not a strong month for markets.

With a rate hike in the US unlikely before December, only the Presidential election seems likely to interfere with a smooth finish into the end of 2016.

Bonds and Interest Rates

The RBA kept rates on hold again in Australia. The Fed Reserve’s second-in-command caused some volatility with his comments, shortly after Chair Yellen made her views known. While Yellen saw the chance of a hike strengthening with good economic data, Fischer went further putting September back on the table. December is still our call for the first hike.

Other Assets

Oil prices have seemingly stabilised on talks between OPEC and Russia. At current prices, oil is too cheap to warrant shale oil to come back on stream in the US and too high to cause major concerns going forward.

The VIX volatility – or fear – index reached a low for 2016 during August. Our dollar did vary somewhat over the month but the change on the month was relatively small.

Regional Analysis

Australia

On the face of it our employment data grew strongly, but full-time employment fell while part-time employment did the work. The unemployment rate was steady at 5.7%.

Trend full-time employment – the official preferred method – has started to pick up – possibly because of the earlier rate cut.

China

The month started reasonably well with the Purchasing Managers Index (PMI) at 49.5 for manufacturing – which is just below the break-even 50 level. The services version of the PMI continues to be well above 50 as the domestic economy takes over from infrastructure expenditure.Mid-month retail sales and industrial production did miss forecasts by a fraction but not enough to worry markets.

U.S.A.

Janet Yellen talked up the strengthening US economy at the annual Central Bankers’ conference in Jackson Hole. There is no doubt that employment data has bounced back strongly from the earlier mini-slump. But two good numbers are not enough to eradicate all discomfort.

Europe

The Brexit vote won at the end of July. August Retail Sales surged at +1.4% against an expected +0.1%. UK confidence also surged from a three year low to 109.8 from 106.6. With Olympic success as well, it seems the UK has side-stepped the issues that some worried about earlier in the year.The Bank of England did cut its rate at the start of August and also pumped in some unexpected monetary stimulus.

Germany’s GDP came in at +0.4% for the quarter smashing expectations. There are also other pockets of mild success. Brexit will happen slowly so trade deals can be renegotiated far before trade becomes an issue.

Rest of the World

Japan can’t win a trick, as they just recorded another month of deflation. Japan is pledging to continue to stimulate the economy as required.Japan’s problem is its falling population. Many countries, such as ours, would also look a little glum if populations were not growing!

*Ron Bewley (PhD,FASSA) – Director, Woodhall Investment Research

This article is brought to you by Infocus.

Important information

This information is the opinion of Infocus Securities Australia Pty Ltd ABN 47 097 797 049 AFSL and Australian Credit Licence No. 236523 trading as Infocus Wealth Management and may contain general advice that does not take into account the investment objectives, financial situation or needs of any person. Before making an investment decision, readers need to consider whether this information is appropriate to their circumstances.

Economic Update – February 2016

Monday, February 22nd, 2016

Summary – Article By Ron Bewley.

Within this month’s update, we share with you a snapshot of economic occurrences nationally and from around the globe. A bad start to 2016… – The fundamentals are still strong – But some unfortunate one off events clouded January’s markets – February reporting season will reveal all! We hope you find this month’s Economic Update as informative as always. If you have any feedback or would like to discuss any aspect of this report, please contact your Financial Adviser.


The Big Picture

The hope many of us felt for markets on New Year’s Eve dissipated in the first week. But January ended so strongly here, Wall Street and elsewhere. So what is going on?
It was largely an accidental coincidence of several things that separately may have had little impact. The economic questions were around China (its stock market, currency and economic growth); US economic growth; oil prices; and interest rate expectations. Each of those is worthy of much consideration but, on top of those issues a number of other events muddied the waters: North Korea’s nuclear testing; IS terrorism; Iran’s sanctions being cleared; Saudi Arabia and Iran over executions; and attacks on the embassy in Tehran.

And the elephant in the room was the length and stability of the multi-year bull-run on Wall Street. Some were expecting a correction just because they hadn’t had one for ages. With that sentiment, markets can easily overshoot when innocuous missiles are thrown at markets. Well they’ve now had that correction so we can move on!

Let’s start with China. Growth has been questioned in some quarters but China just announced not only a strong month for iron ore imports, but a record! RIO backed this up with Q4 iron ore shipments up 11%. Treasury Wines share price went through the roof when it reported its increased exports to China.

China growth will hopefully continue to fall gradually as they move from a government-funded infrastructure economy to more of a capitalist economy like ours. All developed countries have been through periods like China is now experiencing.

Of course their stock market being closed twice in one week because of sharp price movements didn’t help the uninitiated – but the explanation was so simple. The market was closed the first day ‘circuit breaker’ rules were introduced for the first time ever. Everyone admits that the rules were too sensitive and caused the market falls rather than helping market stability. Those rules were quickly shelved.

And the China currency? They are moving from being pegged to the US dollar to a system referencing a basket of the currencies of its major trading partners. The problem here was China not communicating its strategy well enough, rather than doing something people shouldn’t like.

US economic growth just came in at 2.4% for 2015 and +0.7% for Q4. Their unemployment rate is 5.0% which is just a tenth above what the Federal Reserve (Fed) considers full employment to be. Calls for a recession any time soon seem to be the results of underemployed analysts trying to establish a profile for themselves.

And oil? The real experts acknowledge that a sustainable price for oil is around $50 – $60 / barrel. Any higher and shale oil in the US will be back on stream; any lower and countries go bankrupt. But OPEC has been playing games with the US over shale oil and speculators have been exacerbating the situation.

When Brent oil got down to $26 in late January, some were calling for $10 of Brent oil – a fall of around a further 60%. In a few days Brent jumped up over +30%!
But the Fed has been caught out on interest rate hikes. They predicted four hikes during 2016 at their last press conference but markets are pricing in none or one. There is no rush.

For those of you coming back from a good long summer holiday – welcome back – you didn’t miss anything important on the markets – just froth and over-reaction!

Asset Classes

Australian Equities
The ASX 200 was down 5.5% in January after being up +2.5% in December. But this turbulence was not like that last August. Back then the market fell on statistics like the VIX fear index were, which was much worse than that in January. Resource stocks and Financials bore the brunt of the negativity in January but no sector improved by more than +1.0%.

Importantly, our indicators of potential long-run capital gains improved over the month. We have the market under-priced by about 6% so there could be some strong gains sometime soon.

Reporting season by listed companies is about to start. Since a number of downgrades have been reported in resources and retail stocks, much of the bad news is behind us.

Foreign Equities
Our market, although down, performed well compared with many of the big overseas markets. The world index was down 7.8%.

China’s “Shanghai Composite” index continued to lose ground as the heavy gearing encouraged by the government in late 2014 and in 2015 was unwound.

The China regulator brought in ‘circuit breakers’ that closed the market for 15 minutes if the index fell by 5% and closed it for the rest of the day if the index fell by 7%. These limits were far too tight for a volatile index like the Composite. The more stable US market only gets closed for the day if its index falls 20%.

Arguably, the introduction of the circuit breakers for the first time ever in January caused the shutdown on day one and the next. When the breakers were removed the market settled down.

Bonds and Interest Rates
Japan spiced up the cash market at the end of January by flagging negative interest rates, more monetary stimulus and a prediction of 2% inflation in two years after decades of deflation.

The Fed suggested last December that it might hike rates four times in 2016 (March, June, September and December) but the market doesn’t believe them. It seems more like one or none. There is no need to rush increases and the last thing anyone would want is for the Fed to hike rates and then be forced to reverse the decision in an untimely fashion.

At home the RBA did not meet in January. The odds of a cut this year are falling but one cut is still possible. Inflation did pop up a bit in the last read so the RBA might want to wait a few months to assess the situation before acting.

Other Assets
Iron ore and oil prices seemed to have stabilised – at least for the moment. There is talk of co-operation between Russia and OPEC over supply limits but, apparently, enacting such a move would be difficult for technical reasons. With Iran being allowed to export oil again after nuclear-related sanctions, there is downward pressure on oil prices. Brent oil was up +15% on the month!

Iron ore prices have been above and below $40 / tonne during January. Vale, the big Brazilian miner, is reportedly having difficulties with pricing and that might help Australian miners.

A number of other commodity prices bounced back at the end of January. Was January just the month we had to have to shake out the cobwebs?

Regional Analysis

Australia
Our jobs data remained strong – against market expectations. It is now over a year since unemployment peaked at 6.3%. Jobs growth continues to be solid.
We are fast approaching the budget and the government is, as is usual, airing some options to test market sentiment. Some are questioning our AAA rating. As we have been writing since the May 2014 budget, we do have a serious problem to tackle. We are not currently in trouble but we will be if we do not start doing the right thing soon.

China
China’s GDP growth for 2015 came in at +6.9% just short of the target +7%. China has announced that its target growth rate is now 6.5% to 7.0%. Its trade data were much, much better than expected.

The China Purchasing Managers Index (PMI) for manufacturing at 49.4 shows that the industry expects continuing strong growth but at a slightly lower rate (as the PMI is below 50). The PMI for services at 53.5 shows continuing expected strong growth but at a more rapid rate.

U.S.A.
Following the December rate hike – the first in nearly a decade, US jobs data came in particularly strongly. Unemployment is only 5.0% compared with the Fed’s estimate of full employment being 4.9%.

The latest GDP growth data did come in a bit softer than the quarter before but more or less on expectations.

The Presidential election, set for November, is hotting up. The usual smear campaigns are starting on both sides.

Europe
Sweden is considering sending a significant number of refugees back and others are seeking to claim expenses for settlement back from the ‘asylum seekers’.

Angela Merkel – the German leader – has suffered in popularity following her desire to take in an almost unlimited inflow, and has had her previously massive support cut to about 40%. She has now stated she expects most to return home when the troubles end. With the huge death toll in Damascus from bombings overnight, that end doesn’t like coming any time soon.

The ECB is still on the case regarding monetary policy. Europe is healing – but slowly.

Rest of the World
Japan lost its Treasurer in a scandal but that hasn’t stopped the policy machine from seeking new ways of supporting the economy.

New Zealand kept its rate on hold but it is considering further cuts.

Russia is hurting and is seemingly trying to gain support in oil prices. But, apparently, the nature of the frozen terrain in Siberia means that if they do cut back supply from there, it will be lost forever. As a result, this month’s meeting between OPEC and Russia is limited in what it might achieve – but, perhaps, talking is a useful start.

Nigeria has just sought a $US3.5bn international loan to support its budget while oil prices for its major export are depressed.

Article by Ron Bewley brought to you by Infocus

Economic Update – January 2016

Monday, January 18th, 2016

Summary

Within this month’s update, we share with you a snapshot of economic occurrences nationally and from around the globe. We hope you find this month’s Economic Update as informative as always. If you have any feedback or would like to discuss any aspect of this report, please contact your Financial Adviser.

Content

The Big Picture

We were forced to wait 50 weeks in 2015 for the Federal Reserve to hike its key interest rate for the first time in nine years. The angst was so great over 2015 since, at this time last year, there was talk of the first hike occurring last March or at least last June. But those months came and went – and so did September!

The problem with the September meeting was not only that they did they not raise rates as most had expected but the Fed confused all by showing their concerns over global economic conditions. So it was a relief when the rate was finally raised by 0.25% in mid-December with no adverse reaction.

But the damage had already been done. Our market all but reached 6,000 in March from 5,400 this time last year, only to fall to nearly 4,900 near the end of 2015. Then Santa took control and swiftly helped the ASX 200 rise back above 5,300 to finish the year only about 100 points down for the year. Of course investors in our market would also have collected dividends and franking credits of about +6.3% which is very good when compared to holding cash – even allowing for the ?2.1% ‘paper’ capital loss on the price index.

It would be unfair to blame all of the mid-year volatility on the Fed. Oil prices fell sharply because OPEC took on the might of the US shale oil producers. By holding up traditional oil supply, they made the shale oil alternative marginal at best. But the Saudis seemed to have miscalculated the ease with which one can switch shale oil supply on and off. As a result, Saudi Arabia has now found itself with a material government budget deficit problem – and they now intend to hike petrol prices at home by 50% to help rectify the situation. That’s called irony!

Iron ore prices too collapsed – again largely because of an over-supply problem. The ‘Big Three’ producers deliberately put the squeeze on higher cost, smaller mines.

Whether or not ore and oil prices have bottomed is disputable but almost no one of note is predicting prices to rise substantially in 2016. But with the resources sector falling from 36% of our index at the end of 2010 to 16% now, iron ore and oil prices are increasingly less important for an Australian index investor!

At home the big banks came under the spotlight as they were forced by the regulator to improve their balance sheets, to be better able to withstand any future home price corrections. They did this by issuing more shares through ‘rights issues’ which naturally depressed prices. No major additional raisings are expected for at least the next few years.

So the main things to watch for in 2016 are interest rate changes at home and in the US. The Fed published its forecasts which point to four hikes of 0.25% in 2016 while the market is pricing in only two! This disconnect is likely to lead to some short bouts of volatility around Fed meetings.

At home, the Reserve Bank is now thought less likely to continue to cut rates in 2016. There is a chance of one more cut but no one of note is expecting any hikes in 2016.

Market fundamentals are largely fine but it will take some time for investors to feel confident. We are predicting above average returns for both the ASX 200 and the S&P 500 – but nothing stellar. Bond markets might take some buffeting as Central Banks around the world change, or do not change rates.

So our view of 2016 is much like that of a patient just having left the dentist. The build-up was worrying, the treatment not too bad – and now the novocaine is wearing off – with dental health having been restored.

Prepared by Infocus Wealth Management