Where is Noah and his ark when you need him! This deluge of rain of biblical proportions hitting the eastern board of Australia, has been unrelenting! We hope that any flood damage has been as minimal as possible for you. We have had several native animals,  being a kookaburra, two magpies, and a bandicoot ‘move in’ under the protective roof of our backyard balcony, in a desperate move to get dry and find some safety from the incredible rains and winds. Poor critters.

This natural disaster has arrived just as the remaining Covid-19 restrictions of the past two years have been, in the main, finally removed. Alas, more indoors confinement because of the severe weather, but this will recede, and life will go on. It has been a tough and frustrating couple of years for all, both physically and mentally, with a lot of challenges, changes and inconveniences. In saying that, it does not compare to the unjustified destruction and personal misery that the Ukrainians are being subjected to by the madness of the invading Russians. Although the ‘conflict’ will hopefully end soon either outright or via a valid ‘truce’, the Ukrainians can and will rebuild. However, the cost to Russia of the serious imposition by the world with the deserved and severe sanctions against Russia, not to mention the reputational damage to Russia, will be enormous. Russia (certainly Putin should) will be asking itself, why did we do this in the first place. Its people, its economy will suffer immeasurably, and its self-isolation caused by ostracisation, will be crippling.

Given the present high focus on the geo-political events in the Ukraine and given the negative impact on global markets from concerns of this, whether real or just fear, I have included below a couple of current articles detailing some succinct commentary on the situation and its likely impact ahead.

Nevertheless, as disciplined long-term investors, we must bear in mind the strength of underlying economic fundamentals that preceded this Ukrainian conflict have not gone away, but just appear partially absorbed and ignored by the noise and fears of this geo-political event. We should not become distracted by such, but rather see it as an opportunity to build our quality investments, and income streams.

The first related article, is from JP Morgan Asset Management, ‘On the Minds of Investors’ about the Russian/Ukraine conflict. Below are key points from its paper:

• “Energy prices face asymmetric risks as tight demand/supply balance would keep prices elevated, even if tension de-escalates.
• Indirect impact on growth from high oil prices should be manageable and prompt central banks to temper their hawkish stance.
• Despite the fluid geopolitical situation, we expect investor focus to return to global growth fundamentals and policy. Avoid sharp knee-jerk swing in allocation”.

“As the events in Ukraine continue to unfold, this note seeks to answer the economic and market questions from investors around the world.

How will the crisis affect global energy prices? Russia accounts for 13% of global oil production and 17% of global natural gas production. However, the European Union’s (EU’s) reliance on Russian energy sources is far greater: around a quarter of EU crude oil imports and 40% of natural gas imports currently come from Russia. There is only limited scope for the EU to offset any disruption in supply by accelerating imports from other sources, and recent price swings have been exacerbated by the fact that EU energy stocks started winter at depleted levels after an unusually cold autumn. Sanctions imposed to date have been designed to minimise the impact on energy supply, but energy prices will remain highly sensitive to further developments.

The risk to energy prices is asymmetric. We could see significant moves higher in the event that concerns around supply disruption worsen. If the situation calms, we would expect energy prices to decline but the tight supply/demand balance in the market is likely to keep prices at elevated levels relative to history. There are other possible sources of supply that may help to restore demand and supply balance in the long run. This includes sanctions against Iran being lifted if the nuclear agreement is restored, release of global strategic reserves and an increase in production capacity by other oil-producing countries, including the U.S. However, this would still take time and would be unable to address the short-term disruptions.

Will central banks have to hike more rapidly in the face of higher commodity-driven inflation? In our opinion, no. We expect central banks to prioritise growth and thus see central banks normalising policy more gradually as they acknowledge the downside risk that higher commodity prices present to growth. Market pricing for a 50-basis-point hike from the Federal Reserve (Fed) and the Bank of England (BoE) at their next meeting (in mid-March) has fallen to 20%, whereas in previous weeks it had been as high as 80%. (The most likely outcome Market pricing for policy rates by the end of the year has also fallen, with investors now expecting at least one fewer hike from both the Fed and the BoE than they did a few weeks ago.

For Asian central banks, the urgency to follow the Fed was low before the Ukraine crisis. Inflation in the region is manageable and many Asian economies are still at an early stage of pandemic recovery. The latest rise in commodity prices should reinforce their cautious tone.

Which regions are more vulnerable? The European economy is the most exposed given its high dependency on Russian energy. We see the extreme scenario where Russia cuts off all gas supplies as unlikely given the effects it would have on Russia’s income. Europe’s banking system is also exposed. But according to the Bank for International Settlements the total exposure is USD 89billion, which appears manageable. Our judgment is also that the European Central Bank (ECB) has the most scope to slow the pace of monetary tightening because wage pressures are less acute, which should cushion economic activity and spreads in the periphery.

The U.S. consumer can be sensitive to rising gasoline prices, but the oil and gas sector tends to benefit from increased activity. The U.S. became a significant net exporter of energy in 2019, so periods of higher oil prices are not as detrimental to activity as we saw historically.

In the emerging world, there are winners and losers. Commodity exporters (such as Australia) are benefitting from higher prices. However, unlike in the developed world, central banks may be forced to tighten policy in the face of rising inflation which would slow activity. There is therefore a significant dispersion of market performance amongst emerging market (EM) benchmarks.

Investment implications: Historically, geopolitical events, even those involving major energy producers, have not had a lasting impact on markets. Looking back at equity market sell-offs relating to geopolitical events, they have tended to be short and sharp, with sell-offs not lasting much longer than a month as markets react to the sudden event. The size of the market reaction can be considerable, as it has been in this instance, with equities sometimes falling more than 10%. But in most previous geopolitical incidents, markets have tended to recover to their prior levels in under a month, after investors assess that the macro environment has not materially changed. Of course, if the growth backdrop has materially changed, as it did with the 1973 oil shock, then it can lead to a more material sell-off and a longer period to recover losses.

One thing does seem abundantly clear: in the short term and long term, we expect the crisis to intensify the investment in the transition towards renewables as higher energy prices and fears of energy security add to existing climate concerns”. 

The second related article, is from MFS Investment Management, ‘Russian Invasion Fuels Market Volatility’, and some other macro items. Below are key points from its paper:-

“With the humanitarian crisis resulting from Russia’s invasion of Ukraine growing, we wish to express our sincere concern and support for the people of Ukraine and our hopes for a swift de-escalation of hostilities and a peaceful restoration of the country’s national sovereignty.

Russia- has been isolated from the global financial system.

Sanctions imposed by Western governments in response to the invasion took hold this week, including the planned cut-off of seven Russian banks from SWIFT, the communications system that facilitates global money transfers. Additionally, foreign currency reserves held by the Central Bank of Russia have been frozen, limiting its ability to support a weakening rouble. Index providers MSCI and FTSE Russell announced on Wednesday that they will remove Russian equities from all their indices, effective next week. MSCI is changing its classification of Russia from an emerging market to a standalone market. According to Reuters, the country had a weighting of just over 3% in the MSCI emerging market index and about 0.3% of its global benchmark. This week, credit rating agencies S&P, Fitch and Moody’s each downgraded Russia’s sovereign rating, putting it in the high-yield category. S&P, after the second downgrade in a week, rates the country just two notches above default. The agencies said Western sanctions call into question Russia’s ability to service its debt. In retaliation for the sanctions, Russia announced capital controls that will block coupon payments to foreign owners of Russian bonds.

Commodity prices soar. 

Since the start of the invasion, the broad Goldman Sachs Commodity index is up about 16%, to a 14-year high. Oil futures breached $115 a barrel this week for the first time since 2008 as sanctions limited market access to Russian raw materials. Russia has been forced to offer steep discounts on its crude but is still having trouble finding buyers. To the extent that dollar-denominated export revenues become unusable or illiquid, Russia could see less of an incentive to sell energy to the West, analysts at Goldman Sachs said this week. Oil prices eased from their highs on Thursday amid reports that Western nations are close to a deal with Iran over its nuclear program. The recent widespread surge in commodity prices and disruption of existing supply chains is exacerbating already high global inflation. One outgrowth of the sanctions is fear that higher global natural gas prices will push up the costs of fertilizers, ultimately resulting in food price inflation and shortages.

Germany, others, undertake major policy shifts in defense and energy. 

The German government’s announcement that it will dramatically increase defense spending in response to national security threats posed by Russia is expected to help offset some of the economic drag stemming from higher energy prices. Shortly after the invasion, German Chancellor Olaf Scholz laid out a number of major policy shifts, including halting the approval of the Nord Stream 2 gas pipeline from Russia while announcing the construction of two terminals to allow for the importation of liquified natural gas. Scholz also announced Germany will build a strategic natural gas reserve to reduce the country’s reliance on Russian gas supplies. In addition, the German chancellor floated the once-heretical idea of extending the life of several coal- and nuclear-fired power plants. Germany is not alone in reacting strongly to Russia’s attack on Ukraine. Switzerland broke with its centuries-old policy of neutrality, sanctioning Russia, while Sweden and Finland are said to be considering joining NATO. Sweden parted ways with tradition by exporting 5,000 antitank weapons to Ukraine, an active combat zone, this week. Meanwhile, Ukraine has applied to the European Union for immediate membership.

Putin-allied oligarchs feel the pinch. 

The US, EU and United Kingdom are ramping up pressure on Russian oligarchs closely allied with Russian President Vladimir Putin. Many were sanctioned after Russia’s seizure of Crimea in 2014, and sanctions have been stiffened in the wake of the invasion of Ukraine. Several yachts and other properties have been seized, and trophy assets such as the Chelsea Football Club have been put on the market.

OTHER MACRO NEWS

Powell signals that the Fed will hike rates a quarter-point. 

In testimony on Capitol Hill this week, US Federal Reserve Chair Jerome Powell indicated that he is inclined to propose and support a 0.25% increase in the federal funds target when the FOMC meets March 15 and 16. “The bottom line is that we will proceed, but we will proceed carefully as we learn more about the implications of the Ukraine war for the economy,” Powell said, but added that if inflation stays hot, the Fed would be prepared to raise rates more than 0.25% per meeting. It is too soon to assess the impacts of Western sanctions on Russia on the US economy, the Fed chair said. North of the border, the Bank of Canada began its tightening cycle on Wednesday, raising its policy rate to 0.5% from 0.25%. Multiple additional hikes are expected.

Despite eurozone inflation soaring to a record 5.8% in February, markets have lowered expectations for multiple rate hikes from the European Central Bank this year. 

Fears of slower economic growth as a result of surging energy prices and the fallout from sanctions on Russia combined to push the yield on the benchmark 10-year German bund back into negative territory this week. Bund yields peaked at 0.33% in mid-February, prior to Russia’s attack, in anticipation of tighter ECB policy. US rates have fallen as well amid the highest bond market volatility since the early days of the pandemic. Markets forecast the Fed will now tighten slightly less aggressively than before the invasion”.

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Disclaimer for information provided in this Commentary: This document, and the information contained within, is a general communication being provided for informational purposes only. It is educational in nature and not designed to be taken as advice or a recommendation for any specific investment product, strategy, or plan feature. The views expressed in this are subject to change at any time. No forecasts are or can be guaranteed.

The Russians are coming! The Russians are coming! You may remember the title of a movie many decades ago. Quite an apt one in today’s ‘news of the day’. This cry has certainly been the focus of late around the world (media assisted, of course).

The actual ‘invasion’ this week by Russia of its neighbour, Ukraine, was probably not quite expected to the extent just seen. Many experts thought surely Putin would not be bold (and dumb) enough to do what he has just done. But he has, and now Russia faces, as it should, the condemnation and the ensuing wrath of the world via sanctions, bans, and sheer separation. I doubt if many Russian people support the aggressive action of their autocratic and dangerous leader, but sadly they will suffer through shortages of many things if this saga goes on.

The other reason this neighbour war is of focus is that there generally has been peace from mini-wars around the globe during the past years, especially is the case in Europe. Alas, this outbreak is now becoming the new televised war, as were the Gulf and Iraq conflicts of 1990 and then 2003. Although, the Ukrainian situation will probably, and hopefully, be just a short one; although the sceptic in me belies that the media will drag and exaggerate this as much as they can and do with headings on this being the start of the new WWIII. No wonder young people are fearful of what is being portrayed by the media.

Understandably, the new conflict in the Ukraine (there was a similar one there in 2014 too, which we sadly also remember for the downing of MH Flight17 during that affair) is creating some nervousness and market volatility.

This macro uncertainty is despite seeing most restrictions and having nearly all countries with their borders now open and a ‘back to normal business’ approach after the two hard years of Covid-19 and the uncertainty and adverse impacts it brought around the world. Yet, people are fatigued from the pandemic’s duration. We have learnt to ‘live with the virus’ and in the main we have combatted it, but people are probably sensitive and even fearful of any new concerning events or happenings, even if such events are really of no direct and even minimal, if any, indirect effect on them!

Putting the Ukrainian situation aside, the fundamentals for improving domestic and global economic advancement, and in investment growth appear well in stride, as anticipated. Fundamentals are looking good. Rising inflation and higher interest rates are factored in to the main. This risk does remain that these may be a bit higher than first thought. With the US Fed expected to move on increasing official interest rates next month, this should provide more tangibility on further increases. The days of ‘free money’ are effectively over, and with rising interest rates, we are seeing a change in how things will look ahead. Although this is all quite anticipated, there remains some uncertainty which can, and does, make markets jumpy in the short term.

Nevertheless, as true investors, we know and understand that we must not forget facts and fundamentals are what matters, as does having a dedicated long-term outlook.  We are seeing a return to normality. However, the markets were somewhat volatile even before the sudden Russia/Ukrainian event this week and the lead up to it. One benefit, of course, there are cheaper and good quality investment assets now available to buy in such a period of volatility that we are seeing the markets in now!

As the fund manager, Hyperion Asset Management, recently stated in its report on this; “The current (six-monthly) global and domestic reporting season has delivered some truly remarkable results. However, with markets trading on short-term momentum, non-fundamental macro news flow and self-reinforcing negative feedback loops, short-termism and fear have pushed fact and fundamentals from a rational market”. Yes, short-termism and fear are the enemies of true investing. And, so, what does media always sadly (and irresponsibly) focus on, yep, and we know it is rarely on facts and fundamentals!

Importantly, as investors we do remember what really matters is what price you pay for an asset, what price you receive if/when you sell the asset, and what net returns/income the asset delivers to you while you own it, which may be for a very long while. The price of an asset today is not relevant if you are not buying or selling it today, is it? Really, most of the rest we see and hear is avoidable noise. The key to successful investing too is to build a diverse mix of quality assets that will, overall, deliver growth and income to you over time. Sprinkle that with some patience and with courage in times of volatility, and it presents very well for a reliable and rewarding wealth strategy!

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To my above commentary, I have also included below a punchy article published this month by the Dr Shane Oliver, Head of Investment Strategy and Chief Economist with AMP Capital. His words provide short and sharp insights into the past year and what the year ahead has in store. Here is Dr Oliver’s simple point-form summary of key insights and views on the investment outlook. Worth the read and it makes good sense.

Investing in 2022: a list of lists

By Dr Shane Oliver  

Six things that went wrong in 2021:

1. Several Coronavirus waves disrupted economic activity.
2. Inflation took off as Coronavirus boosted spending on goods and disrupted production and supply chains.
3. Some key central banks started to remove monetary stimulus earlier than expected, with some raising rates.
4. Bond yields surged.
5. Chinese growth slowed sharply.
6. Geopolitical tensions with China, Russia and Iran stayed high. 

But there were three big positives:

1. Science and medicine appeared to offer hope of getting on top of Coronavirus. This saw less severe illness through the mid-year Delta wave compared to the 2020 waves.
2. As a result, the broad trend was towards global reopening.
3. Monetary and fiscal policy remained ultra-easy.

As a result, global growth is estimated to have been nearly 6%. This drove strong profit growth and, along with low rates, saw strong returns from shares and other growth assets offsetting losses in bonds. 

Four lessons from 2021:

1. Inflation is not dead – a surge in money supply under the right circumstances, in this case, massive fiscal stimulus and supply shortages, can still boost inflation.
2. Shares climb a wall of worry – particularly if earnings are rising and interest rates are low/monetary policy is easy.
3. Timing market moves is hard, and the key is to have a well-diversified portfolio. Despite lots of worries, sharemarkets overall surprised with their strength but some sharemarkets (eg in Asia) and bonds performed poorly.
4. Turn down the noise – investors are getting bombarded with irrelevant, low-quality and conflicting information that confuses and adds to uncertainty. So, one of the best approaches is to turn down the noise and stick to a long-term strategy.

Seven reasons for optimism on economic growth:

1. Coronavirus could finally be moving from a pandemic to being endemic – more on this below.
2. Excess savings in the US and Australia will help to provide an ongoing boost to spending.
3. While US Federal Reserve and likely RBA monetary policy will tighten this year, in AMP’s opinion those policies will still be easy. It’s usually only when policy becomes tight that it ends the economic cycle and the bull market – and in our view, that’s a fair way off.
4. Inventories are low and will need to be rebuilt, which will help boost production.
5. Positive wealth effects from the rise in share and home prices will help boost consumer spending.
6. China is likely to ease policy to boost growth. 
7. While business surveys are down from their highs, they remain strong and consistent with good growth.  

Global growth is likely to slow this year but to a still strong 5%, with Australian growth of around 4%, despite the Omicron virus wave resulting in a brief setback in the March quarter, in AMP’s opinion. 

We have revised down our March quarter Australian GDP forecast by 1% to 0.6%, but revised up subsequent quarters by the same amount. 

Four reasons for optimism regarding Coronavirus:

1. Vaccines are still providing protection against serious illness – particularly once booster shots are administered.
2. New Coronavirus treatments are on the way, which should aid in the treatment of the more vulnerable.
3. Omicron is more transmissible but less harmful (evident in far lower levels of hospitalisations and deaths relative to the surge in new cases compared to past waves) and so could come to dominate other variants.
4. Past Covid exposure is likely to provide a degree of herd immunity. 

Combined, this could set Coronavirus on the path to being endemic where we learn to “live” with it.  South Africa, London and New York are possibly already seeing signs of a peak in Omicron. 

Of course, the risk of new variants that are more transmissible and more deadly remains – which is why it’s in the interest of developed countries to speed up global vaccination.  

Key views on markets for 2022:

Still-solid economic growth, rising profits and still easy monetary conditions should result in good overall investment returns. 
 

1. Global shares are expected to return around 8% but expect to see a rotation away from growth and tech-heavy US shares to more cyclical markets. 
2. Australian shares are likely to outperform, helped by leverage to the global cyclical recovery and as investors continue to search for yield in the face of near-zero deposit rates but a grossed-up dividend yield of around 5%.
3. Still-very-low yields and a capital loss from a rise in yields are likely to again result in negative returns from bonds.
4. Unlisted commercial property may see some weakness in retail and office returns, but industrial property is likely to be strong. Unlisted infrastructure is expected to see solid returns.
5. Australian home-price gains are likely to slow with prices falling later in the year as poor affordability, rising fixed rates, higher interest-rate serviceability buffers, reduced home-buyer incentives and higher listings impact.
6. Cash and bank deposits are likely to provide very poor returns, given the ultra-low cash rate of just 0.1%.
7. Although the Australian dollar could fall further in response to Coronavirus and Fed tightening, a rising trend is likely over the next 12 months, helped by still-strong commodity prices and a decline in the $US, probably taking it to around $US0.80. 

Five reasons to expect more volatility:

1. Inflation – while it’s likely to moderate this year as production rises and goods demand subsides, it is likely to be associated with ongoing scares and the risk that it’s higher for longer. 
2. The start of Fed and RBA rate hikes and quantitative tightening – monetary policy is unlikely to get tight enough to threaten the economic recovery and cyclical bull market, but monetary tightening could still cause volatility. 
3. The US mid-term elections – mid-term election years normally see below-average returns in US shares, and since 1950 have seen an average drawdown of 17%, albeit with an average 33% gain over the subsequent 12 months, according to AMP analysis. 
4. China/Russia/Iran tensions – a partial Russian invasion of Ukraine could lead to even higher European gas prices.
5. Mean reversion – shares are no longer cheap. The easy gains are behind us and calm years like 2021 tend to be followed by volatile years.

Six things to watch:

1. Coronavirus – new variants could set back the recovery. 
2. Inflation – if it continues to rise and long-term inflation expectations rise, central banks may have to tighten aggressively, putting pressure on asset valuations.
3. US politics – political polarisation is likely to return to the fore in the US, posing the risk of a deeper-than-normal mid-term election-year correction in shares.  
4. China issues are likely to continue – with the main risks around its property sector and Taiwan.
5. Russia – a Ukraine invasion could add to EU energy issues. (In play as we know!)
6. The Australian election – but if the policy differences remain minor, a change in government would likely have little impact.

Nine things that investors should remember:

• Make the most of the power of compound interest. Saving regularly in growth assets can grow wealth substantially over long periods. Using the “rule of 72”, it will take 144 years to double an asset’s value if it returns 0.5% per annum (ie 72/0.5) but only 14 years if the asset returns 5% per annum.
• Don’t get thrown off by the cycle. Falls in asset markets can throw investors out of a well-thought-out strategy.  
• Invest for the long term. Given the difficulty in timing market moves, for most it’s best to get a long-term plan that suits your wealth, age and risk tolerance and stick to it. 
• Diversify. Don’t put all your eggs in one basket.
• Turn down the noise. 
• Buy low, sell high. The cheaper you buy an asset, the higher its prospective return will likely be and vice versa. 
• Avoid the crowd at extremes. Don’t get sucked into euphoria or doom and gloom around an asset.
• Focus on investments you understand offering sustainable cash flow. If it looks dodgy, hard to understand or has to be justified by odd valuations or lots of debt, then stay away.  
• Seek advice. Investing can get complicated and it’s often hard to stick to a long-term investment strategy on your own.

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As always, should you have any queries please do not hesitate to contact us.

Wishing you all a Healthy and Happy 2022!!

It is quite incredible to look back on the years 2020 and 2021 and to see over that time the strong investment markets in growth-oriented investment assets combined with the residential property market propelling at super speed throughout this period. Remembering that his is said in the context of what has been the biggest global pandemic for over 100 years causing adverse business and social conditions rarely seen before.

Across Australia, and the rest of the world, there have been city, state and country lockdowns and curfews; businesses, offices and factories closed on and off; working from home being accepted way of life (the new plan B!); border closures; travel bans; sports cancelled; weddings and funerals restricted; hotel and home quarantines; and the ritual of protective face masks being worn daily by billions of people. And, of course, in the past six or so months, billions of people getting much needed vaccinations of one, two or ideally, three doses. We now carry records of vaccinations on our iPhones like we do for a Drivers Licence!

It has been a very strange, very challenging, and a seemingly long period of time for all, indeed. Much of the past two years has been stop-start-stop-start but, although the impact of the virus remains with us, the damage caused by the ongoing virus scenario is lessening.  I think it is fair to say we are all fed up with it and just want to get on with life. Regain control, we say! Hopefully, more and more normality will occur in our lives in the coming months. In saying that, the Covid-19 pandemic has changed many things, probably some permanently, but not all bad.

In the initial stages of the Covid-19 virus and the quickly increasing awareness of it in early 2020, there were predictions that unemployment levels would be similar to those seen during the Great Depression; stock market crashes; property price collapses; horrific mortgage defaults; and untold millions of deaths globally from the virus. Panic was to be the new norm. Well, these fears did not really happen, and fortunately so.

The depth of the human spirit, businesses adapting to and improving change, technology advancements and its increased usage by all, massive government financial support and spending programs, near zero interest rates and, of course, the success of aggressive vaccination programs, all have helped take us to the higher ground where we are today. As 2022 now begins, and an acceptance that we must live with the virus but will overcome its presence, we are with an upbeat approach and, I believe, quite a positive outlook ahead.

As noted above, over the past two years, growth asset investors have received strong total returns, some of these stellar returns! And yes, higher markets do mean higher valuation levels. Conversely, defensive assets have had very low to negative real returns. It would be nice for this trend of very good returns on growth-oriented assets to continue for this new year of 2022, however, it is probably realistic that growth asset returns overall will be return more to normalised levels. Defensive assets returns can only be projected to be flat at best. Bonds may even be adversely impacted, as the Financial Times reports that globally many companies have increased their debt funding notably since Christmas as they rush to secure funding at the (still) low rates before rates rise. Increased issuance tends to mean higher interest rates occur.

In the past couple of newsletters, we have discussed in detail the increasing impact of the faster than anticipated rising global inflation, supply shortages and logistical restrictions, and staff shortages, that many developed countries are experiencing. This is becoming more obvious and is challenging, as we all know. However, as Australian Fund Manager, Ausbil, notes in their most recent Economic Outlook report, that the OECD December Economic Outlook Report forecasts global growth continuing on an above trend glidepath, slowing to a brisk 4.5% pace in 2022, then moderating to a sustainable 3.2% pace in 2023. Ausbil adds that, for Australia, it expects two exceptional quarters for growth, followed by above-trend growth throughout 2022 and leading into 2023.

In his recent address, the Federal Treasurer, Josh Frydenberg, stated that in the Mid-Year Economic and Fiscal Outlook that Australia has performed more strongly than any major advanced economy amid the greatest economic shock since the Great Depression. Presuming that this is true, not a bad platform for us. The Treasurer said, “Having performed more strongly than any major advanced economy throughout the pandemic, the Australian economy is poised for strong growth underpinned by Australia’s high vaccination rate and unprecedented economic support to households and small businesses”. Political speak, yes, but it does appear to make good sense and, overall, Australian corporate balance sheets appear overall as strong.

When looking at just where official cash rates may be heading, the yield curve can provide market implied expectations. We know that for the past year or so, the yield curve has been steadily steepening, that is becoming more normalised. This means that as you move out in duration, interest rates are higher. Longer dated bonds are getting higher in yield. It is still relatively flat from a historic point of view but there certainly is movement at the station. JP Morgan Asset Management reported that implied expectations show official US cash rates up from near 0% now to be around 75 basis points by the end of 2022, and for Australia at around 50 bps. Not big moves by historical standards but the risk is inflation rising higher than expected, which certainly appears it could happen. (US inflation is now at a 40 year high!). Its report shows that the implied expectation two years from now will have the US and Australian cash rate both at 1.50%. And it shows going higher thereafter. Certainly, that will see increased mortgage rates.

The global consequence of all these above variables will very likely see interest rate rises sooner than even recently predicted (particularly in the US); and have central banks further, but cautiously, continue tapering off their bond buying programs, causing probable bouts of market volatility in the months ahead. Yet, this is expected to be managed carefully given large debt levels because of the extreme measures taken over the past two years.

Anticipated market corrections may well happen during this adjustment period of the more back to ‘normal conditions’. Such corrections or pull backs could well provide good buying opportunities for long-term buyers of quality growth assets for both income and growth returns! When looking at just where official cash rates may be heading, the yield curve can provide market implied expectations. We know that for the past year or so, the yield curve has been steepening, that is being more normalised. This means that as you move out in duration, interest rates are higher. Longer dated bonds are higher in yield. It is still relatively flat from a historic point of view but there certainly is movement at the station. JP Morgan reported that the implied expectations show official US cash rates up from near 0% now to 75 basis points by the end of 2022, and Australia at around up 50 bps. Not big moves by historical standards but the risk is inflation rising higher than expected, which certainly could happen. The report shows that the implied expectation two years from now will have the US and Australian cash rate both at 1.50%. And it shows higher thereafter too. Certainly, that would see increased mortgage rates coming.

Interesting times we live in. I strongly believe that sensible investing is good for both your health and wealth! Investing is the foundation for our futures, especially when considering preparing for our non-working lives! Investing and having a commitment and focus to doing it is also a good example to show to our children! This is vital for their long-term futures!

As always, should you have any queries please do not hesitate to contact us.

Indeed, we are all learning Greek! But we must sympathise with the Greeks who are having their alphabet letters picked off one by one. As s a new variant of Covid-19 emerges, it is given a new Greek name by way of its alphabet. We are now up to Omicron, as we know.

Although the media is having its usual field day with being able to keep the headlines going for near two years now (yep, two years!) rattling on about the Covid-19 ‘crisis’ as the daily headline news. Variants have always been expected but, so too is the increasing percentage of vaccination rates happening around the globe. The remaining challenge is still to properly tackle the issue of getting vaccinations into the populations in the undeveloped world. If travel and border openings continue to increase, as they have in the past couple of months, then this means greater vaccination must happen in those particular, more vulnerable countries. Covid-19 does not recognise country borders!

With more time and research, you would believe that future variants will be swiftly tackled and mitigated more quickly. Positive developments and actions combating the virus have come a long way in the past six or so months. The virus, even with its variants, should become less virulent in impacting our lives and economies. I think this is in common agreement now.

Certain economic factors affecting the major global economies seem to be playing out pretty much as outlined in our recent newsletters. These factors include seeing the continued economic growth and progressive activity; consumer and business demand exceeding supply availability; cash galore to be spent (primarily because of the excessive cash holdings from cash savings built up in lockdowns); rising global inflation, and pressure on global interest rates to rise in the nearer future.

 As the global Covid-19 lockdowns and restrictions have, or are, being ‘unwound’, the world economies are responding positively. Economic fundamentals are also improving. As world supply chains do open up, the labour market flows do improve, and with cash and liquidity abound, it certainly appears that economic momentum is gaining its continued strength, which is certainly not surprising. Australia is about to see a much-needed influx of overseas workers’ and students’ imminently. The shortages of goods, materials and workers’ still remain but these ‘bottlenecks’ should be eased somewhat over next year as the global engine of activity increases and supply chains resume more to normality.

The underlying economic impetus is gaining faster traction, which augurs well for 2022. Yet, this is predictably what is causing the market volatility of late, as we observe that central banks’ are, or will be, reducing Quantitative Easing programs (which were very necessary to be implemented for stabilisation purposes, during the first few months’ of the Covid-19 pandemic last year). In addition, these central banks are having more ‘hawkish’ talk about the need to raise official interest rates sooner (possibly in 2022 rather than later). This is particularly the case in the US, the world’s largest economy. The Eurozone is closely following this trend too. We are also seeing incredibly strong US$ gains on rate hike expectations. The US Fed’s meeting this month will be an important one for the markets and rate outlooks.

All this is not a surprise. The slashing of interest rates and the voluminous QE measures made from early 2020 and during the ensuing months’, were done so to avert what could have been an economic calamity from the initial panic and uncertainty caused by the swift impact of the Covid-19 pandemic in March last year. (Of course, as true investors, we understand that reacting negatively to panic is not a good long term investment strategy!).  Now, with the world coming out of this pandemic mode, we should reasonably expect the ‘return to more the norm’, and therefore to see less government QE and to have more standard i.e. have higher interest rates at normalised levels. Near zero cash and bond rates are not normal. The level of dependency on these measures is not needed ahead. I believe we are seeing this adjustment period underway, hence this intermittent volatility.

Again, rising interest rates are not good for those investors with traditional bond holdings. As for those with people with excessive debt, rising intertest rates will be an obvious serious cash flow challenge. Roaring property prices are great for people with property, but you can’t use bricks to repay loans and increased repayments when interest rates rise, which they will.

It is likely that the heightened market volatility, which really began last month, probably will continue in December. However, presuming that the economic rebound proves to be sustainable, as it seems to be, then strong global growth will continue forward into 2022, and should lead to further market gains. If so, any market pullbacks would represent good buying opportunities for the long-term investor looking to add quality growth assets to their portfolio.

We, as investors, need to remember that the recent company reporting season here in Australia was very positive. The Fund Manager, Ausbil, notes in its latest Economic Outlook that “…confirming a full rebound in earnings, strength in balance sheets, and optimism across management teams, despite ongoing lockdowns. Moreover, this earnings rebound has been nothing short of astounding…from the (Covid-19 induced) decline in FY20 earnings.” It adds that, “…inflation impacts on costs were noted but not as a major concern, though we maintain a watching brief on any persistent inflationary impacts on balance sheets and earnings. The balance sheets of Australian listed companies are strong, and capable of supporting expansion in investments ahead as opportunity arises”.

For investors in growth-oriented assets, typically equities, property and infrastructure, 2021 has been a good year with good investment returns. For people in general it has been a tough year with lockdowns and other restrictions it has been a hard year. However, we can take solace and have real hope in that the future is looking brighter for us as people and for us, as true investors.  

Let this Christmas be a wonderful time for all, and a launching pad for a successful and happy year in 2022. And make your number one New Year’s resolution to keep up good long-term financial habits; they make for a strong and happy financial future!

As this year of 2021 draws to a close, all of us at FMA Wealth, sincerely wishes everyone a very Merry Christmas and a truly great New Year ahead!

Well, it’s happening. Australia is reaching vaccine levels that are permitting for more and more ‘back to normal’. A week into the significant easing of the Covid-19 lockdown restrictions, and you can see and feel the difference already. The good side of this being more people out and about, increased social interaction, including families being able to re-assemble from lockdown restrictions. Most businesses are more active again, and the others are just back to reopening stage and revving up. People are spending, booking flights and trips. The bad side is the price of everything is up, traffic is back, queues are long, and there is still, understandably, shortages of supplies because of sheer demand, coupled with supply chains still not back to necessary levels of movement. Very similar scenario to which many overseas countries experienced in the past few months with their own earlier easing of restrictions.

In Deloitte Access Economics’ most recent economic briefing, it notes that “…2020 showed us that the Australian economy and labour market do have the capacity to bounce back. And this time around we have a weapon in our arsenal that we did not have in 2020 – vaccines. Vaccinations are the best possible stimulus for our ailing economy – and forecasts for everything, from wages to unemployment and hospitalisation to haircuts, depend on vaccinations. That’s why, despite the current economic pain, we’re still forecasting a substantial return to growth.” 

The other side to consider besides household consumption growth and increased spending is, of course, what will businesses do from here. The latest NAB Australian business survey shows confidence rising.  In its latest Market recap report, JP Morgan comments on consumers and companies outlooks in saying, “The spending power of consumers and the expected release of pent-up demand is a well-documented reason to see the recent moderation of economic growth as a slowdown rather than the start of a down-cycle in economic activity. However, the consumer is only half the story and the supportive dynamics for companies to spend will add another pillar to the still robust global growth outlook. Capital goods shipments across G3 economies have greatly outpaced what was experienced coming out of the last two recessions (Deloitte noted about shipments that, relative to 2019 – just pre-Covid 19 times – global shipping costs have jumped almost four-fold!). Extremely low financing costs, as well as record profits, means companies are flush with cash to spend. Some of this spending may also be in response to not being able to source enough labour. Either way, business surveys on capital expenditure intentions are near the peaks seen during the prior expansion, suggesting that corporate investment will continue in the year ahead”. As noted before, corporate earnings results have surprised more and more on the upside.

And, yes, the increased waggle in the tail of rising inflation is causing, predictably, markets to have had a bit of volatility in the past month. Nothing unexpected. It is hard to find goods, services, materials, oil and energy, utilities, real assets that have not gone up in price!  It is now a question of how much of this inflation is only transitory, and how much is more entrenched. The days of ultra-cheap debt and record low interest rates are certainly numbered. 

The RBA here has the tough task now of keeping to its ‘promise’ not to raise interest rates until 2023 or later. It will have to do so earlier, much earlier, in my opinion. We know that some other countries central banks have already started to put official interest rates up e.g. New Zealand, Norway and, very probably, soon the UK. With US CPI inflation running now at the level of 5.4% year on year, it is hard not to see the US Fed also pulling the rate trigger early next year. Any increase in rates will be done with caution, no doubt. The challenge is getting the timing right for any rate rises to minimalise unwanted negative impact. This is what central banks are meant to do; get the balance and the timing of it to be as right as possible!  

If the RBA here is effectively forced to raise official rates sooner, it will have to grapple with how to slow down the property price juggernaut without causing a residential property correction considered big enough to really be a crash. With the exuberant amount of residential property debt, his would almost certainly happen if it raised rates too quickly. The RBA has already started its tapering program, thereby reducing cash injected into the system. It could also be a case of just letting market forces come back to play; meaning house prices are just too high because of artificially low record interest rates, and easy home loan money. Some normality is needed presuming the ‘post’ Covid-19 global recovery occurs as is greatly anticipated, and what is hoped for.

There is always talk and speculation which way is the market going next; and further volatility and adjustment to the world ‘returning to more normality’ is likely ahead. For traders, this is their existence. For investors, it is not so, and certainly should not be. Short-term gyrations are far less relevant because of investors longer timeframe, allied with their predominant reasons for investing, which are to get growth and income from their investments which they build up over time. Good investors are builders with patience and understanding, and who want quality assets in their portfolios that will deliver, over time, solid and consistent income flows. Growth will come with through as well, as businesses grow and reinvest in themselves. Dividends returns will grow, in dollar terms at least, as dividends paid as a percentage tend remain consistent. 

Some reinforcement information on all this I recently received from a fund manager. Over the past 20 years, the S&P ASX 300 Dividend Income on shares has been, on average, about 4.5% p/a, plus beneficial franking credits on top of that cash return. If you put in $100,000 into the S&P ASX 300 Index some 24 years ago, but you spent the dividends, your investment would be worth around 2.82 times the original capital amount (i.e. after dividends paid out). Yet, if you bought this same Index and reinvested all the dividends as they were received, then your investment would be worth about 7.28 times its original capital amount. (This does not take any possible tax into consideration). And, in those 24 years, we have seen many, many world impacting events happen, such the GFC, 9/11, and Covid-19, and so on. But, as the world evolves, investing goes on.

The above provides quick illustration of the consistency of dividend income over time; the need for real returns; the power of investing, the power of time in the market, the power which compounding provides to such an investment over time.

“The price of discipline is nothing compared to the price of regret” (writer, Robin Sharma) How true.

As always, should you have any queries please do not hesitate to contact us.

Spring is in the air! With that, now we all hope that we can get the good ol’ spring back in our step as we approach the coming out of lockdown next month! My 21-year old daughter, having her social life curtailed during much of the many months of Covid-19, is desperately counting the days to the ‘Freedom Day’ being planned for 18^th October, when the gates re-open! She, like most of her friends are double ‘vaxxed’, so ‘can travel’! 😊

Australia is just about to reach the first magical target single vaccination level of 70% for ages 16+, and then the greater target of 80% for the population to be double dosed within the next couple of months.  Not far now. We will see more and more normalisation back in our lives. If the lockdown period were extended too much longer, we may be lulled into thinking that lockdown is the actual norm, where one day just blends into another! 

We look at what is now happening overseas, where the much-anticipated vaccinated herd approach to ‘open again for business’ is well underway. I think we can see just how effective the vaccine has been in reducing the impact of the virus and, thereby, allowing for more normality to return, by bringing increased business activity and heightened socialisation. We hope that will be happening more in Australia in the very near future. Roll out the vaccine, roll out the economy!

The markets have performed well from the perspectives of growth in price terms and in dividends paid in the past few months. The keenly awaited recent corporate reporting season has been well received with some very good results Although, the forecast earnings updates have been pared back a little given the Delta strain impact and uncertainty in recent months. However, it is envisaged that this concern will be temporary given we know the government vaccination targets and timetables being more imminent for the lifting of restrictions. The stronger business buoyancy pre this lockdown looks like it will be returning.

This also reflects the broad optimism in the continued actual recovery of global economies as they emerge out of the slowdowns and lockdowns during the grip of the pandemic on economies, not to mention the adverse social and personal costs. We know that complacency to ongoing hygiene and social distancing requirements, etc. remains a threat to a speedier pace of recovery, as well as influencing whether there may be future lockdowns. In saying all that, there does appear to be a strong stance by many nations that have reached high vaccination rates now to simply say that, if Covid-19 numbers rise, the lockdown option if is not really a consideration given the sheer adverse enormity of the impacts on business and on people’s lives. Some common sense always helps too! And a need to combat certain political and media immersed misinformation and fear mongering.

So, where to from here for the markets we ask. Looking at the past year or so, growth assets such as equities, property and infrastructure have shown a very good performance, while bonds and cash remain cellar dwellers with interest rates at or near 0% level.

A lot will depend on the speed of the global recovery, such as, the opening of supply lines, international travel increasing, restaurants and bars reopening, people spending more at shops and online, and general increased consumer and business confidence in the future ahead. A lot will depend on central banks reduction levels and timeframe of tapering of bond buying programs, and the continued degrees of governments stimulatory and support programs, and infrastructure projects, etc.  We know there is a shortage of many supplies, and there is a shortage of skilled workers and professional labour. We know there definitely is capacity for the continued future growth path that was thwarted in the past 18 months of Covid-19 impact. Managed properly, next year should see strong opportunities for growth.

On the flipside, we also know that inflation has been spiking in certain places. Inflation normally occurs when demand exceeds supply. The demand for goods, building supplies, labour, services, travel, and holidays, etc. is only increasing. And there is plenty of cash out there looking to be spent but, also, hopefully it be spent sensibly (or maybe to be invested by the wise investors!).

The faster that countries get ‘back to normal’ will, I feel, accentuate more demand, and the supply to meet this demand will be slower to happen. This will pressurise prices to go up, which will in turn shift inflation upwards. As we have mentioned previously, inflation rising also implies there will be rising interest rates, which is bad for holders of bonds and for those with high mortgages that stretch their cash flow if repayments increase. Would this inflationary increase scenario be transitionary or become more entrenched? That will depend, but central banks seem to want to manage inflation changes so hopefully all will occur orderly!

The strong economic recovery winds that were around earlier in the year were somewhat deflated by the devious Delta variant of the virus. That wretched limo driver! Yet, this all did prompt much faster vaccination rates to occur since that fateful car trip from the airport over three months ago. Delta did delay rather derail growth. So, although we are all a bit battered and tired from the Covid-19 impact to our lives and businesses etc. I think that the desire and the appreciation to get all back on board to the road to recovery is well there. By Christmas onwards, we could be well on the way. Let’s hope so. Let’s get back our mojo!

The markets have certainly built in some level of confidence in the recovery ahead. All going well, the gains will be validated. Yes, there will be bouts of outbreaks of the virus but, really, the show must and wants to go on!

The delaying of growth and recovery because of the impact of the Delta strain was mentioned above. Now, we must hope that governments, on all levels, play a sensible and positive part in the recovery process by cooperating with each other, and by reducing red tape and work on easing regulations. I think we could all sense at stages of the past eighteen months that some power fiefdoms were becoming too comfortable with certain politicians, who have enjoyed and arguably extended their accelerated rise to notoriety, at the expense of the ‘greater good’ of the whole country! We shall see.

As always, should you have any queries please do not hesitate to contact us.

July 2021, the month that FMA Wealth was meant to be celebrating its 20^th anniversary of providing financial advisory and investment services. Well, we are celebrating this notable achievement, but just not with the fanfare, ticket-parade, or mayoral offering of the key to the city of Manly that we had hoped for! Only kidding! Of course, we are delighted to reach this milestone, and we thank our loyal and valued clients for their trust and support over these years, which we know have had the typical headwinds and tailwinds, joys and challenges for us all, as is life! Nevertheless, the journey continues and we progress looking forward! And the future looks bright.

One of these challenges is the ongoing situation of Covid-19 and, in particular, with the repeat of and duration of lockdowns. We all cringe with the continual berating politics, the blame game, the media citing propaganda of public fear. And, also, we are astonished and becoming more infuriated at the complacency of certain people to follow sensible health guidelines, and the selfish circumvention of public instructions and restrictions that are in place for the good of us all.

As for the Australian states and their medieval border hugging approach to this pandemic. You would not believe we are meant to be a Commonwealth! Someone alternatively described us now as the United Nations of Australia! Sad. As I have written before, the need to have a system of state governments in Australia went decades ago. It is damaging to the country and, really, quite an unnecessary overlay level of government as it operates.

The key task remains to get us vaccinated as we all well know. Fortunately, the rollout here is gaining momentum with both rising vaccination supply deployment and increased public participation in actually getting vaccinated. Let this momentum continue for health reasons, and for the reopening and progression of global economies. The economic revival momentum will, of course, see further sporadic virus outbreaks, but the solid revival should continue.

As noted in the latest Vanguard Investment Update; as vaccinations ramp up across the world, health risks are expected to gradually decline over the next few months, which could pave the way for a more robust recovery in face-to-face service sectors. However, differences in vaccination rates and varied levels of government policy support are likely to produce uneven economic results in the near term. The U.S., for instance, with its leading vaccination efforts and strong fiscal support, is likely to lead the global economic recovery with full-year growth of at least 7%.

Despite concerns about rising inflation, global equity markets capped off the financial year with yet another strong quarter to June 2021, as economic activity rebounded, corporate earnings strengthened, and government policy support remained accommodative to stimulating economies.

As I mentioned in our June newsletter, there has been a significant degree of economic momentum occur over the past twelve months. Abundance of cash injections and business stimulus have been critical to this happening in this uncertain times of covid. Vanguard added in their article that a strong U.S. economic recovery, coupled with ongoing supply constraints has, in their view, increased the likelihood of moderately higher inflation in the coming years. Sustained inflationary pressures will eventually call for the U.S.Federal Reserve (and other central banks), to taper stimulus and raise interest rates from near zero. In the U.S., we foresee conditions for an interest rate lift-off to be met in the second half of 2023. While Vanguard expects the labour market to return to normal by the second half of 2022, it expects that modest reflation, rather than runaway inflation, is more likely in the near term.

In Australia, the RBA has adopted a more conservative approach by committing to keep interest rates on hold until 2024 given weaker inflation pressures and a slower vaccination rollout. Personally, I think the RBA will have to move earlier. The latter increases the risks of sporadic outbreaks and lockdowns in the second half of this year, which could see consumers become more cautious with their spending. Despite a relatively faster economic recovery to date, Australian household consumption is still below its pre-Covid 19 level and weaker than that of other markets such as the U.S., where herd immunity is closer in sight.

The fund manager, Ausbil, reported in its latest market commentary that the strong performance across markets illustrates the power of the rebound we have experienced, even as the virus remains an overhanging risk. This resoundingly positive movement has been experienced across most markets and sectors. Ausbil notes in its economic outlook article that we are in a unique environment with massive fiscal and monetary stimulus underpinning growth, and the lowest interest rates in history. From an equity strategy perspective, the critical question is; when does this stop?

I think so when interest rates rise, as they will do, primarily as a result of inflationary forces increasing. We could then see a slowdown or even a reasonable market correction occurring. The dilemma or key question lingering in the background is, whether the major central banks will effect a soft landing as they scale back stimulus. As it has been described by the fund manager, MFS Global, central banks will be in the ‘Hotel California’ bind regarding Covid induced gigantic fiscal and monetary measures where they “can check out anytime, but they can never leave”!

Ausbil continues to say that, like most things in life, the answer is not simple, and as with most reactions in the market, it believes the eventual long-term rotation will not be as difficult or as volatile as the media and market pundits might think. Based on how markets work, it would be hard to expect the markets to achieve the same level of performance over the upcoming year as the year just gone, however, underpinning the markets will be another year where it expects strong growth. Ausbil does see a clear path to recovery even with some volatility and uncertainty along the way. It does also caution that, although it maintains a positive outlook on earnings, this is still a time to invest in only the best quality companies, which exhibit superior underlying earnings growth and strength to help achieve longer-term outperformance. What Ausbil is saying here makes good sense, and this economic expansion is positive. Although, this suggests inflationary sensitive rising input costs to occur too.

The supply constraint for many goods, services, and commodities, including building supplies, appears to be unable to accommodate the corporate and consumer demand for them. We all know that there is a wait for many of these things. And, behind this, there is even further pent-up demand that will exhibit itself more once we better emerge from the lockdown conditions and the supply disruption. There is certainly this feeling around that the wave of business momentum is building and has a way to go. We just need the world to be reach critical vaccination numbers. These are on their way!

Speaking of continued momentum, the upcoming August company reporting season will see the release of earnings for the six months to the end of June 2021. More interesting will be the associated company announcements of what are the expected earnings for at least the following six months. Market analysts’ expectations are that the forecasts will be strong. We will know this important analysis shortly.

On the business side here, FMA Wealth remains open as per usual, as we have done so throughout the whole Covid period since it began. Other than not being able to have face-to face client meetings because of obvious presently imposed restrictions, we are able to continue with Zoom and phone meetings for our clients.

Getting my second AZ vaccination jab this Friday, which will be good to have done. In saying that, I just can’t wait till I can get a haircut! I’m over the enforced man-bun and mullet hair combination! 😊.

Keep well, keep safe and keep sane during these lockdown (again) times!

As always, should you have any queries or need to talk in these more testing times of lockdown, please do not hesitate to contact us.

With the end of the financial year fast approaching, given the uncertain global circumstances we have seen, investors should be pleased with the very positive year that is near completion. In fact, given the Covid-19 pandemic, which the world went in and out of since February 2020, all Australians should be, and probably are, delighted with where they are, where the economy is, how low unemployment is, and with the overall positive economic outlook ahead.

In a recent article, Deloitte research shows that in real terms when looking at the latest official GDP data here, the GDP per capita confirms that Australians are, on average, better off today than what they were before Covid-19 struck. It added that the data illustrates the Australian economy is continuing to regain its mojo; and that growth drivers are becoming more broad-based and government spending is becoming less of a lifeline.

Yes, there have been recent bouts of domestic border closures and varying shutdowns of a couple of capital cities here because of containment leaks of ‘overseas arrivals’ in quarantine. Amazing how many of these arrivals come here with the virus! However, in the main, with Covid-19 vaccines being rolled out, there should be less and less closures ahead. Yet they still will occur again given the bizarre and questionable stance governments here are taking to still using city hotels for incoming arrivals quarantine rather than purpose-built quarantine stations away from major cities and regional towns. Basic cost versus benefit analysis on both a human level and an economic scale would, I do believe, show the latter would be more sensible and provide a stronger long-term solution to being able to open our borders to the world.

Deloitte research also noted that as we head forward towards 2022 (when it is anticipated that our international border restrictions will begin to ease), it is increasingly clear that the measure of economic success will be vaccinations and the ability for societies to function with open borders, not closed ones.

The boosters behind the strength in the Australian economy, and it is fair to also say in many other global economies too, such as the USA, remain in place. These boosters include quantitative easing measures by central banks, favourable tax incentives, continued government spending into the economies, particularly targeted areas hit harder by the loss of business impact caused by the pandemic.  Equally and importantly, both consumer and business confidence are back on the saddle and galloping along, as are the solid results in corporate earnings across many sectors. The challenge will be when and by how much to reduce these boosters and lifelines, and to thereby allow the more ‘normalised’ flow of the economy to resume.

As the fund manager, Investors Mutual, commented in an article last week; “Share markets around the world, including Australia’s, remain well- supported as economic growth continues to rebound from Covid-19 lows and central banks continue to hold interest rates at record low levels, despite increasing signs of rising inflationary expectation. The Australian share market is now trading at record high levels with seemingly very little on the horizon to halt its ongoing rise”.

That seems to be the case indeed, especially with the surprisingly strong corporate earnings announcements and further with the forward earnings guidance for 2022.

As we know though, markets can be volatile at times. Often this it is triggered by an event, or a political statement, or a geo-political action of aggression, made that was not expected. Covid-19 is a classic example of this. When markets have had good rallies, and especially now being on their record highs, a correction to the trend can quite easily take place. And, really, a slowdown in the pace of the rising markets would be better for long-term consolidation of gains. Similarly, a slowdown of the frenetic pace of major city residential property prices is well due!

Given the global economic horizon appears quite positive ahead, I would consider that the key possible triggers for a market correction, in the near future, could be inflation growth faster than anticipated; a regressive occurrence with the global Covid-19 battle; or even a major cybersecurity attack or incident.

Inflation is rising, so the chance of interest rates moving upward sooner than we have been led to anticipate by central banks is increasing. Moderate inflation generally means that economic growth is happening. Businesses with measured debt levels should be able to manage slightly higher interest rate as they are also having growth to counter in their business. However, rising interest rates certainly are not good for mortgage holders with high debt levels, and there appears to be quite a few out there. Nor are rising interest rates good for fixed interest bond holders. The key question is, will the growing inflation levels ahead be moderate or too much? This question should and will be very much the focus point of central banks management over the next twelve or so months.

As commented on earlier, besides the heavy human impact of Covid-19, the longer our borders remain closed, it is not good for our economy. We are a country that needs immigration for population growth and to help reduce our worker and skills shortages. We need trade and tourism. We need to be a Covid-19 vaccinated population to help properly break the lingering shackles of the virus, and to lessen the threat of troublesome strain variants of this virus.

The other current risk I mentioned to causing a market pullback, is cybersecurity risk. We are all so dependent on and immersed in information technology. It is the way of life for most of us. The year of Covid-19 accelerated the importance and use of IT to governments, businesses, and individuals alike. Yet, of late there appears to be more occurrences of attacks on ‘systems’ by hackers. Imagine the impact of a serious hack on some major global IT provider or on a government or credit card provider? As a counter, the global growth in cybersecurity companies is understandably very strong. There is not much we can do ourselves to stop ‘hacks’, however, a reminder to each of us back up our systems and information securely, and to be alert to this ever-present danger of information theft, misuse, and opening unknown emails and attachments.

Any of these above-mentioned possibilities could well prove to be catalyst(s) for a market pullback, which many cashed up buyers are longing for! Market gyrations are all part and parcel of an investor’s world, and it is important to always understand that. Investment portfolios must be maintained with this awareness in mind.

Stick to the course, the plan, and to best ensure that your investment mix is both diverse and engaged for the times ahead. Investing is not about the short-term, it is a lifelong journey. And successful investing favours the patient and disciplined investors, as we know. It is about being sensible in approach and choice, and not faltering to the traps of fear or greed when they enter the investor’s arena!

Onwards, to the new financial year ahead!

As always, should you have any queries please do not hesitate to contact us.

Last night, the Federal Government handed down its Budget for the 2021-22 financial year. As usual, much of its broad content was deliberately ‘leaked’, but the fuller details for clarity were outlined last night. Like the previous ‘special’ budget released last October, last night’s Budget appears to be very well received by economists and the media.

The Budget is a continued ‘cash splash’ fiscal budget to ensure that the momentum of the existing strong economic recovery is maintaining the pull away from last year’s adverse Covid-19 pandemic’s impact. These ongoing aggressive fiscal measures are coupled with the ongoing aggressive monetary policy of ultra-low interest rates and high money supply managed by the RBA.

Attached here is a quick ‘What it means for you’ summary of the Budget, prepared by Challenger Technical Services.

There are several areas touched on by the various policies contained in the Budget. The main area that impacts you, our clients, involves Superannuation. As you can see in the attachment, two key constructive changes to note to superannuation are:

• Repealing the work test for Non-Concessional Contributions (NCC) and Salary Sacrifice Contributions for people aged 67 to 74. This is very positive. Previously, unless you passed the ‘works test’, you were unable to add further NCC (subject to not having reached the NCC limits already).

• Reducing the eligibility age for Downsizer Contributions from age 65 to now age 60. Again, a very positive change as more people can access this opportunity, and more larger family homes should, in theory, become available to the market to help reduce the tight supply to a growing demand for such properties. And the kids may be forced to leave their comfortable home sooner!
  • The Downsizer Contribution rule allow people to make a one-off after contribution to super of up to $300,000 from the proceeds of selling their home so long as they have held it for at least 10 years. Under the rules, both members of a couple can make a downsizer’s contributions for the same home, and the contributions do not count to a member’s NCC cap.

So, more opportunities and more time to contribute to your super!

Also, bearing in mind the earlier good news about superannuation, as discussed in my commentary last month, as from 1 July 2021, the new increases in contribution limits available. That is, the annual concessional contributions (CC) limit increases from $25,000 to $27,500; the annual non-concessional contributions (NCC) limit increases from $100,000 to $110,000 (or to $330,000 under the Bring-Forward rule); and the Transfer Balance Cap (TBC) for the maximum amount of super that can be rolled to the tax-free pension phase increases from $1.6mm to $1.7mm.

Of course, there is also the relatively new Carry-forward unused CC cap consideration for individuals who have super balances of < $500,000, can carry forward their unused CC cap for up to five financial years for use in a future financial year.

Speaking about superannuation, do make sure that you, ideally, will have utilised your super contribution capacities for the upcoming financial year (or contact us if you need assistance or clarification on this).

If you have any queries about the Federal Budget’s content or, as always, any queries in general, please do not hesitate to contact us.

Compared to this time a year ago when the Covid-19 induced times were causing massive uncertainty in all regards, the thaw is in progress. With the resultant economic and medical boosters for consolidation put in place, and with the road to recovery activated, the green shoots of renewed confidence and activity have been revigorated.

Fortunately, the global downturn predicted by the ‘experts’ and revelled on by the media, has not been as severe as was feared. If you had been on a desert island for a year, and then came back and looked at the indices, etc., you would have thought little has changed! But we do know the past year was a year like no other in many respects.

The global recovery and heightened optimism do appear to be both underway and be justified based on recent months’ positive economic data releases, better than expected corporate profit results, improved forward estimates, and stronger corporate balance sheets. This should also mean that 2021’s dividend payouts eclipse the reduced ones of 2020.  Yes, fundamentals are returning to favour, as they tend do in the passage of time after any volatile and uncertain period.

The markets do look as if they will continue to be stronger ahead in what is hoped will be the post Covid-19 world. In saying that, a market correction of some sort would not be surprising given the continued strength, and this period of strength, in the markets. A correction would possibly be caused more by a geopolitical event (e.g. with Chinese debt, trade war or territorial issues), rather than an economic event or slowdown at this stage.

If the global Covid-19 vaccine rollout continues its progress, and the evidence of lesser infections and lower risk of adverse consequences should a person still get the virus, then the larger the probability of further economic improvement and greater resultant consumer and business confidence. Nevertheless, although lifestyle normality appears to be coming back (subject, of course, to the shadow of the occasional Covid-19 lockdown risk), we are certainly living in a somewhat changed world. We seem to all be busier and busier with the immersion in faster technology and in a growing regulatory environment. Not only does the world never sleep, innovation never sleeps! And this situation is without global travel returning yet!

The seemingly endless, but deliberate, supply of government money, via bond buying programs, into the financial system over the past year has buoyed much activity, not to mention fuel growth and, probably, overheating certain sectors such as housing. This ‘cash injection’ positivity will no doubtably need to be reduce soon. The challenge ahead is the timing of when to reduce, and the degree of taking the foot off the ‘cash accelerator’ and allowing the increased economic activity to take more hold for sustaining growth. That is, so as to regain more normalised economic conditions, including having higher, more normalised interest rates as well.

The days of the RBA giving the banks’ here cash at 0.10% to on-lend to consumers and property buyers at circa 2.00% must be numbered, as the eased lending conditions also have helped house prices to record levels. The amount of personal and government debt does remain a concern, and will be more so, if/when interest rates rise. You can see why also the RBA wants rates to stay low as long as possible!

Globally, and here in Australia, we are seeing the back ended (longer dated) bonds interest rates’ rise as global activity improves and fears of inflation heading above the central banks’ desired levels may become a reality, maybe not soon but possibly later this year on. The RBA is still saying that it will not move on increasing cash rates for another two or three years to ensure the recovery does not stall. I think the RBA may need to move earlier as inflation and GDP look like rising further, sooner. Anyone who has shopped for goods, dined out, used a professional service or a tradie in the past year could only say that prices have only gone up, and notably so!

We have the Federal Budget coming out in May, and it should be an important directional one. It will be very interesting to see what the government’s fiscal approach will be from there as we move away from the events of the most unusual and challenging times of 2020 and on.

Upcoming Changes to Superannuation from 1st July 2021

In the meantime, separate to upcoming Budget announcements, there is good news with a few positive changes to superannuation have been announced that will be taking place as from 1st July 2021. These changes are outlined and discussed below in a recent article released by Shuriken Consulting. The article relates how it will impact you regarding how much money you can contribute to superannuation, and how much you can have in your retirement (pension) phase superannuation account.

As shown in Table 1 below, indexation will increase the concessional contribution (CC) and the non-concessional contribution caps (NCC) as from 1 July 2021. This is the first increase since the major superannuation changes in July 2017.

Table1: Concessional Contribution Cap Changes

In general, your superannuation is either in an accumulation account (when you are building your super), or in a retirement/pension account (when you meet preservation age and certain conditions of release to be able to roll your super), or in between, when you are transitioning to retirement (when you reach perseveration age, are working reduced hours and take some of your superannuation as a pension).

Remembering, the amount of money you can transfer from your super account into your tax-free pension account is limited by a transfer balance cap (TBC). From 1 July 2021, the current $1.60mm general TBC will be indexed to $1.70mm and, once indexed, no single cap will apply to all individuals (each person will have an individual TBC between $1.60mm and $1.70mm).

Indexation will also change other superannuation caps and limits including; Non-concessional contributions (contributions from after tax income; Co-contributions (personal contributions made by low and middle-income earners matched by the Government up to $500); and, Contributions you make on behalf of your spouse that are eligible for a tax-offset.

If you are building your superannuation and not withdrawing it, indexation of the TBC is a good thing because from 1 July 2021 you will be able to access/roll more of your superannuation tax-free. If you start taking your superannuation after 1 July 2021, for example, if you meet a condition of release and retire, your transfer balance cap will be $1.70mm. This is to say, if you have never had a transfer balance account credit, then the full indexation is available to you.

If you started taking your superannuation before 1 July 2021 and have already had a credit added to your transfer balance account, then your TBC will be between $1.60mm and $1.70mm depending on the balance of your transfer balance account between 1 July 2017 and 30 June 2021. If your account reached $1.60mm or more at any point during this time, your TBC after 1 July 2017 will remain at $1.60mm. If the highest credit ever in your account was between $1 and $1.60mm, then your TBC will be proportionally indexed based on the highest ever credit balance your transfer balance account reached. That is, the ATO will look at the highest amount your transfer balance account has ever been, then apply indexation to the unused cap amount.  Yes, a bit more complicated!

A further positive change is to the ‘Bring Forward Rule’. The Bring Forward rule enables you to contribute up to three years’ worth of non-concessional contributions in the one year. This means that from 1 July 2021, you could contribute up to $330,000 to your superannuation in one financial year (as shown in Table 2 below). You can use the rule if you are 64 or younger on 1 July of the relevant financial year of the contribution and the contribution will not increase your total super balance by more than your transfer balance account cap. If you utilised the bring forward rule in previous years, your non-concessional cap will not change. You will need to wait until your three years has expired before utilising the new cap limit.

Table 2: Non- Concessional Contribution Cap Changes

On another totally different area of discussion: Cryptocurrencies is a topic which is getting more media attention, as well as people wanting to know or at least better understand what it is. I, like most people, know little about it nor have ever used it (or is it even tangible?). All we hear is this ridiculous price movement in the most prominent one, being Bitcoin. We have even heard that using cryptocurrencies would be a favoured means of doing transactions for money launderers and terrorists!

A golden rule that the investment stalwart, Warren Buffet, says about investing if you do not understand it, do not invest in it. This rule would no doubt apply to Cryptocurrencies. Nevertheless, I came across this brief and interesting research article that may be of interest to you to at least better understand this somewhat mysterious world of cryptocurrencies.

Cryptocurrencies: The next ‘Tulip’ or a genuine emerging asset class?

(by Lukasz de Pourbaix, Executive Director & CIO, Lonsec Investment Solutions -April 2021)

“Everyone has a view on cryptocurrency, and in most cases, it is a tale of extremes. On one side sit the sceptics, who believe that cryptocurrencies are one big Ponzi scheme that will self-implode like the ‘tulip mania’ of the 17th century Dutch Golden Age, which saw the price of tulip bulbs reach incredible highs and then dramatically collapse. On the other side are the ‘true believers’, who believe cryptocurrencies such as Bitcoin are not just a new form of currency but a symbol of decentralisation and freedom from central banks and governments.

I am by no means an expert on cryptocurrency and blockchain technology, however, it is worth noting the growing interest by various institutions in cryptocurrency. Probably the highest profile announcement was Tesla’s decision to buy US $1.5 billion in bitcoin and its announcement that it would start accepting bitcoin as a payment method for its products.

The sceptics would say, ‘Yeah but it’s Elon Musk, the guy who sends rockets into Mars and wants to insert computer chips into people’s brains.’ However, we have seen institutions such as Mastercard indicate that it would bring cryptocurrencies onto their network, and recently JPMorgan Chase & Co strategists have been floating the idea of investors using cryptocurrencies such as bitcoin as a way of diversifying portfolios. According to a survey released by specialty insurer Hartford Steam Boiler Inspection and Insurance Company, 36% of small- to mid-sized businesses in the US accept digital currency for payments for goods and services.

From an investment perspective, proponents of cryptocurrencies such as bitcoin have considered the digital currency from two main perspectives. Firstly, bitcoin can be viewed as a store of value akin to gold. This view has been amplified in a world where central banks have been flooding economies with money via their quantitative easing programs since the time of the global financial crisis. The decentralised nature of bitcoin means that the price is not influenced by central banks, which is the case with traditional fiat currencies.

Interestingly the uptake of cryptocurrencies has been strongest in some emerging economies where arguably they are more prone to government instability, and in some instances, they have experienced the effects of hyperinflation, which has rendered traditional currency worthless.

Secondly, bitcoin offers ‘frictionless’ transacting, whereby the blockchain technology underpinning the digital currency uses a public ledger system to validate transactions, effectively cutting out the ‘middleman’, hence increasing the speed of transactions and reducing costs. The potential applications of blockchain technology beyond cryptocurrencies are far reaching and many institutions are actively exploring its application in areas such as property transfer, execution of contracts and identity management.

However, there are fundamental questions that need to be addressed before cryptocurrencies can become mainstream. From an investment perspective, how do you value crypto assets? What are you valuing and what metrics do you use to value it? These are valid questions, and, in my view, we are yet to address them adequately as an industry. Questions around the secure storing of cryptocurrencies and the associated risks with the different methods, ranging from holding assets on an exchange through to storing assets via a digital wallet using web-based or hardware solutions, all have their pros and cons in terms of security, and need to be considered when allocating assets to crypto. For large institutional investors such as super funds, how they hold investments is very important, and having a custodial structure supporting crypto assets will be imperative for the asset class to gain traction in that market.

We have seen BNY Mellon, the world’s largest custodian bank, announce that it will roll out a new digital custody unit later this year to assist clients in dealing with digital assets. Furthermore, we have already seen crypto ETFs launched in Canada and we will no doubt see managed fund and ETF structures reach our shores at some stage, which will alleviate some of the issues associated with storing crypto.

Another area which has come under the spotlight regarding crypto currencies is ESG (environmental, social, and governance) concerns over the energy required to mine cryptocurrencies. According to the Cambridge Centre for Alternative Finance, coal accounts for over 38% of energy consumption by miners. Given ESG is a growing part of people’s investment considerations and processes, this will be a relevant aspect of crypto which will need to be explored further.

Finally, we expect the sector to become more regulated as cryptocurrencies gain greater acceptance. While this does create uncertainty, it is also an important step for digital currencies to become accepted more broadly.

Cryptocurrencies and the associated implications of blockchain protocols and their applications are arguably still in their infancy and will dramatically evolve over time. While we do not expect cryptocurrencies to suddenly appear within your standard diversified portfolio in the near future, to simply dismiss the sector without trying to understand it would be a mistake. At a minimum, clients are increasingly likely to ask questions about cryptocurrencies, particularly as we see (eventual) product structures such as ETFs and managed funds make the sector more accessible for investors. The more we learn, the more we will be able to provide an informed response”.

As always, should you have any queries or wish to talk, please do not hesitate to contact us.