FMA Wealth Commentary – January 2020

These quite extraordinary times continue for people and for investors. And, we have entered the New Year and the new decade on a wave of this continued momentum.

As people, we are seeing and we are being personally impacted by faster and faster global changes through technology and automation, healthcare, social media, population growth, climate change and awareness, and demographic changes. We are also seeing a growing swell of government policy reforms being demanded by people. This ‘people’ side of things is discussed further on.

As investors, we have seen the markets finish the previous decade with a flourishing 2019, which was quite different to the close out of the preceding decade! The past decade has had its many challenges no doubt but, for the true, long-term and logical investor, it has provided solid investment returns in most sectors of the available asset allocation, especially in the growth and income producing areas of shares and property. Investors have had the opportunity to genuinely build their wealth.

In describing his recent assessment of how things look for investors ahead, the Head of Australian equities at Fidelity Worldwide Investments, Paul Taylor, states that “We are in the unusual position heading into 2020 of having tailwinds from both monetary (easing) and fiscal policy (government spending). Having pretty much used up all monetary policy ammunition (through successive easing), governments are now being asked to step up with further fiscal policy to help economies break free of this very low growth world. This will come via significant infrastructure development which should be good news (for investors) as low interest rates combined with fiscal stimulus is normally a positive environment for equity returns”. This includes, I would add, the very good global equity and property returns we saw in 2019.

The conflict or challenge to this is what Taylor adds in saying that “While conditions remain constructive for the Australian equity market, it is certainly not without risk. For lack of a better word, the ‘populism’ based politics that seems to be sweeping the world is very anti-growth in its approach. Populist policies like protectionism (i.e. trade wars), anti-immigration and government intervention are all anti-growth in nature and are likely to continue to put downward pressure on the already sluggish one or two percent economic growth range in most developed economies”. Taylor says he remains positive ahead, and he encourages investors to focus more on the next decade than just the next year. This makes good sense.

There was a degree of negativity heading into 2019, with the usual media led ‘fear of this and fear of that’ stories. This included the spruiking of a global recession being quite possible. This particular ‘fear’ was dissipated by upcoming facts and results (e.g. US corporate profits continuing very well). Facts versus Fears! So, we saw a resultant strong rally in the markets. And, 2020 appears as though this will continue onwards but very unlikely to the degree of what we saw last year, particularly as this new year has started with the markets already at record highs.

Moreover, there does appear to be more global stability than a year ago; or maybe the fact that no major meltdown happened has meant less fear. Although there are always ‘fears’ to find! There is the Chinese economy to worry about, whether the US/China trade war reignites, or in the US election late this year, will the Democrats win (unlikely, but a concern if they did)?

Although, there is no doubt that interest rate cuts and fiscal spending, allied with low unemployment, have substantially supported the strength in markets as well as turning around the what was definitely a weaker residential property market.

Traditional asset allocation models are being challenged in these changing times. The investment markets have seen investment money has moved out of cash and bonds in the latter months of last year into investments such as equities, property and infrastructure where returns at least have a chance real possibility of being better and more attractive. The fast pace of the rally in the markets of late is probably justified in the big picture but a consolidation pullback would be healthy. In saying that, there is still considerable cash looking to be invested, so any pullback(s) will be used by investors to buy yielding assets.

At mentioned earlier, these are extraordinary times for people. Despite this background of positive markets, I think that we would agree there does appear to still be this air of uncertainty or caution amongst people. There is so much change happening in all our lives. Much of the pace of this change can be daunting. Social issues such as climate change response, population growth and traffic congestion, sufficiency of energy supply and of water supply trigger concerns and often deep debate. The tragic bushfire dramas across Australia of late have further highlighted unease, and these have literally sparked a swell of ‘we do need a plan of committed action’.

I see much of the true ‘concern’ issues we face as being a lack of cohesive planning and foresight by government. I think that we all want to see long term plans in place to make our energy supplies consistent and affordable, to have proper bushfire controls, to agree a climate change response, to remove traffic gridlocks, to reduce regulation and red tape, etc.

However, plans to manage these issues must be practical and realistic, and implemented with vision not just a reactionary band-aid treatment of throwing money at the damage done..

One thing the bushfire calamity sadly demonstrated was just how bureaucracy can impede decision and action. Australia is over-governed; we have local, state and federal layers. They were arguing just which was responsible for how to respond and how to resource the growing need to fight the calamity. Do we really need a both local level and state level government? Cut one layer surely.

Having calls for a Royal Commission into what happened with the bushfires is simply a waste of resources and a way of Government avoiding it having to risk making the obvious decisions we need made What we do need is a Government brave and visionary enough to seriously work on solutions to these matters of concern. And to do so beyond a mere reaction to appease present media hype.

Furthermore, we seriously need to have a bipartisan approach between the prevailing government and the opposition (isn’t ‘opposition’ such a negative description, wouldn’t the term ‘alternative government’ conjure up something more positive in its depiction at least!) in how to tackle these such social issues with a long term strategy that will continue on regardless of which party is in power during that time.

This time frame for these ‘national development plans’ may need to be 10, 20 or 30 years national plans. In other words, plans and projects of national interest and development should be undertaken with the necessary commitment and surety of being completed and implemented, start to finish!

Government should have an acute focus on the things needing important attention. Why not have a uranium policy/plan to reduce coal dependency over time; why not use these great record low interest rates to raise long term funding for the numerous national infrastructure projects such as bushfire hazard reduction, such as water catchment and containment in city and regional area, such as more tunnels road programs, such as airport and port improvement; such as developing regional centres that will reduce city congestion. Some of these projects will take many years, even decades, to be completed, and will ‘outlive’ government after government, but that is what this planning should be realistically about. Blueprints that will happen! Build for better!

Make greater use of, and incentivise the use of private capital from fund managers, super funds, and even the ordinary person to support projects close to their hearts and minds! Get a buy in from people and from corporates! I know that it sounds a bit like the old cry to buy ‘war bonds’, but I think you get my drift!

The Morrison Government truly has a chance to really show leadership now where it matters with people and for the good of the country. Its success could actually be planning the future beyond what will be its term(s) in government. People will respect this, people like and need proactive leadership on important issues. Reducing regulation would also be on my wish list!

If this approach happens, I do believe that you will find improved confidence, optimism and greater economic benefits result too.

Switching discussion here, Governments have their role in our lives, but when it comes to personal wealth creation and management, people really are still responsible for their own planning. This is very important. Building wealth is based on investing in the right mix of assets over the long-term. It starts with having a plan, a process and a commitment to persevere. Investing is like life in some ways, it has its ups and its downs but it goes on!

Increasing wealth should and can be enhanced by using concepts such as Saving regularly, as we do through using superannuation and through dollar cost averaging; Compounding to accelerate growth, as we do through re-investment; Tax management to deliver better net outcomes, such as through the right investment structures (especially superannuation) and franking credits, and using CGT discount availability, etc; and also by having sensible Diversity in our investment asset mix.

Diversity reduces investment risk by spreading the risk, which in turn adds to actually having more stability over the long term.

Yet, the actual concept of ‘what and why’ about investing is relatively straightforward. Fundamentally, if you invest sensibly with a long-term horizon, you will be rewarded with a growing asset base, with their resultant income streams. Where many people flounder or fail to understand is with the ‘how to’ actually do investing. Investing is full of complexity, volatility and is prone to both domestic and global economic, political, and technological changes, as well as the exposure to handling negative media interference, and with what appears to be becoming more of a consideration are social issues, such as climate change considerations.

The actual concept of investing and the why to invest remain the constants in the process. It is the understanding and the navigating the investment road, including asset allocation and product selection, which are the variables, just to name a couple of them! The benefit of experience and even of being mentored in investing such as through good advice, should deliver better knowledge, appreciation and patience surrounding the diverse world of investing.

Most of us will be (and should be!) investing for many decades. It could be from say age 20 through to age 90, or more! On average, most people will be investing or using the fruits of their investing in some manner for 50,60,70+ years!  If we start earning wages from school or university, we will likely be earning and investing super. This is often the starting block for many of us. The earlier people really begin to invest and also understand investing, the better i.e. the better off and more self-sufficient they should be in their years ahead.

Anyway, let’s see how the roarin’ twenties roll out! Well, a good start so far from the kick-off!

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

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FMA Wealth Commentary October 2019

As discussed in our last commentary, these are extraordinary times for the Australian investor and even more so for the global investor. We have, these days, ridiculously low cash rates and bizarrely low bond rates, with several countries actually having negative yields. Cash rates and bond yields have fallen even further in the last couple of months.

And all this is while equity and property markets remain strong despite having ‘bouts of volatility’ about the same thing, aka the China/US trade war. Cheap cash and lower interest rates should help boost markets and activity. That is what central banks are hoping for, with fingers crossed! Yet, it is more complicated than that, and more needs to be done.

The weird concept of negative interest rates/yields has many rational people confused. What are negative interest rates really, and why are they becoming more prevalent now around the globe? Why on earth would people buy a guaranteed negative returning asset, particularly when there are other asset classes that will or at least have a far greater chance of a good positive return to the investor?

Turning directly to the negative interest rate situation. I consider there are two types of ‘negative returns’. In the first case, and one that is now an actuality here in Australia, is where you earn a positive nominal interest rate return on your cash, term deposit or bond however, now, when the interest or bond coupon is less than the prevailing CPI i.e. level of inflation in real terms you will lose money. If you earn less than inflation (which is currently at an annualised rate of 1.6%), your investment is effectively losing money. For example, if you, an investor, bought an Australian Government Bond (AGB) today and held it to maturity, you would yield 0.68% p/a for a 2yr AGB; 0.70% for a 5yr AGB; and a paltry 1.01% for a 10yr AGB! And should you pay tax on your meagre interest earnings then that loss in real terms will sadly be accentuated!

In the second case, you will also actually lose money; meaning lose it in two forms in terms of the money eventually returned to an investor in nominal terms as well as in real terms! Europe is a clear case where this is now occurring. The German Government Bund (GGB) is a good example to illustrate this such scenario. If you, say a German investor, bought an GGB today and held it to maturity, you would simply lose money, full stop! You would get a negative yield of -0.74% for a 2yr GGB; -0.70% for a 5yr GGB; and -0.45% for a 10yr GGB! To explain this scary outcome using the 5yr Bund as a current example. You are offered 0.00% coupon (interest) on the bund, which you can buy now for $103.57. Then, when it matures in five years’ time, the government gives you back $100.00 being the face value of the bund. So, the loss locked in, both in actual cash terms and even more so in real terms! Go figure!

So, why are such securities being bought? There are several reasons. I think, out of habit of people just buying good old bonds; out of a belief that it is still good to always own bonds in a portfolio for diversification; and also because, other than high growth investors, all other portfolio profiles will include bonds, to varying degrees, in a portfolio. When bond prices are rising (and thereby yields falling), as has typically been the case for several years now, bond returns have been good – but only if you offloaded the bonds and have not held/hold them to maturity when the revert back to the lower face value on the designated maturity.

Bonds are generally considered defensive, low risk investments. However, the whole question of investors owning bonds now is becoming very questionable. Yes, we do need diversification in investment portfolios, but buying more bonds now when bouts of market volatility occur, is probably not the answer! Certainly, being overweight bonds in these times does question logic especially where investors require income from their investments.

There is a lot of talk by local economists and the like about activity and growth being quite stagnant, and even of a recession here being imminent. I do struggle to see ‘this’ recession happening here soon, especially with the recent tax cuts still to kick in and our relatively strong employment rate. Have you tried to find staff in recent times? It is very hard! I speak with clients from many areas of business and, like financial services, finding the right staff is probably the biggest challenge facing many firms here.

Yes, a recession may mean tougher times are prevalent, but recessions are part of economic cycles. They do not happen often, and supposedly, very rarely in Australia, but they do and will happen, as do expansionary and boom periods to which we are more accustomed too! Economic cycles happen. Of course, Australia is part of the world of economies, so we are prone to overseas events and economic cycles as well as to how things are going here.

Certain business sectors, such as retail, are definitely feeling the pinch and the grip of global competition and of online purchases being so readily available in these times. The impact, speed and development of the internet and similar technology combined have changed our world (especially retail) forever. People and businesses have to adapt and evolve so quickly now. We live in this world that is faster and faster with even more and more information available. It is a challenge for all especially handling and manoeuvring with this continual pace of change. It is all this rapid change that I consider is what does create discomfort and uncertainty, at various stages, for businesses and for people alike.

One outcome of all this increased visibility, globalisation and increased competition via access to more markets to access more and cheaper goods, etc. is that inflationary pressures have reduced globally. However, speaking of inflation, I remain perplexed at how the Bureau of Stats comes up with continually low annualised inflation numbers. Other than some food items being possibly unchanged in prices, virtually everything else seems to be rising at rates well faster than official weighted inflation figures. Any services, insurances, education, health, council rates, fuel and travel costs just keep going up. And there is little wage growth to combat these rises to the consumer and their families. At least mortgage rates are coming down, so this is a cash flow boost to many households. There is ‘talk’ that inflation will fall even further, but this could well change if stimulatory monetary and fiscal measures do gain traction.

I do think that consumer and business confidence has waned. So why is there this ‘flattish’ sentiment supposedly around. The sheer pace of change, discussed above, brings with it fatigue and uncertainty. What also cannot be underestimated is the negative impact that the Labor election campaign had on investors and businesses for the many months leading up the Federal Election held a few months ago. Fortunately, Labor failed to get elected because of the recognition by voters of Labor’s regressive and class segregation policies. Nor can we underestimate just how damaging has been the Banking Royal Commission for the country. Yes, there have been the remediation benefits to impacted consumers, however, the sheer financial cost, reputational damage and the pulling out of, or the reduction to, many banking and financial services, and to lending by the banks,’ as a consequence of the Commission has, I fear, outweighed the intended benefits. It was a political football. Labor had said it would undertake a full banking enquiry when it came to power, so Turnbull jumped in beforehand to say that ‘we’ will do it. A country must have a strong banking sector (and ideally one with very strong ethics) to underpin a strong economy. We are all paying for the Commission’s outcomes. Ignoring the argued benefits of the Commission for a moment, further regulation and compliance has slowed down the economy and raised business operational costs. Many businesses are having to push their wheels of motion through more ‘wet mud’.

So, to also help move things along and to encourage growth activities, with official cash rates already squeezed down to such low levels, increased fiscal measures and more investment by governments must occur, together with pro-business and more stable policies needed. Maybe also seeing a pull back on some of the constant and often questionable regulatory framework we are being tied up in. We all can only hope that this will all occur!

Certainly, global events such as the ongoing China/US trade dispute and the Brexit saga have fuelled market concerns and volatility on many occasions during the past couple of years. It has become quite tiring but, if these such issues can be resolved favourably, then the growth market sectors of equities, property and infrastructure are primed to advance further ahead, especially in the US. This would be a good result for investors with sensibly diversified portfolios but understanding that allocation to traditional defensive assets is now a far more questionable choice with such very limited income and very limited, if any, capital gain prospects in the current environment. Taking more supposed ‘risk’ by investing in more growth-oriented investment assets needs to be decided by investors based on their income needs, risk appetite and, really, logic and common sense!

As noted previously, all in all, maybe we don’t need to wear the shades but the future here still looks pretty bright!

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


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