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
|Cap Type||Current Cap||Cap from 1st July 2021|
|Concessional Contributions (CC) Cap||$25,000||$27,500|
|Non-Concessional Contributions (NCC) Cap||$100,000||$110,000|
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
|Between 1st July 2017 & 30th June 2021||After 1st July 2021|
|Total Super Balance (TSB)||Contribution and BFR Available||Total Super Balance (TSB)||Contribution and BFR Available|
|< $1.40mm||$300,000||< $1.48mm||$330,000|
|$1.40mm – $1.50mm||$200,000||$1.48mm – $1.59mm||$220,000|
|$1.50mm – $1.60mm||$100,000||$1.59mm – $1.70mm||$110,000|
|$1.60mm +||Nil||$1.70mm +||Nil|
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.