Financial Planning

The big news of the month was the announcement of the federal election on May 22nd. This creates uncertainty which markets do not like but are clearly very temporary and adjustment is swift once the winner is decided. A hung parliament extends the uncertainty with lasting impacts.

The ASX outperformed most markets in April by falling only 1% versus 8.7% for the S&P500 and the NASDAQ falling 13.2%, which was the worst performing market. The only market to move into positive territory was the UK which was up 1%. Over the past 12 months, the worst performing market was China, down 35..3% and the best performing market was the UK up 15.6%. Australia is up 10.8% and the S&P500 down 1.6%.

The best performing sectors in Australia for the month were Utilities (up 9.3%) and Industrials (up 3.5%). Over 12 months, Utilities have delivered a return of 41.2% and Energy is up 34.2%. The worst performing sectors for April were Technology (down 10.4%) and Materials (down 4.3%). Over 12 months the worst performing sectors were Technology down 22.3% and Consumer Discretionary down 2.7%. These figures highlight a couple of investing lessons, 1) Don’t buy the hot sector or stocks of the day – the hot sectors 12 months ago were Technology & Consumer Discretionary on the back of strong performance during COVID, 2) The noise around markets are likely to be focused on past performance and not looking forward, 3) Forecasts are more often wrong than right, and, 4) Diversification is your friend in investing.

If we were to look at what is being promoted now, climate change beneficiaries, lithium battery component suppliers, companies benefitting from rising interest rates and commodity producers. I would suggest that these companies will not be the winners of the coming 12 months as much of the upside is already priced into the market. Then again, as in point 3, forecasts are more often wrong than right!

The big issue markets are grappling with is inflation. The annualised rate in the US is 8.7%, while an inflation rate of 5.1% was seen in Australia. This is spooking markets and the forecasts (often wrong) are suggesting massive increases in interest rates, far more than I believe the economy can handle or require. My view is we are still in an economic environment that has been massively impacted by COVID-19 and that will take time to adjust. I believe many of the influences on inflation will die down and over 3-5 years will fall back to more reasonable levels. Central Banks will be patient with inflation and lift rates in a measured fashion that the economy can handle. This is particularly so in Australia. The Reserve Bank (RBA) responsibility is to maintain full employment and inflation at 2-3% over the MEDIUM term. Medium term to me means 7-10 years and I believe that the RBA has the same view. We were undershooting the inflation target for many years and the RBA is likely to be patient on the way up. The key focus is wages growth which is the main driver of inflation.

The property markets are showing signs of slowing with both Melbourne and Sydney prices flat over the month and much of the last 3 months. I believe the election is impacting this, along with forecasts of higher interest rates keeping people on the side lines. I believe demand will return once the election is decided with strong underlying growth, immigration and still very accommodating interest rates being the key drivers.

The Australian dollar fell by 5.4% versus the $USD over April. This was due to the interest rate expectations in US rising faster than here in Australia and China locking down major cities to prevent the outbreak of COVID with a zero COVID policy in place. The China slow is temporary with the Chinese government announcing stimulus measures which will be a tailwind in the future. The interest rate differential is likely to linger for a while until there is clarity on how many interest rate rises are required in each country. This makes the costs of travelling to the US a bit more expensive for the time being.

Thank you for reading the monthly report. If you would like to discuss any topics in the report or how they might impact your financial plan, book in a review appointment with a financial adviser today!

Until next month!

March saw the Australian share market outperform most global markets on the back of strength in Banks and Resources companies which are the largest on the market. Resource stocks were up 10.2% and the banking sector was up 10%. The biggest moves in the resource sector were seen from Fortescue Metals, South32 and Independence Group. The moves in resources are on the back of a fall in supply of metals that Russia and the Ukraine usually supply to the world. While this is a shorter term reason, the strength of the global economy is driving demand for commodities. If you use current prices when valuing resource companies, earnings upgrades will continue which should drive resource company prices higher.

Australia is a beneficiary of the demand for commodities, and we expect the Australian market to continue to outperform less resource focused markets in the medium term. Our expectation is that demand for commodities will push up the Australian Dollar (rose 3.5% in March but is down 1.4% over 12 months). The strength in commodities flows through to the broader economy with the government forecasting a positive outlook in the budget released during the month.

The Technology sector was the best performing sector for the month after a difficult start to the year. Square (formerly Afterpay) was the best performing stock rising 19.3% after reporting strong earnings growth, Wisetec was up 17.3% and Computershare up 14%. The worst performing sector was AREITs which were up 1.5% for the month due to the rising bond yields. This is a short-term adjustment with the strength of the economy to drive rents higher in the future.

Turning to property, residential rents are recovering fast. The vacancy rates in residential property around the country is being reported at the lowest level on record, which is leading and will continue to lead to rent increases in the future. Rent increases lag due to rental agreements rolling over, it is important that you review your rent when your lease is up and seek advice from The Hopkins Group property team to make sure you are getting rents appropriate for your property.

There is an undersupply of property in Australia which will only be exasperated by the return of immigration. If you are in the market for investment property, we have a range of options to find a property that will meet your needs. We have the skill in house to advise you on buying established property through our buyers advocacy team and buying new property which requires careful consideration due to the rising prices and the quality of the development team.

Global equity markets were higher with Latin America up 6.6% and Japan up 5%. The worst performing global indices were China down 7.7% and Emerging markets down 2.2%. China has shut down major cities to maintain its Zero COVID policy and lower growth forecasts of 5.5%. Emerging markets typically struggle when commodity prices rise as they are net importers of commodities including oil, which has risen significantly in recent months. The NASDAQ rose 3.5%, recovering some of its losses over the last couple of months.

Bond yields continue to rise across the global with inflation driving expectations for higher interest rates. If inflation works its way into peoples expectations, inflation will be a permanent feature of our economic future. Wages has the biggest impact on inflation and we are starting to see wage increases globally. The bond market gave a signal that there may be a recession in 12 months time when the 3 year US bond yield was higher than the 10 year bond yield. This is not a fool proof indicator but could highlight a long term slowing of the US economy or to my mind, could indicate that inflation is going to short lived and that the COVID stimulus will work through the economy and inflation will fall back to levels acceptable to central banks.

Superannuation has undoubtedly been an area that many Australian’s either don’t fully understand or outright ignore. This lack of interest and or awareness has led many individuals to receive suboptimal outcomes with their retirement savings.  

Compulsory superannuation was first introduced in 1992 in a bid to ensure that the aging population of Australia was going to be able to support themselves in retirement without the need to rely on Social Security.  

The government at the time implemented a carrot and stick policy in order to convince Australian’s to save for their own retirement.  

The stick: Whilst the amounts have changed over the years currently 10% of your salary must be paid to your nominated fund. In the event you don’t nominate a fund your employer will nominate one for you. So statistically for every fortnight you work one day is spent working for your retirement savings. 

The Carrot: In order to encourage people to save for their own retirement superannuation has a concessional tax rate. Currently the tax rates are 15% for those in an accumulation fund and 0% for those in a pension fund. The outcome of this is if a 26-year-old earning $50,000 per annum invested $5,000 per annum inside superannuation versus invested $5,000 in their own name. After 40 years the value of the investment inside would be $355,472 inside superannuation and $199,360; i.e. you end up with 78% more funds just due to the favorable tax structure. The benefit of this increases further with higher income earners. See figure 1.  

 

Figure 1.

In summary, for the average Australian worker once a fortnight they are working for their retirement fund. It pays to take some time to work out where these funds go and where they are invested. If savings are for the purpose of funding retirement superannuation should be at the top of your considerations due to the favorable tax structure.

What can I do today to help me maximise my superannuation balance at retirement?

Following mandatory superannuation in Australia the superannuation industry has become a $3.3 trillion dollar industry (Association of Superannuation Funds Australia, 2021). There are many products out there to choose from, and just like any other product, some are better than others.

The two key factors that will contribute to an individual’s ability to grow their superannuation balance over time: Fees & charges and the correct asset allocation mix.

Fees:

Each superannuation fund charges a mix of flat member fees, tiered administration fees and investment management costs. There can also be other costs imbedded into your investment management fees such as transactional costs, property costs, borrowing costs and performance fees. These can be difficult to find and may require a thorough read of your relevant product disclosure statement.

However, just like adding an extra 0.5% to your investment returns will compound over time and produce a greater balance, so will reducing the amount of fees charged to your account.

Asset allocation mix:

The correct asset allocation mix is the most important determinant of your investment returns. The mix of growth and defensive assets that the funds are invested in is therefore incredibly important to maximising the superannuation balance at retirement.

There is strong link between portfolio asset allocation and investment timeframes. A longer time period allows for a full market cycle to ride out any volatility, and experience the investment returns of a full cycle whereas a shorter investment timeframe can result in volatility forcing an investor to exit their position in a down market.

The important thing about superannuation savings is that they cannot be accessed until you reach preservation age and retire or reach age 65. This means that for most Australians (under age 55) their investment timeframe is over 10 years which allows time for a full market cycle.

Alternatively, older Australians may find that as they approach retirement their investment window is getting shorter. In both scenarios it is important to consider what mix of growth and defensive assets is appropriate and going to produce the best outcome.