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Author: Provision Wealth

Now’s the time for tax planning

Date: Apr 16th, 2018

With less than ten weeks remaining to the end of the financial year, now is the time to start some serious tax planning.

Getting ready for tax time should go well beyond bundling receipts into a shoe box for your accountant. The run up to 30 June is a critical time for investors to take a good look at their investment portfolio.

Your goals and needs may have shifted over the year, and your portfolio needs to keep up with the right blend of assets to meet your goals. Even if nothing has changed on the personal front, investment markets don’t sit still for long.

Property investors in Sydney and Melbourne for instance, have enjoyed tremendous value gains over the past few years but this may mean the weighting of your portfolio is dramatically skewed towards bricks and mortar.

If that sounds like you, bear in mind rental yields on property are sitting at just 3.7% across our state capitals, and a significant chunk of your wealth could be tied up in low-yielding assets.

Consider new legislation

The need to review your portfolio ahead of 30 June isn’t just about market performance. It can also involve taking advantage of, or responding to, new legislation.

We’ve heard lots of speculation recently about Labor’s plan to scrap cash refunds for excess franking credits on Australian shares.

So far, this policy has been amended to include a so-called Pensioner Guarantee that will exempt full and part-time pensioners including those who are recipients of a self-managed superannuation fund.

Nonetheless, jumping the gun and altering your portfolio based on what may – or may not – happen further down the track is a gamble, and on this particular score it could be worth taking a wait and see approach.

In the meantime, plenty has happened in other areas that could directly impact your portfolio.

As a guide, since 1 July 2017 property investors can no longer claim the cost of travel to inspect a rental property. This could be a significant downside for investors who own an interstate property – especially if part of the appeal was a tax break on an annual trip to check out the property.

Also, from 1 July 2018, those aged 65 and over may be able to contribute up to $300,000 from the sale of their main residence to super without the money counting towards contribution caps.

Each member of a couple can take advantage of the $300,000 limit, potentially adding $600,000 to their combined nest egg. It could be an option worth considering if you’re thinking about downsizing.

Get your portfolio in shape for a new financial year

Fine-tuning your portfolio ahead of 30 June can mean paying costs, and capital gains tax may apply to any profit you make on the sale of an investment. The upside is hitting the new financial year with a portfolio that’s in tune with your goals and lifestyle.

Please contact us on |PHONE| to review your portfolio before the end of the financial year. It can be a valuable step to ensure your money continues to work hard for you.

 Source : AMP 13 April 2108 

Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.

Important 

This article provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Although the information is from sources considered reliable, we do not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, we do not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person.

Planning for a (much) longer life

Date: Apr 13th, 2018

We generally need to make earnings from 40 to 50 years in the workforce extend across what could be 80 to 90 years of living.

Australians today need to do something our parents and grandparents didn’t even think about – plan for a long life, and a new report shows the benefits of planning for longevity go beyond money matters.

The gift of an extra decade

Australians enjoy one of the longest life expectancies in the world. Around 3.7 million of us (15% of the population) are aged 65-plus, and today’s 60-somethings can expect to live for another 20 years on average. That’s an increase of more than eight years for men and almost 10 years for women since the turn of the century.

However, a new study by National Seniors Australia (NSA) shows that our savings behaviour is not keeping pace with increasing life expectancy.

The challenge of ageing is simple – in theory at least. We need to make earnings from 40 to 50 years in the workforce extend across 80 to 90 years of living. The NSA report highlights a key problem with this: We have a tendency to take the present more seriously than the future, and that means we often fail to save enough to pay for later life.

Look beyond early retirement

The same study found that what matters most to people about their finances in retirement is having regular, constant income. Conserving capital to leave money for the next generation is becoming less of a consideration for many Australians.

Nonetheless, many of us expect to maintain similar spending patterns in retirement as we did in the workforce. Crunch time often comes as we head towards retiring age, and the reality of what may be a limited nest egg becomes more obvious.

We also have a tendency to make plans for travel and leisure in early retirement. However, it pays to look a little further over the horizon and consider how you will meet aged care costs because chances are, either you – or your family – will need to pay for them.

Avoid future disadvantage

It all highlights the need for good planning. The NSA found that people who have no plans to deal with an increased lifespan are more likely to experience financial, social and emotional disadvantages.

I’m pretty sure that’s not the outcome you want for your retirement. Thankfully there is a solution. Part of the answer lies in committing to saving for retirement while you have enough income to do so. But it also hinges on how you use your super and other investments once you leave the workforce.

Striking the balance between a quality retirement and running out of funds prematurely is a juggling act that calls for expert financial advice, and it’s not something you should put off until you’re ready to walk away from the workforce for the last time. Seeking good advice early can be one of your best investments.

Regardless of your life stage, contact us on |PHONE| about laying foundations to enjoy a rewarding future. Retirement really does come around far sooner than any of us expect.

Source : AMP 5 April 2018 

Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.

Important 

This article provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Although the information is from sources considered reliable, we do not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, we do not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person.

US China trade war fears – Q & A

Date: Apr 12th, 2018

Introduction

Much has been written about the trade dispute between the US and China and the risk of a global trade war. Much of it has been hyperbole but financial markets have had to price in the risks of a full-blown trade war zapping global growth. This has been difficult given almost daily developments on the issue since early March. This note takes a simple Q & A approach to the key issues.

What is a trade war?

A trade war is a situation where countries raise barriers to trade with each other (such as tariffs or quotas on imports or subsidies to domestic industries) usually motivated by a desire to “protect’ domestic jobs and workers sometimes overlaid with “national security” motivations. To be a “trade war” the barriers needs to be significant in terms of their size and the proportion of imports covered. Tariffs on a few goods don’t really count as a trade war because it’s not significant.

The best known global trade war was that of 1930 where average 20% tariff hikes on most US imports under Smoot-Hawley legislation led to retaliation by other countries and contributed to a collapse in world trade.

What is wrong with protectionism?

A basic concept in economics is comparative advantage: that if Country A and B are both equally good at making Product X but Country B is best at making Product Y then they will be best off if A makes X and B makes Y. Put simply free trade leads to higher living standards and lower prices whereas restrictions on trade lead to lower living standards and higher prices. This is why economics should be compulsory in final years at high school!

The trade war of the early 1930s is one factor – along with wrong-footed monetary and fiscal policy – that contributed to the severity of The Great Depression.

A few years ago, at a presentation in Adelaide I tried to explain all this to a woman in the audience who was incensed by the recent closure of auto production in South Australia by Mitsubishi. After a while someone else in the audience asked for a show of hands as to who drives an Australian-made car – only about five hands went up including mine (the Holden!) but most people’s hands stayed down, including the lady’s and she said she liked the safety of a Volvo. Fair enough. But it seems that while some want to protect local industry they don’t buy it themselves. The experience of heavily protecting Australian industry in the post WW2 period was that it was just leading to higher costs and prices and lower quality products and Australians’ were voting with their wallets to buy better value foreign made goods. We might have protected lots of manufacturing jobs if we stayed at the levels of protection of 45 years ago, but we would have become a museum piece as would the US.

Fortunately, despite the loss of jobs in manufacturing (from 25% of the workforce in 1960 to around 8% now) other jobs have come along in the services sector where Australia’s and America’s relatively highly-skilled but highly-paid workforce have a comparative advantage compared to workers in less developed countries.

In short, if you want to support your country’s products buy them, but trade barriers don’t work.

Why is President Trump raising tariffs then?

It’s simple. He is fulfilling a 2016 presidential campaign commitment to “protect” American workers from what he regards as unfair trading practices. He has long held this view – see his 1986 interview with Oprah where his focus was Japan. Last year his focus was on deregulation and tax reform, which helped share markets. This year the November mid-term elections are approaching & polling not helped by his poor popularity has been pointing to the Republicans losing control of the House, so he is back in campaign mode returning to his campaign commitments on trade, knowing tariffs are popular with his supporters.

What does President Trump want?

President Trump wants better access for US exports to China. While it’s been feared at times that Trump was willing to get into trade wars with any country that the US has a trade deficit with, including long time US allies – with criticism of Europe and Germany on the trade front and regular threats to tear up the South Korea/US free trade deal (KORUS) and NAFTA, and US aluminium and steel tariffs originally thought to apply to all countries, it’s clear the main focus is China:

  • Europe has been exempted for now from US tariffs on aluminium and steel (along with most US allies).

  • KORUS has been renegotiated with only minor concessions to the US (on steel and cars with a focus on reducing non-tariff trade barriers); and

  • The NAFTA free trade deal with Mexico and Canada looks on track to be renegotiated.

So maybe Trump is not so blindly protectionist as feared. Basically, the US under Trump feels that China is not giving its exports fair access and alleges – after a review under section 301 of the US Trade Act – that it’s not respecting the US’s intellectual property.

Where are we now?

Fears of a global trade war were kicked off in early March with Trump’s announcement of a 10% tariff on aluminium imports and a 25% tariff on steel imports. US allies were subsequently exempted but China was not, and it announced similar tariffs on roughly $US4bn of imports from the US matching the US tariffs. So tit for tat. But tariffs on $US4bn of imports are trivial – less than 0.1% of US imports for example.Fears of a global trade war were kicked off in early March with Trump’s announcement of a 10% tariff on aluminium imports and a 25% tariff on steel imports. US allies were subsequently exempted but China was not, and it announced similar tariffs on roughly $US4bn of imports from the US matching the US tariffs. So tit for tat. But tariffs on $US4bn of imports are trivial – less than 0.1% of US imports for example.

The focus then shifted to China. On March 22 in response to the Section 301 intellectual property review, Trump announced 25% tariffs on $US50bn of US imports from China with the details announced two weeks later but to be subject to a period of comment before “proposed” implementation in late May/early June. At the same time the US lodged a case against China with the World Trade Organisation, providing confidence Trump is not trying to undermine the global trading system.

China then announced “plans” for 25% tariffs on $US50bn of imports from the US with a focus on agricultural products. So more tit for tat – but in this case only in relation to proposals or plans. And still only small at around 1.5% of US imports, implying an average tariff increase across all US imports of just 0.4%.

To appear to stand up for American farmers, President Trump announced that the US would consider tariffs on another $US100bn of imports from China. China indicated it would again announce a proportional response should the US do so. So fears started to rise of an escalation. But again, it’s all proposals.

On March 22 Trump asked the US Treasury to consider restrictions on Chinese investment in the US by May 21.

What is the most likely outcome?

So far what we have really seen is not a trade war but a phoney trade war between the US and China. The tit for tat tariffs triggered in relation to US steel and aluminium imports are trivial in size. All the other tariffs are just proposals, contingent on the US and China being unsuccessful in reaching a negotiated solution. Our view is that a negotiated solution will head off their implementation, indefinitely delay them contingent on trade success or result in very watered-down tariffs:
 

  • President Xi Jinping’s speech at the Boao Forum committing to lower import tariffs for various products, increased market access for foreign investors and strengthened protection of intellectual property rights echoes comments by Premier Li and indicates that China is aware of the issues and willing to negotiate. PBOC Governor Yi has added more detail in relation to making it easier for foreign participation in the Chinese financial system and indicated the China will not manipulate a Renminbi depreciation in the trade conflict. So it’s a good first step.

  • Similarly, while President Trump wants to be seen to “stand tough for American workers” a full blown escalation into a real trade war with China come the November mid-term elections is not in his interest as it would mean higher prices at Walmart and hits to US agricultural exports both of which will hurt his base and a much lower US share market which he has regarded as a barometer of his success.


Reaching a deal with China will be harder than “fixing” KORUS and NAFTA and there is a long way to go with setbacks inevitable, but ultimately a deal is likely.

Will all this really fix the US trade deficit?

No. The real issue is that America as a nation spends more than it earns which results in it importing more than it exports. The only way to solve this is for it to save more but the now rising US budget deficit due to tax cuts and spending hikes will mean it will save less. So while a deal with China may reduce the US trade deficit with China the trade deficit will simply shift to other countries.

What to watch?

Key to watch for is negotiation between the US and China on trade. Meanwhile, the US Trade Representative will hold hearings on its proposed US tariffs on $US50bn of imports from China on April 23, these tariffs “if any” are due to be finalised by May 21 and the US Treasury is due to propose restrictions on Chinese investment in the US by May 21 – but both could be delayed if negotiations are ongoing. May 1 will also see exemptions to the US’s steel and aluminium tariffs expire if they are not renewed.

What would be the impact of a full-on trade war?

The negative economic impact from a full-blown trade war would come from reduced trade and the disruption to supply chains that this would cause. This is always a bit hard to model reliably. Modelling by Citigroup of a 10% tariff hike by the US, China and Europe showed a 2% hit to global GDP after one year with Australia seeing a 0.5% hit to GDP reflecting its lower trade exposure compared to many other countries, particularly in Asia which will face supply chain disruption. But of course we are currently nowhere near a 10% average tariff hike. And the current situation really just involves the US and China so arguably Chinese and US goods flowing to each other could – to the extent that there are substitutes – just be swapped for goods coming from countries not subject to tariffs thereby reducing the impact.

Why have share markets fallen?

A full-blown trade war would depress global growth so share markets have moved to make some allowance for the probability of this. If a trade war is averted, even though we may not have trade peace, share markets will be able to unwind this, albeit volatility will still remain high given other issues such as Fed tightening and ongoing risks around President Trump.

Source: AMP Capital 12 April 2018

Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.

Falling Sydney & Melbourne home prices – is this the crash? What about other cities & the impact on the economy?

Date: Apr 09th, 2018

Australian capital city home prices fell 0.2% in March, their fifth monthly fall in a row. This has brought annual growth down to 0.8% from 11.4% in May last year. Most of the recent weakness relates to Sydney and to a less extent Melbourne.


Source: CoreLogic, AMP Capital

This is unusual in that property price downturns are usually preceded by significant interest rate increases. Consistent with the fall in Sydney and Melbourne property prices, auction clearance rates and home sales have also fallen.


Source: Domain, AMP Capital

How far will prices will drop? Will the weakness spread to other cities? And what will it mean for the broader economy?

Australia’s Achilles heel – the risk of a crash

With prices falling in Sydney and Melbourne some see this as the start of a crash. There is good reason to be concerned:
 

  • Real capital city house prices are 27% above their long-term trend (see the next chart) and are at the high end of OECD countries in terms of the ratio of prices to income and rents.


Source: ABS, AMP Capital

  • The surge in prices relative to income since the mid-1990s has gone hand in hand with a surge in the ratio of household debt to income that has taken it to the top end of OECD countries.

  • With a long period of strong prices and low mortgage rates has come some deterioration in lending standards with the share of new interest only loans reaching around 45% in 2015 and concerns about the reliability of borrowers’ income and living expense assessments when they take out loans.

  • Finally, there has been a surge in the supply of apartments, notably in Sydney evident in the high number of residential cranes in use, raising concerns about oversupply.


Source: Rider, Levett, Bucknall Crane Index, AMP Capital

However, a crash remains unlikely

While crash calls and stories of mortgage stress are common, they have been repeated endlessly over the last 15 years. But, a crash (say a 20% national average price fall) remains unlikely:

First, the real driver of high home prices and their persistence has been that, thanks to tight development controls and lagging infrastructure, the supply of dwellings has not kept pace with population driven demand.  Over the last decade annual population growth has averaged about 150,000 above what it was over the decade to the mid-2000s, which would require roughly an extra 50,000 new homes per year. But it’s only recently that supply has caught up with the pick-up in population growth. And population growth remains very strong.


Source: ABS, AMP Capital

Consistent with this average capital city vacancy rates are at or below their long-term averages, notably in Sydney.

Secondly, while mortgage stress is a risk: there has been a sharp reduction in interest only loans since APRA strengthened lending standards; debt servicing payments as a share of income have actually fallen slightly over the last decade and Census data shows that the share of owner occupier households with a mortgage for which debt servicing is above 30% of income has fallen from 28% in 2011 to around 20%; a significant number of households with a mortgage are ahead on their repayments; and banks non-performing loans remain low. While there has been some deterioration in lending standards it does not appear to be anything like that seen with NINJA (no income, no job, no assets) loans in the US prior to the GFC.

Finally, it is dangerous to generalise. Property prices have surged in Sydney and Melbourne but have fallen in Perth and Darwin and have seen only moderate growth in other capitals.

To see a property crash we probably need much higher interest rates or unemployment (neither of which are expected) or a continuation of recent high construction for several years (which is unlikely as approvals have cooled from their 2016 highs).

Outlook

A further tightening in lending standards as banks get tougher on borrowers’ income and living expense levels along with rising supply and more realistic capital growth expectations by home buyers will see Sydney and Melbourne property prices fall another 5% or so this year with further falls likely next year.


Source: CoreLogic, AMP Capital

By contrast home prices in Perth and Darwin are either at or close to the bottom, price growth is likely to be moderate in Adelaide and Canberra, but it may pick up a bit in Brisbane thanks to stronger population growth and the boom in Hobart has a way to go yet.

Regional centres are likely to provide relatively faster capital growth reflecting weaker supply and offering more attractive rental yields (around 1.5 percentage points higher than in cities). Units are at greater risk given surging supply, but so far house prices have slowed more in Sydney and Melbourne.

The property cycle and the economy

A slowdown in the housing cycle can affect the broader economy via slowing dwelling construction, negative wealth effects on consumer spending and via the banks if mortgage defaults rise. However, as things currently stand the drag from housing construction is likely to be minimal – building approvals don’t point to a collapse in new construction (see the next chart) and it looks like alterations and additions will rise, negative wealth effects will weigh on consumers but not dramatically if we are right, and in the absence of a property price crash the impact on the banks will be manageable. Finally, other sectors of the economy are taking over from housing, eg business investment and state capital works, as being growth drivers.


Source: ABS, AMP Capital

Implications for investors

There are several implications for investors:

  • Firstly, over the very long term residential property adjusted for costs has had a similar return to Australian shares (see next chart). Its low correlation with shares, lower volatility but lower liquidity makes it a good portfolio diversifier. So, there is clearly a role for property in investors’ portfolios.


Source: ABS, REIA, Global Financial Data, AMP Capital

  • Secondly, there remains a case to be cautious regarding housing as an investment destination for now. It is expensive on all metrics and offers very low income (rental) yields compared to other growth assets. This means a housing investor is more dependent on capital growth.

  • Thirdly, these comments refer to Australian housing overall but it’s dangerous to generalise. Other cities and regional property are far more attractive than Sydney & Melbourne.

Source: AMP Capital 9 April 2018

Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.

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