Provision Newsletter

The AMP iPad App is another way you can connect with your finances when and where you want to. Check in when you’re on the move with our Mobile App, explore your options from the couch with the AMP iPad App, or take control of your finances from your desktop.

So, what can you do on the new AMP iPad app?

The new AMP iPad app lets you see where you are now, where you may be heading and then change direction at a touch. It’s like a remote control for your finances.

With easy access…

• A secure four-digit PIN

…you can explore your finances…

• See a summary of all your AMP accounts

• Use calculators to estimate your potential financial future

• Set the ball rolling to consolidate your super

…see how your super, retirement and investments have performed, and view your insurance cover.

• View your super, retirement and investment balances and investment mix

• Check the balance of your insurance cover

• Discover how your investments are performing

…access your banking…

• Add or link other accounts—even those outside AMP Bank

• Make BPAY payments

• Set up an alert—so you’ll know when money goes in or out of your AMP Bank account

View your AMP Bank statements

Getting started

It’s easy to start connecting with your finances, your way.  All you need is an active online account.

Don’t have an online account?

For super, insurance, retirement, investments

Register for My Portfolio here 

For banking

For BankNet simply call AMP Bank on 13 30 30 from 8am to 8pm Monday to Friday and 9am to 5pm Saturday and Sunday (AEST).

Download the AMP iPad app

Once you’re registered, download the AMP iPad app and connect to your finances – your way. Enter your UserName or Customer Number and you’re good to go.

Eurozone recovery

Signs abound that the Eurozone has left the crisis behind.

• Thanks to austerity programs and more recently a return to economic growth, budget deficits are coming under control in the main crisis countries, viz, Italy, Spain, Portugal, Ireland and Greece. Spain is a laggard, but the average Budget deficit in these countries will be around 4% of GDP this year, down from 10% plus a few years ago. Greece, Italy and Portugal are on track to run primary budget surpluses (ie the budget excluding interest payments) this year. See the next chart.

   

• The decline in budget deficits in the crisis countries is set to see average gross public debt levels peak this year.

Source: IMF; AMP Capital

• Economic restructuring is starting to bear fruit. One guide is unit labour costs as it reflects both productivity growth and labour costs, so is a guide to competitiveness particularly across countries with a common currency as is the case in the Eurozone. Italy (and France) have been the laggards on the economic reform front with rising unit labour costs, but Spain and Portugal have made significant progress in reducing costs, particularly relative to Germany. See the next chart

Source: OECD; AMP Capital

• Reflecting the return of investor confidence, particularly once it became clear the ECB was not going to allow a break up in the Euro (and so bond holders would get paid back in Euro’s & not devalued new liras, pesos, etc), bond yields in the crisis countries have collapsed to precrisis levels or below. In fact Spanish and Italian 10 year bond yields have fallen to record or near record lows.

Source: Global Financial Data; AMP Capital

• Finally, confidence and business conditions have improved across the Eurozone and this has seen a return to growth. While the next chart has a lot of lines on it the key is that confidence is moving up across the Eurozone including in the crisis countries. In fact, the improvement in Greek confidence levels is quite astounding given where it was a couple of years ago.

Source: Bloomberg, AMP Capital

ECB moves again

However, Europe is not completely out of the woods yet. While confidence and business conditions have picked up nicely, growth remains gradual (at just 0.9% over the year to the March quarter), unemployment has only fallen slightly from its peak of 12% to now 11.7%, inflation is just 0.5% year on year, money supply is growing at just 0.8% year on year and bank lending contracted 1.8% over the year to April. This has led to concerns that the Eurozone might be sliding into a Japanese type scenario of low growth and deflation.

To head off this risk the ECB has unveiled another round of monetary stimulus. While much anticipated, as the ECB had been foreshadowing a move for some time, it did not disappoint. The key measures deployed include cutting its key interest rate to just 0.15%, cutting the rate of interest banks receive on excess deposits at the ECB to -0.10%, an extension of guidance as to how long rates will remain low, an extension of the commitment to supply unlimited short term funds to banks at the 0.15% interest rate, a new long term lending program to banks (called Targeted Long Term Refinancing Operations or TLTRO), an end to the sterilisation of the bonds held in its existing bond buying program (which it calls SMP) and preparation for a program to purchase asset backed securities (which would amount to a US style quantitative easing program). The highlight was probably the TLTRO program which is effectively a “funding for lending” program that will allow banks to borrow to fund their non-mortgage lending at just 0.25% interest for four years.

The latest ECB move is not as momentous as its efforts in 2011 and 2012 (the first LTRO, “whatever it takes” and the Outright Monetary Transactions program that backed it up) that ended the Eurozone crisis. It would also have been better to see a US style quantitative easing program straight away and there are doubts about how successful each of the measures announced by the ECB will individually be.

But the ECB has more than met market expectations as reflected in the 2.3% rally in Eurozone shares and the collapse in bond yields in Spain, Italy and Greece since the announcement. What’s more the scatter gun approach of deploying virtually everything at once adds to confidence that the whole should be worth more than the sum of the parts in terms of its impact on the economy. The ECBs broad based approach also adds to its own credibility and confidence that it is determined to get the economy on to a stronger path.

And the clear impression is that while interest rates have hit bottom it stands ready to do more if needed and this is likely to involve the purchase of private sector asset backed securities. Finally, there are signs that the wind down in bank lending in Europe that has occurred in the run-up to this year’s review of the quality of the banks’ assets and stress tests of their capital, has run its course. If so the ECB’s measures aimed partly at boosting bank lending have a good chance of succeeding.

Implications for Eurozone & global recoveries

The bottom line is that the ECB’s measures – and commitment to do more if needed – add to confidence that the Eurozone economic recovery will pick up pace over the year ahead and that deflation will be avoided. This in turn is good for global growth and since Europe is China’s biggest single export destination, also good news for China, which in turn of course is good news for Australia.

What it means for investors

There are several implications for investors.

First, the determination of the ECB to put Europe on to a stronger growth footing and the easier monetary environment in Europe is positive for Eurozone equities, which remain relatively cheap. The chart below shows a composite valuation measure for European shares that indicates they are still about 2 standard deviations (or about 20%) undervalued.

Source: Bloomberg, AMP Capital

Second, ECB actions are likely to maintain downwards pressure on peripheral country bond yields, but given they are historically low, particularly so given the still high debt levels in such countries, this trade is becoming risky.

Third, the ECBs actions provide further support for the global “carry trade” that involves borrowing cheaply in low yield countries like Europe and putting the proceeds into higher yielding countries and assets. As a result, the chase for yield looks like it has further to run. This is supportive of corporate debt and high dividend paying shares.

Fourth, and related to this, the reinvigoration of the carry trade risks delaying the next leg down in the value of the Australian dollar, as global demand for high yielding investments like those in Australia remains strong. Japanese interest in Australian bonds appears to be returning and Europe is likely to be a source of funding for carry trades. In the short term this could work against the downwards pressure on the $A coming from the weaker terms of trade and the need to rebalance the Australian economy.
Finally, the ECB’s latest monetary easing also provides a reminder that the global monetary policy back drop remains very supportive for growth assets like shares generally.

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.

Download Market Watch – June edition and read the full report. (1.5 MB file)

This month's topics are:

• Despite some prospects of a bumpy ride there is a positive outlook for shares this year.

• A more selective approach to investing in the emerging world is ideally now required.

• The Westfield proposal is in a holding pattern.

• High-frequency trading is not a concern in Australia.

The saga over the budget in particular has been depressing with the 2013 Budget showing a run of deficits worse than those associated with the 1990s recession despite having the biggest boom in our history. And the community reaction to the latest Budget seems to have had the effect of refocusing the debate from the broad based need to reform the economy and get the budget back into surplus to a focus on equality. In other words rather than focusing on growing the national pie, the focus is back to how to divide it up.

The problems Australia faces are trivial compared to those seen in many other countries with more rapidly aging populations and far bigger public debt burdens. Talk of a budget emergency is over the top. But we do need to take our fiscal challenges seriously or else we could end up in the sort of mess several other countries have run into, where when luck ran out and things turned sour the IMF got called in and the choice became cut back or no bailout from the IMF. We are a long way from that but so too was Ireland in 2006 when its net debt to GDP ratio was the same as Australia's today but its boom turned to bust, house prices tumbled, banks had to be bailed out, public debt ballooned and lenders dried up necessitating IMF support.

After the biggest resources boom in our history, Australia’s public finances should be in far better shape. Norway is a good example. Realising that its North Sea oil reserves would not last forever it has been running big budget surpluses and putting the money into a sovereign wealth fund for use when the boom is over. As a result Norway’s net public debt is negative, ie it is owed way more than it owes.

Source: IMF, AMP Capital

I am optimistic we will get Australia and its fiscal finances back into shape, but we need to see much better from all in Canberra than we have seen lately for this to occur.

The Challenges

The structural challenges facing Australia are simple:

• The biggest boom in our history is now fading as lower commodity prices drive lower growth in national income.

• This has seen the boost to the budget from the resources boom go into reverse at a time when we have spent and continue to spend the proceeds whilst the demands on health and pension spending are set to accelerate from the ageing population. At the same time we are embarking on several major expenditure items at once – the National Disability Insurance Scheme, the Gonski education reforms and the new Paid Parental Leave scheme. All of these are desirable, but they are not really all affordable. The NDIS in particular could turn out to be very expensive over time.

• This is all occurring at a time when the boost to productivity growth from the economic reforms of the 1980s and 1990s that lasted into early last decade has faded. This is particularly evident in multifactor productivity (that looks at growth in output per unit of labour and capital), which has gone backwards over the last decade. This didn’t matter when national income was growing strongly through the commodity boom, but with it now slowing it matters a lot if we want to keep growing our living standards.

Source: ABS, AMP Capital

What to do – restart the reform agenda

To get back on track, Australia needs to do several things.

Put the Budget on to a sustainable path towards surplus. To not do so will leave us with little fiscal flexibility come the next downturn and leave us vulnerable should our luck turn against us resulting in extraordinary demands being placed on the Federal Government as occurred in Ireland. The Government’s Budget puts us in the right direction. To minimise the negative impact on confidence and to gain Senate passage some of the harsher aspects of the Budget are likely to require softening.

Reform the tax system. This is a big one. Put simply the current tax system suffers from a number of problems.

• It’s too complex – with over 120 taxes but just 10 of them raising 90% of the revenue.

• There is a heavy reliance on income tax (raising around 50% of revenue) as opposed to sales tax (raising nearly 30% of revenue) and this did not change with the GST. As a result, following the Budget Australia’s effective top marginal tax rate at 49% will be 15th highest globally and the highest in our region, viz NZ 33%, Singapore 20% and Hong Kong 15%. Sydney can forget about becoming a world financial centre – as why would individuals locate here and lose half their extra income? The end result is a disincentive for extra effort, increased demand for tax minimisation strategies and less incentive to save.

• The numerous taxes along with the GST exemptions for fresh food, health and education result in various distortions in the economic system.

Ideally, from an economic perspective the GST needs to be broadened and its rate increased and the proceeds used to fund the removal of numerous nuisance taxes and reduced income tax. Tax reform should occur with the aim of not increasing the overall tax burden on the economy. Once allowance is made for compulsory superannuation contributions in Australia and social security levies in other countries, the tax burden in Australia is already around the OECD country average. Taking it higher would only reduce incentive and Australia’s long term growth potential, as various high tax European countries have found.

Embark on another round of privatisation. Private operators can invariably run businesses better than governments and the proceeds from asset sales can be used to pay down debt and/or recycle into new infrastructure spending. Privatisation of infrastructure assets also provides investment opportunities for Australian superannuation funds. The Federal and Victorian Governments went down this path significantly in the 1990s and there are still significant utility assets in other states that can be privatised.

Boost infrastructure spending. This is essential if we are to boost productivity and income levels. The Federal/state agreement to privatise assets and use the proceeds to invest in infrastructure is a move in the right direction. Queensland has announced a move down this path, but it won’t start till after next year’s election.

Reduce regulation. Excessive regulation is slowing business and investment. The Federal Government looks to be taking this on.

Reduce remaining protection. Industry protection has been substantially reduced but remains significant with various protection measures remaining such as bans on book imports, restrictions on pharmacies and the licensing arrangements of doctors and lawyers. The Government has at least made a start on this front by not chasing various failing businesses lately with blank cheques.

Get our education system producing better outcomes. As various studies have shown our education system is lagging other OECD countries in some areas. But as the debate around the Gonski reforms highlights, fixing it probably requires more funding, a solution to which likely involves greater deregulation, greater private sector involvement and higher fees.

Of course there is much more, but these are the main areas needed to be looked at to boost productivity growth.

What does it mean for investors?

Economic policies can have a significant long term impact on growth and hence asset market returns. Australian shares outperformed global shares significantly last decade. A lot of this owed to the resources boom and our absence of tech stocks which meant the Australian market largely missed the tech wreck. But the boost to productivity and profitability from the economic reforms of the 1980s and 1990s also helped.

Since 2009 though, the relative performance of Australian shares has slipped. While several key global share markets have made new highs including the US share market and just recently global shares generally, the Australian share market remains 20% below its November 2007 high

Source: Bloomberg, AMP Capital

Why the recent underperformance? A combination of factors have played a role including tighter monetary policy, the strong $A, weakness in China, and the fact Australian shares reached a much higher high in 2007. It’s also worth noting that if the reinvestment of dividends is allowed for then Australian shares are above their 2007 high. But the lack of recent growth enhancing reforms and the productivity growth slowdown have likely also played a role in the relative underperformance of Australian shares in recent years.

Concluding comments

Don’t get me wrong. I am not bearish on Australia. The economy can rebalance as the mining investment boom continues to fade – as it has been doing over the last year. But if we want strong sustainable economic growth that underpins a relatively strong performance from Australian asset classes we do need to seriously reinvigorate the economic reform process in Australia. Getting lost in endless debate about how to divide up the national cake or denial about the need to get the budget under control will only take us back to the poor economic performance of the 1970s.

Dr Shane Oliver
Head of Investment Strategy and Chief Economist
AMP Capital

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.

The Indian share market has, not surprisingly, taken this very positively having risen 3.5% since the election and being up 15% year to date, making it one of the world’s strongest share markets this year as investors moved to position for a BJP win. But has it gone too far in the short term? What does the change of Government mean over the long term? And what does it mean for commodities and Australian exports?

India's growth potential is very high…

India’s growth potential is well known. Its population is still growing rapidly, unlike say China’s. By 2050 its population will likely exceed that of China. It has a highly educated workforce which has helped fuel growth in its services sector. Its urbanisation rate is low and has the potential to rise much further. Similarly its starting point of low per capita income (about one third of China’s) also means plenty of potential. And being a relatively closed economy it’s not as vulnerable as say Brazil to slower growth in China.

Through much of last decade this potential started to be unleashed as a result of economic reforms of the 1990s that de-regulated the economy and opened it up to investment. As a result the Indian economy performed spectacularly well, with growth averaging nearly 9% per annum over the five years to 2007 and increasing confidence that it was following in China’s footsteps.

…but yet to be fully realised

However, starting late last decade it seemed the wheels started to fall of the Indian economy. As can be seen in the next chart, for the last five years inflation has pushed higher while growth has slowed leading to a significant deterioration in the growth/inflation trade-off.

At the same time, the budget has remained in chronic deficit and is currently 5% of GDP and the current account has also remained in deficit.

Essentially the supply side of the economy did not keep pace with demand resulting in rising inflation and trade imbalances. Perhaps the biggest problem was that the Indian Government, run by the Congress Party, for various reasons failed to continue with the reform agenda in a meaningful way. As a result, privatisation has been slow, protection of domestic industries has been high, its labour market lacks flexibility and business is mired in red tape. It takes more than twice as long to start a business in India than it does in China. Compared to China, India also saves less and invests less in infrastructure.

As a result of its poor recent performance along with its dependence on foreign capital, India only a few months ago was being described as being one of the “Fragile Five” countries along with Turkey, Brazil, South Africa and Indonesia in terms of their vulnerability to the end of quantitative easing in the US.

Another round of reforms

However, the resounding BJP victory means that the reform process will likely get underway again. Narendra Modi’s pro-development track record in Gujarat state where he has been Chief Minister for the last decade has been impressive, resulting in 10% pa growth over the last five years. The BJP and Modi ran their campaign with a pro-business and pro-reform policy agenda, which they now have a mandate to deliver upon. Based in large part on the BJP’s economic agenda, key reforms are likely to include:

• cutting subsidies and price controls;

• implementing the GST;

• increasing infrastructure spending over current spending;

• reducing the budget deficit;

• faster privatisation;

• commencing a high speed rail network;

• boosting urbanisation and low cost housing;

• cutting read tape;

• simplifying labour laws; and

• support for inflation targeting by the central bank.

The BJP led alliance found support from all social classes and regions (with the exception of Muslims) indicating that the electorate is supportive of the reform agenda. These reforms should help to boost India’s average growth rate back up to around 8% pa in the years ahead. That there are some signs of slowing inflation and a stabilisation/revival in growth indicators may mean that the task may be a bit easier in that at least some of the hard work in getting inflation down has already been undertaken by the Reserve Bank of India.

Short term challenges

Of course, Modi and the BJP alliance will face a number of short term challenges worth keeping an eye on:

• First, the BJP alliance does not have a majority in the upper house and support from the states will be required. There are potentially ways around the upper house though using joint sessions, although this will take time. And un-cooperative states will be under pressure as they will lose out to states that go down the reform path.

• Second, there’s a lot to fix.

• Third, past experience with economic reforms indicates that economic conditions can get worse before they get better.

• Finally, there are some concerns that the BJP’s victory will fuel tensions with Muslims. A counter though is that at the end of the day Modi and the BJP are pro-development and pragmatic.

Implications for the world & Australia

A reformed India combined with its large and strongly growing population will put it back on the path to (again) becoming the world’s biggest economy – probably by the end of the current century (but after China gets there first).

Like China, India will become an increasingly important driver of global economic growth, it will add to commodity demand and its abundant cheap labour and cost advantages will see India play an ever increasing role in world trade adding to downwards pressure on global inflation. In terms of commodity demand, the following table highlights the potential. India’s per capita consumption of commodities is a long way behind that of China, let alone developed countries.

India has a long way to go though. Its per capita real GDP is about where China’s was in 2000 and its commodity demand is only around 15% of that of China. So, it’s a long way from being able to fill any gap in commodity demand should China have a short term setback. However, its long term demand for commodities will be large and over time this will provide a strong source of growth for Australian exports. India is now Australia’s 4th largest export market, having risen rapidly from 7th largest in 2007 and 15th in 2001.

What about the Indian share market?

On most metrics the Indian share market is expensive. Its price to earnings ratio and its price to book value ratio is above that in other emerging countries and the world average and its dividend yield is far lower.

A higher return on equity does provide some support for richer valuations, but having risen so rapidly this year to record highs and relative to other markets Indian shares are at risk of a short term set back. This could be triggered by short term uncertainties or setbacks regarding the reform process.

However, with the election ushering in a business friendly reform Government, which should be very positive for long term Indian growth, any short term set back should be seen as a buying opportunity. Over the long term Indian shares are likely to be relative outperformers globally.

Dr Shane Oliver
Head of Investment Strategy and Chief Economist
AMP Capital

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.

Download Market Watch – May edition and read the full report. (190 KB file)

In this edition:

• In balance, we are in an investment friendly environment.
• A health check on the residential housing sector.
• Microsoft well-placed to reward investors.
• The National Commission of Audit – what is it and what does it mean to Australians?