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Provision Newsletter

Corporate bonds vs. term deposits

Posted On:Apr 16th, 2019     Posted In:Rss-feed-market    Posted By:Provision Wealth

Invest in a corporate bond fund or put your money in a term deposit? It’s a question more pertinent now than ever, as market interest rates push towards new lows.

Both term deposits and managed bond funds are suitable for investors who want a reliable income stream, liquidity and capital preservation. But they have different risk and reward outlooks. We consider

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Invest in a corporate bond fund or put your money in a term deposit? It’s a question more pertinent now than ever, as market interest rates push towards new lows.

Both term deposits and managed bond funds are suitable for investors who want a reliable income stream, liquidity and capital preservation. But they have different risk and reward outlooks. We consider each in detail below.

Corporate bond funds

Corporate bond funds can provide an attractive, low-risk alternative for investors seeking a reliable, consistent income stream with returns typically higher than cash, while also providing investors with a return stream which has historically protected against falling equity prices.

They typically suit investors with a longer-term investment horizon willing to take on slightly more risk.

A corporate bond fund will typically generate income above cash and term-deposit levels, as owning the bonds issued by banks and corporates earns investors an additional premium over cash to compensate for the additional risk of not being repaid. It may be structured to have sensitivity to changes in interest rates (typically measured as ‘duration’), and so the returns earned by owning units in a fund may be impacted by this.

An actively-managed corporate bond fund may provide additional returns to investors by increasing or decreasing the sensitivity to credit spreads and interest rates based on the manager’s views on whether these markets are over or under-pricing the associated risks. This may mean changing exposures to certain sectors like banks, utilities or telecommunications, and by focusing investments in key issuers that are expected to improve in credit quality.

An actively-managed corporate bond fund may also reduce the sensitivity to changes in interest rates by managing the duration of the fund. If the portfolio manager’s expectation of future changes in interest rates differs from that of the market, then they may choose to position the portfolio to potentially profit from this. For instance, if the portfolio manager expects yields to rise by more than the market is currently pricing, then they may choose to reduce the fund’s sensitivity to higher yields (which cause bond prices to fall). Conversely, if the expectation is for interest rates to fall, the portfolio manager may choose to increase the fund’s sensitivity to interest rates, to benefit from falling bond yields (which lead to higher bond prices).

Bonds can help reduce risk within an investment portfolio by providing a buffer in times of market stress. They provide a diversification benefit to an investor’s overall portfolio and historically, bond returns have been negatively correlated with riskier assets such as equities. This has meant that bond prices have usually risen in value when share prices are falling (and vice versa).

Most investment-grade corporate bond funds publish unit prices every day, unlike term deposits which do not. This provides the appearance that there is greater volatility in the unit price of a bond fund, relative to cash or term deposits. However, an investor with a longer-term investment horizon should achieve better returns over time when compared with a term deposit or an exposure to cash.

Term deposits

Term deposits are popular with investors wanting security in the return that they will receive over a period of time, and certainty that their capital will be returned at this time. They are a good option for those with investment horizons of less than 12 months, provided that investors do not wish to access their investment before the end of the term, as additional fees can apply for early access.

Term deposits typically generate a higher rate of return for an investor compared to leaving their money in a transaction account. Investors in term deposits also benefit from the government guarantee on deposits (which protects deposits up to $250,000), which can provide comfort to an investor if the viability of the bank the term deposit is with were to ever come into question.

Investors also need to be aware that term deposits come with their own set of risks. Primary amongst these is the risk for investors that when they come to roll their investment at maturity, the interest rate may have fallen. This is called re-investment risk. In recent years, the returns offered on term deposits have been relatively stable, and re-investment risk has not been an issue. This is because the market’s expectation for the future path of interest rates has been reasonably stable. However, sustained falls in bond yields may mean banks choose to offer lower term deposit rates in future periods, as those banks may be able to finance themselves at better interest rates elsewhere. This can have a substantial impact on the returns generated from a term deposit roll-over strategy, if subsequent term deposit rates materially fall.

Ready access to a term deposit is also restricted through the term of the contract. If an investor requires access to their funds – for whatever reason – this can take up to 31 days from the date of request. The issuing bank will also usually charge an “interest adjustment”, which is a penalty charge for breaking the conditions of the term deposit prior to maturity and may reflect a combination of fees and forgone interest.

Conclusion

Investors in an actively-managed corporate bond fund may reap the benefits of combining a portfolio of bonds to achieve a stable, diversified income stream to longer-term investors during different market cycles. A skilled active bond manager may deliver above-average returns through the market and interest rate cycle while lowering overall portfolio risk. Term deposits also remain a viable investment strategy for shorter-term investors, depending on their role within a broader portfolio allocation, though investors need to be mindful of the risks.

 

 

 Corporate bond funds

 Term deposit

 
 

Typical investor type

 Longer-term investors

  Shorter-term investors

 
 

Main pros

Monthly income

Daily liquidity

Diversification

Defensiveness

Professional management

Deposits up to $250,000 are guaranteed by government

Guaranteed interest rate

Security

Higher rate of return than a transaction account

 
 

Main cons

Investment value changes alongside yields

Volatility in daily price movements

Higher level of risk compared to term deposits

Illiquid asset; normally need 31 days’ notice to access funds

Penalties may apply for accessing money early

Reinvestment risk if yields fall

 

Please call us on |PHONE| if you would like to discuss.

 

Author:  Nathan Boon, Sydney, Australia

Source: AMP Capital 11 April 2019

Important notes: 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)  (AMP Capital) 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 and must not be provided to any other person or entity without the express written consent of AMP Capital.

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AREITs: harnessing the real estate tailwinds of digital disruption

Posted On:Apr 16th, 2019     Posted In:Rss-feed-market    Posted By:Provision Wealth

Moving towards the end of the business cycle, investors are increasingly seeking exposure to assets with defensive attributes. Australian real estate investment trusts (AREITs) is a defensive asset class that has shown its ability to deliver strong returns over a variety of market conditions, having outperformed equities over the past one and five-year periods, by 11.81 per cent and 5.7

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Moving towards the end of the business cycle, investors are increasingly seeking exposure to assets with defensive attributes. Australian real estate investment trusts (AREITs) is a defensive asset class that has shown its ability to deliver strong returns over a variety of market conditions, having outperformed equities over the past one and five-year periods, by 11.81 per cent and 5.7 per cent respectively1. And as the Australian 10-year bond yield hits new all-time lows, the demand for long duration assets like real estate are likely to be well bid.

The influence of positive global trends and long-term contractual income streams, usually in the form of rental income, means that a well-constructed property portfolio can offer stable cash flows even through periods of high volatility and weak economic growth.

Rise of the boomers

Some of the trends responsible for this strong performance are as fundamental as the profound demographic shift affecting western society, as retiring baby boomers re-allocate their not-inconsiderable resources to better suit their changing needs.

Given the swelling population of over 65s and their increasing need for health-care services that will inevitably follow, there is a substantial tailwind for property offering high-quality health care facilities that cater to this demand, such as aged care facilities.

Digital disruption

Some of the other opportunities appearing in property are less intuitive, such as those afforded by digital disruption – the replacement of old ways of doing business, of communicating, of storing information – with new online platforms.

Historically commercial property has benefited from the physical presence of businesses and it might seem counter-intuitive to think that it might profit in some way from the forces that are disrupting those traditional models. However, the drive to online and cloud solutions are providing opportunities for listed real estate investors to capture some of the positive value from that disruption through stakes in the real estate and infrastructure required to support it.

Datacentres

With the Internet of Things making its way into fridges and kettles across the globe, the ever-increasing uptake of data-hungry streaming services such as Netflix and YouTube and corporate servers continuing their relentless transition to the cloud, demand for data storage will continue to grow for the foreseeable future. Whilst the term “cloud” conjures images of an esoteric, intangible repository, the space it now occupies is no less real (if somewhat more compact) than the mountains of DVDs, CDs, hard drives and server stacks it has replaced.

Between 2016-2021 global datacentre workloads are set to increase by 27 per cent compound annual growth rate2, more than tripling over that period, and demand for the real estate and infrastructure to support this extra volume will grow in tandem.

As landlords to the internet and the cloud, datacentres will profoundly benefit from this fundamental shift in our society, in a way that should prove resistant to cyclical influences in the wider economy. The highly-specialised nature of the properties involved also presents high barriers to entry, insulating existing investments from oversupply, and typically long-term lease arrangements for big tenants offer consistent cash flows that are largely independent of cyclical factors.

E-commerce

Much in the same way as we discount the bricks-and-mortar implications of sending our data to the cloud, it can be easy to forget that the disruption of physical stores by e-commerce retailers has positive implications for real property as well.

Consumption trends have been shifting for many years from retail stores to online platforms, spearheaded by the rise of e-commerce titans Amazon and Alibaba.

But while the storefronts have moved online, physical storerooms have taken on a new significance. Logistics facilities have been nicknamed ‘cheap malls’ in certain real estate circles, for the way in which they have taken over the role of shopping malls in e-commerce transactions, providing storage and access to goods. Online retailers are investing heavily in their logistics centres, with automation and proximity to transport hubs such as airports and intermodal rail becoming vital assets in their quest to beat their competitors on price and delivery speed.

The resulting improvements in cost and convenience are only increasing the trend to online. The UK is one of the leaders of this structural trend, with e-commerce penetration (excluding food) approaching 40 per cent and forecast to move towards 50 per cent in the coming three to five years3. This is driven in part by the proliferation of mobile technology, with 47 per cent growth in online sales via mobile devices in 20164.

Concurrently, industrial floor space in major cities now comes at a premium, as industrial property has been re-zoned over the last twenty years to higher-value land use, such as residential. This is causing an inflection point today in the logistics market, squeezing rents, capital values and occupancy to all-time highs in modern facilities located close to the consumer.

Conclusion

Despite broader market fluctuations, the relentless march to online services will continue to create value in selected real estate sectors into the foreseeable future, even as it disrupts real-estate business models in other sectors. High-performing REITs are able to identify these trends at an early stage and use them to capture the crucial defensive positioning sought by investors at times of uncertainty and late in the business cycle.

If central banks further loosen monetary policy over the next twelve months, lowering bond yields, the case for investment in those AREITs which are taking advantage of global tailwinds and which offer the security of long-term income streams will become even more compelling.

Please call us on |PHONE| if you would like to discuss.

 

1 AMP Capital, 2019
2 Cisco, Global Cloud Index, 2018
3 CBRE Global Research, 2016 (data represents non-food shopping)
4 IMRG Capgemini, eRetail Sales Index, 2016

Author:  James Maydew, Head of Global Listed Real Estate Sydney, Australia

Source: AMP Capital 27 March 2019

Important notes: 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)  (AMP Capital) 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 and must not be provided to any other person or entity without the express written consent of AMP Capital.

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The changing role of benchmarks

Posted On:Apr 16th, 2019     Posted In:Rss-feed-market    Posted By:Provision Wealth

Benchmark-aware and index investing will likely always have a role to play in the investment world, but as markets have evolved and diversification has become progressively more important, investors are increasingly looking for approaches that are benchmark unaware.

The background to benchmarks

A benchmark is any definable market cross-section. Most are weighted by market capitalisation, but they can also be equal-weighted or

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Benchmark-aware and index investing will likely always have a role to play in the investment world, but as markets have evolved and diversification has become progressively more important, investors are increasingly looking for approaches that are benchmark unaware.

The background to benchmarks

A benchmark is any definable market cross-section. Most are weighted by market capitalisation, but they can also be equal-weighted or fundamentally-weighted, among other measures.

Australia’s first share price index was established in 1938. But it wasn’t until December 31, 1979 the All Ordinaries was created as Australia’s first national index. It soon became the default instrument against which fund performance or individual stock performance was measured, however this was never its intent.

To address this, almost 20 years ago, the S&P/ASX 200 equity benchmark index was created, which focussed on addressing the investability of the index
reflecting both the size and liquidity of the top 200 stocks in the Australian market.

Equity benchmarks help explain the risks and returns that stem from equity investments. They also help investors understand fundamental factors such as profitability when trying to figure out average corporate performance. They provide context for investors to help judge fund manager success and compare their performance. Given they are published and highly rules-based, they can be easily tracked.

Challenges with benchmarks

Of course, benchmark-aware investing is only one approach. This is important, as large parts of a benchmark may be inappropriate to meet an investor’s requirements. Income is one example.

In the run up to the global financial crisis of 2007/2008, the banking sector produced more than a third of the total dividend income for the UK’s FTSE 100 index. An income investor following a benchmark strategy would have lost 35 per cent of their income as the share market fell following the financial crisis. As a result, this strategy would have been inappropriate for an investor seeking income security.

Additionally, smaller, evolving sectors tend to have a lower weighting in benchmark indices versus mature industries such as banking, energy and mining. Compared to smaller businesses, companies in these sectors may be relatively more cyclical, competitive and capital-hungry, and the ability to generate value (and therefore future market returns) may be more limited.

Benchmark unawareness

As a result, some investors are seeking alternatives to benchmarks. Becoming benchmark unaware does require a shift in mindset and in the focus of an investment team. In contrast to benchmark investing, fund managers are tasked with finding stocks they believe will deliver the outcome clients are seeking.

In this approach, analysis is focussed almost entirely upon the stocks that are likely to meet the client’s needs, since the need to “cover” a stock because it is in a benchmark is removed. This typically increases the depth of research and insights on stocks that are potential investments for the fund.

Importantly, becoming benchmark unaware is liberating. It offers a freedom to find great ideas for clients with a flexible approach. Often teams work within a more generalist model, rather than as sector specialists, which can lead to more collaboration on investment decisions, aiding objective decision making.

Tracking performance

Being benchmark unaware is, however, no excuse for failing to outperform an index over time. But ignoring the benchmark in the near-term in some circumstances may to lead to stronger performance longer term versus the benchmark.

The key is to be clear about the investment process and what’s needed to drive an asset’s long-term performance. For an income fund, that may be cash flow and dividend cover. For a fund seeking capital growth, earnings and cash flow growth may be the salient factors to measure.

Teams can track these underlying drivers for clients and demonstrate they are moving in line with the client proposition. This will help provide comfort that the outcome they are seeking – income or capital growth, for instance – should be delivered over time.

Ultimately what matters to clients is absolute outcomes after all costs. Research suggests that this is often more often achieved via less benchmark awareness – it seems clear that our industry is increasingly heading this way.

Please call us on |PHONE| if you would like to discuss.

 

Author: David Allen – Meng (Chemical Engineering) Global Chief Investment Officer, Equities London, United Kingdom

Source: AMP Capital 29 March 2019

Important notes: 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)  (AMP Capital) 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 and must not be provided to any other person or entity without the express written consent of AMP Capital.

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How to set short term goals

Posted On:Apr 12th, 2019     Posted In:Provision Newsletter Articles    Posted By:Provision Wealth

By Flying Solo contributor Fiona Adler

Lots of us walk around knowing inside that we have untapped potential and ideas for what might be possible in the future, but turning these thoughts into a reality is where we fall down. We know goal-setting is important, but how do we actually set goals so that we’ll achieve them?

Thinking ‘short term’ seems, well short-termed. We’ve

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By Flying Solo contributor Fiona Adler

Lots of us walk around knowing inside that we have untapped potential and ideas for what might be possible in the future, but turning these thoughts into a reality is where we fall down. We know goal-setting is important, but how do we actually set goals so that we’ll achieve them?

Thinking ‘short term’ seems, well short-termed. We’ve put so much emphasis on being strategic and thinking long-term, that we’ve overlooked the importance of short term goals. Today I want to encourage you to put your focus back onto short term goals – it’s one of the most powerful techniques to be more productive.

Why you should focus on short term goals

There are lots of reasons short-term goals are more effective than long-term goals, but for me, the top ones are:

1. Short term goals are more relatable

Having a big vision for our lives or our businesses is great and can be very inspiring, but often there’s a huge disconnect between that vision and our current reality. Imagine setting a goal to be a top-selling author when you haven’t written a single book. Or imagine setting a goal for your business to be number one in your industry while you’re still barely profitable. The jump is too big.

Even if we can convince our conscious minds that all this is possible, goals like these cause cognitive dissonance as there is always a part of us that doesn’t believe they are achievable. A series of short-term goals, that inevitably lead to the long-term goal or vision, is much more effective.

2. Achieving short term goals sets up positive reinforcing patterns

By definition, short-term goals are easier to achieve than long-term goals – and this is a good thing! When we achieve the goals we set ourselves, our confidence in our ability to achieve bigger goals grows.

Although it sounds simplistic, don’t under-estimate the power of this reinforcement loop! As humans, we’re all wired to stay in our comfort zones and we need all the help we can get to push ourselves to do things that are outside of our normal frame of operating.

Success breeds success so the more goals you can achieve, the more you are likely to achieve in the future.

3. Short term goals lead to action

For me, this is the most important reason to focus on the short-term. Goals written with a very near deadline create a sense of urgency. They tell you what to do now and how to take action so that you can actually achieve them.

Imagine you have a long-term goal to hit $1 million in sales. What should you be doing today to get there? Who knows.

But imagine instead that your goal is to make 3 sales this week. You’d better start making some phone calls and sending out some proposals!

This is the same for all types of goals. If you want to run a marathon next year, of course you know you should be training now, but it’s difficult to make the connection and generate a sense of urgency. However, if you have a goal to run 20 miles this week, you now know exactly what you should do.

How to set short term goals

So how do you actually set short term goals so that you’ll achieve them?

Connect with your vision

Firstly, connect with your big vision. The thing that pulls you forward, inspires and excites you. Think about where you want to be in the longer-term. How would your business look in three years? What would your life be like in three years. You might want to write down some ideas or even create a vision board. But your vision is not the goal – it’s too big to be relevant to you today.

Choose a 30 day milestone as your short term goal

Instead, your goal needs to be the next milestone towards this vision. Ideally, something that you can achieve in 30 days, or 90 at the most. You need to figure out the next step in your journey and use that as a goal. You might think of this as a milestone towards a bigger goal, but in my opinion, naming this as the goal itself is more helpful.

Make your goal SMART

I’m sure you’ve heard about SMART goals before – that is to say they should be Specific, Measurable, Actionable, Realistic and Time-Framed. I never used to like this framework because I wanted to focus on really big goals. But now, I understand the difference between a goal and a vision and this framework makes perfect sense for short term goals.

Once you’ve chosen a goal, you need to phrase it in a way that ensures it meets all of these criteria. In particular, pay attention to it being Actionable – it should be something you can directly control.

Short term goals for business teams

Setting shot term goals for business units or business teams is exactly the same. As a team, you need to first connect with the bigger vision – either for the business, or for the team – and then brainstorm what that means for the next 30-90 days. What goals are you aiming to hit in this timeframe?

Beware of choosing too many goals as the more you have, the more diluted they become. In fact, many would argue that having one, single goals is the most powerful. Even if you do choose several goals, be clear on which is the most important. When it comes to making decisions, this should be used as a decision reference point, and every effort should be made to achieve that most-important goal (even at the expense of the others).

Examples of short term goals

A lot of people know about writing goals, but still, they are confused as to what a goal should look like. Here are some examples:

Short term personal goal examples

  • Run 20 kilometres a week

  • Do 30 minutes of yoga 6 days a week

  • Read each night for 30 minutes

  • Practice piano for 10 minutes every day this month

  • Organise a family reunion party

  • Book a family trip before x date

  • Go out with friends twice this month

  • Clean out the garage by the end of the month

  • Organise all Christmas presents before x date

  • Eat vegetarian 4 nights a week for the next month

  • Order a new computer and set up my office by x date

Short term business goal examples

  • Have x customers using y new feature by z date

  • Grow subscriptions to monthly revenue of x by y date

  • Sell x of product y by z date

  • Hire a new account manager by x date

  • Submit taxes by x date

  • Re-do website by x date

  • Create a new lead magnet by x date

  • Document x number of processes by y date

  • Collect x customer testimonials by y date

  • Release new feature x by y date

  • Migrate to new software x by y date

Putting your short term goal into action

So now you have a great short-term goal, it’s time to figure out what you need to do to get there. In particular, what do you need to do today? And what do you need to do for the next few days. In reality, it’s pretty hard to plan more than a few days out, but if you keep asking yourself what you need to do today and tomorrow, it’s amazing how much you can achieve.

Put an action plan together with all the mini-steps involved in achieving this goal.  It could be something like make five phone calls a day, or find three web designers, or choose colours. Make each step tiny so that it is easy to achieve. Breaking down your goals (which are already small), into tiny parts is what leads to success.

Then do what it takes each day to get those things done! Get into the habit of actually doing each thing on your action plan. Remember, you decided this is the most important goal for you, so doing this action is the most important thing to focus on. Don’t let your brain trick you into getting distracted or fall into the habit of procrastinating. This is the most important thing for you – so treat it that way!

All this is simple in theory, and it can be easy to do – providing you don’t overthink it. Instead, just focus on doing the actions you need to achieve your short-term goal.

Good luck!

 

Source : FlyingSolo April 2019 

This article by Fiona Adler is reproduced with the permission of Flying Solo – Australia’s micro business community. Find out more and join over 100k others.

 

Important:
This 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. Any information provided by the author detailed above is separate and external to our business and our Licensee. Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business, nor our Licensee take any responsibility for any action or any service provided by the author.

Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.

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The 2019 Australian Federal election and investors

Posted On:Apr 11th, 2019     Posted In:Rss-feed-oliver    Posted By:Provision Wealth
The Federal Election

Some might be forgiven for thinking the wheels have fallen off Australian politics over the past decade with the same number of PM changes as Italy, a fractured Senate and “minority government” at times making sensible visionary long-term policy making hard. With the May 18 Federal Election offering a starker than normal choice political uncertainty may see another

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The Federal Election

Some might be forgiven for thinking the wheels have fallen off Australian politics over the past decade with the same number of PM changes as Italy, a fractured Senate and “minority government” at times making sensible visionary long-term policy making hard. With the May 18 Federal Election offering a starker than normal choice political uncertainty may see another leg up. Polls give Labor a clear lead, albeit it’s narrowed a bit.

Elections, the economy & markets in the short term

There is anecdotal evidence that uncertainty around elections causes households and businesses to put some spending decisions on hold – the longer the campaign the greater the risk. Fortunately, this time around it’s a relatively short campaign at five weeks. However, hard evidence regarding the impact of elections on economic indicators is mixed and there is no clear evidence that election uncertainty effects economic growth in election years as a whole. In fact, since 1980 economic growth through election years averaged 3.6% which is greater than average growth of 3.1% over the period as a whole.

In terms of the share market, there is some evidence of it tracking sideways in the run up to elections, which may be because investors don’t like the uncertainty associated with the prospect of a change in policies. The next chart shows Australian share prices from one year prior to six months after federal elections since 1983. This is shown as an average for all elections (but excludes the 1987 and 2007 elections given the global share crash in late 1987 and the start of the global financial crisis (GFC) in 2007), and the periods around the 1983 and 2007 elections, which saw a change of government to Labor, and the 1996 and 2013 elections, which saw a change of government to the Coalition. The chart suggests some evidence of a period of flat lining in the run up to elections, possibly reflecting investor uncertainty, followed by a relief rally.


Source: Thomson Reuters, AMP Capital

However, the elections resulting in a change of government have seen a mixed picture. Shares rose sharply after the 1983 Labor victory but fell sharply after the 2007 Labor win, with global developments playing a role in both. After the 1996 and 2013 Coalition victories shares were flat to down. So based on historical experience it’s not obvious that a victory by any one party is best for shares in the immediate aftermath, and historically the impact of swings in global shares arguably played a bigger role than the outcomes of federal elections.

The next table shows that 9 out of the 13 elections since 1983 saw shares up 3 months later with an average gain of 4.8%.


(Based on All Ords index.) Source: Bloomberg, AMP Capital

The next chart shows the same analysis for the Australian dollar. In the six months prior to Federal elections there is some evidence the $A experiences a period of softness and choppiness, which is consistent with policy uncertainty, but the magnitude of change is small. On average, the $A has drifted sideways to down slightly after elections.


Source: Thomson Reuters, AMP Capital

Political parties and shares

Over the post-war period shares have returned 12.7% pa under Coalition governments and 10.7% pa under Labor governments. It may be argued that the Labor governments led by Whitlam in the 1970s and Rudd and Gillard more recently had the misfortune of severe global bear markets and, if these periods are excluded, the Labor average obviously rises to 15.8% pa, although that may be taking things a bit too far. But certainly, the Hawke/Keating government defied conventional perceptions that conservative governments are always better for shares. Over the Hawke/Keating period from 1983 to 1996 Australian shares returned 17.3% pa, the strongest pace for any post-war Australian government.

Once in government, political parties are usually forced to adopt sensible macro-economic policies if they wish to ensure rising living standards and arguably there has been broad consensus on both sides of politics in recent decades regarding key macro-economic fundamentals – eg, low inflation and free markets.

Policy differences starker than since the 1970s

However, after narrowing in the 80s and 90s with the rationalist reform oriented agenda kicked off by Hawke and Keating, in recent years the policy differences between the Coalition and Labor have been intensifying again to the point that they are now arguably starker than they have been since the 1970s (when there used to be more of a focus around “class warfare”). In part this is consistent with rising interest in populist policies globally which in turn reflects angst over low wages growth, widening inequality, globalisation and automation. Each side of politics is now offering very different visions on the role and size of government. And so the policy uncertainty around this election is greater than usual.

The Coalition is focussed on containing government spending and encouraging economic growth via infrastructure spending, significant personal tax cuts (to return bracket creep and cap taxation revenue at its long term high of around 24% of GDP) and mild economic reforms.

By contrast Labor is focussed on spending more on health and education and in the process allowing the size of the public sector to increase. This is proposed to be funded by “tax increases” including:

  • cancelling the Coalition’s middle and upper income personal tax cuts scheduled for next decade and reimposing the 2% Deficit Repair Levy on incomes above $180,000;

  • restricting negative gearing to new residential property (and no other assets) and halving the capital gains tax discount from January 1 2020;

  • stopping cash refunds for excess franking credits;

  • and a 30% tax rate on distributions from discretionary trusts;

It’s not proposing to spend all the extra revenue this will raise with some earmarked for higher budget surpluses (ie paying down public debt). It’s also promising a sharp lift in the minimum wage towards being a “living wage”, some labour market re-regulation, far more aggressive climate policy (with a 45% reduction in emissions on 2005 levels by 2030, which is almost double the Coalition’s policy) and in relation to superannuation key changes are likely to include a resumption of the increase in the Super Guarantee, lower non-concessional contributions and a lower income threshold for the application of the 30% tax rate on super contributions. Intervention in the economy is likely to be higher under a Labor government.

Perceptions that a more left leaning Labor government will mean bigger government, more regulation and higher taxes and hence act as a drag on productivity and be less business friendly may contribute to more nervousness in shares and the $A than usual around this election. More specifically there are a number of risks:

  • There is a danger that relying on tax hikes on the “top end of town” will dampen incentive in that Australia’s top marginal tax rate of 47% is already high – particularly compared to our neighbours: 33% in NZ; 20% in Singapore; and 15% in HK. Australia’s income tax system is already highly progressive: 1% of taxpayers pay 17% of the total personal income tax take (with an average tax rate of 42%) & the top 10% pay 45% of tax compared to the bottom 50% who pay around 12% (with an average tax rate around 11%).

  • The proposed changes to franking credits even though they only impact around 8% of taxpayers are potentially a negative for stocks with high-franked dividends.

  • The proposed changes to capital gains tax and negative gearing have been estimated to cause a 5 to 12% decline in home prices & a boost to rents of 7 to 12%. This is risky as the property market is already weak. This could further impact construction/property stocks, banks & retail shares.

  • Higher minimum wages and some labour market re-regulation risk higher unemployment, a less flexible labour market and are a negative for hospitality and retail stocks.

  • The focus on economic reform needed to boost productivity looks to have fallen by the wayside in the face of populism – eg, why aren’t we considering injecting more competition into the health sector along with spending more on it?

That said there are some offsets in relation to ALP policies that investors need to allow for:

  • Some ALP policies may not pass the Senate, including those around negative gearing and repealing the middle & upper income tax cuts that have already passed into law.

  • Labor is planning bigger budget surpluses which is positive.

  • Labor policies encouraging “build to rent/affordable housing” are positive, but it’s unclear how much impact they will have.

  • Labor policies focussed on greater spending and tax cuts more targeted to lower saving low income earners may provide more of a short-term boost to economic growth.

  • Labor has a track record of taking sensible advice & responding quickly to help the economy in a crisis (think 1983 and in the GFC). In the short term, this could include a First Home Buyer grant to mute the property downturn.

Concluding comment

The now wider left right divide in Australian politics suggests greater uncertainty going into this election potentially affecting all asset Australian classes. But the bigger concern is the dwindling prospects for productivity enhancing reform, which could be an ongoing dampener on growth in living standards.

 

Source: AMP Capital 11 April 2019

Important notes: 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)  (AMP Capital) 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 and must not be provided to any other person or entity without the express written consent of AMP Capital.

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Don’t just plan for retirement; Plan for your life

Posted On:Apr 11th, 2019     Posted In:Provision Newsletter Articles    Posted By:Provision Wealth

In the financial services industry, advising people to spend money is like being a doctor encouraging ice-cream consumption. There is a good reason why investment firms recommend setting aside as much as possible for retirement: many people in or approaching retirement fall short of what they need to be comfortable, according to the Association of Superannuation Funds of Australia standard

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In the financial services industry, advising people to spend money is like being a doctor encouraging ice-cream consumption. There is a good reason why investment firms recommend setting aside as much as possible for retirement: many people in or approaching retirement fall short of what they need to be comfortable, according to the Association of Superannuation Funds of Australia standard for a comfortable retirement, so the adequacy question is real enough.

But it is a discussion with two sides, and increasingly data and research is pointing towards an unexpected issue which is that people in retirement appear to be being unnecessarily frugal.

While it is generally not smart (or sustainable for most people) to go out and spend at will (or to eat nothing but ice cream), a good way to view the spend / save relationship is through an “everything in balance” approach.

A comfortable retirement is a long-term goal, and you need a plan to achieve it. Consistent contributions via a diversified, low-cost portfolio are a good place to start. Ideally start young so that compound interest can help you across the finish line. Avoid unnecessary debt. Do all these things, but if you also love model railroads, crave a baking career, or just want to visit Coober Pedy before you die, isn’t that part of the reason you are saving today?

Ideas for matching your financial planning to your personality abound. You are no longer locked into logging every dollar you spend into a spreadsheet, unless you like doing it that way. There are lots of neat new online tools to help with budgeting, saving and keeping track of spending that can work for you.

One of the strengths of the Australian super system is its mandatory contribution regime but when it comes to drawing down those hard-earned savings in retirement the system is still immature, so it is not surprising that people are conservative about drawing down from super when they (a) don’t know how long they will live for (b) what investment performance they can expect or (c) what provision they need to make for health and aged care costs as they grow older.

Government regulations dictate that we have to withdraw minimum amounts from our super pensions each year – for those aged under 65 that starts at 4% a year, rising to 5% for those between 65 and 74 and so on until it reaches a maximum withdrawal amount of 14% for those over 95.

The government rules are designed to ensure that savings that benefited from super’s tax concessions eventually come out of the system. So these rules are driven by tax policy and were never intended to be the recommended way for retirees to spend their super.

But in the absence of any other guidance, it is hardly surprising that many people treat these as recommendations and only withdraw the minimums, just as many people only save the mandatory 9.5% in the savings phase.

So while there is understandably a lot of focus on saving enough in super to pay for retirement, perhaps the next focus needs to be helping people develop lifestyle spending plans.

Remember too, that many of the personal finance numbers you see are averages and may not be relevant to your situation. Some of you may inherit a portion of the estimated $2.4 trillion in wealth expected to be transferred from Baby Boomers to the next generation. Longer lifespans also may mean you can work and earn for more years than previous generations did.

Now, sit down, scoop yourself a healthy-sized portion of ice-cream, and start planning.

Please contact us on |PHONE| if you seek further discussion on this topic.

Source : Vanguard March 2019

By Robin Bowerman, Head of Corporate Affairs at Vanguard.

Reproduced with permission of Vanguard Investments Australia Ltd

Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients’ circumstances into account when preparing this material so it may not be applicable to the particular situation you are considering. You should consider your circumstances and our Product Disclosure Statement (PDS) or Prospectus before making any investment decision. You can access our PDS or Prospectus online or by calling us. This material was prepared in good faith and we accept no liability for any errors or omissions. Past performance is not an indication of future performance.

© 2019 Vanguard Investments Australia Ltd. All rights reserved.

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