Provision Newsletter

Many of us dream of being our own boss and, with hard work and careful planning, self-employment can bring financial and lifestyle rewards – along with enormous personal satisfaction. But, without the backup of a regular wage or salary, running your own show calls for careful money management.

Manage your cash flow

Many self-employed Australians earn a good living. But, while your overall annual income may be strong, the flow of money is not always regular. It can be weeks and even months between pay cheques.

Smart tip

If you buy second-hand equipment, machinery or vehicles for your business, check the Australian Government’s Personal Property Securities Register (PPSR) to make sure there’s no money still owing on it.

So it’s very important to manage your money carefully. Running out of cash before you get paid again could mean living on credit cards, which charge high interest rates.

Pay yourself a wage

Rather than treating all the income you earn from your business as your personal spending money, pay yourself a weekly wage. You should also maintain separate bank accounts for business receipts and personal spending.

Deposit or transfer your business revenue into a high-interest savings account, and only draw on this account to pay yourself a set amount as a wage, or to pay actual business expenses. Putting your business earnings in a high interest account is a simple way of earning extra income through interest.

Set a personal budget to help you live within your wage, and so that you don’t dip into business receipts too often.

Compare your wages to your spending.

Use the budget planner

Plan ahead for holidays

As a self-employed worker you won’t enjoy the benefit of paid holidays: it’s up to you to set aside funds. Saving a little extra on a regular basis will help you manage through any quiet business periods, as well as funding a well-deserved break.

Set aside money for tax

A common pitfall for small business is failing to set aside money for income tax. As you become more established, the Australian Taxation Office (ATO) might also require you to make quarterly pay as you go (PAYG) tax instalments. Use the ATO’s PAYG instalment calculator to estimate how much tax you’ll have to pay.

If you don’t meet your tax obligations each year, you could pay hefty penalties. Talk to your accountant and read ATO: Due dates for lodging and paying your BAS. At worst, the ATO can take legal action, including winding up your company or bankrupting you to recover unpaid taxes.

Unless you plan ahead for tax, it can be difficult to pay tax bills when they fall due. So it’s worth making this a priority for your business.

Work out how to set aside money for your upcoming bills.

Use the savings goals calculator

Divide your cash takings

Keep on top of your tax obligations by opening a separate savings account and regularly deposit part of your takings into this account. It can take discipline not to dip into the account, but a good incentive to leave the money aside until you need to pay tax is to remember that the ATO can charge high penalties for late tax payments.

Don’t forget GST

If your business is registered for Goods and Services Tax (GST), you will also need to set aside money for that.

Self-employment and super

Self-employed people often earn a decent income while working, but without the benefit of employer-paid superannuation contributions, find they have very little money to live on in retirement. Almost a quarter of self-employed Australians had no superannuation at all in 2016, according to research by the Australian Super Funds Association (ASFA).

Don’t rely on selling your business to fund your retirement. Without your involvement, your business may be worth less than you think. Many business ventures can also be hard to sell. Instead, think about building a separate pool of retirement savings. You may also be eligible for the government super co-contribution. For more information see super for self-employed people.

Save for retirement, save on tax

Superannuation is a tax-effective investment for retirement savings. Adding to your super can also reduce the tax on your current income.

As a guide, you or your business may be able to claim a tax deduction of up to $25,000 annually for contributions to your superannuation fund. It’s an easy way to trim your tax today while building a nest egg for the future.

Be sure to make your contributions before 30 June to claim them as tax deductions, but be careful not to go over the contribution caps so that the penalty tax does not apply.

Protect your income

One hazard of running your own business is being unable to work due to illness or injury. Without sick leave, your financial situation could take a turn for the worse if you become sick or injured.

Income protection insurance protects you financially if you can’t work because of illness or injury. It’s worth thinking about when you run your own show because bills don’t stop if you’re unable to work.

Premiums for income protection insurance are usually tax-deductible, which helps reduce the cost. Most large insurance companies offer income protection insurance, or you might be able to buy it through your superannuation fund. Do an internet search to compare different income protection insurance products and prices.

Keep control your cash, and draw a line between your personal and business’ money, to help you make the most of self-employment.

Please contact us on |PHONE| if we can be of assistance .

Source : ASIC’s Moneysmart September 2018 

Reproduced with the permission of ASIC’s MoneySmart Team. This article was originally published at www.moneysmart.gov.au/life-events-and-you/self-employed-people

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. 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.  Past performance is not a reliable guide to future returns.

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.

For years now, many have told us that Australia is heading for an imminent recession. By contrast official forecasts have long been looking for several years of above trend growth. In the event neither has happened and we don’t see them happening anytime soon. Against this backdrop there are five things you should know about the Australian economy.

First – the economy grew solidly over the last year

After several years of muddling along the Australian economy actually perked up over the last year with GDP growing a surprisingly strong 3.4% year on year, its fastest since 2012.

Source: ABS, AMP Capital

That growth has been able to range between just below 2% and just above 3% over the last six years despite a large drag on growth from the fall back in mining investment is actually pretty good. But it’s below the norm for Australia, which has averaged around 3% GDP growth per annum over the very long term. It should also be remembered that strong population growth has been one of the reasons for the relative resilience of Australia’s economy, but over the last year per capita GDP growth at 1.8% has been running below that in the US and in line with that in Europe.

Second – growth is likely to slow a bit from here

While economic growth averaged a strong 1% quarterly pace in the first half of the year it’s likely to slow going forward:

• The housing construction cycle is turning down as approvals trend down and the cranes come down. Falling alterations and additions won’t help. 

• Growth in consumer spending is likely to slow given weak wages growth, high levels of underemployment and slowing wealth gains as home prices fall. With falling home prices its unlikely that households will be prepared to keep running down the household saving rate – which is now at a 10 year low of just 1% – to make up for weak income growth.

• Business investment plans for the current financial year are still subdued pointing to roughly flat investment (if plans for this year are compared with those made a year ago) and political uncertainty could start to weigh ahead of a potential change in government.

Source: ABS, AMP Capital

• Drought could knock 0.5 percentage points off economic growth this year.

Source: ABS, Bureau of Meteorology, AMP Capital

• While agricultural production as a share of GDP is now just 2.5%, a 20% slump in farm production as seen in past droughts would still knock 0.5% off economic growth. If it turns into an El Nino phenomenon it could be worse.

Third – but it’s not going into recession

Despite these drags, recession will continue to be avoided just as it has been over the past 27 years:

• Over the past five years or so the slump in mining investment back to more normal levels has knocked around 1.5% per annum from GDP growth. However, mining investment is no longer 7% of the economy and it’s near the bottom so its drag on GDP growth is approaching zero.

Source: ABS, AMP Capital

• Public infrastructure spending is rising and has further to go.

• Net exports are likely to add to growth as the completion of resources projects boosts resources export volumes, although a US/China trade war is a threat here.

• Profits for listed companies are rising in contrast to the 2014-16 period. This is a positive for investment.

Source: UBS, AMP Capital

• While profit growth has slowed from 17% in 2016-17 to around 8% it’s positive and 77% of companies in the recent reporting season (the highest since the GFC) have seen rising profits with 86% of companies raising or maintaining their dividends indicating confidence in the outlook.

Source: AMP Capital

So while housing construction will slow and consumer spending is constrained, a lessening drag from mining investment and slightly stronger non-mining investment along with solid export growth provide an offset and are expected to see growth between 2.5-3% going forward. Down from over the last year and slower than the RBA expects, but stronger than many doomsters see.

Fourth – spare capacity will remain for a while yet

With the economy’s potential (or sustainable) growth rate running around 2.75% and actual economic growth likely to run around this spare capacity in the economy will be with us for a while yet. To use it up we really need a long period of above trend economic growth, but this looks unlikely. Spare capacity remains most obvious in the labour market where the underutilisation rate remains historically high at near 14%. With it likely to remain high for some time to come it’s hard to see much acceleration in wage growth or inflation in the economy.

Source: ABS, AMP Capital

Fifth – which means RBA rate hikes are a long way off

The RBA’s forecasts for continuing solid economic growth and a gradual rise in underlying inflation argue against a rate cut and support the case for an eventual hike. But our more constrained view on growth implying lower for longer wages growth and inflation along with the risks posed by likely further falls in Sydney and Melbourne home prices, tightening bank lending standards and the drought indicate a rate hike is unlikely to be justified any time soon. The next move in rates is probably still up but not until second half 2020 at the earliest and there is a risk that the next move will actually be down if falling home prices pose a significant threat to consumer spending and inflation starts falling again.

Implications for investors

There are several implications for Australian investors.

First, continuing growth should provide support for reasonable returns from Australian growth assets.

Second, bank deposits are likely to provide poor returns for investors for a while yet.

Third, while Australian shares are great for income, global shares are likely to remain outperformers for capital growth.

Finally, the outlook remains for a further fall in the $A. With the RBA comfortably on hold and the Fed raising rates every three months (with the next move coming this month), the interest rate gap between Australia and the US will go further into negative territory making it even more attractive to park money in the US and not Australia which will drag the $A down. Threats to global growth from a trade war and problems in emerging countries will also weigh on the $A.

Source: AMP Capital 6 September 2018

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) 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.

At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.

The global economic expansion is continuing. A number of advanced economies are growing at an above-trend rate and unemployment rates are low. Growth in China has slowed a little, with the authorities easing policy while continuing to pay close attention to the risks in the financial sector. Globally, inflation remains low, although it has increased in some economies and further increases are expected given the tight labour markets. One ongoing uncertainty regarding the global outlook stems from the direction of international trade policy in the United States.

Financial conditions remain expansionary, although they are gradually becoming less so in some countries. There has been a broad-based appreciation of the US dollar this year. In Australia, money-market interest rates are higher than they were at the start of the year, although they have declined somewhat since the end of June. These higher money-market rates have not fed through into higher interest rates on retail deposits. Some lenders have increased mortgage rates by small amounts, although the average mortgage rate paid is lower than a year ago.

The Bank’s central forecast is for growth of the Australian economy to average a bit above 3 per cent in 2018 and 2019. In the first half of 2018, the economy is estimated to have grown at an above-trend rate. Business conditions are positive and non-mining business investment is expected to increase. Higher levels of public infrastructure investment are also supporting the economy, as is growth in resource exports. One continuing source of uncertainty is the outlook for household consumption. Household income has been growing slowly and debt levels are high. The drought has led to difficult conditions in parts of the farm sector.

Australia’s terms of trade have increased over the past couple of years due to rises in some commodity prices. While the terms of trade are expected to decline over time, they are likely to stay at a relatively high level. The Australian dollar remains within the range that it has been in over the past two years on a trade-weighted basis, but it has depreciated against the US dollar along with most other currencies.

The outlook for the labour market remains positive. The unemployment rate has fallen to 5.3 per cent, the lowest level in almost six years. The vacancy rate is high and there are reports of skills shortages in some areas. A further gradual decline in the unemployment rate is expected over the next couple of years to around 5 per cent. Wages growth remains low, although it has picked up a little recently. The improvement in the economy should see some further lift in wages growth over time, although this is likely to be a gradual process.

Inflation is around 2 per cent. The central forecast is for inflation to be higher in 2019 and 2020 than it is currently. In the interim, once-off declines in some administered prices in the September quarter are expected to result in headline inflation in 2018 being a little lower, at 1¾ per cent.

Conditions in the Sydney and Melbourne housing markets have continued to ease and nationwide measures of rent inflation remain low. Housing credit growth has declined to an annual rate of 5½ per cent. This is largely due to reduced demand by investors as the dynamics of the housing market have changed. Lending standards are also tighter than they were a few years ago, partly reflecting APRA’s earlier supervisory measures to help contain the build-up of risk in household balance sheets. There is competition for borrowers of high credit quality.

The low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual. Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.

Source: Reserve Bank of Australia, September 4th, 2018

Enquiries

Media and Communications
Secretary’s Department
Reserve Bank of Australia
SYDNEY

Phone: +61 2 9551 9720
Fax: +61 2 9551 8033

Email: rbainfo@rba.gov.au

For the last two calendar years the Australian dollar has defied our expectations for weakness. But after hitting $US0.81 in January it’s been trending down as US interest rates fell below the Australian cash rate, the threat of a US-driven trade war increased and it recently broke below a short-term range around $US0.74 and fell as low as $US0.72 on fears of contagion to global growth from a crisis in Turkey. This note looks at outlook for the $A and why it makes sense for Australian-based investors to hold a decent exposure to foreign exchange.

What are the fundamental drivers of the $A?

The Australian dollar tends to move in line with relative price differentials over the long term. This is the theory of purchasing power parity (PPP) according to which exchange rates should equilibrate the price of a basket of goods and services across countries – see the next chart.

Source: RBA, ABS, AMP Capital

If over time Australian inflation and costs rise relative to the US, then the value of the $A should fall relative to the $US to maintain its real purchasing power and competitiveness. But in the short to medium term, swings in the $A are largely driven by swings in the prices of Australia’s key commodity exports and the terms of trade (when they go up the $A tends to rise and vice versa) and relative interest rates such that a rise in US rates relative to Australian rates makes it more attractive to park money in the US and hence pushes the $A down.

Why the $A is likely to fall further 

At current levels, the Australian dollar at around $US0.7350 is around where it should be on a long-term purchasing power parity basis – see the first chart. But the $A rarely spends much time at the purchasing power parity level and tends to be pushed to extremes above and below it. Our view remains that the downtrend in the $A that started in 2011 when the iron ore price peaked at over $US190/tonne has further to go. The main reason is the interest rate differential in favour of the $A is likely to go further into negative territory as the Fed continues to hike rates and the RBA remains on hold. This is making it relatively less attractive to park money in Australia putting downwards pressure on the $A. The Fed is on track to hike rates again next month as the US economy has continued to strengthen highlighted by a very tight jobs market. This will take the Fed Funds rate to a range of 2-2.25%. If the RBA leaves rates on hold at 1.5%, as is almost certain, then the gap between Australian and US official interest rates will fall to -0.5-0.75%, from a whopping +4.5% in 2011. Periods of a low and falling official interest rate differential between Australia and the US usually see a low and falling $A.

Source: Bloomberg, AMP Capital

While some think that the RBA just follows the Fed there has often been significant divergences. This has notably been the case lately with the RBA hiking in 2009 (as the mining boom returned) and the Fed holding and the RBA continuing to cut in 2016 even though the Fed had commenced a tightening cycle. While US growth is running well above potential and has largely used up spare capacity, Australian growth has been running below potential and there is plenty of spare capacity. This is evident in the combination of unemployment and underemployment in the US running about as low as it ever gets whereas in Australia it’s about as high as it ever gets.

Source: Bloomberg, AMP capital

While there are some positive signs in Australia with investment picking up, strong export volumes and strong employment growth, uncertainty remains high around the housing sector and consumer spending. Wages growth and inflation also remain very low so the RBA is likely to be on hold for a long while yet as the Fed continues to hike. Given falling home prices in Sydney and Melbourne a rate cut cannot be ruled out if it threatens overall growth and inflation.

Our base case is that solid global growth will support commodity prices – particularly iron ore and coal – and that this will provide a floor for the $A in the high $US0.60s. However, history suggests we are still in a commodity price bear market after last decade’s surge in prices, the recent 20% or so plunge in metal prices is a warning of weakness and there are threats to emerging world growth from a rising $US, a potential contagion from Turkey, slower growth in China and from US trade policy.

Source: Global Financial Data, Bloomberg, AMP Capital

In the very short term the Australian dollar is oversold and this along with speculative short positions warns of a bounce higher. However, beyond this our assessment is that the $A has further to fall and will likely reach $US0.70 by year end.

What does it mean for investors?

With the risks skewed towards more downside in the value of the $A, there are several implications for investors.

First, there remains a strong case to maintain a decent exposure to offshore assets that are not hedged back to Australian dollars. A decline in the value of the $A boosts the value of an investment in offshore assets denominated in foreign currency by one for one. This can be seen in relation to international equity returns in the next table. The first column shows the return from global shares in local currency terms; the second shows the return in Australian dollars (if foreign currency exposures are not hedged back to Australian dollars); the third column shows the difference, which is the change in the $A on a weighted basis; and the final column shows the return to global shares if hedged back to Australian dollars.

Source: Thomson Reuters, AMP Capital Investors

When the $A rises as it did last year it reduces returns from international shares for an unhedged investor. But when the $A falls as was the case in 2005, 2008, 2013, 2014 and 2015 it boosts the value of global assets and hence the return from global shares for an unhedged investor.

Furthermore, when Australian interest rates are above global rates, investors are “paid” to hedge their foreign currency exposure back to Australian dollars. As can be seen in the last column the return from global shares when hedged back to Australian dollars has been higher than the local currency return because hedging investors receive the difference between Australian and foreign rates. However, with Australian rates falling versus global rates the incentive to hedge is falling.

Second, if the global outlook turns sour, having an exposure to foreign currency provides protection for Australian investors as the $A usually falls in response to threats to global growth. As can be seen in the next chart there is a rough positive correlation between changes in global shares in local currency terms and the $A. Major falls in global shares associated with the emerging market/LTCM crisis in 1998, the tech wreck into 2001, the GFC, the Eurozone crises and the 2015-16 global growth scare saw sharp falls in the $A. This has been evident this year with worries about a trade war and Turkey weighing on the $A. So being short the $A and long foreign exchange provides good protection against threats to the global outlook.

Source: Bloomberg, AMP Capital

Finally, continuing weakness in the $A will be positive for Australian sectors that compete internationally like tourism, higher education, manufacturing, agriculture and mining.

Source: AMP Capital 21 August 2018

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) 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 potential for financial technology (fintech) and bank collaboration is endless. Emerging technologies and innovations such as crypto currencies, voice-activated banking and the application of artificial intelligence to financial services are likely to transform banking in the future.

This was a key message from Henri Arslanian, founder of the fintech Moven, who addressed AMP’s recent Amplify event.

There is enormous work being done within banks and also within fintechs right now to develop new tools and technologies. The superannuation and investments platform space is a great example of Australian firms driving innovation in fintech, with Netwealth and HUB24 capturing significant share in the local market.

Robo advice is an emerging trend which has the potential to be adopted by the financial advice industry in the future. This software is currently able to deliver simple and broad based financial advice, but over time sophistication levels will increase and cater to more individual needs. The main hurdle to adoption is the consumer and regulator gaining comfort with the technology, given most people require individual advice suited to their unique circumstances.

Voice-activated banking is another evolving area, facilitated though devices such as Amazon Alexa. This device operates as a virtual assistant and can respond to simple queries. But there are substantial risks that also need to be addressed before tools such as Alexa become widely adopted for banking purposes.

It’s already possible to ask Alexa about the price of a share, for instance. But this becomes trickier when it comes to private banking information. For instance, asking Alexa or other similar devices such as Apple’s Siri function to perform transactions such as transferring funds is fraught with risk.

Banks must be certain the person performing the transaction is the person who owns the account. This will be difficult to resolve without putting the user through an additional layer of security checks which potentially negate the time saving benefit of using voice technology in the first place! It may be that a middle ground is found, whereby voice-activated technologies can be used for low-value transactions in the same way payWave technology is used now.

Distributed ledger technologies, or blockchain, are already being adopted in financial services. For instance, the Australian Securities Exchange (ASX) is planning to use blockchain-based technologies to replace its CHESS transaction settlements system. This is a huge project spanning many years, but the potential to increase efficiency and reduce errors makes it a worthwhile endeavour. While many associate blockchain with crypto currencies, investors should focus less on crypto and more on the technology that enables it.

There’s much for investors to absorb and understand about many of these new and largely unproven technologies. Many fintechs are still at a very nascent stage and investing in them carries substantial risk. This was evidenced recently when small business lender Prospa postponed its ASX listing after queries from the regulator. There are also a very limited number of fintech companies in Australia of a meaningful size that have made it onto the ASX. Examples include Netwealth, HUB24, OFX Group and EML Payments.

It’s important for most investors to understand early stage ventures such as fintechs carry more risk than proven businesses. While some will do exceptionally well, many will fail, and there is usually a long runway between a fintech starting up and profitability. It is however, still an area for investors to keep watch over to understand emerging technologies and how they are likely to contribute to the financial services sector over time.

Source: AMP Capital 16 August 2018

Author: Matt Griffin, Co-portfolio Manager, Small Caps

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) 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.

Investor uncertainty and market volatility appear to be increasing as the economy continues to strengthen, leading to higher bond yields and eventual interest rate rises.

Australian equity investors trying to navigate the choppy waters that lie ahead should ignore the day-to-day ‘noise’ of the markets and instead focus on seven key questions. The answers to these will help investors better understand the approaching dangers and opportunities.

Will Aussie banks keep paying out big dividends?

Banking has been the principle beneficiary of the 25-year bull market in residential mortgages that has followed in the wake of Australia’s housing boom.

Bank share prices have powered ahead over recent years, fueled by the sustained and predictable earnings that strong mortgage lending delivered. Retail investors in particular have been drawn to the strong growth in (franking credit-enhanced) bank dividends.

Banks have been able to capture generous mortgage lending margins because the regulatory environment has prioritised banking solvency. The banks’ balance sheets further benefitted from the 30-year decline in bond yields.

However, regulatory focus may now shift from institutional stability towards promoting customer interests, following the Royal Commission.

Meanwhile, global bond markets are now moving into a period of rising yields, even if Australian interest rates are unlikely to increase for some time yet. These trends will not be positive for bank valuations.

Moreover, personal debt in Australia has reached historically high levels, leaving many recent homebuyers looking vulnerable. The most highly indebted are now worryingly exposed to a downside shock.

Credit conditions for borrowers are continuing to tighten, as maximum earnings multiples fall and living expenses are considered more cautiously by loan officers. Buy-to-let investors and first-time buyers with modest deposits appear to be withdrawing from the market now that home prices are falling in Sydney and Melbourne.

Why are Aussie consumers looking so glum?

The high level of indebtedness is having a significant impact on consumer spending in Australia. Under-employment remains high and wage growth for large parts of the labour force remains fairly stagnant.

Families who bought their home more recently at elevated price levels and now face increasing mortgage payments are especially impacted.

This is leading many families to look much more closely at their weekly spending, especially those seeking to pay down debt.

The retail sector is seeing shoppers switch their spending to market challengers such as Aldi, where private labels are priced at a significant discount to the major grocery stores, which is forcing down pricing on the majors’ own goods.

Investing in price cutting is not expected to be sustainable over the long-term and could detract from the major supermarkets’ earnings.

A wider range of businesses that depend on such price-sensitive shoppers will struggle to grow earnings as real wage growth remains subdued and debt servicing costs rise.

When will the next capex boom ride to the economy’s rescue?

The end of the mining investment boom led to resources companies taking an extended capex holiday that has been a major drag on the Australian economy. However the depletion of older mines is now leading to investment in new facilities.

Meanwhile Federal and State governments are continuing to support infrastructure investment, often as part of asset recycling programs in an attempt to grow productivity levels.

Australia’s growing population faces energy supply limitations as many base load power generation assets need upgrading or replacement and renewable energy targets loom large. This will require a capital investment uplift in power generation and transmission assets.

Finally Australia’s LNG market is moving from a period of oversupply during which capex was highly restricted, to one of undersupply. This is leading to a renewed surge of investments in brownfield sites.

This is likely to present the opportunity for well-positioned developers and contractors to grow earnings over the next phase of the capex cycle.

How can Australia make beautiful returns from a Beautiful China?

President Xi recently announced the intention to build a “Beautiful China” that would reduce the country’s toxic levels of air, water and soil pollution.

Older polluting coal power stations are likely to be shut. However, while the country is expected to continue importing high volumes of Australian coal, cleaner fuels such as LNG may grow in relative importance. Australian companies are expected to continue to benefit throughout this shift as they begin to invest in new LNG projects again.

In addition to ongoing demand for high-grade seaborne commodities, Australian companies exposed to China’s growing demand for clean energy, electric vehicles and batteries have the opportunity to grow earnings.

How will regulatory change impact companies?

The Federal Government in Canberra is now intervening much more actively across a number of areas of the economy. This is motivated by a desire to bring down those costs to voters and companies that threaten the economic recovery and the government’s political fortunes.

This is especially impacting regulated infrastructure companies, where some have been assigned especially low rates of return by regulators. Consequently, the less attractive earnings outlook may start to be reflected in companies’ market valuations.

Therefore, investors should be cautious about the wider regulated utility market, especially transmission assets facing government pricing decisions. The implementation of the National Energy Guarantee by the end of 2018 is likely to influence the returns and valuations of a range of energy businesses.

Meanwhile, gaming reform that impacts margin bets, advertising and taxation poses a potential threat to companies in the sector.

However media deregulation may well permit increased consolidation in the industry, which will potentially be supportive of earnings and valuations.

Which companies will be bitten by rising bond yields?

Rising global bond yields have been signaling the start of the return to more normal levels of interest rates for some time now. The rate-hiking cycle is well advanced in the US and has now started in the UK and some other markets.

Such an environment is generally considered to be negative for the market valuations of companies whose earnings are relatively stable and predictable. These include those in the infrastructure, listed real estate and telecommunications sectors. This is because as bond yields rise, investors apply a higher discount rate to their expected earnings, which reduces the implied valuation levels.

Therefore a cautious approach to these sectors is likely to be appropriate during the next phase of the business cycle.

However, certain companies in these markets are nonetheless able to grow earnings independently of the business cycle. These include real estate companies exposed to the growth of data centres and e-commerce, which are poised to outperform the market even during a period of rising interest rates.

Should I be investing in growth or income companies?

Australian growth companies have strongly outperformed value/income stocks since the last round of Chinese economic stimulus. This is to be expected during a stage of the economic cycle when earnings growth is generally positive and interest rates remain at historically low levels

However, the valuations of growth companies are now notably high, trading at large premiums to their 10-year average price/earnings ratio and relative to the wider Australian equity market.

Such lofty valuation levels require very strong and sustained earnings growth in order to justify the present market premiums. Therefore many growth companies appear to be highly vulnerable to any events that slow the upward path of corporate earnings.

Hence investors may now find more attractive opportunities in companies that are characterised by sustainable dividend payouts and/or more attractive valuation levels.

Source: AMP Capital 16 August 2018

Author: Dermot Ryan is a co-PM for AMP Capital’s Australian equity income-focused strategies and covers mining and energy sectors.

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) 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.