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Provision Newsletter

Why real estate can deliver solid returns through different cycles

Posted On:Jul 13th, 2018     Posted In:Rss-feed-market    Posted By:Provision Wealth

Commercial real estate is a unique asset class that acts and performs differently from other investment classes. It is generally characterised by relatively low total-return volatility and high-income stability. As part of a multi-asset portfolio, commercial real estate can provide several benefits, such as an attractive risk-return profile and low correlation with other asset classes (diversification) whilst also providing long-term

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Commercial real estate is a unique asset class that acts and performs differently from other investment classes. It is generally characterised by relatively low total-return volatility and high-income stability. As part of a multi-asset portfolio, commercial real estate can provide several benefits, such as an attractive risk-return profile and low correlation with other asset classes (diversification) whilst also providing long-term inflation protection.

While once regarded as an expensive investment option only available to large companies and high net worth individuals, this sector can be accessed by retail investors through listed property funds. Commercial real estate is an established asset class in capital markets and an important consideration for investors wanting to diversify beyond asset classes such as term deposits and bonds.

Is it the right time to buy real estate?

Real estate is still fairly priced. A leading indicator of fair value is current real estate yield spreads versus the long-term average. Presently, 10 Year Government Bond yields are at 2.8%, which represents the risk-free rate. The east coast prime office markets of Australia are exhibiting yields over 280 basis points (bps) above the risk-free rate, compared to the 20-year average spread of 180 bps. Even super-prime real estate transactions in the range of 4.50% to 5.00% are still comfortably above long-term average spreads. Our view is that pricing remains fair in the current low yield environment. Yield compression is anticipated to continue in 2018, compressing by an average of 12.5 to 25 bps across all sectors, however economic volatility and monetary policy changes may change this trajectory.

Why this cycle is different to 2007

Under ‘normal’ market conditions there is a positive spread between bonds and real estate yields, ie you get a lower return from bonds than the return that you get from investing in real estate – the higher return from real estate reflects the higher risk relative to investing in bonds. In 2007, the market became overheated and the relationship inverted, which meant that the prices being paid for assets didn’t reflect the risk (relative to the risk-free investment in bonds). As a result, investors were left with high levels of debt exposed as interest rates lifted. 
 

In 2007, the average gearing level for AREITs was ~55%. 
 

Today leverage remains under 30%. Investment managers have been more conservative in their capital management strategies in this cycle, however the redevelopment of core assets may see this gearing level rise, as investors deploy their available capital to enhance returns. Having said this, the clear strategic objectives of investment managers is to keep gearing lower so that a fall in asset values will not result in involuntary sales.

Finding value a challenge, not impossible 

This current cycle has been led by strong capital growth, with rental growth and tenant demand appearing more fragmented. In this environment, outperformance on the demand side has come down to active asset management by fund managers. Investors will need to focus on boosting income returns through active management as the current cycle matures and inevitably results in a slowdown. Redevelopment and targeting exposure to growth sectors such as technology and e-commerce will be critical to achieving outperformance in rental growth.

Where to find value in the current cycle? 

Australia’s roaring population growth, high infrastructure spending and positive business confidence will stabilise returns over the medium term for investors. On a sector by sector basis, there will be mixed performance, however active management and a disciplined long-term strategy for attracting tenants will be critical to success.

Figure 1: Average annual returns (CARG) by asset class

Past performance is not a reliable indicator of future performance.
Source: MSCI, AMP Capital Real Estate Research. As at December 2017. 

Relative to other asset classes, commercial real estate in Australia has historically delivered attractive risk-adjusted returns. As illustrated in figure 1 commercial real estate has outperformed most other asset classes over the last 5,10 and 20 years on average (on a compound annual growth rate basis). Notably, commercial real estate has also demonstrated relatively low total return volatility in comparison to other asset classes as illustrated in figure 2 and can therefore be considered lower risk. 

Figure 2: Risk vs Returns by asset class (past 20 years)

 

Past performance is not a reliable indicator of future performance.
Source: MSCI AMP Capital Real Estate Research. As at December 2017.
  

The low volatility in commercial real estate returns can be explained by the fact that in comparison to other asset classes, a high proportion of returns are being generated by income rather than capital appreciation. Notably, in comparison to residential property, commercial real estate lease term agreements are long-term in nature and are usually contracted over a 5 to 10-year time-frame. Even 15 or 20+ year leases are not uncommon. These long-term lease agreements help provide a relatively stable income stream to investors. This helps to generate a stable return pattern and reduce total return volatility.

Different ways to invest in real estate

Direct real estate

When investing in direct real estate, investors purchase the assets themselves and gain access to the ‘pure’ risk of real estate. This means they can try to achieve predictable, secure, long-term rental cash-flows through exposure to the real estate market cycle, rather than the equity market. The downside of owning a physical asset is that money has to be spent on maintaining the asset over time and liquidity can also be a risk. Historically, direct real estate has produced relatively strong returns for investors (as illustrated in figure 2).

Unlisted property funds provide an efficient way for smaller investors to get exposure to high-quality real estate assets. 

Listed real estate (REITs)

Investors in listed real estate investment trusts (REITs) do not hold the title to the property, but instead own units in a fund or trust that is listed on the stock exchange. With REITs being closely linked to the performance of the general share market, REIT performance is generally more volatile (as illustrated in figure 2) than that of unlisted funds. However, investing in REITs, particularly by taking a global approach, provides investors with a number of advantages: 

  • In comparison to unlisted property funds, REITs offer greater liquidity and the ability to quickly adapt to changing market fundamentals 

  • If the REIT invests in listed global property companies it allows investors to gain exposure to some of the best real estate assets and managers in the world.

By taking a global approach, investors can gain access to different property cycles, economic trends and interest-rate environments. It also allows investors to broadly diversify their real estate allocation by investing into real estate asset classes that are not available domestically such as multi-family (built to rent), self-storage and student housing.

As with all listed investments though there are risks to consider such as the value of the Fund’s investment potentially decreasing as a result of adverse share market movements.

 

Source: AMP Capital 13 July 2018

Author: Claire Talbot, Portfolio Manager, AMP Capital Core Property Fund

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.p

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How active ETFs work

Posted On:Jul 13th, 2018     Posted In:Rss-feed-market    Posted By:Provision Wealth

Active ETFs are proactively managed and aim to outperform their benchmark or objective. 

But they share many attributes with ETFs which are passively managed and aim to track a particular benchmark:

Buying and selling via a live market price on the ASX using a full service or online broker

Can be managed and reported in one place – alongside all other broker portfolio

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Active ETFs are proactively managed and aim to outperform their benchmark or objective. 

But they share many attributes with ETFs which are passively managed and aim to track a particular benchmark:

  • Buying and selling via a live market price on the ASX using a full service or online broker

  • Can be managed and reported in one place – alongside all other broker portfolio holdings

  • Open-ended: the issuer can issue and redeem units based on supply and demand 

  • Generally trade at tight spreads around net asset value (NAV)

However, there are some differences between how active ETFs and ETFs work, particularly around portfolio disclosure and the role of third-party market makers.

Daily versus quarterly disclosure

ETFs disclose their portfolio and NAV on a daily basis.

But active ETFs only disclose their portfolio every three months, generally lagged by two months (i.e. portfolio at end of January disclosed at end of March). The composition of a portfolio is an active manager’s key intellectual property (IP). If their portfolio was continuously revealed to the market, like ETFs, their competitors could simply replicate their portfolio.

To protect IP the Financial regulator ASIC has agreed to allow Active ETFs to disclose their portfolio holdings on a delayed basis.

This difference in disclosure flows through to differences in how ETFs and Active ETFs are traded on the exchange.

ETF market makers

ETFs rely on third party ‘market makers’ to provide liquidity during the trading day. If there are no unit holders selling, the market maker ensures there are still orders in the market.

If an ETF’s indicative net asset value (iNAV) at a point in time during an ASX trading day is $2.50, for example, the third-party market maker might offer to sell ETF units at $2.51 and buy at $2.49.

Market makers know the holdings of index the ETF is tracking. They can therefore accurately calculate the true value of the ETF, or net asset value (NAV), and can set bids and offers accordingly.

The Active ETF as market maker

In addition to investors buying and selling with each other, the Active ETF acts as market maker providing live bids / offers and creating new units. Active ETFs benefit from the publication of a regularly updated indicative net asset value (iNAV), providing investors with a “fair value” for the Active ETF throughout the trading day. The indicative net asset value (iNAV) is updated every 15 seconds.

As shown in the diagram above [insert updated version with prices], there are two ways to buy and sell Active ETFs
  • Investors can buy and sell between each other at live prices during the trading day.

  • They can buy and sell from the fund as market maker. If an Active ETF’s indicative net asset value (iNAV) at a point in time during an ASX trading day is $2.50, for example, the Active ETF may offer to buy units at $2.49 and sell units at $2.51.

To ensure the unit price trades at a price close to NAV, the Active ETF issuer will also create more units if demand for units exceeds supply; and conversely it will cancel units should supply exceed demand.
  
Unlike ETFs, Active ETF issuers are not aiming to make a profit overall from market making activities. Instead they are trying to protect existing unitholders and ensure new and existing investors can trade at the best available price.

Source: AMP Capital 13 July 2018

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

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Should we worry about emerging markets?

Posted On:Jul 13th, 2018     Posted In:Rss-feed-market    Posted By:Provision Wealth

Key Points

Emerging market equities have performed poorly since the beginning of the year. More recently, trade tensions between the US and China, a rising US dollar and issues in individual emerging market economies have hit emerging markets.

The last emerging market downturn was in 2015 on the back of Chinese growth concerns, a devaluation in the Chinese Yuan and Fed interest

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Key Points

  • Emerging market equities have performed poorly since the beginning of the year. More recently, trade tensions between the US and China, a rising US dollar and issues in individual emerging market economies have hit emerging markets.

  • The last emerging market downturn was in 2015 on the back of Chinese growth concerns, a devaluation in the Chinese Yuan and Fed interest rate hike fears. Emerging market economic fundamentals (GDP growth, national savings, current account balances and government budgets) are now in better shape compared to 2015.

  • US dollar denominated external debt makes up a decent chunk of total debt outstanding for emerging markets (averaging around 30%) but is manageable in the current environment of better economic fundamentals. The US dollar appreciation also appears to be close to a peak.

  • Emerging market equities and currencies may face more downside in the current risk off environment. But, global growth is still good, economic fundamentals are holding up and some policy easing from China is likely which will help emerging markets. So, a broad-based emerging market downturn is unlikely to occur.

​Introduction

Global share markets have taken a tumble over recent weeks, as concerns around a US-China led trade war have dominated headlines. Emerging market (EM) shares have been hit particularly hard, although this weakness in EM equities really started in March (the MSCI EM index is down by nearly 10% since the peak at the start of the year in local currency terms and by 18% in US dollar terms). The concern around EM economies has come off the back of global trade tensions but also from:

  1. The lift in the US dollar (USD), up by 7% since its bottom around February, which has occurred as the Fed has been lifting interest rates and global growth has become less synchronised and more US-led (which tends to result in a higher USD). A rising USD is seen as a negative for emerging market economies, because foreign debt in these countries is predominately issued and denominated in USD.

  2. Specific problems in individual emerging market economies, most recently in Argentina and Turkey due to deteriorating current account positions and capital outflows which lead to a weaker currency, lifting inflation and driving sudden interest rate hikes from the central bank. Weakness in external financing is negative for confidence, which loops back into outflows and exacerbates this cycle. Election risks in EM economies (Mexico and Brazil) have also been keeping investors cautious.

EM economic growth, share markets and currencies tends to be volatile and there have been numerous examples in recent history of worries around EM markets leading to broader share market falls (e.g. 1997/98 Asian/EM crisis and the 2015-16 China-led EM downturn). The key question for investors is: are we at that point where the downturn in EMs turns into a major bear market and drags developed market equities with it, along with global growth? In this Econosights, we look at how emerging markets are currently positioned compared to history and whether there are any red flags investors should watch for as sign of a growth deterioration across these economies.

A backdrop to emerging markets

After the Asian/EM crisis (in 1997-98), EM economies implemented various reforms to lift productivity, decrease reliance on foreign capital and float exchange rates which boosted growth in the 2000s. The industrialisation of China at the time and the subsequent surge in commodity prices provided a big boost to underlying EM performance.

Post-GFC, poor growth in advanced economies encouraged capital to flow to the stronger EMs, supporting growth in these countries. But, since 2011, EMs have come out of favour and have been underperforming developed market shares (see chart below). In 2015, EM equities faced a difficult period because of heightened concern around weakening Chinese growth (especially after the authorities devalued the currency), a recession in Brazil and Russia after the collapse in oil prices and uncertainty around interest rate hikes from the Fed and its impact on the USD.

Since 2016, the cyclical global growth upswing has predominately been based in developed markets (US, Eurozone and Japan) after years of easy monetary conditions and easy liquidity which has lifted asset prices in these markets. The chart below shows the turnaround in manufacturing business conditions across developed economies, while EMs have lagged behind. EMs have still benefited from the strength in the global economy and more recently, through the reliance on global trade.

But, EMs are still more important to global growth now than compared to history. EMs make up close to 60% of world GDP (based on purchasing power parity) with a large majority of this due to China, while developed markets are now around 40% of world GDP.

Emerging market economic fundamentals

We outline important indicators to watch for key EMs in the table below. We compare current conditions to 2015 (the last time EMs faced a downturn). Overall, we find that underlying EM fundamentals over the past three years have improved. GDP growth is holding up well, (which is important to ensure that debt servicing does not deteriorate) with Brazil and Russia now out of recession, current account positions have generally improved, national savings have been maintained and government budgets are under control. These indicators are important to keep monitoring, as a sign of any potential deterioration in EMs.

One of the key concerns around EM vulnerabilities is the stock of USD debt held by these countries. Compared to other countries (particularly advanced nations), EMs tend to borrow in foreign currency (especially in USDs because it is the global reserve currency) rather than in their domestic currencies because EM currencies tend to be more volatile given vulnerabilities to changes in capital flows. There is an inverse relationship between the USD and the cost of emerging market debt. A USD appreciation increases the local currency cost of debt, which increases the cost of debt repayment. A depreciation in the USD is beneficial for holders of USD debt, decreasing the local cost of debt repayments. The table above shows that USD debt makes up a decent chunk of emerging market external debt (all borrowings owed to offshore counterparties) and averages around 30% for these key EMs. But, holdings of USD debt are generally less than 50% of total debt outstanding, which is manageable (if the USD rises) against a backdrop of better economic fundamentals compared to a few years ago. As well, the USD appreciation is probably close to reaching a peak (particularly against EM currencies). We expect some pull back in the USD as growth outside of the US should start improving again and becoming more synchronised (which lifts other currencies).

The other negative from a rising USD is the impact on commodity prices (an appreciation in the USD is negative for commodity prices and vice versa) which hits emerging markets more than developed markets because a good chunk of EM countries are commodity exporters. Another factor to keep in mind for USD debt is the cost of borrowing from interest rates which may continue rising given higher interest rates in the US.

But there are also offsets to holdings of foreign currency debt – predominately foreign currency assets and revenue which act as a natural hedge against adverse moves in the currency. The Reserve Bank of Australia found that around two-thirds of the top 100 EM bond issuers are naturally hedged through holding foreign currency assets.

Implications for investors

In the near-term, weakness in emerging market equities and currencies (as well as some potential widening in EM sovereign and corporate credit spreads) may have further to go as there remain concerns around trade wars, weakening Chinese economic growth and the increase in the USD. Some policy easing is likely from China in the near-term which would ease these concerns. Issues in individual emerging market economies are also likely to persist, as some countries grapple with capital outflows. For this reason, investors need to be selective and focus on EMs that have sound fundamentals (large current account surpluses, good GDP prospects and lower political risks) for example, Korea and Indonesia over Turkey and Brazil.

But, ultimately, we don’t expect a broad-based EM crisis in the near-term that would drag the developed world with it. The fundamentals in EM economies are still holding up well and have not deteriorated over the past few years. Holdings of USD debt (as a proportion of total debt) make up a decent chunk of debt holdings but are manageable against better economic fundamentals. As well, the USD appreciation is probably close to its top for now (particularly against EM currencies) which will ease pressure on USD debt repayments.

 

Source: AMP Capital 13 July 2018

Author: Diana Mousina is an Economist within the Investment Strategy and Dynamic Markets team at AMP Capital. Diana’s responsibilities include providing economic and macro investment analysis and contributing to the performance of the dynamic markets fund.


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) 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 without the express written consent of AMP Capital. © 2017 AMP Capital Investors Limited.

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Super Investment Options – What’s Right For You?

Posted On:Jul 06th, 2018     Posted In:Provision Newsletter Articles    Posted By:Provision Wealth

Choosing the right super investment options at the right time could make a difference to how much money you have when you retire.

When it comes to your superannuation, the investment options you choose today and in future may impact how much money you retire with.

If you haven’t selected an investment option within your super, you’re probably invested in your fund’s

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Choosing the right super investment options at the right time could make a difference to how much money you have when you retire.

When it comes to your superannuation, the investment options you choose today and in future may impact how much money you retire with.

If you haven’t selected an investment option within your super, you’re probably invested in your fund’s default option, which will generally take a balanced approach to risk and return.

To get you up to speed, we’ve answered some commonly asked questions around how your money is invested, the different options available and how your preferences can affect your investment returns at any age.

What do super funds do with my money?

Typically, no less than 9.5% of your before-tax salary (if you’re eligible) is paid into super, which is then taxed at a maximum of 15%. Your super fund will invest this money over the course of your working life, so you can hopefully retire comfortably.

Your super fund will let you choose from a range of investment options and generally the main difference will be the level of risk you’re willing to take to potentially generate higher returns.

If you haven’t selected an investment option, your super fund will usually put you into a default option, which generally means your exposure to risk and return is somewhere in the middle.

If you’re not sure what options you’re invested in, contact your super provider.

What are the super investment options I can choose from?

Most super funds let you choose from a range, or mix of investment options and asset classes. These might include ‘growth’, ‘balanced’, ‘conservative’ and ‘cash’ but the terms can differ across super funds.

Here’s a small sample of the typical type of investment options1 available:

  • Growth options aim for higher returns over the long term, however losses can also be notable when markets aren’t performing. They typically invest around 85% in shares or property.

  • Balanced options don’t tend to perform as well as growth options over the long term, but the loss is also less when there are market downturns. They typically invest around 70% in shares or property, with the rest in fixed interest and cash.

  • Conservative options generally aim to reduce the risk of market volatility and therefore may generate lower returns. They typically invest around 30% in shares and property, with the rest in fixed interest and cash.

  • Cash options aim to generate stable returns to safeguard the money you’ve accumulated. They typically invest 100% in deposits with Australian deposit-taking institutions, such as banks, building societies and credit unions.

Super funds may have different allocations, so it’s important to read your super fund’s product disclosure statement before making any decisions.

What’s the right investment option for me?

Choosing the most suitable investment option generally comes down to your goals for retirement, your attitude to risk and the time you have available to invest.

For instance, if you’re young, you may have more time to ride out market highs and lows, and therefore be willing to take on more risk in the hope of achieving higher returns.

If you’re closer to being able to access your super, you may prefer a conservative approach as a share market crash could be harder to recover from than if you’re 20 years away from retirement.

Different options may suit you at different ages. To help you determine what investor style you are, or if you want to explore strategies , please contact us on |PHONE|

While many people put off thinking about super, being informed and engaged from a young age and throughout your career may make a big difference to the returns generated and your final super balance.

Source : AMP 5 July 2018 

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

 

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2017-18 saw strong returns for diversified investors – but there’s a few storm clouds around

Posted On:Jul 04th, 2018     Posted In:Rss-feed-oliver    Posted By:Provision Wealth

The past financial year saw solid returns for investors but it was a story of two halves. While the December half year was strong as global share markets moved to factor in stronger global growth and profits helped by US tax cuts, the last six months have been messier and more constrained – with US inflation and interest rate worries,

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The past financial year saw solid returns for investors but it was a story of two halves. While the December half year was strong as global share markets moved to factor in stronger global growth and profits helped by US tax cuts, the last six months have been messier and more constrained – with US inflation and interest rate worries, trade war fears, uncertainty around Italy, renewed China and emerging market worries and falling home prices in Australia. But will returns remain reasonable or is the volatility of the past six months a sign of things to come? After reviewing the returns of the last financial year, this note looks at the investment outlook for 2018-19 financial year.

A good year for diversified investors

The 2017-18 financial year saw yet again pretty solid returns for well diversified investors. Cash and bank deposits continued to provide poor returns and the combination of low yields and a back-up in some bond yields saw low returns from bonds. The latter resulted in mixed returns from yield sensitive investments, but Australian real estate investment trusts performed well helped by the RBA leaving rates on hold.

Reflecting strong gains in the December half as investors moved to factor in stronger global growth and profits assisted in the US by tax cuts global shares returned 11% in local currency terms and 15% in Australian dollar terms. Australian shares also performed well with the ASX 200 rising to a 10-year high and solid dividends resulting in a total return of 13%. Unlisted assets have continued to benefit from “search for yield” investor demand and faster growth in “rents” with unlisted property returning around 12% and unlisted infrastructure returning around 13.5%.

As a result, balanced growth superannuation returns are estimated to have returned around 9% after taxes and fees which is pretty good given inflation of 2%. For the last five years balanced growth super returns have also been around 8.5% pa.

click to enlarge

*pre fees and taxes, except Balanced Funds which are post fees and taxes
Source: Thomson Reuters, AMP Capital

Australian residential property slowed with average capital city prices down 1.6%, with prices down in Sydney, Perth and Darwin. Average returns after costs were around zero.  

Key lessons for investors from the last financial year

These include:

  • Be cautious of the crowd – Bitcoin provided a classic reminder of this with its price peaking at $US19500 just when everyone was getting interested in December only to then plunge 70% in price.

  • Turn down the noise – despite numerous predictions of disaster it turned out okay.

  • Maintain a well-diversified portfolio – while cash, bonds and some yield sensitive listed assets had a tougher time, a well-diversified portfolio performed well.

  • Cash is still not king – while cash and bank deposits provided safe steady returns, they remain very low.

Expect more constrained returns and volatility

We expect returns to slow a bit over the new financial year and just as we have seen over the last six months volatility is likely to remain high. First the positives:

  • While global growth looks to have passed its peak the growth outlook remains solid. Business conditions indicators –  such as surveys of purchasing managers (Purchasing Managers Indexes or PMIs) –  are off their highs and point to some moderation in growth, but they remain strong pointing to solid global overall.


Source: Bloomberg, AMP Capital

In Australia, growth is likely to remain between 2.5% and 3% with strong business investment and infrastructure helping but being offset by a housing slowdown and constrained consumer spending.

  • Second, solid economic growth should continue to underpin solid profit growth from around 7% in Australia to above 10% globally

  • Third, while we are now further through the global economic cycle there is still little sign of the sort of excess that normally brings on an economic downturn – there is still spare capacity globally, growth in private debt remains moderate, investment as a share of GDP is around average or below, wages growth and inflation remain low and we are yet to see a generalised euphoria in asset prices.

  • Fourth, global monetary policy remains very easy with the Fed continuing to raise rates gradually, the ECB a long way from raising rates and tightening in Japan years away.

  • Finally, share valuations are not excessive. While price to earnings ratios are a bit above long-term averages, this is not unusual for a low inflation environment. Valuation measures that allow for low interest rates and bond yields show shares to no longer be as cheap as a year ago but they are still not expensive, particularly outside of the US.

Against this though there are a few storm clouds:

  • First, the US economy is more at risk of overheating – unemployment is at its lowest since 1969, wages growth is gradually rising and inflationary pressures appear to be picking up. The Fed is aware of this and will continue its process of raising rates. While other countries are behind the US, its share market invariably sets the direction for global markets

  • Second, global liquidity conditions have tightened compared to a year ago with central bank quantitative easing slowing down and yield curves (ie the gap between long term and short-term bond yields) flattening.

  • Third, the risks of a trade war dragging on global growth have intensified. While the share of US imports subject to recently imposed tariffs is minor so far (at around 3%) they are threatened to increase. Our base case remains that some sort of negotiated solution will be reached but trade war worries could get worse before they get better.

  • Fourth, emerging countries face various risks from several problem countries (Turkey, Brazil and South Africa), slowing growth in China, concerns the rising US dollar will make it harder for emerging countries to service their foreign debts and worries they will be adversely affected by a trade war.

  • Finally, various geopolitical risks remain notably around the Mueller inquiry in the US, the US mid-term elections and Italy heading towards conflict with the EU over fiscal policy.

A problem is that various threats around trade and Trump, Italy and China have come along at a time when the hurdle for central banks to respond may be higher than in the past – with the Fed focussed on inflation and the ECB moving to slow its stimulus and less inclined to support Italy.

What about the return outlook?

Given these conflicting forces it is reasonable to expect some slowing in returns after the very strong returns seen in the last two years. Solid growth, still easy money and okay valuations should keep returns positive, but they are likely to be constrained and more volatile thanks to the drip feed of Fed rate hikes, trade war fears, China and Emerging Market worries and various geopolitical risks. In Australia, falling home prices in Sydney and Melbourne along with tightening bank lending standards will be drags. Looking at the major asset classes:

  • Cash and bank deposit returns are likely to remain poor at around 2% as the RBA is expected to remain on hold out to 2020 at least. Investors still need to think about what they really want: if it’s capital stability then stick with cash but if it’s a decent stable income then consider the alternatives with Australian shares and real assets such as unlisted commercial property continuing to offer attractive yields.


Source: RBA; AMP Capital

  • Still ultra-low sovereign bond yields and the risk of a risking trend in yields, which will result in capital losses, are likely to result in another year of soft returns from bonds.

  • Unlisted commercial property and infrastructure are likely to benefit from the ongoing “search for yield” (although this is waning) and okay economic growth.

  • Residential property returns are likely to be mixed with Sydney and Melbourne prices falling, Perth and Darwin bottoming and other cities providing modest gains.

  • Shares are at risk of a further correction into the seasonally weak September/October period given the storm clouds noted above, but okay valuations, reasonable economic growth and profits and still easy monetary conditions should see the broad trend in shares remain up – just more slowly. We continue to favour global shares over Australian shares.

  • Finally, the $A is likely to fall as the RBA holds and the Fed hikes adding to the case for unhedged global shares.

Things to keep an eye on

The key things to keep an eye are: global business conditions PMIs for any deeper slowing; risks around a trade war; risks around Trump ahead of the US mid-term elections; the drip feed of Fed rate hikes; conflict with Italy over fiscal policy in Europe; risks around China and emerging countries; and the Australian property market – where a sharp slump in home prices (which is not our view) could threaten Australian growth.

Concluding comments

Returns are likely to remain okay over 2018-19 as conditions are not in place for a US/global recession. But expect more constrained returns (say around 6% for a diversified fund) and continued volatility.

 

Source: AMP Capital 4 July 2018

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

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Affordable school holiday activities

Posted On:Jul 03rd, 2018     Posted In:Provision Newsletter Articles    Posted By:Provision Wealth

We asked our readers for their top tips to keep the kids entertained during the school holidays without blowing the budget

Art and craft, board games and movies at home all proved popular, as did visits to the park, playground, picnics, riding bikes and camping.

And perennial favourites such as taking advantage of museums and galleries with free entry, and visits to

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We asked our readers for their top tips to keep the kids entertained during the school holidays without blowing the budget

Art and craft, board games and movies at home all proved popular, as did visits to the park, playground, picnics, riding bikes and camping.

And perennial favourites such as taking advantage of museums and galleries with free entry, and visits to the local library, also rated a mention.

Most creative low-cost school holiday activities

If you’re looking for some fresh school holiday inspiration, some of the most creative ideas included:

  • Looking through photo albums together and creating a family slideshow.

  • Putting on a concert or play for friends, getting the kids to create the show, make costumes and props, and make tickets and food for the guests.

  • Getting the kids to write books and turning them into movies.

  • Going on a park crawl, by setting a timer and after an hour at a park, moving onto another one.

  • Using old bottles and jars to create terrariums using succulents and plants from the garden.

  • Getting together with a group of friends and each taking all the kids for a day, so you only have one day to plan and pay for, and some child-free days during the holidays.

  • Making a list of things for the kids to spot then heading out in the car and playing car bingo.

  • Cutting out pictures from old magazines and cards and creating new homemade cards for upcoming birthdays and events.

  • Scouring the internet in the lead up to the holidays for free and cheap activities to create a lucky dip jar to draw from when boredom sets in.

  • Instead of just playing board games, making one, including planning the theme, rules, making the board, cards and questions, then playing it.

 Source : AMP 3 July 2018 

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

 

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