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Investing for retirement: 6 things to consider

Posted On:Apr 08th, 2015     Posted In:Rss-feed-market    Posted By:Provision Wealth

By AMP Capital Markets

Some will choose to extend their work years while others may need to accept lower than desired living standards in retirement. The earlier that people focus on the issue of funding their retirement, the greater their capacity to respond. In this article, Jeff Rogers, Chief Investment Officer, ipac Investment Management delves into the role of advisers in

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By AMP Capital Markets

Some will choose to extend their work years while others may need to accept lower than desired living standards in retirement. The earlier that people focus on the issue of funding their retirement, the greater their capacity to respond. In this article, Jeff Rogers, Chief Investment Officer, ipac Investment Management delves into the role of advisers in helping clients develop an investment strategy that is aligned with their retirement goals.

The need to plan

In the past, the age pension was the primary source of money to ensure a secure retirement. Today, governments are encouraging people to save for their own retirement. This is because as a growing number of baby boomers reach retirement, the number of working people to support them is not keeping pace. So increasingly, Australians are being asked to invest on their own to create a source of income to supplement their support from social security. That’s why, goal-setting and retirement planning have become so critical in recent years.

A closer look at retirement goals

Typically, a retiree will work with an adviser to scope, and prioritise their life goals. This process will inform how much financial resource to allocate to accounts supporting each life goal as well as the investment strategies to support the achievement of the goals. While the goals associated with retirement can be diverse, most goals belong to one of three broad categories or ‘buckets’. These are essential needs, lifestyle wants, and legacy aspirations.

  • Essential needs: A person’s immediate need in retirement is to have an income to deal with the essentials in life, the ‘must haves’. This includes the need to pay for food, housing, transport, regular bills etc. As such, this represents the most important goal; one which requires the most pressing financial attention. For essential needs, receiving a steady cash flow becomes paramount. (The day-to-day value of their portfolio is arguably of less importance). To address this goal, an adviser might recommend a strategy based on income-focused security strategies that aim to deliver a sustainable level of income to keep up with the cost of living. The powerful link between regular, sustainable income and living expenses represents a source of great confidence and helps a retiree stick to their strategy.

  • Lifestyle wants: Retirees may also want to set aside some assets earmarked to fund discretionary spending. Holidays and hobbies or the purchase of a new car might belong to this category. These lifestyle wants make for a more enjoyable retirement but are not regarded by the retiree as essential to their wellbeing. Investment strategies appropriate for these goals should aim to grow capital steadily over time with a low probability of a major or protracted decline in value.

  • Legacy aspirations: Retirees who have additional financial resources may aspire to leave a bequest for future generations. Not everyone will have the financial resources to meet all their goals, so an important aspect of an adviser’s role is to help their client set priorities. Investment strategies focused on these goals can accept greater short-term price variability provided there is confidence they will deliver strong compound growth in portfolio value over the long-term.

6 things to look for when considering investment solutions

  • A predictable and reliable stream of income: Consider strategies that aim to deliver a steady income in the form of coupons from quality bonds, dividends from shares or distributions from Real Estate Investment Trusts (REITs) and infrastructure.

  • Smoother returns: Focus on strategies that are designed to exhibit lower volatility than the broader market.

  • Inflation protection: It’s important that the overall portfolio seeks to grow with the cost of living to maintain purchasing power of income over time.

  • Tax effectiveness: Even though most retirees have an income tax rate of 0% in retirement, franking credits attached to the sustainable dividends of quality Australian companies represent a good source of retirement income.

  • Liquidity: It is easier to redeem money from liquid investments when a change in circumstances may require it.

  • Transparency of strategy: Seek strategies that are easy to understand and where the manager offers regular communications and insight into how funds are performing against client goals.

Final thoughts

The key to knowing which investment products are most appropriate for clients in or approaching retirement is to understand what success and failure looks like for the client. That is, what does a client want at this particular point in life and how might that evolve over time? What constitutes a ‘must have’; what is ‘nice to have’ and what is ‘aspirational’? These are important questions whose answers enable investment strategies to be better matched to a client’s various goals. Advisers and clients who work together to clearly identify what truly constitutes success and failure are more likely to enjoy a successful long-term relationship. To find out more about the tools and resources available, please see www.ampcapital.com.au/goals.

About the Author
Jeff Rogers, Chief Investment Officer, ipac Investment Management
Jeff Rogers joined AMP Capital in 2011 from ipac Securities and he has over 27 years’ of investment management experience. Jeff holds a Bachelor of Science (Honours) from the University of Melbourne.

 

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China sets 7% growth target: Implications for Australia and commodities

Posted On:Apr 08th, 2015     Posted In:Rss-feed-market    Posted By:Provision Wealth

By AMP Capital Markets

The new target is in line with China's plan to guide the economy towards slower and more sustainable growth. In this article, we provide an update on the Chinese economy and explore what this means for investment markets.

In March, the annual National People’s Congress (NPC) took place in Beijing and the much anticipated economic targets were

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By AMP Capital Markets

The new target is in line with China's plan to guide the economy towards slower and more sustainable growth. In this article, we provide an update on the Chinese economy and explore what this means for investment markets.

In March, the annual National People’s Congress (NPC) took place in Beijing and the much anticipated economic targets were announced by the Central Economic Work Conference (CEWC). There weren’t any real surprises in the targets, but there are a few items worth noting:

  • Fixed asset investment growth target of 15% seems somewhat ambitious given structural headwinds in the form of overcapacity and overbuilding; while the retail sales growth target of 13% may also be hard to hit.

  • The inflation ceiling of 3% looks manageable, particularly given deep and persistent producer price deflation. In that respect, there is plenty of scope for monetary policy accommodation to support growth.

  • The property market is critical to the overall view for China given the downside risks linked to property and the flow-on effects to the broader economy. So it was encouraging to hear out of the NPC that the authorities would look to support stable housing demand. This is important because the property sector is presently in a cyclical and structural downturn, so if the authorities can stabilise the property market it will go some way towards addressing some of the downside risks.

  • Reforms remain a priority, but reforms are often costly in the short-term. So China needs to maintain a baseline of growth while undertaking the difficult and bold reforms that are necessary to ensure more sustainable growth and foster the progression and transformation of its economy.

China’s growth target in context

Source: AMP Capital, Bloomberg, As at 31 March 2015

What does this mean for Chinese shares?

After a frenzied 90% gain from the June 2013 low, Chinese shares listed in China (A shares) are no longer cheap. However, they still represent reasonable value against their historic performance. Chinese companies listed in Hong Kong, or H shares have lagged in the recovery. As such, they may offer better value than A shares in the way of price-to-earnings ratio (PE) – see chart below. Overall, both mainland and Hong Kong-listed Chinese shares offer good return prospects for investors as they stand to benefit from further monetary easing and capital market reforms.

Valuations not excessive versus history, but H shares are cheaper than A shares

Source: AMP Capital, Bloomberg, As at 31 March 2015

Implications for Australia and commodities

While growth in China has slowed since the previous decade, China is still consuming large quantities of commodities. In fact, Gross Domestic Product (GDP) growth of 7% today is equivalent to about 14% GDP growth a decade ago as the Chinese economy has more than doubled in size over that period. A key issue for Australia is that the supply of commodities has now caught up with demand and this will continue to weigh on commodity prices going forward. The good news though is that the risk of a hard landing in China remains low and so a collapse in commodity demand is unlikely. The property sector remains a swing factor in commodity demand.

China property outlook is important for commodities

Source: AMP Capital, Bloomberg, As at 31 March 2015

Final thoughts

More broadly, the data in China has been particularly weak so far this year, supporting the case for further monetary easing and government spending. The Chinese property market merits close watching due to its importance for the outlook in China and commodities.

About the Author

Callum Thomas, Investment Strategist at AMP Capital is responsible for researching a range of asset classes and global macroeconomic themes to aid in formulating investment strategies across the Multi-Asset Group.

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Australia: expect further rate cuts and a lower dollar

Posted On:Apr 08th, 2015     Posted In:Rss-feed-market    Posted By:Provision Wealth

By AMP Capital Markets

At the same time, Australia’s national income has taken a hit as the demand for our main exports – particularly iron ore and coal – have fallen. This has been augmented by a collapse in energy prices. All of these things are weighing on the economy.

Australia’s central bank has done its part to stimulate

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By AMP Capital Markets

At the same time, Australia’s national income has taken a hit as the demand for our main exports – particularly iron ore and coal – have fallen. This has been augmented by a collapse in energy prices. All of these things are weighing on the economy.

Australia’s central bank has done its part to stimulate growth

The Reserve Bank of Australia (RBA) has been attuned to the issues of growth in Australia; that the economy needed help, we needed to get the non-mining part of the economy going again like housing, tourism, retailing and so on. It’s done its part by cutting interest rates, which has led to a pick-up in the housing sector and stronger flows into retailing. As such, we have not gone into recession, as some predicted would happen, but the economy is still lagging. The Australian economy is currently growing at a pace of around 2-2.5% which is well below its long-term potential. In turn, this means unemployment is slowly drifting higher. In response, the RBA has indicated that it has an easing bias. In other words, its inclination is to cut interest rates a little further and we will probably see that in the months ahead.

How do rate cuts boost the economy?

Those with a mortgage should get a boost, those who have bank deposits loose out. But just bear in mind that Australians owe the bank far more than the banks owe them. That’s why, when you cut interest rates, the benefit to those with a mortgage actually swaps the loss of an income to those with fixed deposits or bank deposits.

Expect a lower Australian dollar

One of the issues through to last year was the fact that the Australian dollar held up at a level which was too high; hovering around the mid-90s for a long while. Now, of course, that’s come down and there’s probably more downside ahead. We believe that the Australian dollar remains overvalued and whilst there may be some short-term bounces along the way, the dollar is likely to head towards $US0.70 and possibly lower in the period ahead.

A case for getting the budget under control

As we head into May’s Federal Budget, we’re likely to see a bit of a re-run of what we saw last year. That is, the government may try to make the case that we need to cut back on government spending. Last year, we had the audit of government to pave the way for budget cuts. Of course, this year we’ve had the 'Intergenerational Report', which has again highlighted the pressures on government spending in Australia, particularly from the ageing population with areas like health, pensions and other welfare going forward. Overall, we’re likely to hear more talk about the need to get the budget under control – but probably in a bit more of a controlled fashion than what we saw in the budget last year.

Final thoughts

As interest rate cuts continue to feed through the economy, it would help if there was a bit more confidence coming out of Canberra. The constant political uncertainty may be weighing down, particularly on business confidence. Therefore, it’s understandable why the economy is going through a slower patch. Just bear in mind, it’s not collapsing, but it still needs some stimulus. Ultimately, we believe that the Australian economy is likely to pick up as we go through into 2016.

In this video, Dr Shane Oliver, AMP Capital’s Head of Investment Strategy and Chief Economist, discusses why the Australian economy is slowing and how the central bank is responding. He also highlights what investors can expect in the lead-up to May’s Federal Budget.

About the Author

Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital is responsible for AMP Capital's diversified investment funds. He also provides economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets.

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RBA Board to leave the cash rate unchanged at 2.25 per cent

Posted On:Apr 07th, 2015     Posted In:Rss-feed-market    Posted By:Provision Wealth
Statement by Glenn Stevens, Governor: Monetary Policy Decision

At its meeting today, the Board decided to leave the cash rate unchanged at 2.25 per cent.

Moderate growth in the global economy is expected in 2015, with the US economy continuing to strengthen, even as China's growth slows a little from last year's outcome.

Commodity prices have declined over the past year,

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Statement by Glenn Stevens, Governor: Monetary Policy Decision

At its meeting today, the Board decided to leave the cash rate unchanged at 2.25 per cent.

Moderate growth in the global economy is expected in 2015, with the US economy continuing to strengthen, even as China's growth slows a little from last year's outcome.

Commodity prices have declined over the past year, in some cases sharply. The price of oil in particular is much lower than it was a year ago. These trends appear to reflect a combination of lower growth in demand and, more importantly, significant increases in supply. The much lower levels of energy prices will act to strengthen global output and temporarily to lower CPI inflation rates. Prices for key Australian exports have also been falling and therefore Australia's terms of trade are continuing to decline.

Financial conditions are very accommodative globally, with long-term borrowing rates for several major sovereigns at all-time lows. Financing costs for creditworthy borrowers remain remarkably low.

In Australia the available information suggests that growth is continuing at a below-trend pace, with overall domestic demand growth quite weak as business capital expenditure falls. As a result, the unemployment rate has gradually moved higher over the past year. The economy is likely to be operating with a degree of spare capacity for some time yet. With growth in labour costs subdued, it appears likely that inflation will remain consistent with the target over the next one to two years, even with a lower exchange rate.

Credit is recording moderate growth overall. Growth in lending to investors in housing assets is stronger than to owner-occupiers, though neither appears to be picking up further at present. Lending to businesses, on the other hand, has been strengthening recently. Dwelling prices continue to rise strongly in Sydney, though trends have been more varied in a number of other cities. The Bank is working with other regulators to assess and contain risks that may arise from the housing market. In other asset markets, prices for equities and commercial property have risen, in part as a result of declining long-term interest rates.

The Australian dollar has declined noticeably against a rising US dollar over the past year, though less so against a basket of currencies. Further depreciation seems likely, particularly given the significant declines in key commodity prices. A lower exchange rate is likely to be needed to achieve balanced growth in the economy.

At today's meeting the Board judged that it was appropriate to hold interest rates steady for the time being. Further easing of policy may be appropriate over the period ahead, in order to foster sustainable growth in demand and inflation consistent with the target. The Board will continue to assess the case for such action at forthcoming meetings. 

Source:
RBA Media Release 7/4/15

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Bird’s-eye view: Airport infrastructure

Posted On:Mar 09th, 2015     Posted In:Rss-feed-market    Posted By:Provision Wealth
Aviation is broader than airlines

The aviation sector extends beyond pure airlines as we traditionally think of them. Frequent-flyer programs, aircraft manufacturing and infrastructure are all examples of related sectors which are often quite profitable and are not so bound by external factors such as oil prices, which can heavily influence airline profitability.

In fact, aviation-related infrastructure – such as

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Aviation is broader than airlines

The aviation sector extends beyond pure airlines as we traditionally think of them. Frequent-flyer programs, aircraft manufacturing and infrastructure are all examples of related sectors which are often quite profitable and are not so bound by external factors such as oil prices, which can heavily influence airline profitability.

In fact, aviation-related infrastructure – such as airports, runways, terminals, hangars, and ground transport systems can present a compelling opportunity for investors. Generally speaking, aviation-related infrastructure has similarities to other forms of civilian infrastructure in that it can provide an ongoing cash stream that gradually rises with inflation.

Other advantages of infrastructure as it relates to the aviation industry include:

  • Monopolistic characteristics. Unlike roads, airports tend to have limited competition from alternative airports. Once they are established, potential competitors would have few reasons to attempt to open a ‘better one next door’. These days, competition is more likely to come from alternative modes of transport such as high-speed rail, which is particularly popular across Asia.

  • High barriers to entry: A substantially high initial investment is required to build the necessary infrastructure for airports and other services related to infrastructure. There are also various regulatory and government restrictions such as noise limits and the realities of airport-based airlines which favour concentration of operations in a few ports.

  • Ancillary income streams. Additional cash flow can stem from non-aviation sources such as car parks, shops and ground transport systems. These sources of income, along with the aeronautical revenues received from the airlines for the use of runway and terminal infrastructure can also provide a valuable hedge against inflation.

  • Shelter against a nation’s economic cycle. When an economy is in good shape, and its currency tends to be high, outbound international travel generally becomes more popular. Conversely, in a weak economy, a net inflow of international tourists is often seen, as foreign citizens take advantage of their greater purchasing power.

What are the considerations?

Like all potential infrastructure investments, any prospective investor considering the aviation sector should carefully assess risks. Competition from other hubs may be an important factor though this is generally more relevant overseas than in Australia. Investors should also consider competition from other travel destinations, which is particularly relevant for airports where traffic is majority inbound tourism.

Some other questions that may be worth exploring include:

  • Is the airport dependent on one or few airlines?

  • Is there a good mix of domestic and international traffic?

  • What’s the balance between aeronautical and commercial revenues?

  • What potential competing transport modes could emerge?

  • What regulatory risks exist?

These are all questions that investors should consider before allocating any capital. Positive financial indicators of a ‘good’ airport investment should include a favourable regulatory framework that doesn’t cap returns, high operating margins, strong aeronautical asset base with spare capacity, moderate level of gearing and an ability to expand.

Final thoughts

With the appropriate research, the potential exists to provide an ongoing, inflation-sheltered income stream that should rise in value meaningfully over time.
 

About the Author
Mar Beltran is Investment Director of AMP Capital’s airport investments.

Important note: While every care has been taken in the preparation of this information, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) makes no representation or warranty 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 information 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, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. Certain information in this website has been obtained from sources that we consider to be reliable and is based on present circumstances, market conditions and beliefs. We have not independently verified this information and cannot assure you that it is accurate or complete.

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Global infrastructure and interest rate movements

Posted On:Mar 09th, 2015     Posted In:Rss-feed-market    Posted By:Provision Wealth
Infrastructure assets can have both bond-like and equity-like characteristics

Infrastructure assets, particularly listed infrastructure companies, typically exhibit total returns that have some similarities to both equities and bonds. Some infrastructure assets will have revenue streams more similar to bonds, while others will have a higher equity comparable component.

For example, the revenue a toll road generates depends on the amount

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Infrastructure assets can have both bond-like and equity-like characteristics

Infrastructure assets, particularly listed infrastructure companies, typically exhibit total returns that have some similarities to both equities and bonds. Some infrastructure assets will have revenue streams more similar to bonds, while others will have a higher equity comparable component.

For example, the revenue a toll road generates depends on the amount of traffic using the road and the amount each vehicle pays.  Whilst the volume of traffic varies similar to the sales fluctuation of other companies, the toll fee is often fixed by the regulatory authority or the concession contract.

Another example is in the oil, gas storage and transportation sector where assets, such as oil and gas pipelines, often have minimum guaranteed revenue streams supported by contractual agreements.  The users of the pipelines must agree to pay for the use of its assets for up to 15 or 20 years, which effectively guarantees the return a pipeline will make. This gives this type of asset defensive characteristics and a more fixed income type profile to the revenue stream.

Infrastructure assets where revenue profiles are either fixed, or bound within defined ranges and have low growth opportunities, are sometimes referred to as ‘bond proxies’ as they have similar revenue streams.

How do interest rate expectations affect infrastructure?

In a steepening interest rate curve environment (where future interest rates are expected to increase more when compared to shorter-term rates) long-term assets with fixed income characteristics, such as infrastructure, tend to underperform against both short term fixed income instruments and equities. Higher expected future interest rates can be indicative of an improving economy where equities are expected to outperform bonds and bond proxies.  As such, investors are more likely to sell their bond-like assets and invest in equity-like investments in order to benefit from the economic upswing.

In a flattening interest rate curve environment (where future interest rates are expected to be more closely aligned with short-term rates) bond proxy infrastructure assets tend to outperform equities, in general. This can be for many reasons but includes, at least partly, the reverse of the above scenario. As longer-term interest rates are expected to be more in line with short-term rates, there is no requirement for bond proxy assets to fall in price to compensate for rising long-term interest rates. In addition, equities are generally considered riskier than quality fixed income assets; therefore assuming that the future economic environment remains broadly similar, there is less expectation for equities to outperform bonds.

What does this mean for investors? 

We believe that as the Fed starts to steadily increase rates, creating a shift from a rising to a more flattened interest rate curve environment, core and pure infrastructure assets will outperform global equities. However, the potential of an individual company to outperform will depend on the specific sector that a company operates in, as well as the fundamentals of the company. An example of a company with characteristics that would typically benefit in a steepening environment would be one operating in the transportation sector, e.g. a toll road or an airport.

Companies that should benefit from a future flattening interest rate curve environment are those with more bond proxy characteristics (like some organisations in the communications field) and those companies with contractually supported revenue streams (such as organisations in the oil and gas pipelines field).

Final thoughts

There is the opportunity for an actively managed and well-positioned infrastructure portfolio to take advantage of both current and future interest rate environments and transition to a different mix of optimal assets as the Fed starts to progressively raise interest rates. We believe now could be a suitable time for investors to gain exposure to the secular growth potential in global infrastructure spending, and an attractive and growing dividend yield secured by long-term contracts or regulation.

About the Author

Tim Humphreys is the head of AMP Capital's Global Listed Infrastructure Team with over 15 years' experience in the UK and Australia. Tim also leads the research effort of infrastructure companies in the Americas.

Important note: While every care has been taken in the preparation of this information, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) makes no representation or warranty 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 information 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, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. Certain information in this website has been obtained from sources that we consider to be reliable and is based on present circumstances, market conditions and beliefs. We have not independently verified this information and cannot assure you that it is accurate or complete.

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