Olivers Insights

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

• Successful investing can be really difficult in times of uncertainty like now making it important to stay focussed on the basic principles of investing.

• Here are another five great charts to help illuminate those basic principles: the importance of time in the market versus timing; the case to look less at your investments; the relationship between risk and return; the value of diversification; & the role of property.

Introduction

Successful investing can be really hard in times like the present when share markets are down sharply & very volatile on the back of uncertainty around inflation, rising interest rates and the war in Ukraine. I will be the first to admit that my crystal ball is even hazier than normal in times like the present. As the US economist JK Galbraith once said “there are two types of economists – those that don’t know and those that don’t know they don’t know.” And this is certainly an environment where much is unknown. But the basic principles of investing are simple and timeless and can be particularly useful to bear in mind in times like this. This note continues our updated series that began with “Five great charts on investing”.

Chart #1 Time in versus timing

In times of uncertainty it’s tempting to try and time the market, ie to sell ahead of falls & buy in anticipation of gains. But without a proven asset allocation or stock picking process, trying to time the market is very difficult. A good way to demonstrate this is with a comparison of returns if an investor is fully invested in shares versus missing out on the best (or worst) days. The next chart shows that if you were fully invested in Australian shares from January 1995, you would have returned 9.5%pa (including dividends but not allowing for franking credits, tax and fees).

Missing the best days and the worst days
Return on Australian Shares, % pa (All Ords Accumulation Index, 1995-2022)

Source: Bloomberg, AMP

If by trying to time the market you avoided the 10 worst days (yellow bars), you would have boosted your return to 12.5% pa. If you avoided the 40 worst days, it would have been boosted to 17.5% pa. But this is very hard to do, and many investors only get out after the bad returns have occurred, just in time to miss some of the best days and so end up damaging their longer term returns. For example, if by trying to time the market you miss the 10 best days (blue bars), the return falls to 7.4% pa. If you miss the 40 best days, it drops to just 3.3% pa. Hence the old cliché that “it’s time in that matters, not timing”.

Key message: market timing is great if you can get it right, but without a process the risk of getting it wrong is very high and, if so, it can destroy your longer-term returns. 

Chart #2 Look less

If you look at the daily movements in the share market, they are down almost as much as they are up, with only just over 50% of days seeing positive gains. See the next chart for Australian and US shares. So day by day, it’s pretty much a coin toss as to whether you will get good news or bad news. But if you only look monthly and allow for dividends, the historical experience tells us you will only get bad news around a third of the time. Looking only on a calendar year basis, data back to 1900 indicates the probability of a loss slides to just 20% in Australian shares and 26% for US shares. And if you go all the way out to once a decade, since 1900 positive returns have been seen 100% of the time for Australian shares and 82% for US shares.

Percentage of positive share market returns

Daily and monthly data from 1995, data for years and decades from 1900.
Source: Bloomberg, RBA, ASX, AMP

Key message: the less you look at your investments, the less you will be disappointed. This matters as the more you are disappointed, the greater the risk of selling at the wrong time.

Chart #3 Risk and return

This chart is basic to investing. Each asset class has its own risk (in terms of volatility and risk of loss) and return characteristics. Put simply: the higher the risk of an asset, the higher the return you will likely achieve over the long term and vice versa. The next chart shows a stylised version of this. Starting with cash, it’s well known that its very low risk but so is its return potential. Government bonds usually offer higher returns but their value can move around a bit in the short term (although major developed countries have not defaulted on their bonds). Corporate debt has a higher return potential again but a higher risk of default. Unlisted or directly held commercial property and infrastructure offer a higher return again but they come with higher risk and are less liquid and can be less able to be diversified (except via say a managed fund). Equities can offer another step up in return, but this is because they come with higher risk as they are subject to share market volatility and individual companies can go bankrupt wiping out share holder capital. Beyond this, private equity entails more risk again & so tends to command an even higher return premium.

Each step up involves more risk, and this is compensated for with more long-term return. Of course, this neat relationship may not hold in the short-term – eg, government bonds have had worse returns over the last 12 months than shares. And its hard to place “crypto currencies” on the chart – they are very volatile but have not been around long enough to have confidence their long-term returns will compensate for this.

Risk and return across major asset classes

Source: AMP

Key message: Investors need to allow for the risk (and liquidity) and return characteristics of each asset. Those who don’t mind short-term risk (and illiquidity in the case of unlisted assets) can take advantage of the higher returns growth assets offer over long periods. The key is that there is no free lunch.

Chart #4 Diversification

But this not the end of the story. The next table shows the best and worst performing asset class in each year over the last 15.

Best and worst performing major asset class

Source: Reuters, Bloomberg, AMP

It can be seen that the best performing asset each year can vary dramatically, and that last year’s top performer is no guide to the year ahead. So, it makes sense to have a combination of asset classes in your portfolio. This particularly applies to assets that are lowly correlated, ie that don’t just move in lock step with each other. For example, global and Australian shares tend to move together during extreme events. But bonds and shares tend to diverge when crises hit threatening recession – as we saw in the GFC when shares fell but bonds rallied. So there is a case to have bonds in a portfolio to help stabilise returns. Of course, this doesn’t always work, eg like now when inflation is the key danger, highlighting the case for cash & real assets like unlisted commercial property and infrastructure too.

Key message: diversification is also a bit like the magic of compound interest. Having a well-diversified exposure means your portfolio won’t be as volatile.

Chart #5 Residential property has a role

Chart #1 in the first edition in this Five Charts series highlighted the power of compound interest, with a comparison showing the value of $1 invested in various Australian asset classes back in 1900 and what it would be worth today. Unfortunately, I do not have monthly data for Australian residential property returns back that far but I do have them on an annual basis back to 1926 and this is shown in the next chart starting with a $100 investment.

Long term asset class returns

Source: Source: ABS, REIA, RBA, ASX, AMP

Again it can be seen that over very long periods the power of compounding works wonders for shares compared to bonds and cash. But it can also be seen to work well for Australian residential property with an average total return (capital growth plus net rental income) of 11% pa, which is similar to that for shares. All of which highlights, along with the diversification benefits of a real asset like property, the case to have it in a well-diversified portfolio along with listed assets like shares, bonds and cash.

The key is to allow for the different “risks” experienced by property versus shares. Property prices are less volatile than share prices as they are not traded on share markets and so are not as subject to the whims of investors and movements in their values tend to relate more to movements in the real economy. But residential property takes longer to buy and sell and it’s harder to diversify as you can’t easily have exposure to hundreds or thousands of properties exposed to different sectors and countries like you can with shares. So, there are trade-offs between residential property and shares.

Key message: given their long-term returns and diversification benefits, there is a key role for residential property in your investment portfolio – putting aside the current threat to the housing market from poor affordability and rising interest rates.

Source: AMP Capital May 2022

Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make 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 document 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 document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

And what does it mean for investors?

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

• The RBA has hiked the cash rate by 0.25% taking it to 0.35% and signalling more rate hikes ahead.

• We expect the cash rate to rise to 1.5% by year-end and to 2% by mid next year. But the RBA will only raise rates as far as necessary to cool inflation and high household debt has likely made rate hikes more potent.

• Rate hikes are unlikely to de-rail the economic recovery just yet as monetary policy is still very easy, but they will add to the slowdown in home prices, where we see dwelling prices falling 10 to 15% into early 2024.

Introduction

For the first time since November 2010, the RBA has raised its official cash rate – from 0.1% taking it to 0.35%. This was above market expectations for a 0.15% hike and a bit closer to our expectation for a 0.4% move suggesting that the RBA appears to have partly accepted the argument that it had to do something decisive in order signal its resolve to get inflation back down. The RBA also announced it will start quantitative tightening, by allowing its portfolio of bonds to run down as they mature, which along with the ending of cheap funding for banks under the Term Funding Facility will see a significant decline in its balance sheet next year. And its commentary was hawkish, indicating it will “do what is necessary” to return inflation to target and that this will require further interest rate increases.

Banks are likely to pass the RBA’s rate hike on in full to their variable rate customers and deposit rates will also start to rise. Fixed mortgage rates have already moved up in line with rising bond yields in anticipation of higher cash rates – doubling from record lows around 2% a year ago.

Australian interest rates on the rise

Source: RBA, Bloomberg, AMP

The RBA has now joined central banks in the US, Canada, the UK, NZ, Korea, Norway and Sweden in raising rates – some of whom have started to hike more aggressively with 0.5% moves.

Why the rate hike?

The start of rate hikes has come well ahead of the RBA’s guidance up until early this year that a rate hike was unlikely until 2024. Only a few months ago the RBA conceded a rate hike was “plausible” this year, but it was prepared to be “patient” and then last month it was implying it would wait for March quarter inflation (which we saw last week) and wages data (due later this month). What’s changed is that the jobs market, with just 4% unemployment and inflation at 5.1%yoy or 3.7%yoy in underlying terms, have been far stronger than the RBA expected, removing the luxury of patience and waiting for more wages data. Consistent with this, it announced a downwards revision to its unemployment rate forecasts (to 3.5% by early next year from 3.75%) and big upwards revisions to its inflation forecasts (to 6% for year end from 3.25%) and appears to have become more upbeat on wages growth noting “larger wage increases are now occurring in many…firms”.

While inflation of 5.1% is still below the 8.5% in the US and the circa 7% rates in Europe, the UK, Canada and NZ, it’s been following the other countries higher and, in the near-term, we are likely to see a further rise in underlying inflation with Coles, for example, warning of further significant supermarket inflation.

Australia Consumer Price Inflation

Source: ABS, AMP

Won’t hiking rates just add to the cost of living?

It’s true that the rate hike will add to “cost pressures” facing households with a mortgage. But tightening monetary policy by raising the cost of borrowing (or money) in order to slow demand growth relative to supply in the economy is one of the few levers policy makers have in the short-term to reduce inflation. Much of the surge in inflation owes to pandemic distortions to global supply and goods demand, made worse by the war in Ukraine and the recent floods, which may reverse to some degree at some point. And the RBA can’t do much about supply constraints. But it had no choice but to act to increase the cost of money from near zero. First, having a near zero cash rate when unemployment is 4% and inflation is over 5% makes no sense. Second, the experience from the late 1970s tells us the longer high inflation persists the more inflation expectations will rise making it even harder to get inflation down again without a recession. Thirdly, the global backdrop now of bigger government, a long period of ultra-easy monetary policy and big budget deficits, the reversal in globalisation and the demographic decline in workers relative to consumers, all point to a transition from the falling and low inflation world of the last 30-40 years to structurally higher inflation. Finally, waiting till after the election would have left the RBA vulnerable to criticism that it was influenced politically, which could call into question its independence and further dent its credibility.

Does this mean that the RBA got it wrong?

After the long period of below target inflation and low wages growth last decade the RBA was right to move in 2020 to focussing on actual, as opposed to forecast, inflation and to adopt more dovish forward guidance. But the messy removal of its bond yield target last November, the surge in inflation and now the far earlier rate hike than its recent guidance indicated, have likely dented its credibility. A key lesson is that its interest rate guidance is based on forecasts which can be wrong, so it’s wise for the RBA not to emphasise it too much as some may have read more confidence into it than was warranted.

How far will interest rates rise in Australia?

In order to bear down on inflation expectations, we expect another increase in the cash rate in June (probably of 0.25% but it could be up to 0.4%), a rise in the cash rate to 1.5% by year end and to 2% next year, which, all things being equal, will translate to an increase in variable mortgage rates of up to 2%. While this will cut into household spending power it should be manageable for most borrowers:

• RBA analysis suggests the “majority of households are well placed to manage higher…loan payments” and that while around 25% of variable rate borrowers would see a 30% or more rise in payments from a 2% rise in rates, just over 40% of variable rate borrowers would see no increase in monthly payments from a 2% mortgage rate rise as they are already paying in excess of the minimum.

• Banks were assessing new borrowers on their ability to pay an extra 2.5% on the rate they were borrowing at and since October this was raised to 3%. So, borrowers should be able to manage a 2% increase in mortgage rates without a significant increase in mortgage stress.

The RBA will only raise rates as far as necessary to cool inflation. It knows that high household debt levels compared to the past means households are more sensitive to higher rates and therefore it won’t need to raise rates as much as in the past to cool inflation. So, it won’t be on autopilot mindlessly hiking & crashing house prices and the economy in the process. Rather, after a few initial hikes, it will likely pause to see what happens before doing more, but rates will not rise to nosebleed levels.

Moving earlier and faster initially should allow the RBA to slow the pace of rate hikes next year. And through next year the combination of fixed rate borrowers seeing a doubling in their interest rate as their fixed terms come to an end and falling home prices exerting a negative wealth effect will start to do some of the RBA’s work for it.

What about the impact on the economy?

While rate hikes will cause bouts of uncertainty and see economic growth slow down to around 2.5% next year from 4.5% this year, we don’t see RBA rate hikes this year as being enough to end the economic recovery and trigger a recession. Monetary policy will still be relatively easy for much of this year at least. It’s usually only tight monetary conditions that result in recessions & we are a long way from that. The strong jobs market will continue to support households, and the household sector as a whole is sitting on around $250bn in excess savings, built up through the pandemic. And don’t forget that since the mid-1990s there have been four rate tightening cycles (1994, 1999-2000, 2002-2008 and 2009-2010) none of which caused a recession.

What does it mean for the share market?

There is an ambiguous relationship between rising interest rates and the Australian share market. While higher rates place pressure on share market valuations by making shares appear less attractive, early in the economic recovery cycle this impact is offset by still improving earnings growth. The chart below shows the official cash rate and share prices in Australia since 1980, with cash rate tightening cycles shaded. Sometimes rising interest rates have been bad for shares, as in 1994 for example, but at other times this has not been the case. For example, between 2003 and 2007 shares went up as interest rates rose with shares only succumbing in 2008, after multiple rate hikes over several years and with the GFC.

Ambiguous relationship between Aust interest rates and shares

Shading indicates cash rate tightening cycles. Source: Bloomberg, AMP

Several considerations are worth noting.

Firstly, rising rates from a low base are normally not initially bad for shares, as they go with improving economic conditions.

Secondly, rising interest rates are only really a major problem for shares when rates reach onerous levels (ie, above “normal”), contributing to an economic downturn, eg, in 1981-early 1982, late 1989 and in late 2007 to early 2008. They are also a problem when rate hikes are aggressive, as in 1994 when the cash rate was increased from 4.75% to 7.5% in four months.

Third, if the RBA cash rate rises to 1.5% by year end, deposit rates would still be less than 2%, so they will still be low relative to the grossed-up dividend yield on shares of around 5.5% leaving shares relatively attractive.

Finally, given the high short term correlation between Australian shares and US shares, what the Fed does is arguably far more important than local interest rates, and this is perhaps a bigger risk given higher inflation in the US.

So, the rise in Australian interest rates to 1.5% by year-end is unlikely on its own to derail the cyclical bull market in shares. But an environment of rate hikes will likely result in a continued period of volatility for shares.

What about residential property prices?

The Australian property market is highly sensitive to the monetary cycle as a result of very high prices and debt to income ratios. Rate hikes in 2009-10 were quickly followed by a period of weaker prices. Macro prudential tightening achieved the same in 2015-16 and then more so in 2017-19. Dwelling price growth has already started to slow, reflecting poor affordability and a sharp rise in fixed mortgage rates. We expect the combination of worsening affordability, along with rising mortgage rates to drive a top to bottom fall of 10 to 15% in average home prices from mid-year out to early 2024.

Source: AMP Capital May 2022

Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make 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 document 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 document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

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

• Australian election campaigns tend to result in a period of uncertainty which have seen weak gains on average for shares followed by a bounce once it’s out of the way.

• Labor is not offering a significantly different economic policy agenda than the Coalition. With the exception of climate policies, it’s hard to see a significant impact on investment markets from a change in government. A bigger risk would come from a hung parliament.

• To return to decent and sustained real wage gains requires a productivity enhancing reform agenda. This election is unlikely to deliver much on this front.

The Australian Federal Election

The Federal political landscape has become somewhat less stable since the 2007 election with six changes in PM, “minority government” at times and a rise in the importance of independents. This has made sensible visionary long-term policy making harder. The last three and a half years have seen a bit more stability though with Scott Morrison being the longest servicing prime minister since John Howard. Policy uncertainty going into the 21 May election is lower than in 2019 as Labor is not offering starkly different policies to the Coalition this time.

Polls and betting markets

Polls give Labor a two-party preferred lead of around 54% to 46%, although the ALP’s primary support appears to have softened a bit since the election was called. Of course, overall polling needs to be interpreted cautiously as the ALP was ahead going into the 2019 election only to see the Coalition win. As my Canberra based colleague Al Kinloch points out, around 20% of people decide on election day and they often stick to what they know. It’s also less clear in the marginal seats which is what counts. Betting markets give roughly equal odds to both.

Elections, the economy & markets in the short term

There is anecdotal evidence that uncertainty around elections causes households and businesses to put some spending on hold. However, hard evidence of this is mixed and there is no clear evidence that election uncertainty effects economic growth in election years. In fact, since 1980 economic growth through election years averaged 3.5% which is greater than average growth of 3% over the whole period.

In terms of the share market, there is some evidence of it tracking sideways in the run up to elections, which may be because of uncertainty. The next chart shows Australian share prices around federal elections since 1983. This is shown as an average for all elections (but excluding the 1987 and 2007 elections given the 1987 global share crash and the start of the GFC in 2007), and the periods around the 1983 and 2007 elections, which saw a change of government to Labor, and the 1996 and 2013 elections, which saw a change to the Coalition. The chart suggests some evidence of a period of flat lining in the run up to elections followed by a relief rally.

Australian equity market around election days

Source: Reuters, Bloomberg, AMP

However, the elections resulting in a change of government have seen a mixed picture. Shares rose sharply after the 1983 Labor victory but fell sharply after their 2007 win, with global developments playing a role in both. After the 1996 and 2013 Coalition victories shares were flat to down. So based on history it’s not obvious that a victory by any one party is best for shares in the immediate aftermath, and historically moves in global shares played a bigger role than the election outcome. The next table shows that 10 out of the 14 elections since 1983 saw shares up 3 months later with an average 4.5% gain.

Australian shares before and after elections

Based on All Ords price index. Source: Bloomberg, AMP

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

Australian dollar around election days

Source: Reuters, Bloomberg, AMP

Shares & property under Coalition & ALP governments

Over the post-war period shares have returned (capital growth plus dividends) 13% pa under Coalition governments and 10% pa under Labor governments. It may be argued that the Labor governments led by Whitlam in the 1970s and Rudd and Gillard had the misfortune of severe global bear markets. And the economic rationalist and reformist Hawke/Keating government defied conventional perceptions that conservative governments are better for shares. Over the Hawke/Keating period from 1983 to 1996 Australian shares returned 17.2% pa.

Looking at the Australian residential property market, using CoreLogic data since 1980, capital city property prices have risen 6.6% pa under Coalition governments and 5.2% pa under Labor. That said, policies with respect to housing have not been particularly different under both sides of politics.

Once in government, political parties are usually forced to adopt sensible policies if they wish to ensure rising living standards and arguably there has been broad consensus in recent decades regarding key macro-economic fundamentals – eg, low inflation and free markets. So ultimately economic and interest rate cycles have a dominant impact on investment markets rather than specific policies under each government.

Economic policy differences in this election

The policy differences this time around are a non-event compared to the more left-wing reconstruction Labor proposed in the 2019 election, which offered the starkest choice seen since the 1970s. In the 2019 election, the ALP offered a radically different policy agenda focussed on a significant increase in the size of government (particularly via more spending on health and education) financed by a significant increase in taxation. The latter included a 2% tax increase for high income earners, restricting negative gearing to new residential property, halving the capital gains tax discount, stopping cash refunds for excess franking credits and a 30% tax on distributions from discretionary trusts. Following its defeat at that election, with the tax agenda taking much of the blame, the ALP has adopted a less left leaning agenda going into this election.

Oddly enough we have ended up with bigger government anyway with a huge surge on the back of pandemic spending and the March Budget projecting that Federal spending will settle at around 26.5% of GDP from 2025 onwards due to higher spending on health, the NDIS, the aged and defence. This is well above the pre-covid average of 24.8%. In the meantime, the budget deficit is much higher, even after pandemic spending is wound down.

Federal Government spending and revenue

Source: Australian Treasury, AMP

There are some economic policy differences. Labor is likely to:

• Be more interventionist in the economy.

• Boost public services including childcare and the aged.

• Introduce “portable” entitlements for workers in insecure jobs funded by a levy on employers, whereas the Coalition remains committed to its blocked industrial relations reform bill from last year aimed at revitalising enterprise bargaining.

• Allow the tax to GDP ratio to rise above the Coalition’s self-imposed 23.9% limit and to rely even more on this to reduce the budget deficit, even though it’s committed not to increase taxes or introduce new taxes other than increased tax on multinationals. By contrast, once the cap is reached the Coalition would have to focus more on spending cuts.

• Tighten decarbonisation commitments with a faster reduction in emissions by 2030 – with a 43% cut below 2005 levels compared to a 26-28% cut under the Coalition.

However, these differences are relatively minor compared to the policy platform offered by Labor in 2019. The similarities are more noticeable. Like the Coalition, the ALP is largely seeking to repair the budget through economic growth rather than austerity and its priority areas of energy, skills, the digital economy, childcare & manufacturing have a significant overlap with the Coalition. So, while there may be a little more nervousness in investment markets about Labor, it’s hard to see a big impact on markets if there is a change in government.

Challenges for the next government

The main economic challenges the winner will face include:

• Getting the budget deficit back under control – the Budget does not see a return to surplus for the next decade at least. At some point, tough decisions will be needed to either reduce spending or raise taxes as a share of GDP.

• Boosting productivity growth – this has been flagging as the payoff from the 1980s to early 2000s reforms wane. Without productivity enhancing reforms, it’s hard to see it averaging the 1.5% pa implied in longer-term Budget assumptions. This will mean waning growth in living standards, possibly even higher inflation and weak real wages growth. Neither side is proposing significant productivity enhancing reforms in key areas like tax, education, industrial relations and competition.

• Housing affordability – this has been deteriorating for two decades, impacting productivity and intergenerational & income equity. But serious reforms to address it are lacking.

Concluding comment

The relatively modest difference in economic policies between the Coalition and Labor suggests minimal impact on investment markets if there is a change of government. The main risk for investment markets may come if neither the Coalition or Labor win enough seats to govern, forcing a reliance on minor parties or independents, which could force a new government down a less business friendly path (such as the Greens demanding an ALP led minority government implement their proposed super profits taxes) – although the Senate may act as a brake on this.

Source: AMP Capital April 2022

Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make 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 document 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 document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

What impact will higher interest rates have? How far will prices fall?

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

• Australian home prices are likely to fall by 10% to 15% into 2024 primarily as a result of poor affordability and rising interest rates.

• The negative wealth effect from falling home prices should help limit how much the RBA raises rates.

• A change in Government is unlikely to significantly affect the outlook for home prices, but medium-term price gains are likely to be more constrained as the tailwind from ever lower interest rates comes to an end.

Introduction

House prices always incite a lot of interest in Australia. Until recently it was all about surging prices and ever worsening affordability as prices boomed. But the focus is shifting to the emerging slowdown in the face of rising interest rates. This note provides a Q&A on the main issues.

What is the current state of the property market?

Last year saw national average home prices rise 22%, their fastest 12-month increase since 1989, with gains propelled by record low mortgage rates, home buyer incentives, coronavirus driving a switch in spending to “goods” like housing, recovery from the lockdowns, a lack of supply and a fear of missing out.

Average capital city home prices

Source: CoreLogic, AMP Capital

However, monthly capital city and national price growth peaked in March last year at 2.8% and has trended down to just 0.3% for capital cities in March this year. The slowing trend since March last year has been led by Sydney and Melbourne, with prices now falling in both cities. But price gains remain very strong in Brisbane and Adelaide with property demand in Brisbane benefitting from strong interstate migration, and these cities seeing less of an affordability constraint and very low listings. Perth is accelerating, helped by its reopening to other states. And regional price growth remains very strong.

What is the outlook for home prices?

National average property prices are likely to peak around mid-year and then enter a cyclical downswing. After 22% growth in national average home prices last year, average home price growth this year is expected to be around 1% and we expect a 5-10% decline in average prices in 2023. Top to bottom the fall in prices into 2024 is likely to be around 10 to 15%, which would take average prices back to the levels of March/April last year.

This is likely to mask a continuing wide divergence. Sydney & Melbourne look like they have already peaked & are likely to see falls at the high end of the range. But Brisbane, Adelaide, Perth & Darwin and regional areas are less constrained by poor affordability and are likely to see shallower falls.

Have home prices fallen before?

A common property myth is that home prices only ever go up and never fall. But a simple look at history tells us this is not so.

• Real house prices in Sydney fell 36% in 1934-35, 32% in 1937-41, 41% in 1942-43, 12% in 1947-48, 14% in 1951-53, 12% in 1961-62 and 22% in 1974-77.

• In nominal terms, CoreLogic data shows that Sydney dwelling prices had top to bottom falls (greater than 5%) of 25% in 1980-83, 10% in 1989-91, 8% in 2004-06, 7% in 2008-09 and 15% in 2017-19.

• Similarly capital city average prices had top to bottom falls (greater than 5%) of 9% in 1982-83, 6% in 1989-91, 8% in 2008-09, 6% in 2010-12 and 10% in 2017-19.

All of the price falls since 1980 were preceded by interest rate hikes or, in 2017-19, by a reduced supply of loans.

What are the key drivers of the current downswing?

The slowdown in property price growth already underway and the likely fall in prices ahead reflects a combination of:

• Poor affordability. Over the last 25 years average capital city dwelling prices rose 358% compared to a 113% rise in wages. So prices rose more than three times that of wages. From their most recent low in September 2020, prices have gone up 20% versus just a 3.7% rise in wages. This has priced more home buyers out of the market.

• Rising fixed mortgage rates. These have nearly doubled from their lows & are still rising, reflecting rising bond yields.

• RBA rate hikes. The RBA is expected to start hiking rates in June likely pushing variable mortgage rates up by nearly 1% by year end and by 1.5% by mid next year. Rough estimates suggest that a 1.5% to 2% rise in mortgage rates would reduce home buyer borrowing power and the ability to pay for a house by 10 to 15%. Note that RBA modelling suggests that a 2% rise in interest rates would lower real house prices by around 15% over a two-year period.

• High inflation is making it even harder to save for a deposit.

• Higher supply in Sydney and Melbourne as a result of vendors seeking to take advantage of high prices and solid construction after two years of zero immigration.

• A rotation in consumer spending back to services as reopening continues which may reduce housing demand.

• And a decline in home buyer confidence.

The major driver is the rise in interest rates. While the property slowdown appears to be starting earlier relative to the timing of RBA rate hikes this cycle, this reflects the bigger role ultra-low fixed rate mortgage lending played this time around in driving the boom. Normally fixed rate lending was around 15% of new home lending, but over the last 18 months or so it was around 40% as borrowers took advantage of sub 2% fixed mortgage rates. But now fixed rates are up sharply which is taking the edge of new buyer demand well ahead of RBA hikes.

Will Australian home prices crash?

House price crash calls have been a dime a dozen over the last two decades, only to see the boom roll on after periodic dips. So, the experience since the early 2000s warns against getting too bearish. Some would see a 15% fall in prices as a crash, but I take it to mean prices falling 25% or so. Our assessment is that while a crash is possible, it is unlikely unless we see very aggressive rate hikes – say taking the cash rate to 4 or 5% – or much higher unemployment, driving a sharp rise in defaults and forced property sales. Several factors argue against a crash:

• RBA analysis suggests the “majority of households are well placed to manage higher…loan payments” and that for example just over 40% of variable rate borrowers would see no increase in monthly payments from a 2% mortgage rate rise as they are already paying in excess of the minimum.

• The RBA will only raise rates as far as necessary to cool inflation. It knows that high household debt levels compared to the past mean that the household sector is more sensitive to higher rates and therefore it won’t need to raise rates as much as in the past to cool spending and, hence, inflation. So, it won’t be on autopilot mindlessly hiking and crashing the property market and economy in the process.

• Very low rental property vacancy rates suggest that the underlying property market remains tight.

Residential vacancy rates

Source: REIA, Domain (for last observation), AMP

• The increase in home deposit schemes and rising immigration will help place a floor on housing demand.

However, the risk of a crash cannot be ignored given the high level of household debt and that it’s been more than 11 years since the last rate hike in Australia, meaning many current borrowers have never seen a tightening cycle.

What will be the impact on the economy?

The housing downturn will affect the economy via negative wealth effects on consumer spending (ie, wealth goes down, we feel poorer, we spend less) and a slowing in housing construction. The former was a significant drag on the economy in the 2017-19 period when a 10% fall in average home prices contributed to a significant slowing in consumer spending.

What will it mean for interest rates?

In a way the negative wealth effect of falling home prices means that the slowing housing cycle will do some of the RBA’s work for it, which means there is a good chance that it will pause tightening next year (at around 1.5% for the cash rate) – which in turn should limit the fall in house prices to 10 to 15%.

Are we near the end of the 25 year home price boom?

The past 100 years has seen 3 major long-term booms in Australian home prices – in the late 1920s, the post WW2 period and since the late 1990s. These are highlighted with green arrows in the next chart that shows real house prices back to 1926. The boom over the last 25 years has largely been driven by the shift from high interest rates to low interest rates and a surge in population relative to housing supply.

Aust house prices relative to their long term trend

Source: ABS, AMP

At present the unfolding property downswing looks like just another cyclical downswing. But the 25-year bull market is likely to come under pressure in the years ahead.

• First the 30-year declining trend in mortgage rates from 17% in 1989 to 2% last year – which has enabled new buyers to progressively borrow more, and hence pay more for property, is now likely over.

• Second, “work from home” & the associated shift to regions may take some pressure off capital city prices.

What to do to permanently improve affordability?

My shopping list on this front includes:

• Measures to boost new supply – relaxing land use rules, releasing land faster and speeding up approval processes.

• Matching the level of immigration in a post pandemic world to the ability of the property market to supply housing.

• Encouraging greater decentralisation – the work from home phenomenon shows this is possible but it should be helped along with appropriate infrastructure and housing supply.

• Tax reform to replace stamp duty with land tax (making it easier for empty nesters to downsize) & cutting the capital gains tax discount (to remove a pro-speculation distortion).

Neither side of politics is offering a serious effort on this front.

Would a change of Government impact the outlook?

It’s doubtful. Unlike in 2019 when the ALP’s policy was to limit negative gearing and raise capital gains tax, which modelling indicated could reduce property prices by 2% to 9%, this time around the policy differences with respect to property between the ALP and the Coalition are minor. Out of interest, using CoreLogic data since 1980 capital city property prices have risen 6.6%pa under Coalition governments and 5.2%pa under Labor. But the dominant influence has been the economic cycle and interest rates, as policies with respect to housing have not been particularly different (excepting the brief removal then return of negative gearing in 1985 and 1987).

Source: AMP Capital April 2022

Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make 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 document 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 document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

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

• Successful investing can be very difficult in times like the present with immense uncertainty around inflation, interest rates, war in Ukraine & continuing covid waves.

• This makes it all the more important to stay focused on the basic principles of successful investing.

• These five great charts help illuminate key aspects of investing: the power of compound interest; the investment cycle; the roller coaster of investor emotion; the wall of worry; and time is on your side.

Introduction

Investing is often seen as complicated. This has been made worse over the years by: the increasing complexity in terms of investment products and choices; regulations and rules around investing; the role of the information revolution and social media in amplifying the noise around investment markets; and the expanding ways available to access and transact in various investments. But at its core, the basic principles of successful investing are simple & timeless. One way to demonstrate that is in charts or pictures. So, this note updates five charts I find useful in understanding investing. Of course, there are more than five, so I’ll put out part 2 in a few weeks. These charts are useful in times like the present where the noise has reached fever pitch with the pandemic, rising inflation, rising interest rates & war in Ukraine making the short-term outlook uncertain.

Chart #1 The power of compound interest.

This chart is my absolute favourite and became ingrained in my thinking after many years of hearing my good friend, the well-known economist Dr Don Stammer, expound on the magic of compounding. He is right – compound interest which sees returns compound on top of past returns is like magic!

Shares versus bonds & cash over very long term – Australia

Data shown is prior to any fees and taxes. Source: Bloomberg, ASX, RBA, AMP

The chart shows the value of $1 invested in various Australian assets in 1900 allowing for the reinvestment of dividends and interest along the way. That $1 would have grown to $242 if invested in cash, to $922 if invested in bonds and to $788,013 if invested in shares. While the average return since 1900 is only double that in shares relative to bonds, the huge difference between the two at the end owes to the impact of compounding or earning returns on top of returns. So, any interest or return earned in one period is added to the original investment so that it all earns a return in the next period. And so on.

The “Law of 72” is a useful tool to understanding how long it takes an investment to double in value using compounding. Just divide the rate of return into 72 and that’s the answer (roughly). For example, if the rate of return is 1% pa (eg, the interest rate on a bank term deposit if you’re lucky), it will take 72 years to double in value (= 72 divided by 1). But if it’s, say, 8% pa (eg, the expected return from Australian shares including dividends), then it will take just 9 years (= 72 divided by 8). Key message: if we want to grow our wealth, we must have exposure to growth assets like shares and property.

Chart #2 The cycle

Of course, shares can have lots of setbacks along the way as is particularly evident during the periods highlighted by the arrows on the share market line. And they are vulnerable to the uncertainties around inflation and the war in Ukraine at present. In fact, the higher returns shares generate over time relative to cash and bonds is compensation for the periodic short-term setbacks they suffer from. But understanding those periodic setbacks – that there will always be a cycle – is important in not getting thrown off the higher returns that shares and other growth assets provide over the longer term. The next chart shows a very stylised version of the investment cycle.

The investment cycle

Source: AMP

The grey line shows the economic cycle from “boom” to “bust” to “boom” again. Prior to the low point in the economic cycle, shares invariably find a bottom thanks to attractive valuations and easy monetary policy and as smart investors look forward to an economic recovery. This phase is usually characterised by scepticism. Shares then move higher, eventually supported by stronger earnings on the back of economic recovery, which eventually gives way to a blow off phase or euphoria as investors pile in. This is ultimately brought to an end as rising inflation flowing from strong economic conditions results in ever-tightening monetary policy, which combines with smart investors anticipating an economic downturn and results in shares coming under pressure. Usually around the top of the cycle real assets – like property and infrastructure – are a better bet than shares as they benefit from strong real economic conditions. But once the downturn hits, bonds are usually the place to be as slowing growth eventually gives way to falling inflation, all of which sees bond yields decline, producing capital gains for investors. At some point, of course, easing monetary conditions and attractive valuations see shares bottom out and the whole cycle repeats. Of course, the details of each cycle are different and sometimes “external” events like the coronavirus pandemic or wars can drive downturns even when we are not seeing the sort of cyclical excess usually seen at market tops.

Key message: cycles are a fact of life and while they don’t repeat precisely, they rhyme. It’s invariably the case that the share market leads the economic cycle (bottoming out before economic recovery is clear and topping out before an economic downturn has really hit and vice versa at tops) and that different assets perform relatively best at different phases in the cycle.

Chart #3 The roller coaster of investor emotion

The swings we see in investment markets are far greater than can be justified by movements in investment fundamentals alone – ie profits, dividends, rents, interest rates, etc. In fact, investor emotion plays a huge part. The next chart shows the roller coaster that investor emotion traces through the course of an investment cycle. A bull market runs through optimism, excitement, thrill and ultimately euphoria by which point the asset class is over loved (and usually overvalued too) – everyone who is going to buy has – and it becomes vulnerable to bad news. This is the point of maximum risk. Once the cycle starts to turn down in a bear market, euphoria gives way to anxiety, denial, fear, capitulation and ultimately depression at which point the asset class is under loved (and usually undervalued) – everyone who is going to sell has – and it becomes susceptible to good (or less bad) news. This is the point of maximum opportunity. Once the cycle turns up again, depression gives way to hope, relief and optimism before eventually moving on to euphoria again. The roller coaster of investor emotion

The roller coaster of investor emotion

Source: Russell Investments, AMP

Key message: investor emotion plays a huge roll in amplifying the investment cycle. The key for investors is not to get sucked into this emotional roller coaster: avoid assets where the crowd is euphoric and convinced it’s a sure thing, and favour assets where the crowd is depressed and the asset is under loved. Of course, doing this is often easier said than done.

Chart #4 The wall of worry

It seems that these days there is always something for investors to worry about. This year it’s particularly the case with surging inflation, supply shortages, central banks tightening monetary policy, rising bond yields, concerns that inverting yield curves may be signalling recession, war in Ukraine and all against the backdrop of periodic coronavirus waves. But while this is real and adds to uncertainty, in a long-term context its mostly noise. The global and Australian economies have had plenty of worries over the last century, but it got over them with Australian shares returning 11.8% per annum since 1900, with a broad rising trend in the All Ords price index as can be seen in the next chart, and US shares returning 9.8% pa. (Note, this chart shows the All Ords share price index, whereas the first chart shows the value of $1 invested in an accumulation index, which allows for changes in share prices and dividends.)

Australian shares have climbed a wall of worry

Source: ASX, AMP

Key message: worries are normal around the economy and investment markets but most of them turn out to be no more than short term noise.

Chart #5 Time is on your side

Investment markets bounce all over the place in the short term. As can be seen in the next chart even annual returns in the share market are highly volatile, but longer-term returns tend to be solid and relatively smooth. Since 1900 for Australian shares roughly two years out of ten have had negative returns but there are no negative returns over rolling 20-year periods. (It’s roughly two & a half years out of 10 for US shares since 1900.)

Australian share returns over over rolling 12 mth & 20 yr periods

Data is shown prior to any fees and taxes. Source: Bloomberg, ASX, RBA, AMP

Key message: short term share returns can sometimes see violent swings, but the longer the time horizon the greater the chance your investments will meet their goals. It’s also extremely hard to time these short-term swings. So in investing, time is on your side and its best to invest for the long-term.

Source: AMP Capital

Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make 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 document 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 document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.

– a “magic election pudding” of more spending and lower deficits

Dr Shane Oliver – Head of Investment Strategy and Chief Economist, AMP Capital
Diana Mousina – Senior Economist, AMP Capital

• A budget windfall has allowed both more spending and lower budget deficits, with the 2022-23 budget deficit expected to be $80bn (down from $99bn in December).

• Key measures include “cost of living” payments, a temporary cut to fuel excise, more spending on infrastructure & defence & more help for home buyers.

• Relying mainly on nominal economic growth to reduce the deficit & debt runs the risk that it could take a very long time to get debt back down to a reasonable level.

Introduction

The 2022-23 Budget provides a “magic election pudding” of more spending but lower deficits. The additional spending relates mainly to this calendar year and given the strong economy is more motivated by politics than economics. “Fiscal repair” kicks in for the medium-term but this takes the form of restrained spending growth in contrast to the last two budgets rather than austerity. Despite this, the Government is able to announce lower budget deficit projections thanks to a budget windfall from faster growth and higher commodity prices which is resulting in faster tax collections and lower welfare spending.

Policy stimulus

The key Budget measures are:

• Financial relief to help households deal with “cost of living” pressures with a one-off $420 tax offset for those earning under $126,000 pa and a $250 payment to pensioners and welfare recipients with a total cost of $5.6bn.

• A 22.1 cents a litre cut to fuel excise for 6mths costing $3bn.

• Small business tax incentives.

• Extra $18bn in priority road and rail infrastructure.

• Support for domestic manufacturing worth $1bn.

• Increased defence spending.

• An NBN upgrade for regions.

• Support for the commercialisation of university research.

• A revamped apprenticeship scheme.

• One-year extension of the halved super drawdown rate.

• More spending on childcare (including expanded paid parental leave scheme), disability & mental health.

• An increase to 50,000 places in the home deposit schemes which let home buyers get a loan with a deposit of 5% (or 2.5% single parents), with 10,000 for regional buyers.

Economic assumptions

The Government revised up its growth forecasts for this financial year (from 3.75% to 4.25%) and kept 2022-23 GDP growth unchanged at 3.5%. Unemployment is expected to fall to 3.75% by June 2023 (down from 4.25%). Inflation and wages forecasts have also been revised up significantly. We are a bit more optimistic on near-term growth but also see higher inflation and wages growth. The Federal Government sees net immigration (estimated to be 41,000 this year rising to 235,000 by 2025-26) becoming more of a growth support. The Government pushed out its $US55/tonne iron ore price assumption to September quarter 2022. With the iron ore now around $US135/tonne, it remains a source of revenue upside.

Economic assumptions

Source: Australian Treasury, AMP

Budget deficit projections

The Government’s revised budget projections are shown in the next table. A budget windfall resulting in a boost to revenue and savings in spending from faster than expected economic growth and inflation, alongside higher commodity prices, is estimated to have reduced the budget deficit since the December Mid-Year Economic and Fiscal Outlook by $28.3bn for this financial year and by a total $142.9bn out to 2025-26 (see the line called “parameter changes”). This is being partly offset by extra stimulus (labelled “new stimulus”) of $8.9bn this financial year, $17.2bn next financial year & a total $39.3bn to 2025-26. But as a result of the budget windfall exceeding the new stimulus the budget deficit is projected to be substantially smaller in the years ahead than seen in December. The unwinding of temporary pandemic support measures and the stronger than expected recovery is seeing the budget deficit fall sharply from the record $134bn recorded in 2020-21 (which itself is well down from the $214bn first projected in the 2020-21 Budget).

Underlying cash budget balance projections

Source: Australian Treasury, AMP

Out to 2025 the deficit is projected to fall rapidly as covid programs phase down. However, spending is still expected to settle about a high 26.4% of GDP. This is well above the pre-covid average of 24.8% and reflects higher health/NDIS and defence spending. Rising revenue with a growing economy is assumed to do all the deficit reduction heavy lifting from 2026.

Federal Government spending and revenue

Source: Australian Treasury, AMP

The Government still doesn’t see a surplus in the next decade.

Australian Federal budget deficit

Source: RBA, Australian Treasury, AMP

Because of stronger nominal growth, gross public debt as a share of GDP – which is at its highest since the early 1950s – is now expected to peak at around 45% of GDP in 2025, which is lower and earlier than previously expected. Gross public debt is expected to reach $1tn in 2023-24. Net public debt is projected to peak as a share of GDP by the middle of the decade.

Australian Federal gross debt

Source: RBA, Australian Treasury, AMP

Assessment

This is very much a pre-election Budget with few direct losers (eg, tax avoiders) and lots of winners – including low & middle income taxpayers, welfare recipients, motorists, first home buyers, parents with young children, older super members, apprentices, builders, small business owners, defence industries, transport users, tourism operators, Koalas, etc.

The Budget has a bunch of things to commend it: medium term structural spending is no longer being ramped up faster than the economy; most of the budget windfall from stronger growth and higher commodity prices is being put to deficit reduction and hence long-term debt stabilisation (unlike last year when it was mostly spent); and the annual addition to infrastructure spending along with measures like the Apprenticeship Incentive Scheme will provide some boost to productive potential.

However, at a micro level the Budget may be criticised on the grounds that:

• The temporary fuel excise reduction is bad economic policy in that: it may be very hard to reverse if oil prices keep rising or stay high; it will make no sense if oil prices fall back on say a Ukraine peace deal; and it sets a bad precedent.

• Many welfare recipients are arguably getting compensated for “cost of living” pressures twice – via the one of payment and via the indexation of payments to inflation.

• The housing measures continue to focus more on demand than supply which will result in higher than otherwise home prices (even though they are unlikely to prevent the cyclical downturn in prices now starting) & will boost debt levels.

At a macro level there are two big risks flowing from the Budget.

• First, the pre-election cash splash (which is about 1% of GDP in terms of new stimulus in the Budget for this calendar year, but is actually a bit more if spending of the $16bn in “decisions taken but not yet announced” in MYEFO are allowed for) risks overstimulating the economy at a time when it is already strong, further adding to inflationary pressures and adding to the amount by which the RBA will have to hike interest rates.

• Second, the reliance on growing the economy to reduce the budget deficit and debt is unlikely to reduce debt quickly enough and is dependent on interest rates remaining low relative to economic growth. 10-year bond yields have already gone up more than four-fold since their 2020 low warning of a sharp increase in debt interest payments beyond the medium term. And economic growth is unlikely to be anywhere near strong enough to reduce the debt burden like it did in the post-WW2 period unless there is another immigration boom or 1980s style focus on boosting productivity – both of which look unlikely. In the meantime, the strategy would be highly vulnerable if anything came along to curtail the commodity boom. So at some point tough decisions are likely to be required either to reduce spending as a share of GDP or raise taxes.

Implications for the RBA

We expect the first rate hike in June and the cash rate to reach 0.75% by year end and 1.5% next year. The extra stimulus in the Budget increases the chance that the first rate hike is 0.4% rather than 0.15% (taking the cash rate to 0.5%), with the cash rate reaching 1% by year-end.

Implications for Australian assets

Cash and term deposits – cash returns are poor but they will start to rise as the RBA starts hiking from mid-year.

Bonds – ongoing budget deficits add to upwards pressure on bond yields. The rising trend in yields resulting in capital loss mean that medium-term bond returns are likely to be low.

Shares – more fiscal stimulus, strong growth and still low rates all remain supportive of Australian shares but rising bond yields & RBA hikes will result in a more constrained & volatile ride.

Property – more home buyer incentives are unlikely to offset the negative impact of poor affordability and rising mortgage rates in driving a cyclical downturn in home prices.

The $A – strong commodity prices point to more upside.

Important note: While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) make 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 document 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 document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided.