Greetings as we come into winter!
Rising Interest Rates
We held back the release of the newsletter until after the RBA announcement on June 7, which resulted in an increase in interest rates by 50BP. This was effectively two rate rises in one, reflecting the fact that the RBA has been behind the bond curve for the last 12 months. The longer-term peak in projected rates remains the same with just some front loading to quickly see the effect on demand in the economy. It will take a few weeks for mortgage and cash rates to adjust, so it is a time of extreme caution for investing until we see clear signs of inflation abating and returning to the 2/3% RBA target.
Rising interest rates are very much a double-edged sword. They will help our retirees lock in better and safer investment returns while making It harder for companies to grow their earnings and hence their share price. This will make all kinds of leverage less attractive and the need for consistent dividends and reliable rental payments much more important. With the current uncertainties, it is best to be cautious until the impact of interest rate rises Is fully reflected in our economy.
The RBA will be monitoring the various competing data sets carefully to try to engineer a safe landing where interest rates rise to a neutral level, without damaging the property market excessively, over the next 24 months. There are clear signs over the last few months of the Sydney property market peaking, which should be interpreted as a leading indicator of a natural slowdown in lending and borrowing activity. This will reduce the pressure on the RBA to lift rates to discourage speculation in our property market. Clients potential borrowing capacity has already reduced which will put a natural cap on the growth of property.
Both major parties offered various incentives targeting younger people seeking to buy their first home with smaller deposits. For those approaching retirement, additional incentives have been offered to downsize and make significant additional contributions into super, while not impacting on Centrelink benefits for a further two years. Haydn and Isabella are here to help with mortgage options – haydn.dale@virtueandpartners.com.au.
Federal Election
The Federal Election is behind us with Labour having a working majority for the next three years. There was little difference in policies affecting tax and business and as such markets have taken this result in its stride.
As always there are many competing issues that impact on asset prices, some of which are domestic, however many of which are global and outside of our immediate control. In the immediate, issues of inflation around the world – leading to increased interest rates after a decade of extremely supportive monetary policies – are top of mind.
Coordinated global policy to reset economies, beginning with the recovery from the Global Financial Crisis and then more recently the Coronavirus epidemic, around the world have led to some asset bubbles – particularly in property and some technology stock.
Government agencies are watching data carefully to determine how much of this inflation is temporary and based on short term distortions caused by the global lockdowns of the last two years.
This is as opposed to inflation of a more permanent and serious nature, impacting on the cost of living over the next few years. Monthly economic data can be misleading, and even distorting, but at this stage we may well have reached the peak of inflation both here and in the US.
The terrible conflict between Russia and the Ukraine has exacerbated short term inflation due to additional costs in energy and wheat. While we are hearing very mixed messages at this time, it is best to plan on these elevated costs for the foreseeable future, including a significant increase in our utility bills.
US Inflation over the last 12 months
China Reopens
Our largest trading partner, China, has started to emerge from their own lock-down in both Shanghai and Beijing. This is important and should lead to a stimulation of their economy, including reducing interest rates and increasing Iron Ore purchases from Australia to restart their building industry.
Economies do go in cycles and it is beholden on Governments to adjust policies to support the sustainable growth and prosperity of their communities. Experienced investors should be countercyclical and ready to invest in recovery situations where much of the profits are actually locked in. The effect of the virus on the global community should not be underestimated and has distorted much of the data we are currently making decisions on. Notably there has been a higher level of savings globally due to the lack of travel, which has led to pent up demand and an expectation that consumers will spend some of these savings on discretionary spending over the next 12 months.
Labour costs have also been distorted with the inability of workers to travel between jurisdictions, including Australia, and has led to major employment shortages and thus higher costs. In Australia we effectively lost two years of net migration, which equated to approximately 400,000 permanent workers in our community. This labour shortage hasfed through into higher costs as many businesses struggle to find suitable employees. Looking ahead at the next few years, the new Government can increase migration to recover this shortfall and provide adequate skilled labour to meet the needs of business.
Net Overseas Migration to Australia
Year End Super Contributions
With the election results settled, we can now turn to planning year end strategies and hopefully returning to a more normal business cycle. There still remains good opportunities to increase superannuation balances via work related contributions of up to $27,500 and after-tax contributions of $110,000 ($330k on the three-year brought forward rule). These will incentivise clients to have large enough balances to draw down adequate monthly income streams in retirement to replace the income from their job.
This remains a complicated area with quite prescriptive rules and will need to be considered on a client-by-client basis. The additional option of downsizing and putting a further $300,000 per person into super, on a tax-free contribution basis, will further assist clients in significantly Increasing their balances prior to retirement.
Finally recent changes to legislation requiring superannuation funds to provide better retirement income streams in retirement will also help in ensuring that we manage longevity risk and that clients do not hoard their superannuation unnecessarily due to fears of running out of money in later life. There are a number of improved retirement options now available which can also increase Centrelink eligibility. It is a major project within the business to ensure as many clients as possible can benefit from these changes. There are further details available on our website
Year End Client Meetings
The next few weeks, prior to year-end, will be particularly busy for the practice with your advisers available after work or on Saturday mornings. As mentioned last month, we are trying to utilise online technology to speed up the process of communicating advice in a timely matter, while coordinating instructions with our counterparties and need your help and understanding in responding as needed.
We are also working intensely as an industry to reduce the unnecessary red tape that you are currently experiencing, recognising that short and concise communication more than meets client requirements. Sadly, as has widely been reported in the media, Australia haslost close to half of its Financial Advisers over the last few years, which has put additional pressure on those remaining to meet the demand and expectations or their local community in a fair and efficient manner.
We are increasing our team to meet this additional demand and remain absolutely committed to providing tailored and ongoing personal advice to our community.
Feel free to contact us directly as needed by email tony.virtue@virtueandpartners.com.au and fiona.goodland@virtueandpartners.com.au.
With thanks for your ongoing support of our practice.
Tony and Fiona
