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As I See It: April 2022

Greetings as we wait for a Federal Election to be called in the next few days

We leave behind the wettest March in NSW history with the clean-up continuing and an exhausted community seeking to rebuild their lives. Our best wishes are with clients and friends directly impacted by the floods compounded by the need to quarantine from the Coronavirus outbreak. We are all safe in the business and working away mainly over the phone and via ZOOM to ensure client needs are attended to in a timely manner. With the borders opening I hope to again visit international clients over the next few months as we hopefully get back to a level of normality and can travel freely.

The Federal Treasurer handed down the budget last week which showed some improvements in the budget deficit and some pre-election handouts to ease the current higher cost of living including halving the petrol excise tax for the next 6 months. Superannuation laws were largely unchanged with the extension of reducing the minimum drawdown for Allocated Pensions by half extended for financial year 22/23. Centrelink pensions were increased slightly above CPI with a one-off bonus of $250 due shortly. Principle tax rates and thresholds remain unchanged. A full summary of the budget focusing on financial planning issues can be found by clicking here.

Bond Market
For some time, we have been concerned that the potential for significant increases in interest rates would adversely affect the fixed interest bond market which historically has been an important part of conservative portfolios. Where possible we have eliminated client exposure to bonds and replaced with income paying listed credit funds. The attached graph shows just how serious the loss of value in the global bond market has been which is a leading indicator for further interest rate rises particularly in the US. While short term rates are rising quickly the yield curve has ‘inverted‘ with 10 year bonds having a lower coupon than shorter dated instruments. This would indicate that interest rate rises may be quite brief and decline again in a few years’ time. In the meantime, this is an asset class that is probably best to avoid.

Bond Yields
Source:  Bloomberg 22nd March 2022

Australian Equity Market
Equity markets both here and overseas were very strong in the second half of March recapturing most of the February losses. This in part reflected the markets view that the war in the Ukraine may not be as damaging economically as originally thought. That said the horrific scenes we are watching on the news highlights just what a fragile world we live in and should something adverse happen markets could retreat again quickly. The interim dividend paying season is now flowing through including the CBA which will provide an additional cash buffer for clients to either pay down debt or re-invest. Australia has one of the highest dividend payouts globally at around 5% mainly franked which is a good rule of thumb when considering likely income from your investments. Our resources sector has also had a few strong months due to higher spot prices which has supported our market outperforming our global peers and helping our terms of trade.
 – Dividends per Country
Source:  OPHIR

Residential Property
The residential property market does seem to be naturally slowing down which will be a relief for policy makers and will take some pressure off lifting interest rates. With our borders reopening we should see a strong influx of students and 457 visa holders which will help in meeting job shortages and soaking up any excess rental capacity in our cities. The collective growth in property prices over the last 18 months equates to the total value of the Australian Stock Market and provides a substantial financial buffer for any future financial shocks. As with all asset classes it is best to make investment decisions based on long term averages and accept a level of mean reversion when we have a period of exceptional returns.
– Change in Dwelling Values
Source:  CoreLogic 1st April 2022

The firm remains as busy as ever and we have a number of functions planned as state borders reopen and we become one country again. This has been an extraordinary time in the nation’s history and it is very apparent from talking with clients that our community is looking forward to a long period of stability and peace. We are here to help and support clients through the highs and lows of life. Do look at our website www.virtueandpartners.com.au which has a wealth of information to help you in your financial journey. As always feel free to email us directly as needed tony.virtue@virtueandpartners.com.au and fiona.goodland@virtueandpartners.com.au

With our best wishes

Tony & Fiona

Posted by Dr Tony Virtue, Principal


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