Greetings as we commence the new financial year!
A special welcome to our overseas clients some of whom I will visit in the next few weeks.
Australian Interest Rates
We do appear to be close to the top of the interest rate cycle with the RBA leaving rates unchanged on Tuesday.
While there has been a lot of public commentary as to the terminal rate for the peak in rates, it is perhaps more helpful to focus on the key longer-term direction of interest rates which the bond market indicates will fall quite quickly next year as inflation declines. The recent decline in inflation was primarily driven by the reduction in the cost and distribution of fuel and would have happened irrespective of official interest rate policy.
The key unknown is the likely increase in private sector wages and whether this is matched with productivity improvements. Fair Work Australia has already increased the minimum wage by 5.75% to $23.23 per hour from 1/7/23 which sets a precedent for all other wage negotiations. At this stage it does look like the inflationary spike caused in part by the Covid disruption and exacerbated by the Russian invasion of Ukraine, is abating and we should get back to a more normal inflation target of 2 to 3% over the next 12 months or so. If this is the case, then embedded wage increases should quickly moderate as the cost of living stabilises.
However, in the meantime there is growing stress in the economy with the consumer naturally conserving funds to prioritise mortgage and rent payments ahead of discretionary spending.
Australian Petrol Prices last 12 months(Source: Trading Economics, Australian Institute of Petroleum)
Australian Share Market
Perhaps counterintuitively with rising interest rates the Australian Equity Market held up quite well with a 10% increase for the year.
Generally, the larger companies performed best supported by a strong flow of funds from superannuation contributions into blue chip shares. The smaller end struggled and there were minimal new issues this year with the market actually declining in size due to some companies being bought by foreign interests.
The actual dividends paid across the index continued to increase with a solid 5% plus associated franking credits underpinning portfolio performance. This was again dominated by the four major banks who accounted for 50% of all dividends paid across the market. This is important as it underpins much of the income steams required by retirees to live off from share portfolios. The rise of interest rates has now meant that there are viable less volatile options in the fixed interest and term deposit market which should make actual income steams paid more reliable and certain over the next 12 months.
The reopening of the Chinese economy post Covid supported by stimulatory policies by their authorities including reducing interest rates should be good for our resources sector. Hopefully, progress is being made in some of the excessive tariffs being charged to our exporters to the region and we can proceed with greater confidence in using our natural advantages in the resource sector to progress the nations prosperity. Indeed, the Federal Budget is now projected to be a $20B surplus for FY23 based on improved corporate taxes and associated additional employment primarily in the resources sector.
Australia’s Top Exports(Source: Australian Government, Bloomberg)
Australia’s Top 10 Exports(Source: Icecargo.com.au)
International Share Market
The US Tech sector had a very strong few weeks with Apple reaching a new all-time high exceeding $3Trillion US (much larger than the entire Australian Stock market).
While the growth in the Index has been driven by seven major tech stocks there are signs of a broader rally in anticipation of US interest rates declining early next calendar year. Asa leading indicator share markets tend to trade based on future earnings expectations at least 12 months forward and as such the Nasdaq is up 25% over the year with much of the growth happening in the last few weeks.
Artificial intelligence seems to be the next big thing with NIVIDIA joining the $1Trillion Club. Your international fund managers recent returns reflect this growth and really shows the financial rewards of longer-term investments through the inevitable business cycles which tend to even out over a five-year period.
Nvidia Share Price Rise(Source: money.co.uk)
Domestic Residential Property
Residential property prices are rebounding strongly particularly in Sydney as confidence grows that we are through the worst of the post Covid interest rate increases.
With net migration back at all-time highs in excess of 500,000, new arrivals are looking for accommodation to support their decision to create a new life in Australia with about half descending on Sydney. The need to quickly build adequate affordable housing is top of mind for the State Government including fast tracking the building approval process to meet the supply shortfall we are all currently experiencing.
On a global basis, Australia in general, and Sydney specifically are very attractive places to emigrate which has underpinned much of our national prosperity. The 500,000 new workers and taxpayers joining the payroll will again help in meeting the shortfall of available workers in our economy and help to improve the nation’s economy through additional spending and increasing the tax take for all levels of Government.
The danger now is that properties go up too quickly due to the supply shortages leading to the RBA using the blunt instrument of interest rate hikes to slow down the economy. This is actually quite counterproductive and there is a need for much more targeted tax and grant driven policy to support active creation of wealth through personal exertion and penalise speculative capital growth through excess leverage for those who have access to investment capital. Making the pivot in tax policy much harder politically and we can learn from other countries as to how to encourage reward and risk taking which longer term benefits wider society through innovation leading to better products and services.
For those of you receiving a full or part Centrelink Pension the thresholds have increased as follows:
Asset Test – Full Pension(Source: Services Australia)
Income Test – Full Pension(Source: Services Australia)
Note: Age Pension access as of 1st July 2023 is aged 67
This should also assist in some clients receiving Health Card benefits for the first time which we will discuss at client reviews
As usual a busy time with several new team members joining us to share the load. Do check out our website www.virtueandpartners.com.au for more background information. We also encourage to use your own personalised client portal with us to keep transactions secure.
We both look forward to seeing you soon
Tony & Fiona