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As I See It: February 2024

Greetings and welcome to our first newsletter of the year.
I very much hope that you got some good rest with family and for those of you overseas, that you are safe and healthy.
As it becomes clearer that interest rates will fall later in the year both here and in most global economies, growth assets had a good few weeks with both domestic property and global and domestic shares hitting new all-time highs. The corollary of this is that if assets do grow too quickly the reserve banks of the world are less likely to drop interest rates to avoid speculation and bubbles. It is also fair to say that the growth particularly in international shares has been limited to the larger technology and artificial intelligence companies with a number of them continuing to be larger than the entire Australian stock market.

While these gains have been reflected in the returns of your international managed funds, the technology is now well established forced to buy these larger companies directly for you in a similar fashion to the Australian market.  The graph below shows the largest companies in the world compared to the Australian stock market.

Global Companies vs ASX (Source: companiesmarketcap.com)

 Australian CPI December Quarter

The December quarter CPI numbers have been released at 0.6% for the quarter with the rolling annual CPI declining to 4.1% well below RBA and analysts expectations. This provides further evidence for a drop in Australian official interest rates sooner rather than later which will be a relief to mortgage holders. As you would expect the share market responded positively to the news and this should strengthen the local property market autumn sales.

The table below shoes the CPI over the last few years and demonstrates a normalisation of long term RBA target of 2-3%.If this is achieved in a credible fashion there is every reason to expect rates to fall significantly. The US look like they will cut first in the next couple of months which will provide a good guide as to the timing of own reductions.

Monthly Consumer Price Index Indicator (Source: AFR, ABS)

As of this calendar year, the RBA will only meet 8 times (not 11 as previously), which is consistent with the US.  Meetings will be held over two days and far greater transparency in decision making.  Todays RBA meeting decision to keep rates as they are.
2024 Reserve Bank Board Meeting Dates (Source: RBA)

Legislated Tax Cuts Un-legislated
The third part of the legislated changes to income tax rates in Australia has now been changed by the federal government. In essence higher tax cuts that would have been passed on to the top income earners have now been recalibrated to primarily support lower and middle income families.  The practical effect of this is that approximately 85% of the working population will be better off and the top 15% less so.
The table below shows the current tax rates, the original legislated tax rates, and the new tax rates for your records(Source: AFR)
For top income earners this will mean that tax planning remains very important.  Through a combination of additional superannuation contributions, negative gearing on property and intelligent investments we will seek to reduce the tax liability of clients in these categories. 

Importantly, most Australians, will have more disposable income to meet the increased cost of living that we are all facing at the moment. One of the unspoken aspects of inflation is that higher interest rates actually increase the need to put up prices for consumers which in itself is a self-fulfilling loop. Using interest rate settings to seek to achieve a predetermined goal is a very crude practice and we need to consider more targeted approaches to monetary policy to achieve better social outcomes for those who most need it.
Artificial Intelligence
You would have noticed increased automated activity on both your phones and computers driven by artificial intelligence seeking to provide personalized services to you based on your historical preferences and web browsing. If managed well, this will speed up efficiency and allow consumers to quickly get the information they need to make informed decisions. This is quite a game changer as critical mass is reached and as such companies such as NVIDIA and Microsoft have done extremely well

As investors it is important that we pivot to where there are clear areas of growth and strong modes to protect from competition. A natural outcome of the effective use of artificial intelligence will be greater efficiencies which should lead to deflation and hence lower interest rates as the information flow becomes quicker and more effective and hopefully with less red tape to slow down decision making.
NVIDIA share price over 12 months (Source: NASDAQ)

Domestic Property
The shortage of supply in Sydney property continues to push up the pricing of both rent and purchases. This has been exacerbated by the largest amount of immigration into Australia in our history in the last financial year. Those of you seeking to rent a property at the moment in our area are well aware of just how difficult this is, and we need to improve quickly the process of approving property development and the release of crown land in our state if we are to welcome a large number of migrants in the future. We quite simply need to have an integrated approach between federal and state governments to ensure that we have adequate infrastructure to meet the demands of a growing population.

On a global level Australia still looks like one of the great countries of the world to emigrate to and we should expect this to continue for the foreseeable future. The two largest groups of migrants are now China and India reflecting the two largest populations in the world and this again will affect the practical mix of Australian voters over the next generation.
Australian Home Value Index Annual Change (Source: CoreLogic)
Internal News
As you would expect the business remains busy and we continue to seek to recruit quality team members who share our values to support the growth of the firm. The obvious need for good financial advice that is readily accessible for our community is now well understood and there are several seminal papers that demonstrate that they role of the financial advisor can materially affect the quality of life of clients and in particular in avoiding poor decision making in an emotional state. This includes ensuring that our children get access to the same quality of advice.  We are working hard internally to ensure that through greater efficiency and online capability we can support our community right through their life stages in a supportive and empathetic manner.
It is an incredible privilege for us to share our lives with clients and when we take our responsibilities very seriously. We look forward to seeing you as the year develops in what is shaping up as a strong period for investment as we come out of the post COVID era.
Tony and Fiona

Posted by Dr Tony Virtue, Principal


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