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As I See It: April 2024

I must start by acknowledging with sadness the recent incident at Bondi Junction. We have both team members and several clients living in the area, and this is a time now for reflection and rebuilding the community as they adjust to the loss of loved ones.
Inflation – the Puzzle Continues
It has been very mixed data coming out in relation to recent CPI numbers which on balance will delay any reduction in interest rates until a clear trend is established. It is important to break these numbers down into services and manufacturing and indeed it hasbeen services such as education that have seen the greatest increase in prices in the last few months.
At the same time rents have increased reflecting the lack of supply available in the major cities. The graph below shows the growth of services as a percentage of GDP over the last 40 years and why this materially impacts the actual medicine that needs to be administered to resolve inflation.
The greatest expense of services businesses are wages who in turn must pay mortgages or rent which again have increased significantly. This becomes a circular loop where service companies need to increase their prices to meet this increase in mortgages which becomes self-fulfilling. Indeed, lifting interest rates further merely perpetuates the situation.
Household Consumption to December 2023 – Source:  ABS, RBA

By contrast in the US mortgages are generally fixed for 10 to 15 years which has meant that many mortgages are still locked in at historically low rates and the wider community has not been impacted nearly to the extent of Australian borrowers. At the same time the rapidly growing use of technology is providing greater efficiencies for the community which again has tempered the effect of inflation on living standards.
Both countries have experienced substantial growths in immigration over the last two years which by its very nature is inflationary particularly if there is limited infrastructure to support the growth in population.
So, this is a complex puzzle often described as fixing ‘the last mile of inflation’ and policy makers need to consider alternatives to the very blunt instrument of lifting interest rates to revolve what is much more structural. Perhaps we need new medicine for a new set of economic circumstances. In the immediate, policymakers are less likely to make any major interest rate movements over the next few months until there is a greater sense of comfort as to the likely direction of inflation.
Equity Markets
The listed equity markets both here and in the US waxed and waned over the last few weeks particularly with concerns of an escalation of the proxy war between Israel and Iran. At this stage, the volatility index has declined indicating a lower level of concern about a future escalation. It does however remind us just how fragile life can be and how quickly market sentiment can change in the event of a major global event.
Domestically BHP had made a hostile bid for Anglo American which if successful will be one of the largest takeovers in Australian history. There will be a lot of water unmder the bridge before this is finalised but in general this should be seen as a positive for our markets and for our economy more generally.
In the US the major technology companies have all reported very strong quarterly earnings.  Of note was Google and Microsoft who significantly over performed. It is important to understand that much of the revenue of these organisations comes from advertisers buying their database which is being used with or without the public’s knowledge. This brings to a head the whole issue of ESG and large companies not abusing their market share by putting profits ahead of social responsibilities.
We do have a current live case in Australia with X (formally Twitter) allowing material on their website which is contrary to our national interest that is currently going through the courts. In many cases Australia was seen as a test case for what may happen in other jurisdictions and with the size of organisations such as Twitter can bully their way through legislation. As a reminder, the larger technology companies individually are bigger than the entire Australian stock market and as such continue to push the envelope of legality in much of their decision making.
In context Google paid between $18 and $20 billion last year to Apple to be the default engine on their mobile phone, so as you can see there is a very substantial amount of money being paid both in advertising and an access which transcends national boundaries. Regulations are struggling to keep on top of this as we have seen with the crypto sector.  There is a real risk of loss of sovereign control and the abuse of this data for unacceptable purposes.
Rent and property prices continue to rise, primarily reflecting the lack of supply. Of note is the net Interstate migration particularly from Victoria and NSW to Queensland and WA, primarily driven by lower cost of housing and potentially a better lifestyle. The NSW state government is introducing legislation to allow property developers to go higher with their developments within 400 metres of major train stations which may alleviate some of the supply issues albeit with quite a time lag.
At some stage there must be a limit to excessive growth particularly in the rental market which may lead to further regulatory restrictions. Last year was our highest level of migration in 70 years since 1954 and in February there were 100,000 new migrants into Australia. When you also consider the number of international students attending university, it becomes self-evident that in business terms we are over trading and need to plan more effectively for the future growth of infrastructure for our country.

Annual Change in Rental Rates – Source CoreLogic

Picks and Shovels
Based on client requests I will include a segment each month on a particular stock that dominates in their market, reflected in strong share price growth over the years. To be clear this is not a stock specific recommendation based on their current price, but rather to explain the mindset that needs to go into investing wisely and for the long term.
There is a formula involved with this which I have used for many years:

  1. Does the business have a clear purpose and valuable social service to the wider community?
  2. Are they the leader in their field with the capacity to improve margins both from suppliers and customers?
  3. Do they have a stable management team whose financial objectives are in alignment with shareholders?
  4. Are the major markets that they operate in growing and likely to be significantly larger over the next decade?

 I will start this month with the Australian property sector highlighting REA which is the undisputed leader in online access to purchasing real estate in Australia. Owning one or more properties in Australia is very much a dream for many clients.  As an alternative to the expense of buying property you could consider owning the largest provider of office services to the real estate sector. Clearly you could buy shares in much smaller multiples and increase over time.
The attached graph shows the shear performance of REA compared to the growth of residential property in Australia over the last 10 years. As you can see REA hassignificantly outperformed and can continue to increase its margins for charging real estate agents a growing annual fee for accessing their services. Listed on the ASX 65% of the company is still owned by News Corp which acts as a steady anchor to any future major changes in strategic direction.
REA Group Share Price – Source ASX, Market Index
Residential property Dwelling Stock Value – Source ABS, CommSec

Each month I will go through a similar story in different industries both here and overseasto build up our collective knowledge of opportunities out there.
New Tax and Contribution Rates from July 2024
The long-promised tax cuts will become reality on the 1st of July 2024, and this will help in providing greater disposable income to clients to deal with the inflation that is prevalent at the moment. The table below shows the current position and the new one which will come into place in a couple of months. It also leaves a small arbitrage between the tax years to maximize deductions in this financial year. In addition, superannuation contributions will go up to $30,000 per annum for work related super and $120,000 for personal after-tax contributions (with the three-year brought forward rule remaining).
Centrelink payments have also gone up in recent times which again should assist senior clients with cost-of-living concerns. This also includes the capacity to earn approximately a further $10,000 per annum from personal exertion without impacting on the income test for Centrelink payments

New Personal Tax Rates and Thresholds for 2024/2025 Onwards – Source Australian Government Treasury
New Superannuation Guarantee Percentage from 2024/2025 Onwards – Source:  ATO

 New Concessional Contributions Cap from 2024/2025 onwards – Source:  ATO
 Client function Thursday 6th June Harbour View Hotel at VIVID
I am pleased to advise that we have again reserved the entire first floor of the Harbour View Hotel for our client’s year end function which again coincides with Vivid. This will be a wonderful opportunity to enjoy Sydney at its best and have a relaxing evening at one of our landmark pubs in a private secure environment. There will be free flowing drinks and food all night and it will be a wonderful opportunity to meet both your advisors but also other clients, many of whom have become close personal friends over the years. Formal invitations will be sent in the next couple of weeks.
While there are many challenges that Australia faces it remains one of the great countries of the world to live in and relative to other jurisdictions is in far better shape. As you’d expect we are busy as the community gets a little older and financial advice becomes absolutely critical. We are increasing our team members to meet this additional demand and remain absolutely committed to providing safe reliable independent advice to our community.
It is an incredible honour and privilege to do what we do and something that we take incredibly seriously
Yours sincerely
Tony and Fiona

Posted by Dr Tony Virtue, Principal


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