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As I See It: April 2021

Greetings friends,

I hope you all had a restful and enjoyable Easter Break.

After the difficulties of the last 12 months we are beginning to see our cities bounce back and economic data has been encouraging as the vast majority of our community are able to work again.  The rebound of both equity and property markets since the lows of March 2020 have been far better than predicted by economists with the ASX 200 up 50% for the past 12 months.   Importantly, for clients requiring income there was a good bounce back in dividends paid in the interim reporting season.  Historically around 50% of the total dividend pool has been paid by the big four banks, all of whom have been able to write back some contingent losses for mortgage delinquencies and have guided the market to full restoration of dividends later this calendar year.  Clearly  hospitality, domestic tourism and foreign students at our Universities will take time to recover but wider demand in the working community should assist a quick bounce back.

Equally impressive has been the rebound in residential property prices supported by record low interest rates reconfirmed by the RBA today.  This phenomenon is not just unique to Australia with a similar surge in prices in New Zealand and Canada.  While encouragingly, much of the domestic demand has been taken up by first home buyers.  At some stage there will be pressure put on the regulators to tighten lending standards ashas been evidenced by the New Zealand Government.  Prior to Corona-virus, the aggregate value of Residential Property in Australia was $5 Trillion dollars (with around $1.5 Trillion of debt).  If this was to increase by 20% over the next two years, effectively another $1 Trillion of assets have been created due to the corollary of low interest rates.  So this is perhaps a lazy but very effective method for restabilising aggregate demand in the economy through the feelgood wealth effect.  Again this would be a good time to consider fixing some of your mortgage obligations with 4 year rates still very attractive.  Our mortgage team as always are ready to assist at haydn.dale@virtueandpartners.com.au

Looking at previous recoveries, the strongest result is normally just at the beginning of the recovery before stabilising and producing a more normalised outcome as regulators tighten lending standards and possibly increase taxes to pay back the very substantial federal debt incurred through job keeper.  What is different this time, is that the Governments of the world have taken on debt usually covered by the private sector and as such will incur an increase in their own borrowing costs, should interest rates rise.  There is also quite a market distortion with self-funded retirees getting minimum returns from Term Deposits while property and equity investors benefit from cash flow positive investments.  While politically unattractive, a tax on the sale of the principle place of residence above a certain amount could also be introduced in a staggered manner possibly with some benefit from downsizing with additional super contributions.

Australia has been one of the first countries out of lock-down, so we can expect a similar sequencing of economic events in other countries over time including the UK.  Tech related stock continues to do well with both the Nasdaq and the Dow Jones reaching new highs over Easter with quite a pine line of new IPO’s coming to market over the next few months.   On the downside, should longer term bond rates continue to rise this would be adverse for all asset classes except for cash.  Even a small increase in bond rates would make existing fixed rate bonds less attractive and the discount rate for valuing the future earnings of companies would imply a reduction value of both shares and commercial property.  This is well understood by regulators who will need to tread a difficult path towards embracing full employment (target 4.5% unemployment rates) and keeping inflation in a 2/3% band.

Within the practice it has been great to see clients face to face again and to share our experiences together.  It has been a strong quarter for the business and we will be looking to expanding our support team to keep up with demand.  Feel free to continue to refer friends and colleagues to us which is the greatest compliment you can give us.  More details on our website www.virtueandpartners.com.au including access to your own personal security vault where you can update any changes in your circumstances at your leisure.

With my best wishes

Tony

Posted by Dr Tony Virtue, Principal

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As I See It is a regular video and news update from Dr Tony Virtue discussing the most recent developments in the financial and economic markets