Greetings as we approach financial year-end!
Quite a turnaround in market sentiment as the economy continues to recover with both equities and residential property at all time highs fuelled by minimal interest rates and accommodative Government Policy. This is producing a once in a generation financial windfall for those fortunate enough to own assets which will provide greater choices as the global economy begins to normalise and the vaccination roll out continues towards the goal of community “herd immunity”. Historically, after major economic turmoil, the first year of recovery produces the best financial return before returning to more normal returns for a number of years. It is important at this time, that as a community we don’t develop a culture of over exuberance and reckless investing but retain the self-discipline required not to squander this windfall. Markets can and do revert to long term mean averages and it is unlikely that the current economic tailwinds will last more than another year or two before normalising via regulatory intervention. The recovery, after the Spanish Flu of 100 years ago leading to the roaring 20’s, is a useful historical guide as to how global economic policy and pent up demand can lead to a significant increase in asset valuations. Equally and importantly, the improved use of technology is really driving global efficiency which we are all benefiting from to some extent primarily via our mobile phone.
It is worth looking a little deeper at the current residential property market in the context of future policy issues for Government. The Australian residential property market in aggregate, is worth some $8 Trillion with around $2 Trillion of associated mortgages making it 4 times larger than the Australian share market. It remains as a sector, one of the largest employers in the country and from a policy point of view, crucial to the recovery of an economy. Financial levers for Government have included adjusting interest rates to stimulate demand and providing guarantees to support lower deposits for targeted members of the community.
The net effect of which may well lead to an increase in aggregate value to around $10 Trillion by 2024 when interest rates are projected to rise. This would have the effect of creating a further $2 Trillion of property equity or the current value of the Australian Stock market which is quite a magic trick. The downside being a federal debt projected to be $1 Trillion and younger people being priced out of the property market. So effectively established members of the community are gaining a windful, funded by government debt, leaving the next generation locked out of the property market while having to fund the future interest payments on federal debt and this generations future retirement. Much for policy makers to ponder down the track as the economy stabilises including the contentious issue of capital gains exemption on the family home irrespective of value.
In the immediate, the Governments recent budget announcement is encouraging “empty nesters” to downsize with the ability, at age 60, to sell a home owned for at least 10 years and transfer $300k per person into super as an after tax contribution, irrespective of existing super balances which again will benefit those with high value properties and almost by definition reasonable existing superannuation balances. Other changes to super include the increase of the Super Guarantee Contribution to 10% from the 1st July 2021, work super contribution up to $27,500, after tax contributions up to $110k and the life time cap up to $1.7M will all stimulate the superannuation sector, which again will feed down into both equities and property valuations. The Government has also relaxed the work requirement laws up to age 74 which will allow super contributions to be made later in life. Finally the required draw-down from allocated pensions has again been halved to 2%, at the entry stage, which will allow balances to avoid being forcefully depleted early on in retirement. The net effect of this is that the superannuation pool of $3 Trillion will continue to grow rapidly both from additional contributions but increasingly importantly, the compounding effect of existing funds.
Both the domestic and US equity indexes reached new all time highs in the last few days and it is particularly pleasing to see that these share prices were supported by improved profits not just price/earnings expansion. So on longer term averages our domestic market in aggregate is not overly excessively valued. There is also quite a rotation in performance out of growth stock (particularly technology) back to value stock with predictable future dividends which again reduces volatility risk and provides an option for income requiring clients to get far superior returns to fixed interest in a reasonably stable manner. Again, it is pleasing to see the growth of fund managers making monthly income distributions to support client cash flow requirements. Our exports, particularly of Iron Ore, remain very strong and underpin record terms of trade which again have helped reduce the national debt accumulated through funding the recovery of the economy from the Corona-virus Pandemic. With international travel seemingly off limits for the rest of the year, national saving levels have improved which again appear to have been redirected into home improvements and a growing interest in the stock market.
We will be releasing our very comprehensive year-end summary separately, which covers much of the above themes in a more granular detail and which you can watch at your leisure as needed at www.virtueandpartners.com.au
In the meantime we are working around the clock to meet all of your end requirements. It certainly has been an extraordinary 18 months as a community we have had to adjust to managing the virus but hopefully with the vaccination program growing in momentum, we can get back to normality by the end of winter and have a period of much needed stability. As always, thank you for your support and keep sending across your referrals to info@virtueandpartners.com.au
With best wishes
Tony
