As we all start to enjoy our new freedoms, hopefully we can continue to get back to some level of normality with the Covid restrictions being wound back. A solid enough few weeks with the main highlight being the RBA bringing forward anticipated future interest rate rises by 12 months to mid-2023. This reflected empirical evidence in the bond market over the previous few weeks and, the equity markets took the news in its stride. While lifting interest rates seems a bad thing at first blush, the reality is that artificially low rates does cause asset bubbles in the future as reflected in some parts of Sydney property prices. Providing interest rate rises are done slowly in a predictable manner reflecting the growth in the underlying economy. Then any adjustments to the relative value of both equities and property should be manageable. Over the last 12 months there has been a very substantial growth in the overall value of assets in the country and a period of consolidation would be a good outcome all things considered .The key driver in actually lifting interest rates would be sustainable inflation as opposed to short term labour shortages due to travel restrictions into the country .With the borders reopening I would expect a big push next year to restore immigration numbers and encourage 457 visaswhich should help to alleviate the current labour shortages we are facing . This is a global trend with similar policy adjustments to varying degrees being made in NZ the US and the UK reflecting an improvement in their economies as they recover from the disruption of the Covid virus. In previous economic recoveries there has normally been a coordinated global approach to interest rate policy to help manage currency distortions and Australia cannot raise rates in isolation without potentially effecting the competitiveness of our exports with a higher Dollar.
Australian 2-year Bond Rate – past 5 years
With a significant number of listed companies trading at their 12 month highs, we are seeing a spate of takeovers and capital raisings with company’s using the currency of their share price and still historically low interest rates, to fund purchases .This is set to continue over the next 12 months with some of your fund managers actively buying significant stakes in takeover targets to benefit from a substantial takeover premium (often above 50% above the targets current share price). At the same time the number of Initial Public Offers (IPO’s) has substantially increased. In many cases we have an allocation for clients, but caution is needed as success is far from guaranteed, and it is often better to buy these companies on the stock market once there is a clearer trading pattern. Judo Bank which services the smaller end of town, has been one of the recent highlights, being the first bank to list in Australian in 25 Years and meeting the demand for cash flow lending which had mainly been vacated by the big four banks. This is reasonably common at the tail end of a bull market, and we must be vigilant to avoid poorer listings and any potential investor exuberance. An alternative to straight takeovers is leveraged purchases by Private Equity Funds who will take company’s private and then ‘re-engineer them’ before re listing in a few years’ time, generally at a handsome profit. The advantage of this is to avoid short term adverse share price movements and continuous disclosure requirements on the ASX when major changes are needed to company management and strategy.
Australian Mergers and Acquisitions
Overseas equity markets achieved new all-time highs on the major US indexes and employment figures were strong as their economy recovered, supported by productivity gains and the growing mainstream use of Artificial Technology to improve employee decision making. The attached graph from Goldman Sachs shows the strong inflows into International Shares mainly at the expense of Fixed Interest. This weight of money is a good guide as to where sentiment lies and reflects similar adjustments in our own asset allocation as we focus on the globalisation of stock markets, irrespective of where individual companies are listed. There are several upcoming Exchange Traded Funds (ETF’s) coming to market that will target the private equity space and as such, retail Australian investors now have far greater choice of investments via the better Wrap Accounts including direct access to global shares. While markets are certainly not cheap there is still a lot of money in cash looking for a home, paying a reasonable rate of return including $1Trillion of Australian Term Deposits, so at this stage the momentum is still definitely with the bulls for the immediate future.
Global Equity Inflows over time
Source: Goldman Sachs vis Firetrail
The growth in Australian property prices really has been a game changer for many clients with the collective value of the nation’s homes approaching $10 Trillion up $2 Trillion in the last 18 months. This growth equates to the overall value of the Australian stock market and if managed well will provide great opportunities financially for clients to downsize if they choose and use the additional available capital to supplement their income needs. This may mean bringing forward retirement or at least reducing the number of days per week actively working while also providing a great buffer to contribute back to our society and help others in their life journey. We must anticipate tighter conditions as banks begin to lift borrowing rates and APRA tightens lending criteria, so for those of you with a variable mortgage you should talk to us urgently about fixing some of your lending facilities through firstname.lastname@example.org.
That said, with an expected catch up with net migration next year and limited supply, inner city apartments may well catch up the differential with standalone properties and for landlords rent may well continue to rise quite sharply. Australia is still regarded as a premier global destination to live and with more flexible working options including online business and zoom like communications. should be able to continue to attract the best and brightest of the world which again should add to a premium on our property market. The very significant tax breaks for investors with a long enough investment timeline, coupled with the leverage achieved via mortgages, has allowed many clients to really get ahead financially. This is an area where we have a lot of expertise and contacts in the practice and where possible I encourage younger clients to own several investment properties while they are at the prime of their working life to build up assets which can be sold at a later date. For current opportunities please contact email@example.com.
12-Month Growth of Major Cities
All the above keeps us on our toes and busy. We are really looking forward to seeing clients back face to face where possible and catching up on your news. Feel free to use our updated booking system under our signatures and explore the website for additional insights at www.virtueandpartners.com.au
With our best wishes Tony and Fiona