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As I See It: March 2023

Greetings from a sweltering Sydney!

Interest Rate Rises

The RBA recently lifted interest rates by a further 0.25% to 3.60%, making it 10 months of consecutive rises. Generally residential mortgages are 2% higher than the cash rate, so variable rates are now approaching 6.00 %.

The tone of the RBA outlook has softened, and we may now be very close to the top of the interest rate cycle and the local share market rose on this news. Monetary policy is a very blunt instrument. It can hurt the community by removing disposable income out of the economy and reallocating to higher interest rate payments on borrowed money. Leveraged investments become less attractive, and investors tend to be more cautious and prefer to accept higher guaranteed returns as opposed to taking further market linked risk with growth assets.

Assets that were positively geared, with tax being paid on income, have now turned negative, meaning that the Federal Government tax take will now reduce significantly.

Effectively the authorities have prioritised the taming of long-term inflation over shorter term investment returns. The key here being to ensure that significant wage increases are not expected every year by the community, which leads to an inflation wage spiral that is hard stop without taking even more aggressive interest rate decisions.

RBA Cash Rate Expectations
Source:  Refinitiv

Australia cannot act in isolation and similar rate rises have occurred in the United States Canada, the UK, and the European Union. That said, the data for the last quarter does show growth in the economy slowing rapidly and bad inflation declining as some of the supply-based problems begin to be resolved. It is important to see current interest rate policy in the context of global economies being closed for up to three years through Covid, and significant policy shifts being required to get global economies functioning optimally again.

Australian Retail Sales
Source:  ABS, AMP

Interest rate rises hurt the most vulnerable in society. The mortgage rates in Sydney have increased significantly over the last 12 months, and while it is clear that many are forcefully reducing their expenses to meet higher mortgage payments additionally, the high-end retail shops in the city are still as busy as ever with queues outside. Public data tends to aggregate all these circumstances. As such, there is still concerns as to the reliability and timeliness of the data being used to make interest rate decisions

Deflationary pressures will prevail over the long term
Source:  Hyperion Asset Management

Interim Earnings Review

The interim earnings season concluded at the end of February and in general results were quite solid. Importantly, $36 billion of dividends were declared and are currently being distributed to shareholders.

The reopening of China should be a positive for Australian exporters and in general, outlook statements were strong, with the proviso that rising interest rates will naturally reduce consumer demand in the retail sector. To some extent this is a self-induced coma to avoid bigger problems later and, providing interest rates decline by this time next year, we should get through this without formally going into a recession.

Generally, you are best placed investing in the larger blue-chip companies at this stage of the investment cycle, with strong sustainable dividends, which effectively means major banks and resource stocks. The table below lists the biggest dividend payers by yield.

Top ASX Large Cap Dividend Payers
Source:  The Australian

Fund Manager performance has been mixed depending on their market segments and themes and as such, keeping good diversity and a long-term view to these investments, remains crucial. We have received monthly reports of the returns on the holdings within your portfolio and are now in continuous discussion as to performance.

Increases in Centrelink Payments

Centrelink payments have all been indexed for inflation and will be reflected in fortnightly payments to clients. The new basic pension payments are as follows:

Increase in Fortnightly Age Pension Rates – from 20 March 2023
Source:  Dept of Social Services

These payments really reflect the increase in the cost of living and should be neutral to retirees. It is important to work with us to maximise earnings on assets that you own, to ensure you are receiving returns significantly above the declared deeming rate for income-based calculations of Centrelink.

It is quite possible in this market to receive more than 6% per annum guaranteed return. This is deemed to be a 2.25% return by Centrelink for any financial assets over $56,400 (for a single pensioner) and $93,600 (for a couple).
This is an obvious way of meeting the cost-of-living challenges and in many cases, we can get significantly higher rates for you through wholesale channels.

Possible Future Superannuation Changes

The Government has indicated that they will introduce an additional tax on the earnings of super accounts with assets above $3 million, to be taken to the next election. This will not be indexed, which will increase the number of clients affected in the longer term.

At this stage, it would appear that the amount of funds allowed in the retirement phase of super will increase from $1.7 to $1.9 million, reflecting inflation, on the 1st of July 2023. There is still some doubt as to calculations on future earnings, particularly where investment returns are unrealized, and this is something that we will continue to monitor closely.

Local News

As you would expect, things are very busy in the practice, and we continue to offer appointments late on a Thursday and Saturday mornings to meet demand. We are accepting new clients, particularly from existing trusted referrals. We look forward to being of service to our community as we manage the challenges of today. As always, there is more information on our website www.virtueandpartners.com.au.

Best Wishes

Tony and Fiona

Posted by Dr Tony Virtue, Principal


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