Greetings, as we come into spring and a hot few days in Sydney
Are we there yet?
Interest rates around the world appear to be peaking with the European Central Bank (ECB) stating last week that this would be the peak of the market. In Australia we have a new female RBA governor, and all rates have been on hold now for three months with an expectation that interest rates will drop at some stage in the new year. The US appears to finally be at the top of the interest rate cycle and as you can see there is much correlation between the countries. Excessively high interest rates damage economies and forces capital to be spent on interest payments rather than innovation and employment. With the wave of new technology including artificial intelligence driving costs down we should anticipate that interest rates will drop significantly over the next couple of years. The natural correlation of this is to lock in interest rates at the top of the market for those requiring income streams in retirement while staying variable for mortgages with the expectation that rates will be lower in several years’ time.
Global Interest Rate Comparison Aug/Sep 2023 – Source: Trading Economics
China remains our largest export market and was the last major economy to come out of Covid as well as being the originator of the virus. China has struggled to grow its economy in recent times and has reacted by dropping their own interest rates and supporting their heavily leveraged property development businesses. This should be a positive for Australian exports of resources of both iron ore and lithium with our county experiencing a significant increase in their valuations. Australia continues to run an account surplus – primarily due to the exporting of resources, providing us with far more flexibility than other countries. The key now is managing the change to more sustainable forms of energy while not destroying the economy in the meantime. If this is well managed, Australia should be benefiting as net exporters to Asia which will be a windfall for our economy.
Australian Exporters by type 2023 – Source: IBISWorld
The domestic reporting season has now concluded and generally regarded as pretty solid with a good growth in dividend payments particularly in the banking sector. We will seesome opportunities to pick up assets below market in the property sector due to over leveraged listed companies needing to reduce their debt obligations and will bring these opportunities to you as they become apparent. Opportunities continue to grow in private equity markets where it is increasingly viable to invest in companies not listed on the ASX via managed funds with improved liquidity and access. This is fast becoming a discrete asset class reducing the daily volatility of investing in companies on the stock market while still having the opportunity to invest in companies with the capacity to grow and who will be taken over. We will be steadily increasing our exposure to the sector for growth orientated investors.
Global markets continue to be dominated by technology and artificial intelligence and to some extent have distorted the overall results of the major global indexes. The clear message here is that if you can get market dominance and manage your fixed costs the potential for extreme profits is strong as currently reflected in companies such as Apple and Amazon. Nividia, as the leading artificial intelligence stock in Silicon Valley continues to power on and it’s well commercialised and could improve efficiencies of businesses throughout the world. Most of your international fund managers have done well in this sector and again this is a good example of why we need to invest globally in companies not available in our domestic market.
Property and Migration
Migration is now growing very rapidly with over 500,000 new entrances this year or around 2% of our working population. Having just returned from several international trips it is very clear to me that Australia is regarded as one of the great countries of the world to live in and as such should continue to attract the best and brightest of the world’s talent. The current migration take is a new record and ensuring we have adequate infrastructure to support a larger population including properties to live in will now be a major challenge for both state and federal governments.
Australian Population Growth – Source: ABS
Residential property prices continue to rise particularly in Sydney and now again exceeded $10 trillion in aggregate affectively recovering the shorter-term declines over the covid era. As we come into spring the property market is projected to have several good years ahead of it particularly if interest rates do in fact decline significantly. Why do have issues such as tax policy which really distort the value of a residential home as opposed to other assets. This will eventually need to be tackled head on as currently the principal place of residence remains tax free on sale irrespective of its value. The practical effect of this is that most of the wealth in Australia is still held in residential property followed by superannuation and then shares. This wealth effect should to some extent negate the higher interest rates we are all currently facing but will accentuate the difference between renting and owning property which will again become an increasingly significant social issue for our community.
Australian Home Valuation Index – 31 Aug 2023 – Source: Corelogic
Thank you for your referrals to the business which continues to grow nicely reflecting the very obvious need for financial planning advice particularly for those approaching retirement. We have increased our Manly team to meet this increased demand and to ensure that all clients have access to competent and experienced advisors to help them for the many challenges of life that we all face. Behind the scenes we continue to improve efficiency utilising the best of technology while still retaining the personal touch or being able to talk to your trusted advisors face to face as needed. Full details are on our website which is continually upgraded at www.virtueandpartners .com.au.
With our best wishes Tony and Fiona