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As I See It: May 2024

Budget in Review

The federal budget was handed down last week and we have now had an opportunity to reflect on this and the impact this may have on future financial planning. Looking beyond the politics, all Australians will be getting some level of personal tax relief from 1 July.  This really is just making up for bracket creep over the last few years where there has been no indexation of tax levels reflecting increases in inflation.

Overall, this should help with meeting cost of living expenses including managing mortgages until interest rates begin to normalize.  While the budget declares a small surplus for this financial year, deficits are anticipated in the future based on higher government spending.  I do emphasize these are estimates and any major changes to iron ore assumptions and future tax takes from migration could increase our revenue significantly.

It is possible now that Australia will go to a federal election prior to Christmas and certainly by May of next year so it would be helpful for the incumbent government for interest rates to be falling prior to calling an election. There are similar issues in many western countries who will have elections later this year (see list below) including the UK in July and the US in November. To win elections you need the economy to be doing well and for consumers to feel confident.  This reflects in full employment and confidence to save and invest for the future particularly in big long term decisions like housing.

Countries Holding Elections in 2024 by Most Populous (Source: Time, 2024 Global Forecast Report, Worldometer)

Interest Rates

This remains the most relevant Economic issue for many Australians with the reality that a substantial amount of disposable income is now having to be reallocated to interest payments rather than spending and saving. There’s a growing sense that there is a disconnect between levels of inflation and the need to lift interest rates to drive inflation down and I will cover this now in more detail.

Monthly CPI Indicator, Australia, annual Movement (%)  (Source: ABS)

The broad measure of inflation reflects a basket of goods and services averaged out and compared to the same position 12 months earlier. While a reasonable proxy this does not reflect the individual circumstances of certain members of our community where they will be spending substantially more on housing than the overall basket of goods. Weighting for housing has not changed since 2019, while cash expenses for housing has increased substantially over the past 5 years.

Groups in the CPI Basket (Source: RBA)

Change in CPI Group Weightings (Source: RBA)

For calculation purposes this has distorted the decision making of policymakers and there needs to be greater thought given as to what is a more meaningful way of assessing inflation in our country. In fairness there are similar issues throughout western society with most countries now looking to drop interest rates significantly over the next 12 months.

The length of time interest rates have remained at a peak is now a record for Australia when compared to previous interest rate cycles.  Again, we are faced with a situation of reviewing lagging indicators before making the positive decisions needed to release capital back into our society both at an individual and corporate level. It is probable that the Europeans will drop interest rates first followed by the US and then ourselves later in the year.

Equity Markets

As a forward-looking indicator equity markets price valuations are based on the future not the past whose expectations of where interest rates will be in the next few years. While currently both US and Australian rates are close to all-time highs, it is important to remember that the largest companies in the world (colloquially known as the magnificent 7) and all of which are larger than the entire Australian market, individually hold very little debt, make most of their money via advertising and subscription fees back to customers. This is very capital light and not interest rate affected, which is reflected in their valuations.

At this stage the results of artificial intelligence have been very strong and should lead to improved productivity in all business sectors, in essence another industrial revolution. The poster child for this sector is NVIDIA which reported outstanding numbers last week and whose major customers are the other large technology companies utilizing their AI chips.

NVDA Share Price compared to IVV – iShares S&P 500 ETF(Source: CommSec)

Stock of the Month

Based on client feedback I will continue to introduce some of my favorite direct stock each month to give you a guide as to the characteristics I look for in holding a share directly as opposed to part of a managed fund portfolio or ETF. Again, this should not be taken as an investment tip as good stock are generally very highly priced but more to understand the process.

My favorite property stock remains Goodman Group (ASX: GMG) which had another stellar year at a time when many of their competitors including Lend Lease have struggled. Due to valuations of office properties in the city Goodman is run by a first-generation family who retained a significant shareholding in the company. They have looked to the future and invested heavily in industrial sites used by companies such as Amazon to distribute product directly to the consumer utilizing robotics and artificial intelligence in a repeatable manner.

They are well diversified globally and reflect the vision needed to continually reinvent themselves as markets mature. The attached share price shows how the market has rewarded the company as opposed to the wider sector. It does show that it is possible to outperform an index with outstanding companies with the right management and motivation.

GMG Share Price compared to SLF – SPDR S&P/ASX 200 Listed Property Fund ETF(Source: CommSec)

Client Function

A reminder that we are having our client function at the Harbour View Hotel on the evening of Thursday the 6th of June which coincides with Vivid. We have had an exceptional response from clients to attend which will mean we will have a very full house. That said I do want as many people as possible to enjoy Sydney at its best and to meet your advisors in a collegiate and safe environment. If you do wish to attend and have not already responded, can you let the office know urgently for planning purposes.

Financial Year End

The next few weeks up to the financial year end are going to be extremely busy as we work with clients to maximize their superannuation contributions and manage tax obligations. With the first major changes in income tax rates in many years prepayments will become more valuable in this year the next and there was also the need to very carefully review mortgage obligations and get lower rates where possible.

We will be working through weekends and Thursday nights to meet demand and I’ll be increasing our staffing to reflect this demand. Our website and livery have also been updated to assist in speeding up access to advice as and when needed.

with my best wishes to you all

Tony and Fiona

Posted by Dr Tony Virtue, Principal


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