Optimism for positive growth in Australian

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1 with etica finance e-newsletter January 2014 Optimism for positive growth in Australian share market in 2014 appears well-founded by Australian Unity Investments (reproduced with permission) For Don Williams, Chief Investment Officer at Platypus Asset Management, 2013 was arguably the best year for Australian equities since the global financial crisis (GFC). The market rallied strongly during the first quarter of 2013, with the ASX/S&P 300 trading over 5,000 on a sustained basis for the first time since Following a short but sharp mid-year correction, it closed at 5,304. The general improvement in market performance was underpinned by a gradual but persistent recovery in fundamentals throughout the year. Significant drivers of growth in the market were the lagged impact of lower interest rates and a declining currency. The currency was beginning to respond to the reduced interest rate differential (Chart 1) which, in Don s view, is unlikely to expand from these levels. In addition, during the last quarter of 2013 there was a material pickup in the Australian residential property market. Finally, coming into Christmas 2013, consumer confidence showed signs of improvement as personal balance sheets were meaningfully repaired. Highlighting this strength, the Australian National Retailers Association (ANRA) reported a bumper Christmas trading period. According to the ANRA, the sector has clawed itself back from a flat position earlier in 2013 to be on track for a 4% increase in turnover for the year. 1 For 2013, retailers expected the post-christmas sales to exceed $17.6 billion up 5.6% when compared to Australian shares should be well supported by economic environment Don believes all the above mentioned factors will continue to support Australian equities through However, with strong returns already experienced in 2013, how much is already priced in? While he acknowledges a number of risks to his thesis, including the potential for a property market correction or a continued slowdown in mining, two fundamental data points lead Don to believe that Australian equities will present as good value in The first is the market yield compared to the cash rate; and the second is the improvement in Australian company earnings. As is well known, so-called yield stocks on the Australian market performed well in Today s lowyielding investment environment has meant investors Chart 1: Cash Rate and Currency 3.10% 1.10 RBA Cash Rate 3.00% 2.90% 2.80% 2.70% 2.60% 2.50% RBA Cash Rate $A/US (RHS) $A / $US 2.40% /12/12 31/01/13 28/02/13 31/03/13 30/04/13 31/05/13 30/06/13 31/07/13 31/08/13 30/09/13 31/10/13 30/11/13 31/12/13 Source: Platypus Asset Management and the Reserve Bank of Australia Page 1

2 increasingly seek out other income-producing investments with returns greater than cash and term deposits. But, as Don points out, simply owning the market now gives you a better yield than cash (Chart 2). So, from a long-term perspective, an investor is being paid to hold equities at current levels. With market yield continuing to be attractive when compared to the prevailing cash rate, Don says the yield trade still has some time to run, particularly as the impact of franking imputation credit enhances the effective outperformance. In addition, company earnings are steadily improving without large valuation expansion. Following the September 2013 reporting season, earnings expectations for fiscal 2014 generally demonstrated resilience, and growth was expected across a broad range of market sectors. The average forward price-to-earnings ratio (P/E) of the market since the early 1990s is 14.4 times, and, at present, the market is trading on 14.6 times. This is not expensive by any means, especially in context of the expected earnings environment (Chart 3). According to Don, the forward earnings for the market are improving, and the market as a whole will likely grow earnings by at least low double digits in This is a reflection of the positive macro environment we are now in, and shows the double impact of a lower currency and lower interest rates on company earnings. Australian bull market primed to continue Looking ahead, Don says investors in the Australian market have every reason to believe that we are in the early stages of a bull market that started in the middle of last year, and is primed to continue in 2014 and possibly beyond. Don s view is supported by a lower currency, low interest rates, and an improving building cycle that will help mitigate the reduction in investment by mining companies. If, however, things unexpectedly get markedly worse, the RBA still has capacity to reduce cash rates. As a result, Don and the Platypus Asset Management team are expecting better results from corporate Australia in 2014 and 2015, and higher equity prices. Specific opportunities within Australian equities will come from companies that have good business models and can support sustained earnings growth, as these will benefit the most from the supportive economic environment we find ourselves in. 1. Quick Boxing Day stats, ANRA, Media Release, 24 December Retailers expect bumper sales across Boxing Day, ANRA, Media Release, 26 December 2013 Chart 2: Cash S&P/ASX 300 market yeild compared with RBA cash rate 8% 6% 4% 2% 0% Cash Rate Market Yield 30/12/13 Source: Platypus Asset Management and the Reserve Bank of Australia Chart 3: Index earnings and valuation Earnings per Share ($) month forward EPS 12-month forward P/E P/E ratio Source: Platypus Asset Management, Factset Page 2

3 How does our Tipping Point Table currently rate Australian shares? The Australian Unity Personal Financial Services Tipping Point table is the output of our forecasting methodology which helps us assess the status of Australian shares (and other asset classes) based on the investment fundamentals of income and growth in earnings. As the table shows, the higher prices rise, then the lower the returns we should expect going ahead. Similarly, the lower the price you buy at, the higher returns you should generally expect in the future. So we aim to recommend buying when prices offer good returns, and sell slowly when prospective returns are not so attractive. Despite the continuing strong rally in Australian share prices we believe they still represent good value, as you can see by the circle in the Tipping Point table, right. In the long term, buying at these prices should produce attractive returns. We do not know what will happen to share prices in coming weeks or months and no outcome is guaranteed - but we anticipate that quality Australian shares bought at around these levels should show returns of around 9-10% per annum over the next decade. This is based on current high dividend yields and an expectation that companies will be able to grow earnings by 4.2% per annum over the period - notwithstanding that this rate would vary across shorter time frames. These are not lofty assumptions. Of these returns, over half are expected to come from dividends with just over 4% p.a. growth to provide the rest. Even if there is no growth, which would be unusual, Australian shares should provide a better outcome than term deposits and cash over the long term. Australian Shares All Ords Forecast Status Index 10 year return (p.a.) % Overpriced % Overpriced % Fully priced % Fully priced % Fully priced % Fully priced % Fair value % Fair value % Fair value % Fair value % Fair value % Fair value % Cheap % Cheap % Cheap % Cheap % Cheap + No guarantee is implied as to the accuracy of the specific forecasts provided. Data as at January What is our approach to asset allocation? The objective of our unique approach to asset allocation is to help you minimise investment risk and increase the long term return on your portfolio. Our approach is based on the philosophy that: Buying quality assets at reasonable prices is the best way to achieve competitive long term returns It is important to note we do not try to predict when an expensive asset class will begin to fall in price or when a cheap asset will rise in price. Cheap assets can become even cheaper. Expensive assets can become even more expensive. The turnaround may be just months away or it could be a few years away. No one knows exactly when that turnaround will be. For this reason we advise buying cheap assets slowly and selling expensive assets slowly. This gives you the chance to benefit from buying at even cheaper prices or selling at even higher prices. We do not recommend buying overpriced assets just because you have money to invest. Our goal is to buy at lower prices even if that means you have to wait before all of your money is invested. The benefits of our approach There are many benefits arising from our approach, including: Stronger, smoother and more predictable long term returns from your portfolio Reduction in your exposure to overpriced assets and therefore less exposure to significant market falls and bear markets Increased exposure to rising markets. Page 3

4 How you can safeguard your most valuable financial asset Not many people risk being uninsured when it comes to their car or home. But many choose to not insure their most valuable asset that is, their ability to earn an income. This is despite the fact that most people will earn a fortune between now and when they retire: How much will you earn from now until retirement +? Income p.a. Age Now $60,000 $3,365,096 $1,786,685 $80,000 $4,486,795 $2,382,246 $100,000 $5,608,494 $2,977,808 $150,000 $8,412,741 $4,466,712 + Assumes income increases each year by 4%. Retirement age of 60. This means that most families are carrying significant financial risk should the unexpected happen. The big question you have to ask yourself is: Would your family be able to maintain their lifestyle if you suddenly couldn t earn an income due to a serious illness or accident? If your answer to this question is no, you need to consider transferring that financial risk to an insurance company by purchasing income protection insurance. Your financial adviser can help you do that, as well as answer any questions you have about income protection insurance, and then calculate how much you need to safeguard you and your family in the event something should happen to you or your spouse. And, if you wish, your adviser will use our sophisticated computer program to broker the major insurers to find you the right cover at a competitive price*. What if you already have income protection through your employer? Some people have basic income protection insurance through their employer. But this insurance generally pays a benefit for a maximum period of only two years and is a basic type of cover. This means if you are unable to return to work after two years you may not have a source of income. In some instances it may therefore be appropriate to take an additional policy with a benefit period up to age 60 or 65. How do the insurance companies view you as a risk? Some insurance companies may charge you significantly less than other companies for the same cover, simply because they see you or your occupation as a lower risk. That s why you should use a financial adviser who has the ability to shop Page 4 around the reputable insurers to get the best solution for your particular situation. What is Income Protection Insurance? Income protection insurance is designed to replace your income if you are unable to work due to sickness or injury. It provides a monthly payment of usually up to 75% of your pre-tax income. Its purpose is to provide you with a regular income to help you cover your living expenses so you can focus on your recovery. The premiums are tax deductible for most people. Case study Steve and Petra have two children at school. They both work and they have a mortgage. They have a comfortable lifestyle but would struggle financially if one of their incomes was lost. We would recommend that both Steve and Petra purchase income protection policies which pay 75% of their pre-tax salaries up to age 65. We would recommend different waiting periods as their work circumstances are different. If one of them were to suffer a serious injury or illness, that partner s salary would be almost replaced by the insurance benefit and therefore they could concentrate on getting better rather than worrying about where to find the money to pay the bills. The Facts million Australians aged under 65 are million living with a physical disability 1 1 in 3 Australians have a one in three chance of being diagnosed with cancer before age , ,000 Australians were injured at work between , with 43% not receiving any financial assistance 3 60% More than 60% of Australians will be disabled for more than one month of their working life 4 25% More than 25% of Australians will be disabled for more than three months during their working life 5 Sources: 1 AIHW (2008) Australia s health 2008, Cat. no. AUS 99, Canberra. 2 AIHW (2008) Cancer in Australia: an overview 2008, Cancer series no. 46, Cat. no. CAN 42, Canberra. 3 ABS (2007) Australian Social Trends 2007, Cat. no , Canberra. 4 Fabrizio, E (2007) Australia & NZ Disability Income Experience org/iaahs/colloquia/cape_town/walker_-_income_protection.pdf. 5 AIHW (2008) Cancer in Australia: an overview 2008, Cancer series no. 46, Cat. no. CAN 42, Canberra. *Insurance cover is subject to eligibility.

5 Interest rates we are currently negotiating The tables below indicate the type of interest rates we are currently negotiating on behalf of our clients, as well as the monthly repayments for those loans. Home Loan rates as at Monthly repayments for 15 January 2014* 30 year loans (unless fixed term) for loan amounts of: Basic Rates From Comparison Rate $300,000 $500,000 $1,000,000 Basic Variable Rate 4.61% 4.63% $1,540 $2,572 $5,132 Offset Home Loans 4.74% 4.78% $1,563 $2,605 $5,210 Line of Credit 4.94% N/A $1,599 $2,666 $5,332 Professional Packages 4.79% 5.14% $1,572 $2,620 $5,241 1 Year Fixed Rate 4.48% 5.59% $1,516 $2,527 $5,055 2 Years Fixed Rate 4.65% 5.52% $1,547 $2,578 $5,156 3 Years Fixed Rate 4.84% 5.25% $1,581 $2,635 $5,271 4 Years Fixed Rate 5.49% 5.60% $1,701 $2,836 $5,672 5 Years Fixed Rate 5.59% 5.73% $1,720 $2,867 $5,734 Commercial Loan rates 15 January 2014* Rates From Notes New Business Investment 7.4% Subject to credit assessment Commercial Property Finance 6.1% Subject to credit assessment Agri Business Finance 6.1% Subject to credit assessment *Please note, basic rates do not include any fees and charges payable by the borrower. Comparison rates include fees and charges. Not every product has a comparison rate. Whilst these rates are the lowest rates in each category, the product and lender may not necessarily be available for you or be suitable for your needs. A full analysis of your needs is required before suggesting a suitable loan product. Are you paying the lowest rate you can for your home or car loan? Or your commercial loan? If you are buying a home or car, or borrowing for your business, or if the interest rate on your current loan is too high, we invite you to have your loan position health checked by us. All you have to do is give our mortgage broker the details about your financial objectives and loan position - we ll then analyse loans from the banks and other leading lenders to find you the most suitable loan we can. We ll call you with the result no later than five business days after you call us. It s quick, it s easy and it won t cost you a cent. Page Our five-step loan process We help you work out how much you can borrow... and which type of loan is right for you We search the major lenders to find you the best rate we can We use our buying power to reduce interest rates even more We do all the paperwork for you You save on your new loan repayments and our service hasn t cost you anything

6 Case Study: You get what you pay for... Let s compare the situations of Jenny and Liz: Both are age 30, and both earn $100,000 a year in the same job in the same company Both have the same amount of money contributed to their super funds by their employer Both have surplus income of $68 per week Jenny pays a professional financial adviser to prepare a comprehensive financial plan. As a result, Jenny commences a tax effective investment plan outside of superannuation (for which she uses her surplus income of $68 per week). When Jenny retires at age 60, she has her super fund plus $1,224,707 in her non-super investments. This is after taking into account the annual professional fee she paid to her adviser. Jenny will have a very comfortable retirement because she engaged a professional adviser to prepare a comprehensive financial plan, as well as to review her investments, optimise her tax position, ensure she is properly insured, and modify her financial strategies as her situation and the legislative & economic environments evolve. Liz doesn t want to pay for professional advice she would prefer to rely on her super fund for her financial security. As a result, Liz does not commence an investment plan (instead she spends her surplus income of $68 a week). When Liz retires at age 60, she has her super fund and no other investments. Liz got what she paid for If you genuinely want to be financially secure, you should seek advice from a professional financial adviser. We think you will find your adviser s fees are good value for money. Assumptions: Jenny pays professional adviser fees equivalent to 1% p.a. of her non-super investments, and is paid out of the income that portfolio generates. Jenny pays 2% brokerage when buying shares. Jenny invests outside super by buying blue chip shares (no gearing is used) that gross on average 4.5% growth and 3.5% income fully franked. Jenny re-invests dividends after paying tax on them. 2013/14 tax rates used. It is assumed that tax brackets will rise over time so that they both stay in the 37% tax bracket while they are in the workforce. Jenny holds and pays for life insurance inside superannuation. Having insurance deducted from her super will provide necessary protection but will reduce her superannuation balance. Free Superannuation Health Check Find out if your superannuation plans are on track to deliver you the retirement of your dreams. Our free Superannuation Health Check will help you determine: How much money you need before you retire Whether or not you are on track to reach that goal What you need to do to get on track (if you are not) Whether the investment options in your fund suit your retirement goals If a self managed super fund might be an option for you Your superannuation "health check" is free of charge and obligation. Please call your adviser's office to arrange an appointment. Page 6

7 How much can you invest in super before 30 June 2014 Here are the superannuation contribution caps which apply for the 2013/14 financial year. Contributions which qualify for a tax deduction These are known as concessional contributions and the limit is aged based, as shown below. Generally you can only qualify for a tax deduction if you are self-employed or you are employed and make the contribution through salary sacrifice. The limit includes any Super Guarantee your employer pays on your behalf. Age Tax deductible limit (2013/14) Up to 59 $25, $35,000 Contributions which do not qualify for a tax deduction You could also invest up to $150,000 p.a. in super as a nonconcessional contribution (i.e. you do not receive a tax deduction on this contribution). If you are under age 65, you can bring forward up to two years of non-concessional contributions. This means you could contribute $450,000 in one financial year, but you would not be allowed to make non-concessional contributions in the following two financial years. The Government co-contribution Currently, eligible workers earning up to $48,516 who make personal contributions to super can take advantage of the Government co-contribution of up to $500. Spouse contributions If your partner s income is less than $13,800, you could qualify for a tax offset of up to $540 on the first $3,000 you contribute to superannuation for them from your after-tax income. This tax offset decreases as your partner s income increases above $10,800. Low income superannuation contribution The Government will refund the tax you pay on eligible contributions up to $500 - if your income is less than $37,000 p.a. Accepting a Redundancy? You need to carefully consider what you do with the payments you receive on accepting a redundancy. Some of your options may have adverse tax and Centrelink consequences, and others could hurt your long term financial security. To find your way through this financial maze, please talk with your adviser. If one of your friends or colleagues needs prudent financial advice - tailored advice they can rely on - please feel free to offer them an appointment with your adviser Your adviser will be happy to assist your friends and colleagues who need advice on: Wealth creation Retirement planning Redundancy planning Investments Superannuation Self managed superannuation Personal estate planning Business estate planning Personal risk insurance Business risk insurance Home loans Commercial loans Investment loans Equipment finance Car finance If you no longer wish to receive Money Insights please send an Unsubscribe to the person who sent it to you. Contact us: You can contact us by calling your etica finance adviser or mortgage broker, or you can call us on or , or write to us at GPO Box 5605, Chatswood West NSW 1515, or us at pankaj@eticafinance.com.au or Disclaimer: etica finance pty ltd is a corporate authorised representative of Australian Unity Personal Financial Services Limited ABN AFSL & Australian Credit Licence No , 114 Albert Road, South Melbourne, Vic, Any advice in this document is general advice only and does not take into account the objectives, financial situation or needs of any particular person. You should obtain financial advice relevant to your circumstances before making investment decisions. Where a particular financial product is mentioned you should consider the Product Disclosure Statement before making any decisions in relation to the product. Whilst every care has been taken in the preparation of this information, Australian Unity Personal Financial Services Ltd does not guarantee the accuracy or completeness of the information. Australian Unity Personal Financial Services Ltd does not guarantee any particular outcome or future performance. Australian Unity Personal Financial Services Ltd is not a registered tax agent. If you intend to rely on any tax advice in this document you should seek advice from a registered tax agent. This document produced in January Page 7