Groundhog day continues in equity markets

Transcription

1 e-newsletter August 2012 Groundhog day continues in equity markets by Donald Williams, Chief Investment Officer, Platypus Asset Management^ Those who have seen the Bill Murray movie Groundhog Day will understand how we currently feel about equity markets at Platypus! Each day, it seems as though we are waking up to the same old news and hearing the same conversations, while continually seeking a way to break out of the repetition. The good news is that, just as Murray s character does escape from the groundhog day pattern at the end of the movie, at some point equity markets will start a sustained rally. It s just a question of when. In the meantime, it s a case of same old, same old. Bad news from Europe and the US, concerns about China s growth, the stubbornly high Australian dollar, a seemingly endless stream of profit downgrades, and ongoing political drama domestically, means that we expect very little to change in the short-term i.e. the next six months or so. At time of writing, the August reporting season is about to start and we anticipate little good news will arise. A number of companies have already indicated that they will have profit downgrades, and some of the results are likely to be even worse than the reporting season in February. The Australian sharemarket has continued its pattern of trading within a narrow range, and has also continued to underperform overseas markets indeed, even the growth-challenged European markets performed better than the local market in June. As Chart 1 shows, Australia has lagged other markets since the low of equity markets in February It seems that the Australian market has developed a track record of participating in global risk aversion sell-offs along with international markets, but not participating to the same extent in any rallies. Continued on page 2 Chart 1: Equity Markets Performance % Source: Bloomberg, Platypus Asset Management February 2009 = 0 80% 60% 40% 20% 0% Australia US Japan Germany UK France Hong Kong 2/2009 8/2009 2/2010 8/2010 2/2011 8/2011 2/2012 INSTITUTIONAL DEALER GROUP OF THE YEAR 2012 Australian Unity Personal Financial Services Australian Unity is Money Management s Dealer Group of the Year for 2012 Page 1

2 Continued from page 1 Over the last few months, we have seen further evidence of slowing global growth, with manufacturing data in both China and United States weakening. A number of market commentators are now predicting additional quantitative easing in the US as well as further monetary and fiscal stimulus in China, although the forthcoming election in the US could mean any definite plans are put on hold. Europe continues to be a major concern, particularly now that the European summer is approaching a time when most politicians and policy-makers go on holiday. Nonetheless, some progress has been made recently. In late June, political leaders at the European Union summit finally agreed to try to break the negative feedback loop between banks and sovereign bonds by allowing the European Stability Mechanism (ESM) bailout fund to directly recapitalise European banks instead of lending to individual country governments to then lend to banks. This is definitely a step in the right direction, although the measure will only occur once a single bank supervisor is put in place. In addition, the European Financial Stability Facility (EFSF) and ESM bailout funds will be allowed to purchase Italian and Spanish debt on the secondary market (subject to ratification by member countries), thus helping drive yields down in the secondary market. So there have been steps in the right direction, albeit nothing definitive to suggest that an end to the turmoil is in sight. Ultimately, we see the issuance of Eurobonds (or a version thereof) as the only lasting solution to the European fiscal problems. Once the Eurozone can be seen as a combined fiscal entity, its indebtedness will compare more favourably to other (indebted) developed nations. Australian share market is cheap at the moment In the short term, we are expecting the challenging conditions experienced in the last two to three months to continue. Our view is that the next financial year (i.e. up to 31 June 2013) is likely to be a transition year for the Australian share market. First half results are likely to be poor given the low earnings run rate going into the year and the persistent macro headwinds affecting many sectors. All these challenges are now pretty well understood by the market. And on the bright side, we are significantly more optimistic about the medium to long term, and we think that by this time next year, markets will have turned a corner and things will be looking much more positive. We anticipate that the second half of the 2013 financial year will show some recovery as we see more benefit from lower interest rates and (hopefully) a better outlook for global growth. Currently, the equity market looks attractively priced at approximately eleven times earnings and is very cheap compared to bonds and cash. In particular, dividend yields on banks, industrials and utility stocks are also compelling when benchmarked against these asset classes. However in terms of achieving profit growth and capital gains, the market is hamstrung by the heavyweight financial and resource sectors where the macro outlook is poor and, in the case of mining stocks, deteriorating. If 2013 is a transition year then 2014 is when we expect to see a stronger market performance, as the full benefit of lower interest rates comes into play, better global growth is likely, and we could see a federal election (and probably a change in government) that will remove some of the uncertainty and unnecessary distractions for companies as well as investors. Having said that, in the current market there is the opportunity to buy quality shares at low prices. A good illustration of where we think the market is heading is to compare the All Ordinaries Index between 1987 and 1995, with that of 2007 to today (Chart 2). History suggests markets go through either six to eight year cycles, or 20 year cycles. Spain and Greece may be looking at a 20 year recovery period but in Australia we are more likely toward the end of a six to eight year cycle. As Chart 2 shows, the index for the six years following the start of the 1987 recession is very similar for the index for the six years following the start of the GFC. If this similarity continues, we can expect to see another 12 to 18 months of sideways tracking, followed by a sustained upwards track for the years following. ^ Donald Williams is chief investment officer at Platypus Asset Management, an Australian equities joint venture partner with Australian Unity Investments Chart 2: Comparison of Australian Share market cycles ( versus ) (All Ordinaries Index) 2600 All Ordinaries Index /01/87 2/01/07 2/01/89 2/01/91 2/01/09 2/01/11 Source: Platypus Asset Management 2/01/93 2/01/ Page 2

3 How does our Tipping Point table currently rate Australian shares? Our Tipping Point table is the output of our forecasting methodology which helps us to 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 that prices rise then the lower returns we should expect going ahead. Similarly, the lower the price you buy at, the higher returns you should 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. At the moment, investors in general are cautious about owning Australian shares. But as you can see by the circle in the Tipping Point table, right, Australian shares represent exceptional value (at the time of writing). In the long term, buying at these prices should produce outstanding returns. We do not know what will happen to share prices in coming weeks or months - but we are confident that quality Australian shares bought at around these levels should show returns well in excess of 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 profits by just 3.6% per annum. These are not lofty assumptions; just a reflection of the fact that when fear abounds good investment returns are never far away. 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 % Cheap % Cheap % Cheap % Cheap % Cheap % Cheap + No guarantee is implied as to the accuracy of the specific forecasts provided How much can you invest in super by 30 June 2013 Here are the superannuation contribution caps which apply for the 2012/13 financial year. Contributions which qualify for a tax deduction These are known as concessional contributions and the limit is 25,000 for this year. 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 25,000 limit includes any Super Guarantee your employer pays on your behalf. Contributions which do not qualify for a tax deduction You could also invest up to 150,000 p.a. in super as a non-concessional 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 nonconcessional 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 If you are working, and make a non-concessional contribution to super, and earn up to 46,920 this year, you are eligible for a super co-contribution from the Government 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. Page 3

4 How risk insurance fits into your financial plan Typically you would expect that you would grow your assets until you retire and then those assets would be depleted over your retirement, possibly with some left for your estate. And, of course, you would earn an income up until your retirement. But what would happen if you were seriously injured or had a serious illness sometime in the future? Or if you died? You would lose your ability to earn an income and you or your family would have to draw down your assets to survive (see the red line in Chart 1 below). Of course, your plans for a financially secure retirement for you and/ or your family might also disappear depending on the length of time you were unable to earn an income. That s where risk insurance comes in. Depending on the type of cover, it can fill the gap in assets, and it can replace your lost income. In other words, risk insurance can help keep you on track financially in case an unexpected tragedy causes you to lose the ability to earn an income. Safeguard your vision of a secure financial future if the unexpected happens Most families are carrying significant financial risk should the unexpected happen. The big question you have to answer is: Would my family be able to maintain their lifestyle if I no longer earned an income? If your answer to this question is no, you need to consider transferring that financial risk to life insurance companies. They have a range of insurances which can help you fund your risk mitigation plan and give you enormous peace of mind all for a small fraction of the sum insured each year. Insurance can help your family maintain their lifestyle if life doesn t go to plan Personal insurances worth considering include: Term life insurance - pays a lump sum on the death of the insured. Income protection insurance - replaces 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. Trauma insurance - pays you a lump sum on the diagnosis of a specified non-pre-existing illness or injury, generally including heart attack, stroke, cancer, and paraplegia. The Australian Unity Insurance Portfolio Construction Process To help ensure your risk insurance plan is properly funded, we employ our disciplined eight-step insurance portfolio construction process (see Chart 2). We start by assessing your current situation if the unexpected happened today, what would be the financial shortfall? In other words, how much money would be required for you and/or your family to replace your income... and pay for other expenses? We then develop strategies to help you transfer that risk to insurance companies, and identify which types of insurances you require. We also help you qualify for tax deductions on the annual premiums where possible. Next, we research the major, reputable insurance companies to find the insurances which provide you with the right Continued on page 5 Chart 1: Risk insurance fills the gaps... and maintains financial wellbeing Assets Illness, Accident or Death X Retirement Age Typical Assets Assets if the unexpected happens to you Typical Income Lost Income Current Assets Depending on the cover, risk insurance can fill this gap in assets, and replace lost income Income Now Page 4

5 Continued from page 4 level of protection, including the definitions and exclusions which best suit you and your family. Of those insurances which meet your needs, we obtain quotes to ensure we recommend the most cost effective products. The next step is for you to determine if that cost is affordable. If it s not, you might choose to reduce the cost by reducing the amount insured in other words, retaining some of the financial risk yourself. Once you have made that decision, we finalise your risk transference plan, and arrange the purchase of the recommended insurances on your behalf. That may require you to undergo a physical exam from a doctor (which the insurance company should pay for), as well as completing the paperwork (we will assist you with this). Once your insurance portfolio is in place, we will regularly review it and your situation to ensure your portfolio continues to be relevant and cost effective. Chart 2: We ll help you find the insurance cover you need... at a competitive price Step 8 Regularly review insurances and level of cover to ensure they continue to meet your needs Step 1 Determine the extent of financial risk... and if you need to transfer some or all of it to an insurance company Step 2 Identify insurances required... and develop tax effective strategies for premiums (where possible) Step 7 Arrange purchase of insurances... and liaise with insurance underwriters You Step 3 Calculate levels of insurance cover required... and determine which definitions and exclusions you need Step 6 Do you need to reduce the amount insured and therefore assume some of the risk yourself? Gap Analysis Procedure Step 5 Are you comfortable with the cost of that cover? Step 4 Research market to identify insurances which provide the right level of protection at competitive premiums Pros & Cons of Self Managed Super Funds PROS You have control over how your money is invested There can be fee savings if you have 200,000+ invested SMSFs offer the potential to use tax saving strategies not possible in other types of funds SMSFs can purchase your business real property SMSFs can give you certainty for your estate planning SMSFs can borrow to invest in shares & property (using instalment warrants) CONS You have to make sure your fund complies with all the relevant regulations You have to administer the fund As a trustee of the fund, you are open to personal litigation if the fund is not run properly You are responsible for the fund s investment strategy Page 5

6 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 2 August 2012* Rates From Monthly repayments for 30 year loans (unless fixed term) for loan amounts of: 300, ,000 1,000,000 Basic Variable Rate 5.84% 1,767 2,946 5,893 Offset Home Loans 5.88% 1,775 2,959 5,918 Line of Credit 5.88% 1,775 2,959 5,918 Professional Packages 5.88% 1,775 2,959 5,918 1 Year Fixed Rate 5.59% 1,720 2,867 5,734 2 Years Fixed Rate 5.59% 1,720 2,867 5,734 3 Years Fixed Rate 5.59% 1,720 2,867 5,734 4 Years Fixed Rate 6.29% 1,854 3,091 6,183 5 Years Fixed Rate 6.29% 1,854 3,091 6,183 Commercial Loan rates 2 August 2012* Rates From Notes Motor Vehicle Finance 7.49% This rate for finance over 60,000 Equipment Finance 8.36% This rate for finance over 100,000 New Business Investment 7.4% Subject to credit assesment Commercial Property Finance 6.99% Subject to credit assesment Agri Business Finance 6.99% Subject to credit assesment *Please note, these rates do not include any fees and charges payable by the borrower. Comparison rates for individual products are available on request. 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 every month and our service hasn t cost you anything

7 Making extra repayments to your home loan - even small ones - can make a big difference Paying extra off your home loan can save you a small fortune in interest repayments over the long term (especially when combined with finding a cheaper loan). Make regular extra repayments Can you pay a little extra off your home loan each month? Even reasonably small amounts can make a big difference because the extra you pay comes straight off the principle and this will result in ongoing interest savings. For example, if you have a 400,000 loan over 30 years at 6% p.a. interest, your monthly repayments will be 2,398 If you can afford to pay an extra 600 a month, you ll pay the loan off 12 years sooner and save 202,356 in interest, as shown in Chart 1. Take advantage of falls in interest rates If interest rates and therefore your required monthly repayments fall, try to maintain the old monthly repayment as a way of making extra repayments. Pay fortnightly rather than monthly This is a useful little strategy that works because you effectively pay an extra month s repayment each year. You simply divide your monthly repayment in two, and pay that amount every fortnight. And, because there are 26 fortnights in a year, but only 12 months, you end up paying extra off each year. For example, if your monthly repayments are 1,798, you ll pay 21,576 a year. But you ll pay 23,374 a year (i.e. an extra 1,798) if you use the pay fortnightly strategy (i.e. 889 X 26). Use a one-off windfall to make an extra repayment If you are a recipient of a financial windfall, it can be a wise strategy to use that money to repay some of your home loan. Chart 1: Regular extra repayments can add up to big savings (Interest rate 6.0% p.a.) 400,000 Loan Amount 200,000 Monthly repayments 2,998 Total interest: 260,997 Saving: 202,356 Loan repaid in 18 years Monthly repayments 2,398 over 30 years Total interest: 463, Years Do you have an Overseas Pension Fund? Before you consider transferring your interest in a foreign pension scheme to an Australian Superannuation fund, be aware of the taxation implications, both in Australia and in your former home country. There are many benefits in transferring your pension entitlements to Australia: Pensions paid from an Australian superannuation fund are tax free for persons aged 60 or older. Your superannuation can be managed here in Australia which allays some of the geo-political and foreign exchange risk you incur in leaving it overseas, and It can simplify your tax status by only having to deal with one taxation jurisdiction. When you transfer an overseas pension scheme to Australia it is treated as having been cashed out. You generally have the choice of taking it as lump sum and paying tax at your marginal tax rate, or contributing these funds to your Australian Superannuation Fund where the fund will pay tax at only 15% on the growth portion. This decision is especially critical for people transferring British pensions. Unless the funds are contributed to a Qualifying Registered Overseas Pension Scheme, significant tax can be levied by Her Majesty s Custom & Revenue. In Australia, the tax treatment of a transferred pension lump sum can be impacted by: Whether the funds are received and contributed to an Australian Superannuation Fund within 6 months of becoming a tax resident of Australia, and Whether the lump sum is within the non-concessional contribution cap (up to 450,000 for a person aged under 65). The rules and the process for transferring pension benefits from overseas are complex. To ensure that your transfer is completed as quickly, efficiently and tax effectively as possible, please call your adviser to discuss your options. Page 7

8 Visit our Client Education Centre If you would like to find out more about financial and investment issues, please feel free to visit our Client Education Centre at Calculators You ll find lots of information on a wide range of topics, including the following: Superannuation Transition to retirement Fact Sheet What is Person al Risk Insura nce? Personal risk insurances provide serious injury a financial benefit or illness, or in the event death. They of you suffering disablement include term insurance, income a protection insurance, life insurance, total & permanent and trauma insurance. What is life insurance? Term life insurance pays a lump sum insured, or if the on the death life insured is of the diagnosed with illness and has a terminal usually less than 12 months to live. How much term life insurance do you need? A recent survey by Rice Walker Actuaries found only 4 out of that every 100 Australians life insurance. have adequate And that 60% of families would financial distress be in just one year after the breadwinner died.* As a rough guide, the ready will help you reckoner below calculate how much life insurance and your spouse you need. Day to day living Multiply by 20 ADD to that: Repayment of expenses... x 20 = education Value of your existing investments (super etc) protection of becoming disabled for more than reaching age 3 months before 65.** of work when workers compensation doesn t apply.^ generally Approx. level of life cover you require = This table is for illustrative purposes a financial planner only. You should illustration does to ascertain your specific insuranceseek advice from not take into account needs. This inflation or indexation on earnings. Special Reports protection insurance? do you need? Most people will earn a fortune between now they retire. And and when yet many people fail to insure important asset their most their ability to earn an income. despite statistics This is which show that: SUBTRACT: AMOUNT OF TOP-UP LIFE COVER YOU REQUIRE = How much income per year debts/mortgage Cost of children s SUBTRACT: What is income This insurance is designed to replace your you are unable income if to work due to sickness or injury. provides a monthly It payment of usually pre-tax income. up to 75% of your You can generally choose the waiting long you must period (this is be unable to how work before the begins to pay insurance you) and the benefit period policy will pay (how long the you if you are unable to work). Importantly, the premiums for income insurance are usually tax deductible. protection insurance varies The cost of this based period, your income on the waiting period, the benefit and occupation. As a general rule of thumb, you and your spouse insure the maximum should of 75% of your pre-tax income, age 65. The waiting up to period can be extended until sick leave and after your long service leave etc will be exhausted. Some people have basic income protection insurance through their employer. But this insurance a benefit for a generally pays maximum period of only two years basic type of cover. and is a This means if you are unable to return to work years you may after two not have a source of income. In instances it may some be appropriate to take an additional policy with a benefit period up to age 65. Free Fact Sheets T W hat is the best way to save money on your home loan? T There s a new one posted every month. T What is an Account Based Pension? Investment Update Webinar T What is Business Estate Planning? We will have the September 2012 Investment Update webinar posted here soon. T What is negative gearing? T What is a Self Managed Super Fund? You ll also find the following on our website: What is the rule on borrowing to invest in Self Managed Super? Free Financial Health Checks T What is Investment Risk? T Free Financial Health Check T What is the cut-off limit for Centrelink benefits? T Free Risk Insurance Health Check T What is the Transition to Retirement rule? T Free Superannuation Health Check T What is Estate Planning? T Free Home Loan Health Check T What is a Diversified Portfolio? T Financial Health Check for Women What is the best way to manage your finances after accepting a redundancy offer? T Risk Insurance Questionnaire Employers: Is your Company Superannuation Fund pulling its weight? T What is the benefit of investing in shares? What are some of the key financial issues on entering a Retirement Village? T Does your business need an estate plan? T What is Personal Risk Insurance? What are the key financial issues upon entering an Aged Care Facility? T What is the best way to save for retirement? T What is the value of our advice? T What is our approach to asset allocation? T What is our investment philosophy? Free Information Brochures Free webinars T An Introduction to our Financial Advice Service T What is Business Estate Planning? An Introduction to our Personal & Business Estate Planning Service T What is Personal Risk Insurance? T What is the Transition to Retirement rule? An Introduction to our Mortgage & Finance Broking Service T What is the best way to save for retirement? T What is Investment Gearing? What is the best way to save money on your home loan? T What are the key principles of investing? Page 8

9 Business estate planning helps ensure your business will survive if it loses you or other key people There s an adage that says most of a business assets walk out the door at the end of every working day. But what happens if for some unexpected reason one of the key assets can t come back the next day? What happens to the business and its ability to operate? That s why every business, no matter how small or large, needs a business estate plan. You can t see into the future... but you can take financial care of it Business estate planning is the process of arranging your business affairs now to ensure there is no unnecessary deterioration or loss of continuity in your business should it lose you or one of the other owners or other key people through illness, injury or death. The estate plan should detail the likely risks to the continuity of the business, and outline strategies to ensure those risks are mitigated. It should also give the continuing owners the right to buy the interests of the deceased or disabled owner, and ensure that the departing owner or their estate will be fairly compensated for giving up their rights to the business. In this way, a business estate plan provides all owners and their spouses and families with legal certainty should the unforeseen occur. Your business estate plan is also concerned with ensuring your business has the financial wherewithal to fund the plan. It s all about protecting your business and its people from unnecessary financial distress. The financial well-being of you, your business and its people is our focus At Australian Unity, we take the time to understand you and your business your situation, your needs and your aspirations. Then we will help you define your vision of a secure financial future for your business, if it lost you, or a partner or other key person. And then, working side by side, we will create an estate plan which will ensure you and your business will be financially cared for should the unexpected happen. Does one of your friends or colleagues need prudent financial advice? 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 Australian Unity financial adviser or mortgage broker, or you can call Advisory Services on , or write to us at Level 8, 114 Albert Road, South Melbourne Vic 3205, or us at advisoryservices@australianunity.com.au Disclaimer: Unless otherwise indicated, the information in this newsletter is provided by Australian Unity Personal Financial Services Limited ABN AFSL & Australian Credit Licence No This information has been prepared without taking into account the investment objectives, financial situation, tax position or particular needs of any individual person. Because of this you should, before acting on it, consider its appropriateness, having regard to your objectives, financial situation and needs. You should obtain a copy of the Product Disclosure Statement before making any decisions about any product. Reasonable care has been taken to ensure that information in this newsletter is derived from sources believed to be accurate, and that examples are fair and reasonable. However, it should not be considered a comprehensive statement on any matter nor relied upon as such and Australian Unity Personal Financial Services Limited does not guarantee the accuracy or completeness of the information. Any taxation or legal position described is a general statement and should only be used as a guide. It does not constitute tax or legal advice and is based on current laws and their interpretation. We recommended that you speak with an Australian Unity Adviser to review your individual situation. This document produced in August Copyright 2012 Page 9