Sharemarket recovery on solid footing

Transcription

1 with Geelong Financial Group Planning e-newsletter October 2013 Sharemarket recovery on solid footing by Donald Williams, Chief Investment Officer, Platypus Asset Management, a joint venture partner of Australian Unity Investments As we enter the final quarter of the calendar year, the prospects for the Australian sharemarket are looking more positive than they have for some time. In fact, at Platypus we are predicting the ASX 200 will reach the all-important milestone of 6000 last reached in November 2007 by the middle of next year. This would be a psychologically significant point for investors, signalling the worst of the global financial crisis could be over, and that the market can start to do more than just regain lost ground, and start to deliver outperformance. Positives are out-weighing the negatives Of course, there are a number of ifs that need to be satisfied before we reach that point, but in my mind that list of ifs is getting shorter. The main one that remains is earnings. Over the past few years, earnings have been disappointing. The reasons for this are obvious companies have been struggling against a high Australian dollar, a dysfunctional political situation, and a general lack of business and consumer confidence. These headwinds are now easing - or, indeed, turning into tailwinds. The Australian dollar may not have moved as far back to historic norms as many were hoping or expecting, but it is unlikely it will return to its previous highs, and the most likely path continues to be a downward one. Likewise, the new Federal Government may not prove as business-friendly as many anticipated, but for most people all it needs to do is provide some stability and consistency in order to help business and consumer confidence recover, and we are already starting to see this happen. Positive economic environment Overall, the economic environment is looking brighter and, as a result, the earning outlook is more solid. The last reporting season confirmed earnings have stabilised and we expect a genuine profit upgrade cycle is about six to 12 months away. While valuations are reasonable (around the median of the past 20 years), we are expecting the market to continue to consolidate recent gains until there is a bit more evidence that 2014 will be a better year for profits. Chart 1: Australian Vs US Sharemarket Stockmarket Performance Since GFC Indexed (March August 2013) 2 1 US Australia Australia (inc divs) 0 12/09 12/10 12/11 12/12 08/13 Source: Bloomberg, Platypus Page 1

2 It s important to note some headwinds remain. Perhaps the most significant is the US Federal Reserve s tapering plans. While the expected date of late September came and went without action by the Fed, at some point tapering will start, and this could cause problems for the market. However, by and large the market has already taken into account the future impact of tapering and we expect any issues or volatility that arise from it to be relatively shortlived. In addition, the domestic currency has declined by more than 10 per cent over the past three months, boosting Australian competitiveness and export earnings. We believe this decline in the Australian dollar will continue, regardless of any shortterm bounces. We also expect commodity prices to continue moving lower as new supply comes online, and the currency will probably shadow that decline. Generally speaking, there may be some short-term hiccups in the market but, beyond that, our expectation is the market will continue to appreciate. In a few years time, when people look back at the current market, we believe the data will clearly show we are at the beginning of a secular bull market in equities. US sharemarket leading the way This bull market is being led by the US, where the S&P 500 is trading at all-time highs. There are two main drivers for this. One is the US economy which is in good shape, with unemployment falling and key indicators such as housing data showing positive signs. The other is the recovery in the US appears to be self-sustaining; therefore any shocks from other parts of the world (such as Europe or China) may not have a serious detrimental impact on the US. And despite what many have said in recent years, the US is still the dominant economy of the world. This is good news for Australia. Until very recently, Australia was lagging the rest of the world (as shown in Chart 1), struggling to maintain a sharemarket about the 5000 level, which was seemingly stuck in a range some 40 percent below its all-time high. Despite coming through the GFC as an economic poster child, the global economic recovery seemed to pass us by - due largely to an overly zealous central bank, a high currency, and a political quagmire. This now appears to be behind us. Volatility lessening An additional support to the ongoing recovery is that market volatility has continued to decline to the point where we are now at normal levels. While significant macro risks remain (given the combination of the enormous stock of sovereign debt, low growth rates and austerity weary populations), volatility tends to cluster and it appears we are exiting a volatile period. This has implications for the Australian economy and market. Domestically, with the investment phase of the resources boom tailing off, the economy has been battling with a continuing process of restructuring. Those parts of the economy that are sensitive to interest rates have been slow to take up the slack, despite the Reserve Bank of Australia reducing rates by 1.5 per cent over the past year. Again, most of the blame for this can be laid at the door of the high Australian dollar and the political situation. Another issue, however, has been the focus on savings by Australian households. During the GFC, the savings rate reached 10 percent and has remained around that level, which has obvious knock-on effects on consumption. However, it seems likely consumption will start to increase following the change in government and the improvement in Australia s competitive position, which will both have a positive impact on consumer confidence. Investors paying more for earnings Therefore, as mentioned earlier, we believe we are at the beginning of a new leg to the bull market for the Australian sharemarket. Investors are becoming more optimistic about the prospects for the market and have exhibited greater willingness to pay more for earnings than they have displayed for several years. In our view, risks are diminishing and the earnings outlook improving, and therefore this willingness is understandable. At Platypus, we have a positive outlook on earnings, especially for higher quality companies. In an environment where the currency continues to slide lower over the next two to three years, we see some of the best opportunities in the market being quality companies growing offshore earnings and expanding existing models in newer markets. We also believe there will be select opportunities in the materials sector, and we are positive on the outlook for oil and iron ore. While the iron ore price is notoriously difficult to forecast (largely driven by re-stocking and de-stocking) we believe the prospects for iron ore businesses are positive. While the market was expecting weakness in iron ore prices over the past year, due to a slowing of the Chinese economy, it was generally proved wrong. The key point overlooked was while incremental growth in the demand for iron ore is less than previous years, the re-basing effect (i.e. increased demand on already large volumes) means there is still money to be made in iron ore markets. 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 % Fully priced % Fair value % Fair value % Fair value % Fair value % Fair value % Fair value % Cheap % Cheap % Cheap % Cheap + No guarantee is implied as to the accuracy of the specific forecasts provided. Data as at October 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 When you borrow money to buy a home, the bank makes you insure your home. But they don t make you insure your ability to pay off the mortgage. Why is that? It s strange, isn t it. The bank makes sure your home is insured against flood and fire because the bank needs to know they won t be out of pocket if your home burns down. But they don t care if you are not insured against serious injury, illness or death the three things that could stop you earning an income and paying off the mortgage. The reason for this is that if you were to become seriously ill or injured or if you died and couldn t make your mortgage repayments, the bank would simply sell your home and get their money back. Which would leave you and/or your family homeless. The solution, of course, is for you to make sure you have sufficient personal risk insurance. It can provide the money to cover your mortgage, as well as your living expenses and more if the unexpected were to happen. If you think you need to consider purchasing risk insurance, please contact your financial adviser. They will answer any questions you have about risk insurance, and then calculate how much risk insurance 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. Case study: Insurances to save the family home Bob & Alice have three little children and a $400,000 mortgage. Bob is self-employed and has a small life insurance policy. Alice is a home-maker and has no insurance. Alice is concerned that, should Bob die or suffer a serious illness or injury, the family could lose their home or worse. Similarly, Bob is worried that, if something unforeseen should happen to Alice, he would have to employ someone full time to look after the children. Alternatively Bob would have to leave his job to look after the children. Either option would be very costly and would mean Bob would not be able to afford to continue paying the mortgage. We would recommend that Bob increases his life & TPD insurance to cover the mortgage, the children s schooling and the family s living costs while the children are at school. In addition, we would suggest that Bob takes out an appropriate level of income protection insurance and trauma insurance so that, if he suffered a serious illness or injury, he could continue to pay the mortgage and other costs, as well as medical costs. We would also recommend that Alice takes out life insurance and trauma insurance. Overall, these recommendations will safeguard the family s home and finances in the event of Bob or Alice dying or suffering a serious illness, and in Bob s case, a serious injury. Importantly, because we source insurance policies from the major, reputable insurers, Bob & Alice can be confident we will find them appropriate policies at a very competitive price. We'll help you find the right 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 Conduct research to identify insurances which provide the right level of protection at competitive premiums Page 4

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 10 October 2013* 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 4.90% 4.92% $1,592 $2,654 $5,307 Offset Home Loans 4.74% 4.78% $1,563 $2,605 $5,210 Line of Credit 4.89% N/A $1,590 $2,651 $5,301 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 4.69% 5.05% $1,554 $2,590 $5,180 4 Years Fixed Rate 5.29% 5.25% $1,664 $2,773 $5,547 5 Years Fixed Rate 5.39% 5.30% $1,683 $2,805 $5,609 Commercial Loan rates 10 October 2013* 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 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 Page 5

6 Case Study: How to safeguard your business if the unexpected happens Mary, Wayne and John are co-owners of a successful business. John contracted a serious disease and died after a number of years. He left his share of the business to his wife, Betty. Many years prior to John being diagnosed with the illness, the business had taken out $200,000 of life cover on each partner for use as Business Ownership protection. However, no Buy/ Sell agreement was put in place. After John s diagnosis, he was unable to obtain more life insurance. Over the years, the business grew significantly where John s share was valued at $780,000. The partners had not reviewed the insurance policies to maintain the cover levels in line with the value of the business. This left Mary & Wayne with a $580,000 shortfall. This presented a dilemma for Mary & Wayne. They couldn t afford to buy out John s share of the business, nor could they afford to obtain a loan for that purpose. This left them with a number of unpalatable options, including: Accepting John s wife as a co-owner. The problem here is that Betty has no skills to help in the business. So Mary & Wayne would be doing all the work and giving a third of the profits to Betty. Or Mary & Wayne could find a third party to buy the business and use that money to pay out John s wife but there aren t any obvious takers that Mary & Wayne know already. So they would have to take on a new partner who they don t know possibly leaving them vulnerable to someone they won t get on with. Another option is to sell the business and pay out John s wife from the proceeds. The problem here is that, without John, the value of the business is a lot less. It is not the best time to be selling. In any case, Mary & Wayne both love the business and don t want to sell. The final option is to get Betty to agree to receive the initial $200,000 and then receive regular payments under a vendor terms arrangement. The problem here is that Mary & Wayne are effectively in business with Betty until she is finally paid out. This also means that the business needs to generate Betty s payment and pay it in addition to the existing costs of running the business. What happened? Mary & Wayne had numerous meetings with Betty and, rather than let the business fold, Betty agreed to the following: Receive the $200,000 insurance payout Receive $9,000 per month, indexed each year for inflation for the next five years At the end of the five years, subject to a valuation of the business, the payments would continue or Mary & Wayne could pay a final lump sum. A better solution It s too late now, but Mary, Wayne & John should have put a buy/sell agreement in place from day one. They could have funded it with an insurance policy that covers death, and serious illness or disablement. Plus they could have obtained a valuation of the business from their accountant annually and adjusted the insurance sums insured accordingly. As a result, on John s death, Mary & Wayne could have paid John s wife the agreed amount and Mary & Wayne would then have owned the business outright. The insurance cover required for Death, TPD & Trauma of $780,000 for each partner would have cost each year: Mary $4,435, Wayne $3,892, John $3,105. This is based on the following parameters: Mary age 44, Wayne age 42, John age 40. Business valuation: $2,340,000. That s a total of $11,432* or just 0.49% of turnover. *Premiums are based on occupation code 2A - Managers & Business Executives. Premiums are average (at date of publication) for a non-smoker, with stepped premiums. Indexed benefits (i.e. cover is increased by indexed amount each year), trauma re-instatement benefit (i.e. your cover is re-instated after a claim) and business safeguard (i.e. ability to increase cover in line with business valuation). Source: Xplan Risk Research Manager 2 October What is business estate planning? Business estate planning is the process of arranging your business affairs now to help 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. With appropriate business estate planning, there should be less risk of: A departing owner, or their spouse or estate, taking legal action over a valuation or pay out figure A departing owner s spouse or child deciding against the wishes of the continuing owners to become an active partner of the business (rather than taking a pay out) The departing owner s spouse or family taking their legal right to claim a share of the business profits without having to work in the business A departing owner s spouse or estate selling their share of the business to a third party that may be unsatisfactory or unknown to the continuing owners The control of the business or its assets being frozen due to legal difficulties created by the departing owner, or their spouse or estate. 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. Need to know if you can afford to retire? If you are considering leaving the workforce, the key question is: 'do you have enough capital to reliably generate your required net income for your entire retirement?' For an objective assessment of your retirement savings status, please talk with your financial 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 Geelong Financial Group Planning financial adviser or mortgage broker, or you can call Advisory Services on , or write to us at PO Box 590, Geelong, VIC, 3222, or us at hugh@geelongfinancial.com.au, or visit our website Disclaimer: Geelong Financial Group Planning is a corporate authorised representative of Australian Unity Personal Financial Services Limited (AUPFS) ABN AFSL & Australian Credit Licence No Unless otherwise indicated, the information in this newsletter is provided by AUPFS. This information has been prepared without taking into account of 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. It should not be considered a comprehensive statement on any matter nor relied upon as such, AUPFS does not guarantee the accuracy or completeness of the information. Where a financial product is mentioned, you should obtain a copy of the Product Disclosure Statement relating to it and consider it before making any decisions in relation to it. Any taxation position described is a general statement and should only be used as a guide. It does not constitute tax advice and is based on current laws and their interpretation. AUPFS is not a registered tax agent under the Tax Agent Services Act If you intend to rely on any advice in this document to satisfy liabilities or obligations or claim entitlements that could arise under a tax law, you should seek advice from a registered tax agent. We recommended that you speak with a Financial Adviser to review your individual situation. Past performance is not a reliable indicator of future performance. AUPFS cannot guarantee future returns. This document produced in October Copyright 2013 Page 7