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Quarterly Market Commentary - Brexit, Trumpit!

Keep calm and carry on.

The Ministry of Information was formed by the British Government as the department responsible for publicity and propaganda during the Second World War. A number of morale boosting posters were designed to be displayed across the British Isles during the testing times that lay ahead. The third and final poster was to be issued only upon the invasion of Britain by Germany. As this never happened, the poster was never officially seen by the public. It is believed that most of the Keep Calm posters were destroyed. However, about ten years ago a copy resurfaced and the rest as they say is history. I receive a 'Keep calm and carry on' desk calendar from the kids for Christmas, possibly a subtle message being delivered.

The future is uncertain.

We have some certainty from the US with Trump because many of his plans will get enacted. The Republicans have control of Congress – both the Senate and the House by slim margins. Recent history does show that when a party holds the presidency and controls Congress, economic growth improves. Financial markets have recognised that lower tax rates, less business regulation, combined with defence and infrastructure spending will most likely be positive for business investment and US economic growth. Financial markets are also adjusting to the possibility that the US Federal Reserve will likely be increasing interest rates at a faster pace over the next twelve months, keeping animal spirits in check. How will he pay for it? Debt. The Obama administration has nearly doubled the US debt from $10.6 trillion to $19.9 trillion. Debt levels are going to continue growing as governments scramble to placate voters.

The Brexit vote, the Trump result, upcoming referendums and elections in Italy, France and Germany reflect the growing divide around the impacts of globalization and free trade, and the consequences being high youth unemployment and immigration issues. People are not only fleeing countries due to war, but also looking for work, and in the case of Europe, a generous social welfare system. It is important to remember that restrictions on international trade arguably led to the Great Depression in the 1930s.

Australia has been fortunate, China is our largest trading partner and largely determines the price of commodities, iron ore prices have increased from under $40/t at start of 2016 to around $75/t today. Australian coking coal prices have tripled in last six months to $300/t. China has increased its steel output and at the moment there is a cyclical up-tick in global economic activity which is benefiting Australia's bottom line, however offset by weak wages growth in real terms.

We expect interest rates to remain low, with debt levels where they are no government can handle sudden increases in interest rates, the cost of servicing the debt will rise too quickly. We expect that governments will relax the purse strings and increase spending in an attempt to generate economic growth, or at least keep people working.  Employment and wages growth is the big issue around the globe.

Japan offers an insight into the challenges facing many countries, an ageing demographic with more people working longer hours. There is evidence that an ageing work force puts downward pressure on real wages thereby reducing consumption and lowering economic growth.

Gross domestic product (GDP) is often used as an indicator for economic growth. GDP is the sum of consumption or consumer spending plus government spending plus investment including business capital investment, plus total net exports (exports less imports). There are a number of drivers to consider, but if consumer spending declines and business investment is not occurring, GDP is likely to fall, and this is what has been happening in developed economies for some time. Australia enjoyed the mining boom but that capital investment phase is coming to an end.

Looking ahead the following are important for our economy and financial markets:

The direction of the $US, it is rising, if the trend continues that keeps our exports competitively priced. A stronger $US will likely lead to higher US interest rates. This combination could pose some risks for financial markets in 2017 and beyond.

The commodity price rally may run out of steam as the positive impetus from China begins to wane. It will be interesting to see if the share prices of resource companies decline on any falls in underlying commodity prices. The listed resource companies have reduced their dividend payouts which make them less attractive to investors seeking income. 

There are always uncertainties and how markets respond is uncertain. We see no reason at the moment to be making major shifts in investor asset allocations. Keep calm and carry on.

This information is general in nature and does not take into account your personal goals, objectives or financial situation. Personal advice should be sought prior to making any investment or strategy decisions. Cameron Diffey is a Director and Financial Advisor of Johnsons MME Financial Advisory Pty Ltd ABN 30 141 828 033 and is authorised to provide advice on behalf of Johnsons MME Financial Advisory. 

Cameron is a Chartered Accountant Financial Planning Specialist, has completed a Bachelor of Business (Accounting/Economics) and a Graduate Diploma in Applied Finance with FINSIA. He has been working in financial and business services since 1995. 

The 2016 Federal Government Budget, proposed some of the most significant changes to superannuation that we have seen since 2007. However, as with all budgets and proposals, generally some things go through, some proposals are changes and some are scrapped.

With several traches of draft legislation now released, you might be wondering where are we up to with the proposed superannuation changes and what are the planning opportunities?

1.      The reduction of the concessional contribution cap to $25,000 from 1 July 2017 and ability to have 'catch up contributions'.

From 1 July 2017, the concessional contributions cap (the total amount of superannuation guarantee, salary sacrifice and tax deductible contributions) is proposed to reduce to $25,000 from the current level of $30,000 for those under age 50 and $35,000 for those over age 50.

A higher rate of contributions tax for high income earners was also proposed with the taxable income threshold reducing from $300,000 to $250,000. This is also likely to go through as proposed.

2.      Changes to the non-concessional contribution (NCC) rules and lifetime cap of $500,000.

This proposal has been scrapped by the government with a revised policy drafted and transitional arrangements in place.

It was intended to introduce a lifetime cap on NCC of $500,000 and to include all contributions made from 1 July 2007.

The new proposal provides for an annual NCC cap of $100,000 per financial year from 1 July 2017. The current $180,000  NCC cap will apply for the current 2017 financial year.

The rule that allows individuals aged under 65 to be able to 'bring forward' three years' worth of NCC will continue to apply. However, since the annual NCC cap will reduce to $100,000 per year, the maximum amount of NCC that can be brought forward will be reduced from $540,000 to $300,000 from 1 July 2017.

Ok, sounds simple enough you might say but here is where it gets complicated. 

Where an individual has not fully used their 'bring forward' NCC cap before 1 July 2017, transitional arrangements apply.

  • * If the 'bring forward' rule was invoked in the 2016 financial year and the individual does not intend to make further NCCs under the 'bring forward' rule in 2018, then the individual is entitled to make non-concessional contributions of up to $540,000 prior to 1 July 2017.
  • * Where the individual has made NCCs amounting to $460,000 or more, then the remainder of their NCCs cap at 1 July 2017 will be reassessed to nil.
  • * If the 'bring forward' rule was invoked in the 2017 financial year and the individual does not intend to make further non-concessional contributions under the 'bring forward' rule in 2018 and/or 2019, then the individual is entitled to make non-concessional contributions of up to $540,000 prior to 1 July 2017.
  • * Where the individual has made NCCs amounting to $380,000 or more, then the remainder of their NCCs cap at 1 July 2017 will be reassessed to nil.

It's more complicated than it needed to be.

So what are the planning opportunities and considerations?

If you are currently salary sacrificing, then these levels and the associated tax impacts should be reviewed prior to 1 July 2017, to ensure that you will remain within the new caps.

Importantly with this financial year being the last opportunity to access the non-concessional contributions caps under the current rules, if you were considering making contributions into superannuation, utilising a withdrawal or re-contribution strategy to maximise tax-free component monies in superannuation, or balancing out member balances to maximise tax efficiency under the proposed pension transfer cap rules, then you need to act now.

We will be discussing these changes along with other Federal Budget, superannuation and retirement planning changes in our upcoming seminars. 

This information is general in nature and does not take into account your personal goals, objectives or financial situation. Personal advice should be sought prior to making any investment or strategy decisions. Grant Lewis is an employee advisor of Johnsons MME Financial Advisory Pty Ltd ABN 30 141 828 033 and is authorised to provide advice on behalf of Johnsons MME Financial Advisory. 

Grant is a Certified Financial Planner (CFP) with the Financial Planning Association (FPA) and an acredited Self Managed Superannuation Fund Specialist with The SMSF Association. He has completed a Bachelor of Business (Accounting) and Post Graduate Diploma in Finance (Financial Planning) with FINSIA. 

We all want things to be simple, easy and not take up too much time or cost. Companies pray on this and there is no better example than the personal insurances we see advertised on television.

Is it the decision, the process, the cost or the poor perception of the insurers? Australians are under-insured and we would much rather spend time doing other things than making sure our insurances are right. So it's no wonder that when the option to buy insurance on the television for 'the cost of a cup of coffee a day' with just a simple phone call comes up, we consider it. After all, isn't seeking advice expensive and the adviser just want's to collect a commission?

I looked at cover for myself - a thirty-six year old male office worker. Here are the pros and cons.

Insurance off the television

Pro
The only pro was that the process way easy. I applied for a quote online, told them what I wanted, they called me, asked a few questions and provided me a quote. From there it was a five minute phone call with basic underwriting and I would have had cover.

Cons
Con…The cover was restrictive. I could only hold life and TPD outside of superannuation, meaning I would have to fund the premiums from my personal cashflow.

Con…I could only have stepped premiums that would increase with age.

Con…I was limited to a five year benefit period on income protection.

The worst Con…the cup of coffee a day option was expensive. Very expensive. Even if they do give 10% of the premium back after the first year.

Here is the premium comparison:

Type of Cover              TV/Online Provider          Cover via Advisor 
 Life & TPD of $1million $2,010.06  $675.54 
 Income Protection $6,000 pcm         $1,385.28   $715.65
 Total  $3,395.34  $1,391.19

 

The results will vary depending on your age and occupation, but that's what it was for me.

Don't get me wrong, if you seek cover off the television it will be better than having no insurance at all, but in my case using an adviser would:

  • Save me $2,004.15 on the cost of the insurance in the first year. This premium saving would grow each year. If I hold the cover for ten years that's at least $20,041.50 in extra annual cost.
  • The life and TPD could have been held in super where it could be tax deductible and not need to be funded from my cashflow.
  • Provide a superior income protection policy at half the cost. The income protection quote from the television was limited to a thirty day wait and would only pay me for five years, in addition it was going to cost twice as much. I was able to have a policy with a thirty day wait which would pay until age sixty-five if I was sick or injured.
  • Give me the option to hold some of the cover as a level premium that will not significantly increase over time with age.
  • Allow me to structure the ownership, covers and premiums in a way that better suits my cashflow, tax and overall financial position. In addition I am not limited to using one insurer.
  • Give the option to pay a fee for the advice I receive on policy ownership, premium structure and the level of insurance I need.

Based on the above it's not a matter as to whether I should seek advice. If I need insurances, I can't afford not to seek advice. The cost of the advice for me to obtain the above personalised insurance structure might be $2,000 to $3,000 upfront. As long the adviser is going to the time and effort to tailor something for me that's fine. It would clearly pay for itself and save me money, and not just in the long term, but in the short term.

Curious to find out more? Call and speak with Grant today on (02) 6023 9100 or email him grant.lewis@jmme.com.au

This information is general in nature and does not take into account your personal goals, objectives or financial situation. Personal advice should be sought prior to making any investment or strategy decisions. Grant Lewis is an employee advisor of Johnsons MME Financial Advisory Pty Ltd ABN 30 141 828 033 and is authorised to provide advice on behalf of Johnsons MME Financial Advisory. 

Grant is a Certified Financial Planner (CFP) with the Financial Planning Association (FPA) and an acredited Self Managed Superannuation Fund Specialist with The SMSF Association. He has completed a Bachelor of Business (Accounting) and Post Graduate Diploma in Finance (Financial Planning) with FINSIA. 


Retiring on your terms

You may be familiar with the types of risks involved with investing. The pattern in which returns are realised by investors, known as sequencing risk, also plays a critical role in determining the ultimate value and long-term sustainability of your retirement savings.

What is sequencing risk?

When you are growing your savings, most market losses can be cancelled out by a long-term investment strategy; it makes sense that things will eventually "average out". But, as you get closer to your retirement, the way markets perform becomes an increasing concern. And, when coupled with the need to start taking out income from your savings, just one negative year on the sharemarket can be a significant adversary for your retirement lifestyle.

The examples below highlight the impact of sequencing, showing how the simple act of reversing the order of the returns results in two drastically different outcomes – when building your wealth and when pension withdrawals are taken into account.

Your investment journey

Portfolio A – Growing your savings with a starting value $500,000 and an average return 7% p.a.*

Year

Annual return (%)

Account value ($)

Annual return reversed %

Account value

($)

1

19

595,000

-12

440,000

2

11

660,450

-15

374,000

3

18

779,331

-11

332,860

4

-7

724,777

16

386,117

5

21

876,981

26

486,508

6

26

1,104,996

21

588,675

7

16

1,281,795

-7

547,467

8

-11

1,140,798

18

646,011

9

-15

969,678

11

717,073

10

-12

853,317

19

853,317


 

Portfolio B – Enjoying your retirement. Starting value $500,000 with an average return 7% p.a. and an annual $20,000 withdrawal (includes adjusted 3% CPI p.a.).*

Year

Annual return (%)

Account value ($)

Annual return reversed %

Account value

($)

1

19

575,000

-12

420,000

2

11

617,650

-15

336,400

3

18

707,609

-11

278,178

4

-7

636,221

16

300,831

5

21

747,318

26

356,538

6

26

918,435

21

408,225

7

16

1,041,504

-7

355,768

8

-11

902,341

18

395,209

9

-15

741,651

11

413,347

10

-12

626,560

19

465,787

*Figures are illustrative only.

As can be seen above, the impact of negative returns in the early years of retirement can be significant. During these years managing investment portfolios with the "sleep test" in mind is imperative.

So what can you do?

While we cannot control the sequence of returns, the good news is that there are ways that may help protect against the effects of this risk, such as:

  • Diversifying across asset classes;
  • Adjusting your asset allocation;
  • Adjusting your contribution rate, and;
  • Adopting the "bucket approach" to retirement income funding.

There are few times in life when working with a professional advisor is so important. Give your Johnsons MME Financial Advisor a call today to help you  navigate your retirement planning. 

This information is general in nature and does not take into account your personal goals, objectives or financial situation. Personal advice should be sought prior to making any investment or strategy decisions. Luke Fitridge is an employee advisor of Johnsons MME Financial Advisory Pty Ltd ABN 30 141 828 033 and is authorised to provide advice on behalf of Johnsons MME Financial Advisory. 

Luke is a degree qualified Certified Financial Planner with the Financial Planning Association and have over fifteen years' experience in the financial sector. Luke's qualifications include a Bachelor of Business (Accounting), Post Graduate Diploma in Applied Finance & Investment and a Diploma of Financial Services (Financial Planning). 

 

 

If you have an interest in cycles and the context of the current social and political mood, 'The Fourth Turning' by William Strauss and Neil Howe published in 1997 is an interesting read: 

'In modern history lies a remarkable pattern: over the past five centuries, Anglo-American society has entered a new era – a new turning – every two decades or so. At the start of each turning, people change how they feel about themselves, the culture, the nation, and the future. Turnings come in cycles of four.

Each cycle spans the length of a long human life, roughly eighty to one hundred years, a unit of time the ancients called the saeculum. Together, the four turnings of the saeculum comprise history's seasonal rhythm of growth, maturation, entropy, and destruction:

  • The First Turning is a High - An upbeat era of strengthening institutions and weakening individualism, when a new civic order implants and the old values regime decays.
  • The Second Turning is an Awakening - A passionate era of spiritual upheaval, when the civic order comes under attack from a new values regime.
  • The Third Turning is an Unravelling - A downcast era of strengthening individualism and weakening institutions, when the old civic order decays and the new values regime implants.
  • The Fourth Turning is a Crisis - A decisive era of secular upheaval, when the values regime propels the replacement of the old civic order with a new one.

Each turning comes with its own identifiable mood. Always, these mood shifts catch people by surprise.'

The last Fourth Turning was the period between the two World Wars, which includes the Great Depression of the 1930s. We are again in a period characterised as a Fourth Turning, a time as evidenced by increasing political dysfunction, lack of faith in our institutions be it government, military, religion, and financial, rising frustration from working class people against the political and financial elites, rising geopolitical tensions around the world as the US retreats from foreign affairs, and distressed financial markets.

There is a lot of commentary about income inequality, what in fact has occurred is that the forces of globalisation have increased the wealth of developing economies at the expense of the middle class in the developed world. A recent study in the US has found that the middle class barely exists anymore, they effectively are living just above poverty.

The bigger impact in terms of social mood is that the middle class can't get ahead, aspiring to a higher standard of living is nearly impossible to achieve with youth unemployment high.

Many in the agricultural sector have been subject to the competitive forces of global trade and bureaucratic regulations for many years now, while other sectors of the economy (which have been protected) are now feeling those forces. It generally adds up to declining profit margins.

The social mood of uproar over recent milk price announcements for dairy farmers is all well and good, but will Australian consumers pay a higher price for their milk so a dairy farmer can make a profit?

Distress in the European banking system is growing. The recent "Brexit" vote creates uncertainty, however bigger short term issues are bad loans at Italian banks, and Deutsche Bank being regarded as the biggest risk to the global financial system. The Deutsche Bank share price is now trading at a price lower than during the GFC of 2008.

For banks, bureaucrats are focusing on banks holding more capital, a main reason why share prices for banks around the world have been under-performing other sectors on global share markets. However, in a financial crisis, capital is not an issue - it is liquidity - the flow of capital that creates the crisis. In a financial crisis the flow of capital stops, there is no confidence or trust between parties. A topic for another day.     

The plunge in interest rates continues to new record lows, even negative interest rates in many large economies, which distorts basic investment decisions, and is devastating for retirees who require income to fund living expenses. Investors are being forced to chase income in riskier asset classes.

We are living in challenging times of low economic growth, record low interest rates, high and rising government debt, high household debt, and genuine concerns about the stability of the financial system as we know it.

Yes, risk exists in the financial and property markets. It's never going to be easy, however the alternative for stepping out into the unknown is the known of never building your wealth. Don't invest. Don't save. Allow fear to control your financial decisions. Any sort of plan is better than none.

The cycle lives on! You have to invest.      

This information is general in nature and does not take into account your personal goals, objectives or financial situation. Personal advice should be sought prior to making any investment or strategy decisions. Cameron Diffey is a Director and Financial Advisor of Johnsons MME Financial Advisory Pty Ltd ABN 30 141 828 033 and is authorised to provide advice on behalf of Johnsons MME Financial Advisory. 

Cameron is a Chartered Accountant Financial Planning Specialist, has completed a Bachelor of Business (Accounting/Economics) and a Graduate Diploma in Applied Finance with FINSIA. He has been working in financial and business services since 1995.