HEWISON Financial news, our views AND other issues Issue 39 ~ April 2012
Q
uarterly • Economic update • From the CEO’s Desk • Bank Shares vs. Term Deposits • Investment focus
• LIC Trading at a Discount to Market Price • Glenn Celebrates 10 Years with Hewison • New Client Reporting System Launch
Understanding the terms we use Carbon Tax The carbon tax is an environmental tax levied on the carbon content of fuels. It is a form of carbon pricing. Carbon is present in every hydrocarbon fuel (coal, petroleum and natural gas) and is released as carbon dioxide (CO2) when burnt. In contrast, noncombustion energy sources - wind, sunlight, hydropower and nuclear — do not convert hydrocarbons to CO2. CO2 is a heattrapping “greenhouse” gas and scientists have pointed to the potential effects on the climate system of releasing greenhouse gases (GHGs) into the atmosphere. Since GHG emissions caused by the combustion of fossil fuels are closely related to the carbon content of the respective fuels, a tax on these emissions can be levied by taxing the carbon content of fossil fuels at any point in the product cycle of the fuel. Sovereign Risk The risk that a foreign central bank will alter its foreign-exchange regulations, thereby significantly reducing or completely nulling the value of foreign-exchange contracts. Net Tangible Assets Calculated as the total assets of a company, minus any intangible assets such as goodwill, patents and trademarks, less all liabilities and the par value of preferred stock. Also known as “net asset value” or “book value”. What is the mining tax? The mining tax is best known as the resource super profits tax, or RSPT. It is designed to replace the confusing array of royalties that mining companies presently pay to the states. Any profit made by mining companies that is above 6% of their capital investment would be taxed at 30%, and all royalties presently paid to the states would be rebated.
Economic update Story by Simon Curtain DIRECTOR/PRIVATE CLIENT ADVISER
As expected, economic headlines in the first few months of 2012 have been dominated by Greece and the European Debt Crisis. In February, Greece rushed through a number of austerity measures to secure a second bailout package of EU130 billion. The package also included a write down of around 50 per cent on Greek bonds held by private investors. The aim of this second package is to reduce Greece’s debt as a percentage of Gross Domestic Product (GDP) to around 120 per cent, which is considered to be manageable over the longer term. While the world, and in particular Europe, have gone to great lengths to avoid a Greek ‘default’, one has to wonder how losses of 50 per cent on Greek bonds does not equate to a default of sorts anyway. While some have been predicting that a Greek default could spell the end of the Euro zone, at the recent Hewison Investment Seminar, Clifford Bennett, Chief Economist of the White Crane Group, suggested that Europe will hold together and that the Euro will remain a strong currency. Closer to home, during the past quarter there has been much speculation on the direction of interest rates. After two rate cuts late last year, rates have been on hold at 4.25 per cent. The Reserve Bank of Australia (RBA) is quoted
Image by Nick Benjaminsz
as saying that “the economy would have to weaken materially to prompt a further cut.” While the RBA has noted recent weakness in the retail and manufacturing sectors they believe that the underperformance of these sectors is being balanced by the strength of the mining sector. All this points to rates remaining on hold for the foreseeable future. Employment in Australia remains strong with the unemployment rate sitting at around 5.2 per cent. On a world scale our unemployment rate is enviable, with unemployment of around 8.3 per cent in the US, 8.7 per cent in the UK and 9.3 per cent across the European Union. Over in Asia there has been news on how China will manage a slowdown in growth over the short to medium term. China recently announced that it would be targeting growth of 7.5 per cent over 2012, down from growth of 9.2 per cent last year. The challenge for China over the coming years will be in developing its economy to rely less on foreign demand of exports and instead increase domestic demand for its own goods and services. Over time we expect China to mature into a consumption-based economy as it hastily catches up to the standard of living and lifestyles of its Western counterparts.