HEWISON Financial news, our views AND other issues Issue 44 ~ June 2013
Understanding the terms we use Quantitative Easing A government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital, in an effort to promote increased lending and liquidity. Re-contribution Strategy Put simply, a re-contribution strategy refers to the withdrawal of a lump sum from your superannuation that you then re-contribute back into the same superannuation fund or another fund.
Q
uarterly • Standing on our own two feet • From the MD’s Desk • What to consider this financial year
• FOFA - the future of Finacial Advice • Aussie dollar • Hewison Private Wealth investor insight series for 2013
Standing on our own two feet Story by Simon Curtain DIRECTOR/PRIVATE CLIENT ADVISER Image by ilker
T
Superannuation Guarantee In 1992, the Keating Labor government introduced a compulsory “Superannuation Guarantee” system as part of a major reform package addressing Australia’s retirement income policies. It was calculated that Australia, along with many other Western nations, would experience a major demographic shift in the coming decades, resulting in the anticipated increase in age pension payments placing an unaffordable strain on the Australian economy.
he past few weeks have been a rocky ride for markets around the world and Australia is no exception. For the period January to mid-May, the Australian market increased 12 per cent, only to fall 10 per cent in the following 6 weeks. We now find ourselves back at square one with almost all of the year’s gains gone.
growth in the world’s second largest economy is slowing and as result they will not continue to import huge amounts of materials from the rest of the world (particularly Australia). What we find strange is that the Chinese have been saying for months that they expect growth to slow, and it is only now that the data is backing up this claim that markets are reacting.
So what happened to cause this?
What is the likely outcome?
In short, the reason (or blame!) for this recent sell-off rests with the US and China.
What is salary sacrifice? Salary sacrifice is when you arrange with your employer to contribute some of your future pre‑tax salary into a variety of benefits. Additional superannuation payments are one of these benefits. In essence, you let your employer put some of your pre-tax salary into your super account rather than receiving it in your pay packet.
Over the past few years the US economy has been printing money (or, to be technical, undertaking a quantitative easing strategy). Printing money lowers short term interest rates which in turn encourages banks to lend and consumers to spend. Over recent weeks the chairman of the Federal Reserve, Mr Ben Bernanke, has informed the market that the US plans to cease printing money at some stage in the next 12 months.
While things have been rough in recent weeks, we expect markets to adjust to this new norm. The Australian market has not been immune to these global events and we expect to see a shift in our local economy over the coming years as the falling Aussie dollar increases competitiveness in previously lagging industries like manufacturing, housing and tourism, and slows export-reliant industries like mining and resources (i.e. while the mining boom will end, other industries will pick up the slack).
Interest Rate An interest rate is the rate at which interest is paid by borrowers for the use of money that they borrow from a lender. Specifically, the interest rate is a percent of principal paid a certain amount of times per period.
While Mr Bernanke’s comments were actually a positive for the US – as the US Federal Reserve believes the US economy is in good enough shape to stand on its own two feet – markets around the world failed to see the positive and reacted badly, wiping out most of the year’s gains. It’s a bit like taking a dummy away from a child – you know it is the right thing to do and that the child will be OK without the dummy, but the tantrums in the meantime can be horrendous! Similarly, over in China things have also been a bit shaky. Recent data from China suggests that
In addition, interest rates in Australia will continue to fall and should settle at around 2% – 2.25%. Lower interest rates will encourage consumers to spend, further propping up the economy. Lower interest rates also reduce the attractiveness of bank term deposits, encouraging investors to invest in other assets like shares and property. As always we continue to monitor the global landscape and identify opportunities over the short term, while keeping in mind your long term goals and objectives.
From the MD’s Desk
John Hewison
Happy new financial year! Despite the slightly negative end to the financial year with the ASX falling away in value in June, overall it has been a pretty good year with our client portfolios earning rates generally in the 13.5 – 17% band, or in some cases higher. One of the key challenges has been maintenance of income levels and it is probably a good time to reflect on this issue. Whilst predicting interest rates is difficult, it is generally fair to presume that rates will fluctuate in cycles. Therefore cash flow management needs to include a basket of securities that have the capability to smooth out those fluctuations and ensure the integrity of portfolio income generation is retained. In a way, the management of income can also facilitate the management of capital growth where assets that have the capacity to achieve both are involved. This was certainly the case over the past 3-4 years where quality equities have traded at value where dividend rates were extremely attractive – examples are Telstra and the major banks. It follows that buying these assets at depressed prices can provide high dividend income returns and eventually the market will recognise this mispricing and the asset values will rise, hence achieving capital growth. Fixed interest locked-in toward the top of the cycle will provide stable, reliable returns whilst variable interest securities will follow the market fluctuations. The combination of the two can have the effect of smoothing the overall return. Our focus over recent years has been on the combination of cash flow management in the expectation of a falling interest rate cycle, and buying underpriced assets with high income levels. This strategy has worked extremely well and will soon enter its next phase of realising capital profits to reinvest in income – sort of the reverse to what has taken place. Simply put, successful investment management needs to be based on a fixed strategy and then actively and unemotionally managed to keep faith with the strategy and take advantage of fluctuating market cycles.
What to consider this financial year Story by Glenn Fairbairn , Director/Private Client Adviser Image by Svilen Milev
As we wave goodbye to another financial year, now is an opportune time to review your finances. The new financial year brings with it a number of changes to superannuation but there are also ongoing issues that need to be considered, in particular the impact of a weakening dollar and low interest rates. The major issues that everyone should be aware of and need to consider over the next 12 months have been outlined below
Superannuation • Individuals over 60 can increase their concessional contributions (Salary Sacrifice and Employer Superannuation Guarantee) to superannuation from $25,000 to $35,000 from 1 July. Given that these contributions are taxed at 15% this strategy could provide a significant tax saving for those over 60. • Couples with larger superannuation balances should consider equalising their superannuation balances via a withdrawal and re-contribution strategy. This strategy could minimise the potential impact of tax on superannuation earnings above $100,000 per annum. • The 25% discount that has been applied to account based pensions over the past few financial years has been removed. Therefore individuals drawing account based pensions from their superannuation funds will need to investigate the impact of drawing higher pensions. • Effective from 1 July 2013, the Superannuation Guarantee percentage will increase to 9.25%. This will be a welcome boost for all superannuation funds, but those with existing salary sacrifice arrangements should ensure that they do not exceed the allowable concessional contribution cap of $25,000 per annum or $35,000 per annum for those over 60.
Household expenses • The depreciating Australian dollar is likely to result in an increase in the cost of imported goods i.e. petrol, clothing, etc. Therefore be prepared for an increase in your household expenses. Many experts predict the Australian dollar to remain around $US 0.90-0.95 for the foreseeable future with some even predicting a fall as low as $US 0.80. Therefore the impact of a weaker currency than we have become used to over the past few years may become the norm going forward.
Investments • While low interest rates are a welcome relief for those with a mortgage, it is not so great news for many retirees who rely on income from cash deposits to meet their income need. With interest rates on fixed term deposits likely to remain low for the foreseeable future it may be time for investors to consider investing in other assets i.e. blue chip Australian company shares. In many cases (i.e. banks shares), dividend rates are higher than term deposits.
Debt • For those with a mortgage there is no better time to consider increasing loan repayments. Historically low interest rates provide an ideal opportunity to cut the repayment term of your home loan. However, these good times won’t last forever. There is obviously a lot to consider as we embark on a new financial year so we would strongly encourage you to consult your adviser regarding any of the above issues.
FOFA – The Future of Financial Advice Story by Chris Morcom, Director/Private Client Adviser
You may have heard about the Future of Financial Advice (FOFA) reforms and be wondering what they are, and how they might impact you.
- A requirement to obtain client agreement for ongoing advice fees every two years (the Opt-in requirement);
The FoFA reforms are a series of modifications to the current laws regulating the provision of financial advice in Australia. Through the reforms, the Government aims to build the trust and confidence of retail investors in the financial planning sector, strengthen investor protection and improve the quality of financial advice by introducing higher standards and greater transparency for financial planners and licensees.
- A requirement to provide an annual Fee Disclosure Statement to clients with an ongoing fee arrangement;
In brief, the reforms include: - A ban on conflicted remuneration structures including commissions, volume-based payments, and asset based fees on borrowed amounts; - The introduction of a statutory “best interests” duty requiring financial planners to place the interests of their clients ahead of their own;
- Expansion of the availability of ‘Scaled Advice’ to improve access to and affordability of financial advice for consumers; and, - Strengthening of the Australian Securities and Investments Commission (ASIC)’s powers to act against unscrupulous operators. All these measures apply from 1 July 2013, although existing arrangements are subject to grandfathering. From our perspective, most of the reforms simply regulate what should have been the appropriate behaviour of financial planners.
Aussie dollar The recent slide in the Australian dollar (AUD) has attracted much media attention. It is currently buying around $US 0.92 dollars (USD) and trading at around two and a half year lows. It peaked at around $1.10 in mid2011, a 16% fall from its high. Our dollar has been in steady decline since April this year when it was trading at around $1.05. The recent falls come on the back of Federal Reserve chairman Ben Bernanke’s comments that the US would begin to pull back on its quantitative easing program later this year. Since the Global Financial Crisis (GFC) the US has been pumping money into its economy it an attempt to stimulate it. This quantitative easing program has significantly de-valued their dollar. As more US dollars have been pumped into the system, it has resulted in the USD being less competitive and at the same time pushing US interest rates to record lows. Meanwhile, over the past few years, we have had much higher interest rates that has attracted investment into Australia as international investors seek a decent income return on their capital. This helped push our dollar to record highs.
As a firm that has always been fee-for-service, as well as firmly putting our clients’ interests first, we have not needed to make any significant changes to our business or advice methods to comply with the new regime. Our clients will receive their first Fee Disclosure Statement in July via our secure internet portal, and will include information very similar to that we have previously provided in our annual Tax Invoice. For those who have friends or family with other advice firms, it is important to question any new fees being charged under the guise of FoFA regulation changes. Any such fees need to be commensurate with the services provided, and if in doubt a second opinion should be sought.
Story by Nathan Lear, Director/Private Client Adviser
Now the opposite is occurring, with Australian interest rates declining and the US showing signs of future increases. This has sent the AUD into a tailspin. Interest rates are one of many factors that drive the direction of currencies. Other factors that impact the AUD are commodity prices. To make things worse, on top of the Bernanke comments, recent data out of China revealed that its manufacturing sector has weakened. It comes as no surprise that the market would then take the view that China’s growth is slowing, putting downward pressure on commodity prices and in turn the AUD. It is very difficult to predict where the AUD will settle. For the last 18 months or so the AUD has traded between the range of $1.00 to $1.05. Some of the dynamics that affect the AUD are changing. Therefore we are likely to see the AUD settle into a new lower trading range, perhaps $0.90 to $0.95. With so many factors driving currencies, this is very difficult to predict. Many experts believe it is inevitable the AUD will fall below $0.90 in the coming months.
The Federal Reserve’s intentions to pull back on its quantitative easing program is a sign the US economy is recovering. However, equity markets are fickle and worried that the on-going injection of cash into the US economy might come to a stop. This has seen global equity markets, including the Australian market take a dive in June. The recent pullback in the share market is a short term reaction and has no effect on the fundamentals of Australian companies. Our market has been crying out for a fall in the value of our dollar to boost non-mining sectors such as manufacturing and tourism. Further to this, many Australian companies are global and source earnings from offshore. A lower AUD would result in higher profits when these earnings are repatriated back to Australia. So a fall in the AUD isn’t all a bad thing for Australia, apart from giving you less bang for your buck when travelling overseas.
Congratulations to Congratulations Andrew Hewison on his 10th anniversary at HPW Andrew joined HPW in 2001 after completing his Bachelor of Commerce degree. He completed his Advanced Diploma of Financial Planning in 2002 and then by prior agreement, he headed overseas for around 18 months. Whilst in London, Andrew worked in the finance sector with fund management organisations like ABN Amro. Andrew returned to HPW in 2004 and has since completed his CFP professional designation and has progressed to become an experienced and highly skilled Private Client Adviser. Andrew is also a shareholder and director of the company.
It’s a bouncing baby boy!
Nathan & Laura Hewisons Director and Private Client Adviser Nathan Lear married partner Laura on Saturday 11th May 2013. The ceremony was held at the Star of the Sea College chapel in Brighton where Laura attended high school and the reception was at Butleigh Wootton in Kew. The bride looked stunning in her dress and the couple had a fantastic day. The newlyweds then went on to spend their honeymoon in the USA and Mexico. Congratulations to the happy couple.
Director Glenn Fairbairn and his wife Danica welcomed their third child Chase Tyler Fairbairn who was born 9th of May 2013 weighing in at 7 pounds 11 ounces. He joins older brother Taj and Sister Imogen. Congratulations to Glenn, Danica and family.
Hewison Private Wealth investor insight series for 2013 We are almost at the midpoint of the Hewison Private Wealth Investor Series for 2013. These forums aim at providing attendees with high level content in a concise and simplified presentation. No session goes
for longer than 1 hour. They are also a great opportunity to mingle with other Hewison clients and Advisers. If you would like to register your interest, please email Clare at clare@hewison.com.au.
Date
Topic
Speaker
Venue
Tuesday 16th July 2013
Young Wealth Forum “Suit up to Succeed”
Andrew Hewison and Simon Curtain
@ Hewison Private Wealth 4/102 Albert Road SOUTH MELBOURNE
Tuesday 10th September 2013
“Asset Classes & Performance”
Nathan Lear and Glenn Fairbairn
@ Hewison Private Wealth 4/102 Albert Road SOUTH MELBOURNE
Tuesday 12th November 2013
MD Forum “Secrets of the successful investor”
John Hewison Managing Director
@ Hewison Private Wealth 4/102 Albert Road SOUTH MELBOURNE
Level 4, 102 Albert Road, South Melbourne VIC 3205 P (03) 9682 1900 | F (03) 9682 5999 info@hewison.com.au | www.hewison.com.au
The information contained in this publication is general in nature and not intended as personal advice. Please obtain advice from your financial planner before acting upon this information.