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.
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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
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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.