Volatility seems to have slowed down for the moment with both local and international markets recovering steadily from their declines earlier in the year. This has in part been driven by an increase in global oil and iron ore prices over the last few days. Again, over time you would expect supply and demand for key commodaties to even out with prices reverting to their long term norm. In the meantime oil exporters may have needed to sell foreign reserves including shares which may have contributed to the rough start to the year in equities. The graph below shows the correlation between global share prices and oil over the last few months.
The interim reporting system has just wrapped up which was solid enough with the usual high emphases on dividend payout ratios in the finance and industrial sector. Sustainable dividends do put a floor price on the value of both individual shares and the wider index and as such the domestic market looks relatively attractive when compared to alternatives such as bonds. Market volatility can often be exaggerated through hedge funds borrowing shares from large super funds and then making bets on those shares declining in value. This is a practice that many of us find unacceptable as effectively the superfund is selling its own members short. The banking sector seems to have been on the wrong end of this at the moment reflecting yields around 7% fully franked. The comparison of CBA current dividend yield of 6% franked compared to their 2% overnight cash rate shows just how distorted their current risk adjusted share price is.
Turning to global matters there is a growing number of countries who now have negative interest rates where effectively investors pay their banks for leaving money on deposit. This is a worrying trend which if it spreads has the potential to lead to global deflation where there is no reward for saving and a developing expectation that the value of assets would actually full. The recent G20 meeting held in Shanghai over the weekend recognised this and the need for a coordinated attempt to stimulate global demand. To some extent we are beginning to reach saturation point in our use of technology with smart phones and associated applications now ubiquitous. This has provided wonderful productivity gains which the wider community has benefited from via access to the internet at a relatively low cost. However it will make it harder still for some of the largest companies in the world such as Apple and Alphabet (Google) to continue to grow at the same rate and justify their share price.
So on balance probably best to budget on a low growth/low return economy for the forseeable future with the positive news being that particularly in retirement money is going further as technology provide access to greater knowledge and opportunities for a relatively modest cost. Much of the funding of the drawdown phase of Allocated Pensions is being fully covered by the dividends from our local bourse which looks pretty sustainable based on listed companies future earnings guidance so a reasonably stable outlook moving forward. Ideally keeping enough cash aside as a buffer and then funding consumption from blue chip shares paying fully franked dividends either directly or via specialised fund managers.
Less certain are potential changes to the Superannuation and Tax System as we approach a Federal Election at any time in the second half of this calendar year. There appears to be more speculation than normal about all sorts of changes which again is not good for business confidence and needs to be clarified quickly. There is some talk of reductions to aged based work related super contributions which in my view would be a retrograde step so where possible get your funds in as early as possible prior to the Federal Budget or Economic Statement . There is much more information on this on our website including my blog which will provide updated commentary as things become clearer.
This is a busy time for the firm as we seek to see as many of you face to face as possible to plan financial year end well in advance . As always we welcome your referrals which are the lifeblood of the business and which can be done either by phone or online.
With me best wishes
Tony
We are trialing an improved video content for our newsletter and would welcome your feedback as well as anything you would personally like to discuss with us.
Dr Anthony D Virtue
Certified Financial Planner & Principal Partner
ABN 42 060 673 814 • AFSL No. 407238
