Greetings as we approach another financial year end!
First of all I would like to acknowledge our clients on the Northern Beaches of Sydney affected by the recent wild weather our thoughts are with you as the clean-up continues.
Markets are a little nervous as we approach two significant elections in the next few weeks. Domestically we have our Federal Election on the 2nd July for both the House Of Rep’s and a Full Senate while internationally the UK votes on whether to leave the European Union. Markets tend to factor in a worst case scenario added and abetted by hedge funds looking to make a quick arbitraged profit. Once outcomes are finalised either way markets adjust to the new reality; hedge funds unwind their position and a new market equilibrium is reflected within the respective markets. This is not unusual and happens regularly as the market assesses the impact of political events on future policy decisions and the likely effect on markets. Generally for long term investors it is better to stay on the sidelines while this plays out. Your fund managers will be earning their keep in trying to maximise returns while minimising risk throughout this period.
Having just returned from London last week I was struck by the similarities with Sydney. Both have a buoyant property market fuelled by historically low interest rates (2% in the UK) and local economies heavily reliant on the financial sector. The UK finds itself torn between the economic advantages of being part of the
Economic Union and the de facto loss of sovereign power particularly over Immigration issues. At the time of writing the vote looks very close and either way makes a clear statement of dissatisfaction with the current arrangements. If the UK does leave the European Union this would be adverse for their domestic share market in the short term including Australian Companies with significant revenue in the region most of which is in the financial sector (e.g. BT and Henderson’s), however most of the commercial contracts are of a long term nature and over time other opportunities with different trading blocs may emerge. Much of this appears to have already been priced into the market including the possibility of other member nations also choosing to follow suit and leave the Union. At the very least this will be a wakeup call for Brussels in not overextending their reach over member countries.
Domestically our longest election campaign in living memory drags on and again looks pretty close. Whichever party gets power it does look like a tightening of the Superannuation rules both on the contributions limits and tax on earnings in retirement above a certain amount probably $75k per annum. In the short term for this financial year I would suggest, where able, to maximise your concessional work related super contributions while we have higher limits and hold off on non-concessional after tax contributions until after the election and hopefully there will be some workable legislation which simplifies the whole process. More generally, for those in business consider buying suitable assets up to $20k in this financial year which you will be able to instantly write down and claim a tax deduction. Where sensible, consider prepayments of interest on investment portfolios and generally look to delay profits into the next financial year when company tax rates for small business will continue to reduce.
While these collective uncertainties are being resolved it is most unlikely that interest rates both here and in the US will increase. With our effective risk free rate now at 1.75% (the Reserve Bank Lending Rate) and an average dividend across the ASX 200 of 5.5% mainly franked investors including retirees are being pushed up the risk curve to generate adequate income to live off. This does mean greater volatility in the value of portfolios, even if the actual income generated remains fairly consistent and significantly better than term deposits. One of the positives out of the recent Federal Budget is the establishment of legislation to allow Deferred Annuities into the Australian marketplace. While common overseas, these allow investors to pay a premium and buy an annuity which pays regular monthly payments if you live beyond a certain life expectancy. This can effectively manage longevity risk of outliving your savings and will appeal top clients with good genes!
Internally we are as working hard on year end solutions for clients, with different options for meetings, both face to face and online. There is a lot of good general information on our website www.virtueandpartners.com.au which we encourage you to view as needed.
I look forward to meeting you personally at one of our regular functions
Sincerely
Tony
