Chart of the week: Australia's economic growth accelerates but watch out for those brakes

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Chart of the week: Australia's economic growth accelerates but watch out for those brakes

7 June 2018

Bob Cunneen, Senior Economist and Portfolio Specialist
 

                                           Global economic activity

*The countries collectively known as the Group of Seven (G7) consists of  the US, Canada, the UK, France, Germany, Italy and Japan. BRIC refers to Brazil, Russia, India and China.

Sources: NAB Asset Management Services Limited, Thomson Reuters, Australian Bureau of Statistics. 

After a few years in the slow lane, Australia’s economic growth is accelerating. Australia’s annual growth rate for the year to March 2018 is now registering at 3.1% (red line). Encouragingly, Australia also appears to be finally catching up to global growth which is approaching 4% for the past year (blue line).

However there are some brakes currently being applied to Australia’s growth performance. Consumer spending has recently moderated given the challenges of high household debt and subdued wages growth. The housing construction boom also seems to have peaked.  Tighter lending standards, higher interest rates for housing investors and concerns over the potential oversupply of apartments is now providing a speed limit to construction activity.

Even with these brakes, Australia should manage solid economic growth this year.  Australia’s interest rates remain low and employment growth is strong.  Our export performance will also benefit from stronger global growth. Government spending on transport infrastructure spending is also notably in the fast lane. While the Australian economy can expect to maintain a reasonable growth speed close to 3% in 2018, it’s likely to trail in the wake of faster global growth. 

Source : Nab assestmanagement June 2018

Important information

This communication is provided by MLC Investments Limited (ABN 30 002 641 661, AFSL 230705) (“MLC”), a member of the National Australia Bank Limited (ABN 12 004 044 937, AFSL 230686) group of companies (“NAB Group”), 105–153 Miller Street, North Sydney 2060. An investment with MLC does not represent a deposit or liability of, and is not guaranteed by, the NAB Group. The information in this communication may constitute general advice. It has been prepared without taking account of individual objectives, financial situation or needs and because of that you should, before acting on the advice, consider the appropriateness of the advice having regard to your personal objectives, financial situation and needs. MLC believes that the information contained in this communication is correct and that any estimates, opinions, conclusions or recommendations are reasonably held or made as at the time of compilation. However, no warranty is made as to the accuracy or reliability of this information (which may change without notice). MLC relies on third parties to provide certain information and is not responsible for its accuracy, nor is MLC liable for any loss arising from a person relying on information provided by third parties. Past performance is not a reliable indicator of future performance. This information is directed to and prepared for Australian residents only. MLC may use the services of NAB Group companies where it makes good business sense to do so and will benefit customers. Amounts paid for these services are always negotiated on an arm’s length basis. 

Source: MLC Economic Monthly update

Monetary Policy Decision – Statement by Philip Lowe, RBA Governor, June 2018

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Monetary Policy Decision – Statement by Philip Lowe, RBA Governor, June 2018

At its meeting today, the Board decided to leave the cash rate unchanged at 1.50 per cent.

The global economy has strengthened over the past year. A number of advanced economies are growing at an above-trend rate and unemployment rates are low. The Chinese economy continues to grow solidly, with the authorities paying increased attention to the risks in the financial sector and the sustainability of growth. Globally, inflation remains low, although it has increased in some economies and further increases are expected given the tight labour markets. As conditions have improved in the global economy, a number of central banks have withdrawn some monetary stimulus and further steps in this direction are expected.

Financial markets have been affected by political developments in the eurozone, particularly in Italy. There are also concerns about the direction of international trade policy in the United States and economic developments in a few emerging market economies. Long-term bond yields in most major economies have declined recently and there has been some widening of corporate credit spreads. Overall, though, financial conditions remain expansionary. Conditions in US dollar short-term money markets have eased recently, although they are tighter than earlier in the year, with US dollar short-term interest rates having increased for reasons other than the increase in the federal funds rate. The higher rates in the United States have flowed through to higher short-term interest rates in a few other countries, including Australia.

The price of oil has increased over recent months, as have the prices of some base metals. Australia's terms of trade are expected to decline over the next few years, but remain at a relatively high level.

The recent data on the Australian economy have been consistent with the Bank's central forecast for GDP growth to pick up, to average a bit above 3 per cent in 2018 and 2019. Business conditions are positive and non-mining business investment is increasing. Higher levels of public infrastructure investment are also supporting the economy. Stronger growth in exports is expected. One continuing source of uncertainty is the outlook for household consumption. Household income has been growing slowly and debt levels are high.

Employment has grown strongly over the past year, although growth has slowed over recent months. The strong growth in employment has been accompanied by a significant rise in labour force participation, particularly by women and older Australians. The unemployment rate has been little changed at around 5½ per cent for much of the past year. The various forward-looking indicators continue to point to solid growth in employment in the period ahead, with a gradual reduction in the unemployment rate expected. Wages growth remains low. This is likely to continue for a while yet, although the stronger economy should see some lift in wages growth over time. Consistent with this, the rate of wages growth appears to have troughed and there are reports that some employers are finding it more difficult to hire workers with the necessary skills.

Inflation is low and is likely to remain so for some time, reflecting low growth in labour costs and strong competition in retailing. A gradual pick-up in inflation is, however, expected as the economy strengthens. The central forecast is for CPI inflation to be a bit above 2 per cent in 2018.

The Australian dollar remains within the range that it has been in over the past two years. An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.

The housing markets in Sydney and Melbourne have slowed. Nationwide measures of housing prices are little changed over the past six months, with prices having recorded falls in some areas. Housing credit growth has slowed over the past year, especially to investors. APRA's supervisory measures and tighter credit standards have been helpful in containing the build-up of risk in household balance sheets, although the level of household debt remains high. While there may be some further tightening of lending standards, the average mortgage interest rate on outstanding loans is continuing to decline.

The low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual. Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.

Source: Reserve Bank of Australia, June 5th, 2018

Enquiries

Media and Communications
Secretary's Department
Reserve Bank of Australia
SYDNEY

Phone: +61 2 9551 9720
Fax: +61 2 9551 8033

Email: rbainfo@rba.gov.au

Source: MLC Economic Monthly update

Why the FANGs could bite into your portfolio

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Why the FANGs could bite into your portfolio

Redpoint Investment Management

ABOUT REDPOINT Redpoint Investment Management Pty Ltd (Redpoint) is a boutique global equities manager headquartered in Sydney, Australia. Redpoint specialises in listed equity investments and manages in excess of $10bn for institutional and retail clients. Redpoint is also the investment manager of the Redpoint Global Infrastructure Fund issued by responsible entity, Antares Capital Partners Limited.

There is much investor interest in the so-called FANGs: Facebook, Amazon, Netflix and Google, and the rest of the ‘internet-based’ companies. But while their popularity continues to grow there are reasons to be cautious about their ability to continue to deliver solid returns for investors.

Investors have no doubt heard of, or had some exposure to the FANGs. These are the largest and most well-known companies in a group which really includes any company with a predominately internet-based service delivery model. While these companies continue to grow strongly, currently with very expensive valuations, we don’t have to look too far back to find an example where something similar has happened before.

         Chart 1: Performance of the S&P 500 Index – Index vs IT sector

Source: S&P Global Market Intelligence and Redpoint, as at 31 January 2018. Past performance is not indicative of future performance.

Note: we have trimmed the extreme data outliers as they reduce the graph’s meaningfulness.

The 'Tech Wreck' lesson

In March 2000, the Technology, Media and Telecoms (TMT) bubble burst. The Information Technology (IT) Sector comprising many of these stocks was trading at a previously unseen price-earnings (PE) ratio of 95.2x. In contrast, on 27 March 2000, the S&P 500 Index was trading at a PE ratio of 34.6x. To understand how spectacularly expensive a PE ratio of 95.2x is, consider buying an investment property, for say $500,000 and receiving only $5,252 rent for the year. That’s about $100 a week. (95.2 x $5,252 = $500,000).

So how could you justify this valuation? Maybe, you purchased the property in a hot new area of town, you expect high demand in the future, and expect the rental income to grow strongly? You know you’ll need to renovate the property over time, the kitchen and bathroom will need upgrades, new carpets, painting, etc. You can see most of your rental income getting reinvested.

The danger is, if the demand doesn’t materialise to the extent you forecast, or other cheaper, more modern properties become available, or the property needs even more reinvestment than expected, then your property is going to trade lower, perhaps much lower. In short, there is little margin for error. For TMT stocks all three of these things happened.

What can we learn about a ‘technology bubble’ from historical PE valuations?

By looking at historical PE valuations we can identify the following three characteristics of technology-related bubbles.

The first is, it is hard to predict when the correction will occur. The IT sector traded at ever higher multiples for several years prior to the major correction. There were some drawdowns, but euphoria in the prospective returns offered by early adopters of the internet pushed prices higher.

The second important fact is that the correction actually took some years to fully run its course. There was an initial sell-off of TMT stocks and the market more broadly, then there were the write-downs and the economic slowdown, eventually there were the bankruptcies.

The third fact is that it took twelve years for the IT sector’s valuation to match the market. It wasn’t until January 2013 that both valuations matched at a PE ratio of 17.6x.

You could argue the market was right in March 2000. The IT sector did offer an enormous growth opportunity which you would expect to pay a premium for. What the market got wrong was how much of a premium to pay.

Chart 2 – Largest constituents of the internet software and services and internet and direct marketing retail industries

 

Source: S&P Global Market Intelligence and Redpoint, as at 31 January 2018. Past performance is not indicative of future performance.

Be wary of the FANGs

Today, we are looking at a similar situation, the S&P 500 Index is trading at a PE ratio of 30.2x (34.6x in March 2000), but we need to look deeper into industries to see those companies trading at eye-watering premiums to earnings.

Chart 2 shows the PE and forward PE ratios of the largest constituents of the Internet Software & Services and Internet and Direct Marketing Retail industries, which includes the ‘FANGs’. The forward PE ratio is measured as current price relative to the consensus earnings forecast for 2019. The chart is sorted from largest company to smallest company by market capitalisation.

With the exception of eBay, PE valuations for these companies range from high (twenty-something), very high (thirty-something) to extreme (forty-something+). Supposing there is no share price growth in the spectacularly expensive Amazon and Netflix, then these are forecast to reach reasonable valuations in about 10 years time. If there is share price growth, which most investors would hope for, then it is likely to take longer to reach reasonable valuations. Netflix is as large as Commonwealth Bank, the largest Australian company. The currently loss-making Twitter, is as large as Transurban Group, and is expected to reach a reasonable PE ratio in five years, again assuming no share price growth.

To give an appreciation of scale of these internet companies, they have a combined market capitalisation roughly the size of the UK share market.

Viewing these valuations another way, Chart 3 shows the PE ratios of the NASDAQ Internet (QNET) Index, against the S&P 500 Index. The QNET Index includes 84 internet technology companies trading in the United States. Internet stocks had, in totality, negative earnings for much of the early part of the 2000s, so a PE ratio doesn’t make sense and isn’t displayed.

Chart 3 – NASDAQ Internet (Qnet) Index relative to the S&P 500 Index

Source: S&P Global Market Intelligence and Redpoint, as at 31 January 2018. Past performance is not indicative of future performance.

Note: we have trimmed the extreme data outliers as they reduce the graph’s meaningfulness. 

Once bitten, twice shy

At a current PE ratio of 93.1x the NASDAQ Internet Index is looking much like the IT sector in March 2000. Whether the internet sector suffers (another) tech wreck, rises from here, or flattens is unknowable. One thing is certain though, the sector appears very expensive. While investors should be looking towards sectors which are driving innovation and growth like internet-based companies, they should also take into account past lessons and their individual circumstances before deciding to commit to ensure they don’t end up being bitten where it can hurt most; their wealth.

Please contact us on |PHONE| if we can be of assistance .

Source : Nab assetmenagement June 2018 

Important information

This publication is provided by nabInvest Capital Partners Pty Limited (ABN 44 106 427 472, AFSL 308953) (‘NCP’) as service provider of Antares Capital Partners Limited (ABN 85 066 081 114, AFSL 234483) (‘ACP’), responsible entity of the Redpoint Global Infrastructure Fund (ARSN 155 123 032, APIR code PPL0031AU, ASX mFund code RPO01) (‘Fund’) and Navigator Australia Limited (ABN 45 006 302 987, AFSL 236466) (‘NAL’) as responsible entity of the Separately Managed Account (ARSN 138 086 889) (‘SMA’). Redpoint Investment Management Pty Limited (‘Redpoint’) has been appointed by ACP as investment manager of the Fund, and by NAL as investment manager for the Redpoint Industrials Model Portfolio on the SMA. Before making any decision about investment in the Fund or the SMA, you should consider the product disclosure statement (‘PDS’) of the Fund available from nabam.com.au/rgif or by calling 1300 738 355 and the PDS of the SMA available from mlc.com.au/forms_and_brochures or by calling 132 652 or by speaking with your financial adviser.

NCP, ACP and NAL are members of the group of companies comprised National Australia Bank Limited (ABN 12 004 044 937, AFSL 230686), its related companies, associated entities and any officer, employee, agent, adviser or contractor therefore (‘NAB Group’). Any references to “we” include members of the NAB Group. An investment in any product or service referred to in this publication does not represent a deposit or liability of, and is not guaranteed by NAB or any other member of the NAB Group.

The information in this publication has been provided to us by Redpoint, it comprises their opinion and judgment at the time of issue and are subject to change. We believe that the information herein is correct and reasonably held at the time of compilation. However, neither NCP nor any member of the NAB Group, nor their employees or directors give any warranty of accuracy or accept any responsibility for errors or omissions in this publication. Where information contained herein includes information obtained from third parties, we believe to the best of our knowledge, necessary consents have been obtained.

Any reference in this publication to a specific company is for illustrative purposes only and should not be taken as a recommendation to buy, sell or hold securities or any other investment in that company. The Fund or SMA may not hold securities of, or any other investment in, any company mentioned in this publication before, at or after the time of publication.

Past performance is not a reliable indicator of future performance. The value of an investment may rise or fall with the changes in the market. Any projection or other forward looking statement in this publication is provided for information purposes only. Though reasonably formed, no representation is made as to the accuracy of any such projection or that it will be met. Actual events may vary materially.

This publication may constitute general advice. It has been prepared without taking account of your objectives, financial situation or needs and because of that you should, before acting on the advice, consider the appropriateness of the advice having regard to your personal objectives, financial situation and needs.

This publication is directed to and prepared for Australian residents only.

Source: MLC General article newsletter

Chart of the week: ‘The Italian job’ on bond spreads and budget balances

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Chart of the week: ‘The Italian job’ on bond spreads and budget balances

30 May 2018

Bob Cunneen, Senior Economist and Portfolio Specialist
 

                    Italy's bond and budget gap to Germany

Sources: Sources: NAB Asset Management Services Limited, IMF Fiscal Monitor, Thomson Reuters. 

Italy is again in the headlights. After the European debt crisis of 2011-12, Italy managed to enter a brief period of stability. However in Italian history, stability is only temporary.

Italy’s budget deficit had gradually improved to -2 % of nominal GDP in 2017. Yet this was still well above their more conservative German partners who are running a 1% budget surplus. Indeed this 3% budget balance gap between Italy and Germany (inverted red line) had been stable over recent years.

The European Central Bank’s (ECB) “whatever it takes” bond purchases and low interest rates helped push Italian government bond yields down over recent years. Italian bond investors now seem to have been lulled into a sense of complacency by the ECB policy actions over the past five years and wishfully ignored Italy’s potential risks.

After Italy’s confusing general election in March 2018, a strange coalition involving the conservative Northern League and the populist Five Star Movement agreed to form government in May. This new coalition pledged to provide income tax cuts and to increase pension and welfare benefits.

Bond investors have now become alarmed about Italy’s budget discipline prospects. Italian government bond yields have surged higher over recent weeks .The yield spread between Italy’s 10 year government bond and the German government bond has widened to 2.9% (blue line) which is the largest spread since 2013.  

Source : Nab assetmanagement 30 May 2018 


Important information

This communication is provided by MLC Investments Limited (ABN 30 002 641 661, AFSL 230705) (“MLC”), a member of the National Australia Bank Limited (ABN 12 004 044 937, AFSL 230686) group of companies (“NAB Group”), 105–153 Miller Street, North Sydney 2060. An investment with MLC does not represent a deposit or liability of, and is not guaranteed by, the NAB Group. The information in this communication may constitute general advice. It has been prepared without taking account of individual objectives, financial situation or needs and because of that you should, before acting on the advice, consider the appropriateness of the advice having regard to your personal objectives, financial situation and needs. MLC believes that the information contained in this communication is correct and that any estimates, opinions, conclusions or recommendations are reasonably held or made as at the time of compilation. However, no warranty is made as to the accuracy or reliability of this information (which may change without notice). MLC relies on third parties to provide certain information and is not responsible for its accuracy, nor is MLC liable for any loss arising from a person relying on information provided by third parties. Past performance is not a reliable indicator of future performance. This information is directed to and prepared for Australian residents only. MLC may use the services of NAB Group companies where it makes good business sense to do so and will benefit customers. Amounts paid for these services are always negotiated on an arm’s length basis.

Source: MLC Economic Monthly update

3 Ways rising interest rates could disrupt the economy

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3 Ways rising interest rates could disrupt the economy

What is quantitative easing?

Quantitative easing is when central banks purchase assets from the market to lower interest rates and increase credit availability to help stimulate the economy.

February’s correction in equity markets appeared to have limited contagion spreading to other markets, but the money markets are now pricing in an increased probability of the US Federal Reserve (Fed) hiking interest rates three times in 2018. A significant rise in interest rates could disrupt the economy in three ways:

 

Tightening financial conditions: Rising interest rates are tantamount to a tightening in financial conditions. This is symptomatic of liquidity withdrawal from markets. Given the importance of liquidity to asset markets in recent years and the role central banks have played in providing this, any liquidity uncertainty is likely to require investors to demand higher returns for the risk they’re taking.

This can result in falling asset prices. Hit to confidence and wealth: As interest rates adjust to the new economic outlook, valuations across asset markets may become more vulnerable. It is not uncommon for asset volatility to increase as we move into the later stages of the economic cycle, as the US currently finds itself. All else being equal, higher interest rates typically mean higher discount rates are used when valuing assets. This leads to asset values falling, and so negatively affecting wealth and impacting on consumer spending and business investment.

Impairment to credit channels: Rising interest rates result in higher debt servicing costs for businesses and consumers. While the earnings outlook may be positive, lower interest rate coverage ratios will leave many leveraged businesses vulnerable to higher financing costs.

The central bank safety net might be taken away

After eight years of quantitative easing (QE), a more direct concern for investors is that the central bank safety net may be taken away. QE provided investors with cover in entering the riskiest of investments with little fear, while suppressed volatility helped to reinforce the view that central banks ‘have your back’.

We believe central banks will be less inclined to manage rate expectations lower in an environment where inflation risks are rising. When the economy was still recovering and unemployment and excess capacity were more elevated the Fed could reasonably maintain accommodative rate settings, even as growth was surging. This is because moderate productivity and underutilised capacity allows for economic growth without pushing up prices and inflation. However, in the late stages of an economic recovery, as we find ourselves now, the ability for central banks to hold back rate expectations in support of risk markets is significantly curtailed. This results from the fact that in the late cycle there is an acute trade-off between growth and inflation, with the potential for inflation to pick up rapidly.

Markets will need to find a new equilibrium

Over the coming months it is likely that financial markets and central banks will hash out a new equilibrium, as equity markets and central banks adjust to the reality of higher (and potentially more volatile) economic growth and inflation. Equity markets will need to adjust to the likelihood of higher interest rates, while bond markets will need to incorporate the possibility of higher growth and inflation with less accommodation coming from central banks.

Conclusion

Whenever there is a sharp divergence between economic data and market expectations there is a good chance there will be a violent response in asset prices. In the past, central banks have managed to suppress this volatility via QE and by managing interest rate expectations lower. Going forward, there will be less scope to do this as we move into the late cycle where growth and inflation trade-off more acutely.

At the same time, an overly restrictive Fed, that tightens too quickly in anticipation of rising inflation, risks stalling the economic expansion and potentially sparking the next downturn. Confronted with these options the Fed has an incentive to let inflation run higher and for inflation expectations to become more deeply ingrained, before completely winding down the party.

 Source : Nab asssetmanagement May 2018 

Important Information

This publication is provided by nabInvest Capital Partners Pty Limited (ABN 44 106 427 472, AFSL 308953) (‘NCP’), a member of the group of companies comprised National Australia Bank Limited (ABN 12 004 044 937, AFSL 230686), its related companies, associated entities and any officer, employee, agent, adviser or contractor therefore (‘NAB Group’). Any references to “we” include members of the NAB Group. An investment in any product or service referred to in this publication does not represent a deposit or liability of, and is not guaranteed by NAB or any other member of the NAB Group.

This information may constitute general advice. It has been prepared without taking account of your objectives, financial situation or needs and because of that you should, before acting on the advice, consider the appropriateness of the advice having regard to your personal objectives, financial situation and needs.

Opinions constitute our judgement at the time of issue and are subject to change. We believe that the information in this publication is correct and that any estimates, opinions or conclusions are reasonably held or made at the time of compilation. None of NCP, any other member of the NAB Group or their employees or directors give any warranty of accuracy, not accept any responsibility for errors or omissions in this publication.

This information is directed to and prepared for Australian residents only.


Important
Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business, nor our Licensee take any responsibility for any action or any service provided by the author.

Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.

Source: MLC General article newsletter

Chart of the week : The 'end of cheap money ' is coming

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Chart of the week : The 'end of cheap money ' is coming

7 May 2018

Bob Cunneen, Senior Economist and Portfolio Specialist 

                                 Real interest rates

Sources: Australian data: RBA cash rate and Australian Bureau of Statistics (ABS) Consumer Price Index; US data: Federal Reserve, St Louis.  

Global growth and share markets have benefited from ‘cheap money’ over recent years.

A measure of how cheap money is can be seen in the real interest rate. This is measured by taking the cash interest rate and then subtracting inflation. The real interest rate is used by central bankers to gauge whether their policy stance is easy or restrictive for economic growth and financial markets.

US real interest rates (red line) have actually been negative since 2008 with the US interest rate being set well below inflation. Since 2015, the US central bank has been gradually raising interest rates to tighten policy. Essentially this is ‘withdrawing the punchbowl’ for Wall Street’s exuberance.

The Reserve Bank of Australia (RBA) had been less generous to Australian shares with Australia’s real interest rate (blue line) being closer to 0%.  However Australia’s cash rate at 1.5% is now 0.4% below the 1.9% annual inflation rate. The RBA Governor signalled on 1st May that it’s “reasonable to expect that the next move in interest rates will be up”1. So even for Australia, the ‘end of cheap money’ is looming.

1. RBA Governor Philip Lowe’s comment comes from: https://www.rba.gov.au/speeches/2018/sp-gov-2018-05-01.html

Source : Nab assetmanagement May 2018 


Important  information

This communication is provided by MLC Investments Limited (ABN 30 002 641 661, AFSL 230705) (“MLC”), a member of the National Australia Bank Limited (ABN 12 004 044 937, AFSL 230686) group of companies (“NAB Group”), 105–153 Miller Street, North Sydney 2060. An investment with MLC does not represent a deposit or liability of, and is not guaranteed by, the NAB Group. The information in this communication may constitute general advice. It has been prepared without taking account of individual objectives, financial situation or needs and because of that you should, before acting on the advice, consider the appropriateness of the advice having regard to your personal objectives, financial situation and needs. MLC believes that the information contained in this communication is correct and that any estimates, opinions, conclusions or recommendations are reasonably held or made as at the time of compilation. However, no warranty is made as to the accuracy or reliability of this information (which may change without notice). MLC relies on third parties to provide certain information and is not responsible for its accuracy, nor is MLC liable for any loss arising from a person relying on information provided by third parties. Past performance is not a reliable indicator of future performance. This information is directed to and prepared for Australian residents only. MLC may use the services of NAB Group companies where it makes good business sense to do so and will benefit customers. Amounts paid for these services are always negotiated on an arm’s length basis.

Source: MLC General article newsletter

2018 Federal Budget Analysis

By | MLC Economic | No Comments

2018 Federal Budget Analysis

Summary of Budget measures

Note: These changes are proposals only and may or may not be made law.

From 1 July 2018

  • Low and middle income earners are to benefit from tax savings of up to $530 per person (or $1,060 per couple).

  • The Medicare Levy will remain at 2%.

  • The $20,000 instant asset write-off for business with aggregate turnover less than $10m will be extended

    until 30 June 2019.

  • Funding for home care services and residential aged care will increase.

From 1 July 2019

  • A one year exemption from the ‘work test’ will apply to recent retirees who have less than $300,000 in total super savings.

  • Life insurance can only be offered in super on an ‘opt-in basis’ to new members under 25 years of age or members with inactive accounts or an account balance under $6,000.

  • Fees when exiting a super fund will be banned and administration/investment fees will be capped at 3% pa on accounts with balances of less than $6,000.

  • The ATO will work to proactively reunite Australians’ dormant superannuation funds with their active account, with inactive balances less than $6,000 to be transferred to the ATO. 

  • The Pension Loans Scheme will be available to all Australians over Age Pension age and the maximum payments will increase to 150% of the full Age Pension.

Opportunities post 1 July 2018

There are some key opportunities announced in previous Federal Budgets that are already legislated to take effect on
1 July 2018. These include:

  • People aged 65 or over can make ‘downsizer’ super contributions of up to $300,000 from the proceeds of selling

    their home.

  • First home buyers who have made super contributions under the First Home Super Saver Scheme can access their

    money for eligible property purchases.

  • Where the annual concessional contribution cap is not fully utilised, it may be possible to accrue unused amounts

    for use in subsequent financial years.

Further information on these opportunities can found at the end of this summary.

Taxation

Personal income tax savings

Date of effect: From 1 July 2018

Low and middle income earners will benefit from tax savings of up to $530 per person (or $1,060 per couple), via a series
of changes to be implemented over seven years.

Personal income tax thresholds

The income threshold at which the 32.5% marginal tax rate applies will progressively increase to $200,000 by 1 July 2024.

Table 1: Personal tax rates and thresholds

Personal tax offsets

  • A Low and Middle Income Earners Tax Offset of up to $530 will apply from 1 July 2018 to 30 June 2022.

  • From 1 July 2022, the Low Income Tax Offset will increase from $445 to $645.

Personal tax savings

Table 2 below illustrates the tax payable in future financial years (and the potential tax savings compared to 2017/18) for a range of taxable incomes. These figures take into account the proposed personal income threshold and tax offset changes.

Table 2: Tax payable and potential savings

Medicare levy to stay at 2%

The previously proposed increase in the Medicare levy to 2.5% from 1 July 2019 has been abandoned.

Extension of instant asset write off

Date of effect: From 1 July 2018

Small businesses with turnover of less than $10 million will be able to immediately write-off newly acquired eligible
assets valued at less than $20,000 for a further 12 months.

Superannuation

Work test exemption for retirees

Date of effect: 1 July 2019

A person aged 65 to 74 is currently able to make contributions to superannuation if the ‘work test’ has been satisfied
(ie they have worked at least 40 hours in 30 consecutive days) in the financial year the contribution is made.

A one year exemption from the work test will apply to older Australians who have less than $300,000 in total super
savings. This exemption will apply to the financial year following the last year the work test was satisfied. This will
allow an additional period of time for those eligible to contribute to superannuation.

Insurance in super

Date of effect: 1 July 2019

In many super funds, including MySuper and employer funds, insurance is offered as a default option. It’s proposed
that members will need to ‘opt-in’ for insurance where they:

  • have a balance less than $6,000

  • are new members under age 25, or

  • have an account which has not received a contribution in 13 months and are considered inactive.

Protection for small super balances

Date of effect: 1 July 2019

Measures will be introduced to reduce the impact of fees on low super balances and focus on returning lost
super to members.

  • Protection will be provided to super accounts by limiting administration and investment fees to a 3%

    annual cap. This cap will apply to accounts with balances below $6,000.

  • Exit fees will also be banned on all super accounts.

  • A $6,000 threshold will apply to inactive accounts. These accounts will need to be transferred to the ATO.

    The ATO will increase data matching activities to return amounts to active accounts held by members.

Personal deductions

Date of effect: 1 July 2018

The ATO will develop new compliance processes for taxpayers claiming a deduction for personal superannuation
contributions. This includes raising awareness regarding the necessary steps, including lodging a ‘notice of intent
to claim a tax deduction’ form with the super fund trustee.

Inadvertent concessional cap breaches

Date of effect: 1 July 2018

Employers are required to pay Superannuation Guarantee (SG) based on an individual employee’s income.
For some individuals this means their concessional contribution cap is breached by the total of multiple employers’
compulsory contributions.

Individuals who have a total income exceeding $263,157 pa and multiple employers will have the option to elect
to no longer have SG contributions paid on certain income from their employer. This overcomes the inadvertent
breach of the concessional contribution cap and associated tax penalties.

SMSF increase in member numbers

Date of effect: 1 July 2019

Self-managed superannuation funds (SMSFs) are limited to having four members. This threshold will increase
to six to provide greater flexibility and allow families, for example, to all be members of the same SMSF.

SMSF three-year audit cycle

Date of effect: 1 July 2019

SMSFs with a history of good record-keeping and compliance will move from providing an audit on an annual basis
to a three-yearly cycle. Eligible SMSFs will be those with a history of three consecutive years of clear audit reports
and have lodged annual returns on time.

Social security

Pension Loans Scheme

Date of effect: 1 July 2019

The Pension Loans Scheme allows eligible individuals to access some of the equity in the home or other property
via a Government loan, which is advanced in fortnightly instalments.

This scheme will be available to all Australians over Age Pension age and the maximum loan payments will increase
to 150% of the full Age Pension. Eligibility will continue to limited by the value of the property used as loan security.

The following table summarises the payment ranges for singles and couples based on current rates, where the full
pension and no pension is available.

Table 3: Pension Loans Scheme payment range

Work Bonus

Date of effect: 1 July 2019

Under the Work Bonus, the first $300 per fortnight (currently $250) of employment income will not count when calculating
Age Pension entitlements under the income test.

Self-employed retirees will be able to access the scheme for the first time.

A ‘personal exertion test’ will ensure the bonus only applies to income earned from paid work.

Any unused Work Bonus (up to a total of $7,800 pa) can continue to be accrued to reduce assessable employment income
in a future period.

Means-testing of certain lifetime income streams

Date of effect: 1 July 2019

Favourable social security rules will be introduced to encourage the development and use of income products that
will help retirees reduce the risk of outliving their savings.

Under the proposed rules, only 60% of the amount initially invested in these ‘lifetime income streams’ will be assessed
under the assets test. This concession will apply until the account holder is 84 (or for a minimum of five years). After this
time, only 30% will be assessed for the rest of the person’s life. Also, only 60% of the income payments will be assessed
under the income test.

Means testing of Carers Allowance

Date of effect: To be confirmed by Government

As previously announced, the Carer Allowance and Carer Allowance (child) Health Care Card will be income tested. Households earning over $250,000 won’t be eligible. Both existing and new recipients of Carer Allowance will need
to meet this income test.

Aged care

Additional funding for aged care

Date of effect: From 1 July 2018

Funding for home care services and residential aged care will increase, including:

  • 14,000 new home care packages over four years

  • 13,500 new residential aged care places, and

  • grants for aged care facilities in rural, regional and remote areas.

Legislated super changes post 1 July 2018

Downsizer contributions

Individuals aged 65 or older may be able to make super contributions of up to $300,000 (or $600,000 per couple)
from 1 July 2018 when selling their home.

These contributions, known as ‘downsizer contributions’ can be made without having to meet a ‘work test’ or ‘total super balance test’ and they don’t count towards the contribution caps. However, they must be made with 90 days of settlement
and a tax deduction can’t be claimed.

The property must have been owned for at least 10 years and have been the main residence at some time during this period.

First home super saver scheme – access

First home buyers who have made super contributions under the First Home Super Saver Scheme (FHSSS) can access
their money from 1 July 2018.

The FHSSS started on 1 July 2017 and allows eligible first home buyers to save a deposit in the concessionally taxed superannuation system. Contributions of up to $15,000 per year (and a total of $30,000) can be made and they count
towards the relevant contribution cap.

An online estimator is available to explore the potential benefits of using the FHSSS.

Catch-up concessional contributions

Where the annual concessional contribution (CC) cap is not fully utilised from 1 July 2018, it may be possible to accrue
unused amounts for use in subsequent financial years.

The CC cap is currently $25,000 pa1. Counted towards this limit are all employer contributions (including super guarantee
and salary sacrifice), personal tax deductible contributions and certain other amounts.

Unused cap amounts can be accrued for up to five financial years. 2019/20 is the first financial year it will be possible
to use carried forward amounts.

To be eligible, individuals cannot have a total super balance exceeding $500,000 on the previous 30 June.

This measure could help those with broken work patterns and competing financial commitments to better utilise the CC
cap. It could also help to manage tax and get more money into super when selling assets that result in a capital gain.

  1. This cap applies in FY 2017/18 and 2018/19. It may be indexed in future financial years.

 

Important information

The Federal Budget Analysis prepared by the MLC Technical team, part of GWM Adviser Services Limited, appears below.

The information contained in this Federal Budget Analysis is current as at 8 May 2018 and is prepared by MLC Technical, part of GWM Adviser Services Limited ABN 96 002 071749, registered office 150-153 Miller Street North Sydney NSW 2060,  a member of the National Australia Bank Group of Companies.

Any advice in this Federal Budget Analysis has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on any advice, consider whether it is appropriate to your objectives, financial situation and needs. Any tax estimates provided in this publication are intended as a guide only and are based on our general understanding of taxation laws. They are not intended to be a substitute for specialised taxation advice or a complete assessment of your liabilities, obligations or claim entitlements that arise, or could arise, under taxation law, and we recommend you consult with a registered tax agent.

Past performance is not a reliable indicator of future performance.

Before acquiring a financial product, you should obtain a Product Disclosure Statement (PDS) relating to that product and consider the contents of the PDS before making a decision about whether to acquire the product.

MLC companies are subsidiaries of National Australia Bank Limited ABN 12 0004 044 937. An investment with MLC is not a deposit or liability of, and is not guaranteed by, National Australia Bank Limited.

Source: MLC Economic Monthly update

Dollar-cost averaging: An investor's emotional circuit breaker

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Dollar-cost averaging: An investor's emotional circuit breaker

The latest bout of higher sharemarket volatility reinforces the potential benefits of a disciplined investment strategy called dollar-cost averaging. It can act as an investor’s emotional circuit breaker and a means to progressively create long-term wealth.

Dollar-cost averaging simply involves investing the same amount of money into, say, shares or managed funds at regular intervals over a long period – whether market prices are up or down.

Investors practising dollar-cost averaging automatically buy more, shares or units in a managed fund when prices are lower and fewer when prices are higher. This averages the purchase prices over the total period that an investor keeps investing.

Yet the central attribute of dollar-cost averaging is not so much the price paid for securities; it is the adherence to a disciplined, non-emotional approach to investing that is not distracted by prevailing market sentiment.

Dollar-cost averaging can assist investors to focus on their long-term goals with an appropriately diversified portfolio while avoiding emotionally driven decisions to buy or sell – in other words, trying to time the market. Repeated research, including by Vanguard, shows that market-timers rarely succeed over time.

Of course, the use of dollar-cost averaging does not necessarily mean that investments will succeed; nor does it protect investors from falling asset prices.

Super fund members having contributions regularly paid into their diversified super accounts are practising a form of dollar-cost averaging and employees can easily magnify the potential effectiveness of dollar-cost averaging through higher salary-sacrificed contributions.

Most investors use dollar-cost averaging as a way to regularly save a proportion of their incomes. However, investors can sometimes face the issue of how and when to invest a large, one-off lump sum – perhaps from an inheritance or sale of an investment property. Should such a large amount be invested all at once or drip-fed into the markets using dollar-cost averaging?

The answer to this question should, of course, take into account personal circumstances such tolerance to risk, age and how long the capital is likely to remain invested.

A Vanguard research paper published several years ago confirmed that investing a sizeable lump sum all at once generally had a better chance of producing higher long-term returns than drip-feeding the money into the markets. This research was based on long-term past returns.

As this research paper comments: “Clearly if markets are trending upward, it’s logical to implement a strategic asset allocation as soon as possible because it should offer a higher long-run expected return than cash.”

And investing a lump sum immediately maximises the rewards of compounding, as earnings are made on past earnings as well as the original capital.

Yet risk-averse investors with a large amount of capital to invest may understandably want to ease their way into the markets in an effort to reduce the impact of a possible sudden fall in prices.

Putting aside the issue of how to invest lump sums, dollar-cost averaging provides a straightforward way for most investors to steadily accumulate wealth without being overly concerned by prevailing market volatility.

 

Source : Vanguard April 2018 

Written by Robin Bowerman, Head of Corporate Affairs at Vanguard

Reproduced with permission of Vanguard Investments Australia Ltd

Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients' circumstances into account when preparing this material so it may not be applicable to the particular situation you are considering. You should consider your circumstances and our Product Disclosure Statement (PDS) or Prospectus before making any investment decision. You can access our PDS or Prospectus online or by calling us. This material was prepared in good faith and we accept no liability for any errors or omissions. Past performance is not an indication of future performance.

© 2018 Vanguard Investments Australia Ltd. All rights reserved.

Important:
Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business, nor our Licensee take any responsibility for any action or any service provided by the author.

Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.

Source: MLC General article newsletter

A guide to buying your first home

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A guide to buying your first home

You’ve made the next step in life and want to buy your first home, but you don’t know where to start. Here's a quick guide to help you get started.

WHAT COSTS ARE INVOLVED WITH BUYING A HOME?

Before you can pack up and move into your new home there are a number of costs you need to know about.

The list below shows some of the major costs to buying a home.

  • LMI premium.

  • Stamp duty.

  • Bank and government fees and charges.

  • Solicitor or conveyancer costs.

These fees and charges can be expensive so you should add an additional amount to cover these into your budget.

HOW MUCH CAN I BORROW?

Before you start saving, you will need to know how much you can borrow. This not only determines how much you need to save, but also what you can afford.

HOW MUCH DEPOSIT DO I NEED?

Ask yourself one simple question, ‘How quickly do I want to get into my first home?’ This will not only determine how much you need to save but also how long it will take you.

Next, we’ll take a look and show you what you can get for your deposit.

Can I buy a home with less than a 20% deposit?

A small deposit definitely allows you to purchase a home. Just keep in mind you’ll be liable for a Lenders’ Mortgage Insurance (LMI) premium (added on top of your home loan) if your deposit is under 20%.

What is LMI?

You need to pay Lenders’ Mortgage Insurance if your lending is above 80% of the purchase price. The insurance covers us if your circumstances change and you can’t make your repayments.

What if I have a 20% deposit (or more)?

If you’re a saving genius; having this deposit means you don’t pay LMI costs. This reduces your overall loan amount, builds equity sooner and saves you on interest charged over the life of the loan.

What is the First Home Owners Grant (FHOG)?

How does a boost in your savings sound? The First Home Owners Grant (FHOG) is a national scheme funded by the states and territories. It was established to offset the effect of GST on home ownership. But be mindful, that you need to be eligible to apply and the amount of the grant varies from every state and territory.

USE A BUDGET TO HELP YOU SAVE

Once you know how much you can afford to spend—and how big your deposit needs to be—you can look at getting a savings plan together. A budget allows you to see how much you can afford to save, so you can see how much you need to put away each pay.

GET A SAVINGS ACCOUNT

Next, find an account so you can reach your savings goal sooner. You might be after an account that rewards you with bonus interest each month. On the other hand, perhaps you’d prefer a fixed term deposit. 

CHOOSE THE BEST HOME LOAN FOR YOU

Once you know your affordability, deposit, and have a savings plan, you’ll need to research home loans. We have various loans with many features, including offset or redraw, variable or fixed rate, or perhaps a flexible line of credit.

We know with so many options available that choosing a home loan can be daunting. When the time comes, don’t feel like you have to do it on your own. Contact us on |PHONE|

Source : Nab May 2018 

Important information

The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, NAB recommends that you consider whether it is appropriate for your circumstances. NAB recommends that you seek independent legal, financial, and taxation advice before acting on any information in this article

Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business, nor our Licensee take any responsibility for any action or any service provided by the author.
Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.

 

Source: MLC General article newsletter

Budgeting 101 working out your income and expenditure

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Budgeting 101 working out your income and expenditure

Working out a realistic budget is a great way to take control of your finances. Although it may seem like a chore, it's the crux of sound – and sustainable – financial management. In this article we look at how to ‘do the numbers.

A budget shows you how much money you’re earning, how much you’re spending, and how much you’re saving.

While it can be tempting to put it off, creating a realistic budget can help you hit your savings goals faster. Let’s start with the numbers.

WORK OUT YOUR CURRENT INCOME

For most of us, this is a matter of checking our payslip or salary credit and seeing what we get (after tax and super). It’s trickier if you’re a contractor or self-employed, or if your income varies wildly from month to month. Use your last tax return and work out your weekly net income (after business expenses, GST and PAYG).

Do you have any other sources of income? Interest from investments, government contributions or child support payments? Work out what they average week to week, then add this in.

WORK OUT YOUR SPENDING

It can be easy to underestimate how much you spend on a day-to-day basis. But in order to create a realistic budget, it’s important to find out how much you’re spending, and on what.

Firstly, take a good hard look at your bank statements. Go back over the past two or three months and make a note of everything you’ve paid for. Remember there are some hefty costs that only come up every year, or less, like car insurance and registration.

It’s helpful if you group things into categories. Let’s start with the basics: food, clothing, housing, transport, communication and insurance.

Housing expenses

The biggest expense you’ll face is probably your rent or mortgage. If you own your own place, you’ll also be hit up for home maintenance (repairs), home and contents insurance, and rates. Plus utilities (gas, electricity, water etc.).

If you’re currently renting or considering renting, check out our Renting vs Buying calculator. This calculator shows you what size home loan repayments you may be able to service based on your current rental payments.

Food and drink

This includes your groceries, but also your takeaway lunches and evening feasts out. Don’t forget those coffees and other incidental snacks – it all adds up.

Clothing

You might want to divide this category into your work clothes and your fun clothes to sort out what’s necessary and what’s not. If shoes are your thing, you’ll need to account for these too.

Transport

The costs of running a car or using public transport can easily add up. Fuel’s just the start—there’s parking, repairs, preventative maintenance and insurance.

A really robust budget also factors in things like replacing your car at some point.

Public transport’s often cheaper, and this also has to be factored in.

Communication

Consider the bills for your mobile, internet and (if you still have one) landline charges.

Insurance

If you have any sort of insurance – health, life, medical, or perhaps income – you’ll be paying premiums. They may be yearly or monthly, but make sure they’re factored into your final budget.

Health and wellbeing

Although these costs might be occasional, your budget should take into account things like medical spending (including the dentist) and pharmaceutical costs.

In this section you can also include lifestyle costs like gym membership and sports club fees.

Life and leisure

Think about all those incidental costs that pop up over the year: magazine and TV streaming subscriptions, weekends away, movies, Christmas and birthday gifts.

Replacement costs

Every now and then, you’ll unfortunately have to replace the fridge, the washing machine, the TV, the lounge suite etc. Replacing these items can make a significant dent in your savings if you don’t have a plan in place to prepare for them ahead of time.

Debts

Which includes personal loans, credit cards, store cards and other loans, and the interest that comes with them.

Miscellaneous

This is where you’ll budget for everything else that doesn’t fit within the categories you’ve laid out. These might include pet costs, uni or office fees, childcare, beauty costs etc.

The government’s MoneySmart website also has a comprehensive section on budgeting that’s worth a look.

We can offer straightforward, transparent advice and can help develop a plan that suits you.Please contact us on |PHONE|

Source : Nab May2018

Important information

The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, NAB recommends that you consider whether it is appropriate for your circumstances. NAB recommends that you seek independent legal, financial, and taxation advice before acting on any information in this article

Any information provided by the author detailed above is separate and external to our business and our Licensee. Neither our business, nor our Licensee take any responsibility for any action or any service provided by the author.
Any links have been provided with permission for information purposes only and will take you to external websites, which are not connected to our company in any way. Note: Our company does not endorse and is not responsible for the accuracy of the contents/information contained within the linked site(s) accessible from this page.

Source: MLC General article newsletter