Chart of the week: “Back to the future” on share volatility

By | MLC Economic | No Comments

Chart of the week: “Back to the future” on share volatility

 

VIX Volatility Index

Chart of the week: “Back to the future” on share volatility

Source: US Federal Reserve, St Louis 

View larger chart

US shares have been in turmoil since February 2nd. The announcement that US wages growth had accelerated to its fastest pace since 2009 was the catalyst for this sharp share selloff. However this US inflation surprise was actually magnified into a shock due to complacency about volatility.

Indeed there was a notable absence of fear in financial markets. Even the ‘fear gauge’ known as  the VIX was trading at a tranquil 12% on January 31st. The VIX is an option pricing measure of US share market volatility over a one month time horizon. Any concerns about US inflation risks or North Korea or even Middle east tension were just concerns rather than potential catastrophes.

History reminds us that when fear returns, the VIX volcano erupts. Over the past two decades, there have been numerous episodes of intense share market volatility. The current turmoil has seen the VIX climb to 37.3 on February 5th, its highest close since August 2015 when China devalued its currency. US share investors are hoping this is just a temporary setback, as was the case in  2015.

Yet the high VIX reading presently suggests that  the age of tranquillity has passed. US share volatility is now “back to the future”.

Please contact us on |PHONE| if you would like more information.

Source: NAB Asset Management 12 February 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

Why your chances of a pay increase could finally be improving

By | MLC General News | No Comments

Why your chances of a pay increase could finally be improving

With 2018 now underway, many Australians may have noted ‘pay increase’ in their new years’ resolutions list. While the economic conditions over the past few years may not been ideal for having successful conversations with your boss around remuneration, MLC’s Senior Economist Bob Cunneen explains how changing economic factors could lead to an improving environment for pay rises.

Nominal wages growth is the slowest it’s been in 20 years. This is despite a number of strong economic indicators in the past year including a dramatically improved Australian labour market and employment growth running at its fastest pace since 2008 with 3.3% annual growth.  Also, the unemployment rate has fallen to 5.5% which is the close to its lowest level since 2013. So why are pay rises as common as finding a Tasmanian tiger barking in the bush?

There has been a shopping list of explanations given for this “wages woe” by commentators and economists. The most frequently cited reasons are the elevated level of unemployment which is also known as “spare capacity”, “job insecurity” and the longer-term challenges of “globalisation and technology”.  All three factors can be considered inter-related.  If an individual is insecure about their job given the level of unemployment as well as globalisation and technology putting pressure on their job security, it doesn’t provide much support for an increase in pay.

How are wages measured? – “Just tell us the price” 

Australia’s nominal wages have been measured every which way with acronyms to astound and confound. Fortunately there is one standardised measure that Reserve Bank of Australia (RBA), Federal Government and financial markets focus upon. This is the “Wage Price Index”. This Wage Price Index (WPI) measures nominal wages to ensure “a constant quantity and quality of work performed”. The Wage Price Index is adjusted for different levels of hours (“quantity”) and skills employed (“quality”).

Australian wages growth


Source: NAB Asset Management Services Limited, Australian Bureau of Statistics.

The Wage Price Index has only recorded 2% annual growth in the year to September 2017. This is essentially the slowest pace for wage gains since this measure began in 1997. Wages growth is now lower than the experience during the Global Financial Crisis (GFC) from 2007 to 2009.

 The RBA Governor Dr Philip Lowe is concerned about this slow wages growth, calling it a “major priority” for understanding. Slow wages growth is a major contributor to both the “low inflation” and “high asset prices” which is currently perplexing central bankers.1

Spare capacity

Australia’s unemployment rate is cited as a key measure of “spare capacity” in the labour market. The unemployment rate calculates the percentage of the available workforce that is out of work. As the theory goes, the more unemployed Australians, the less pressure on wages as people compete for available jobs.

Certainly Australia’s current unemployment rate at 5.5% is higher than in 2007 prior to the GFC where the unemployment rate was 4.2%. So there is an additional 1.2% of the available workforce currently unemployed. However this does not fully explain the current slow wages growth. Even in 2009 when the unemployment rate was higher at 5.9%, wages growth was still at a solid 3% annual pace.

Actually the unemployment rate is a debateable measure of “spare capacity”. If you work for more than one hour, you are considered employed. So what happens if you are “underemployed”. You could be a part time worker who would like to work additional hours but do not have the opportunity. According to the ABS, Australia has an underemployment rate of 8.3% at November 2017.

A potentially more accurate measure of Australia’s “spare capacity” is the underutilisation rate. This combines both the unemployment rate (5.5%) and underemployment rate (8.3%) to arrive at a circa 13.7% underutilisation rate. This effectively means nearly 1 in every 7 potential workers are either unemployed or underemployed.

The underutilisation rate when turned upside down in the following chart (red line is inverted) is highly correlated with wages growth (black line). This suggests that the higher the percentage of Australians that are underutilised, then the slower the wage growth.
 

Australian underutilisation vs wages

 

Source: NAB Asset Management Services Limited, Australian Bureau of Statistics.
 

Fortunately there are encouraging signs that this underutilisation rate is starting to decline. The underutilisation rate peaked in November 2014 at 14.9% and since then has been making a choppy and gradual improvement to now stand at 13.7%. Clearly there needs to be a further sharp downward shift in this underutilisation rate to place upward pressure on wages growth, but at least the labour market’s spare capacity is moving in the right direction by becoming ‘less spare’.

Globalisation and technology ….

The RBA Governor, Dr Phillip Lowe, recently suggested that workers’ concern over globalisation and technology may also be restraining wages noting the possibility that “workers feel a heightened sense of potential competition, either from advances in technology or from international competition” in curbing their wage demands.

So has this ‘brave new world’ of integrated global supply systems and machines impacted on wage growth? Currently the evidence is more anecdotal than statistical, so the jury is still out. However let’s briefly consider what can be called the “Rage against the machine at the checkout” as a prime anecdotal example of both globalisation and technology weighing on wages growth.

The arrival of Germany’s ALDI into the Australian supermarket industry shows globalisation at work. ALDI has become a key competitor to Coles and Woolworths and uses its lower-price model as a differentiator. The “advances in technology” are also now evident in the recent introduction of “self-checkout” scanning machines by Coles and Woolworths.  Now consider yourself a cashier employee in any Australian supermarket. Do you have the bargaining power for higher wages given the greater competitive pressures and technological advances that now prevail?

Job insecurity (is falling)

 Since the GFC began in August 2007, the spectre of job cuts has loomed like a black cloud over the workforce.  Both the corporate and public sectors have been seeking “efficiency dividends” from employees. Given this plague of management euphemisms about “cost control”, “downsizing”, “rebalancing” and even “rightsizing”, it would be rational for employees to worry about their jobs.

While “job insecurity” may not be exactly measurable, the Melbourne Institute conducts a survey that canvases consumers’ expectations for unemployment. Notably unemployment expectations has seen some sharp movements over the past decade, as seen in the chart below.

The GFC witnessed a sharp spike in unemployment expectations (red line is inverted in chart) as consumers became anxious about their job prospects.  While there was a brief recovery from 2010 to 2011, unemployment expectations then rose again from 2012 to 2015.  Given this apparent correlation between unemployment expectations and wages growth, then “job insecurity” seems to be a key contributor to Australia’s wages woes.

Unemployment expectations vs wages

 

Source: NAB Asset Management Services Limited, Australian Bureau of Statistics, Melbourne Institute.


But there is light on the horizon

Fortunately for those in the workforce there are some signs that unemployment expectations are now getting better, rather than deteriorating further into fear and loathing. The Melbourne Institute survey measure (previous chart) has now fallen to its lowest level since 2011. Another alternative measure is NAB’s Consumer Anxiety Index which also shows that stress over job security has fallen to its lowest level for the past five years.

Indeed these diminishing survey responses for ‘unemployment expectations’ and ’consumer anxiety’ suggest that employees are coming to terms with the challenges from spare capacity, globalisation and technology. We now seem to be becoming less fearful. Stronger jobs growth over the past year appears to be turning the tide in favour of more bargaining power for employees. This is a particularly welcome development for consumer spending as a moderate rising tide of wages growth should lift the economy’s growth performance. So there are now some hopeful signs for wages growth and that elusive pay increase may not be as far away as you think.

1 Reserve Bank Governor Dr Philip Lowe, “Some Evolving Questions” Address to the Australian Business Economists Annual Dinner Sydney – 21 November 2017, https://www.rba.gov.au/speeches/2017/sp-gov-2017-11-21.html  

Source : Nab Assest Management January 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

Wall Street finally awakes to a “clear and present danger”

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Wall Street finally awakes to a “clear and present danger”

US shares vs Government bonds

US shares vs Government bonds

Source: Federal Reserve St Louis.

Wall Street has fallen -4% over the past week. This was off the back of record highs on January 26 with the S&P 500 Index peaking at 2872.87 (black line).

What’s behind the share correction? Well the “bears” would argue that US shares were already overvalued on key measures. There was also evidence of ‘irrational exuberance’. Positive investor surveys, high margin debt and the very low VIX volatility readings all indicated elevated levels of optimism.

Yet the primary catalyst for a share correction has been evident for the past six months. The US Government 2 year bond yield has surged from 1.3% to 2.1% currently (red line). Bond markets are increasingly nervous that US inflation pressures are starting to build as wages have risen and the US dollar has weakened. Given there is a new Fed Chair and committee members in 2018, the Fed could easily shock financial markets with a more aggressive interest rate stance. The days of cheap money in terms of low bond yields seemed to be over six months ago. So after Wall Street’s dream run with record highs, US shares seem to have finally awoken to the reality of higher bond yields.

 

Source: nab asset management 5 February 2018

Author: Bob Cunneen, Senior Economist and Portfolio Specialist

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

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

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

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

There was a broad-based pick-up in the global economy in 2017. A number of advanced economies are growing at an above-trend rate and unemployment rates are low. Growth has also picked up in the Asian economies, partly supported by increased international trade. 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.

The pick-up in the global economy has contributed to a rise in oil and other commodity prices over recent months. Even so, Australia's terms of trade are expected to decline over the next couple of years, but remain at a relatively high level.

Globally, inflation remains low, although higher commodity prices and tight labour markets are likely to see inflation increase over the next couple of years. Long-term bond yields have risen but are still low. As conditions have improved in the global economy, a number of central banks have withdrawn some monetary stimulus. Financial conditions remain expansionary, with credit spreads narrow.

The Bank's central forecast for the Australian economy is for GDP growth to pick up, to average a bit above 3 per cent over the next couple of years. The data over the summer have been consistent with this outlook. Business conditions are positive and the outlook for non-mining business investment has improved. Increased public infrastructure investment is also supporting the economy. One continuing source of uncertainty is the outlook for household consumption. Household incomes are growing slowly and debt levels are high.

Employment grew strongly over 2017 and the unemployment rate declined. Employment has been rising in all states and has been accompanied by a significant rise in labour force participation. The various forward-looking indicators continue to point to solid growth in employment over the period ahead, with a further gradual reduction in the unemployment rate expected. Notwithstanding the improving labour market, wage growth remains low. This is likely to continue for a while yet, although the stronger economy should see some lift in wage growth over time. There are reports that some employers are finding it more difficult to hire workers with the necessary skills.

Inflation is low, with both CPI and underlying inflation running a little below 2 per cent. Inflation is likely to remain low 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.

On a trade-weighted basis, 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.

Nationwide measures of housing prices are little changed over the past six months, with prices having recorded falls in some areas. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. To address the medium-term risks associated with high and rising household indebtedness, APRA introduced a number of supervisory measures. Tighter credit standards have also been helpful in containing the build-up of risk in household balance sheets.

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, February 6th, 2018

Enquiries

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

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

Source: MLC Economic Monthly update

Power of retiree super dollars

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Power of retiree super dollars

With the waves of baby boomers now nearing or entering retirement, it is hardly surprising that the ranks of retired super members is rapidly growing. Yet the extent of that growth may surprise you.

The latest Superannuation Market Projections report, recently published by independent consultants Rice Warner, forecasts that the number of members with retirement accounts will rise by almost 70 per cent over the next 15 years to more than 3.7 million.

And the total value of retirement assets in super is expected to grow from $828.9 billion (as at June 2017) to $1.335 trillion in 2017 dollars over the same period.

However, the retirement segment of superannuation is not a story of straight-out growth. There are interesting dynamics occurring.

Rice Warner projects that retirement segment's share of total superannuation assets will reduce from 35.6 per cent today to 31 per cent over the next 15 years.

This expected dip in market share is largely due the combination of retirees drawing down on their savings, and the growth in assets and members in the accumulation phase.

An even higher proportion of retirees in future are likely to take their super benefits as a pension rather than a lump sum – further breaking down the myth that Australia is a lump-sum society in regards to super.

"With the [superannuation] industry's focus on member education, improved financial literacy of the general population, and retirement products aimed at helping members preserve retirement assets, we expect a decrease in the rate of lump sum benefits at retirement," Rice Warner comments.

Over the next 15 years, the proportion of members taking their super as pensions rather than lump sums is expected to reach 90 per cent, "resulting in a positive cash flow in the long term" for super's retirement sector.

It is anticipated that the biggest change will occur in the market share of the retirement dollars held by the different superannuation fund sectors.

Rice Warner forecasts that the market share of retirement assets held by the various fund sectors to significantly change over the next 15 years to: SMSFs, 44 per cent (58 per cent today); industry funds, 18.9 per cent (7.6 per cent today); commercial retirement products, 29.4 per cent (26.1 per cent today); public-sector funds, 7.8 per cent (7 per cent today); and corporate funds, nil per cent (1.3 per cent today).

The expected reduction in the proportion of retirement superannuation dollars held in self-managed super is readily understandable given that SMSFs hold by far the biggest market share of retiree super savings. SMSFs will therefore experience the largest proportion of retirement drawdowns.

 

Source:

Written by Robin Bowerman, Head of Market Strategy and Communications 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

2018: A balancing act

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2018: A balancing act

Fidelity's Investment Director, Tom Stevenson, shares his thoughts on investing in 2018.

Most of the time investors don’t need to think too much about market timing or asset allocation. The long-term trajectory of financial markets is up and the only sensible thing to do is to be fully invested and allow the odds to work in your favour. As we enter 2018, however, it doesn’t feel like ‘most of the time’. Nine years into the current equity bull market and with well-known and successful investors like Jeremy Grantham and Neil Woodford muttering darkly about investment ‘bubbles’, every investor’s New Year Resolution should be to look at their portfolio and understand the risks they are taking.

If you try to call the top of the equity market, one of three things will happen. You will get it just right, be too early or too late. The chance of the first is vanishingly small, so it is prudent to assume that if you try and time the market peak you will get it wrong. The only question that matters is how you want to be wrong. Do you care more about losing what you have accumulated in recent years or watching from the side-lines as others make profits that you have consciously foregone?

Whichever misjudgement you choose, it will probably be expensive especially if you are over-exposed to the equity market as most investors are. A year ago, you could have looked at the valuation of the US stock market and concluded that it was over-priced. Shares cost about 25pc more as a multiple of profits than their long-term average. If you had de-risked your equity portfolio at the beginning of 2017, you would have missed out on a 20pc rise in the S&P 500 and even more on the basis of the Dow Jones Industrials index or the Nasdaq.

Anyone bailing out of the market today risks a similar opportunity loss. In every market peak since the 1920s, returns have tended to accelerate in the six months before the market changes direction. On average, missing out on the final year of a bull market has meant leaving 20pc of gains on the table for someone else.

Being late is just as painful. Between 2000 and 2002, the same US benchmark index fell by nearly 50pc. Between the peak in 2007 and the bottom of the market in 2009, the fall was closer to 60pc. These are the exception not the rule but there are plenty of other examples of market falls of between 10pc and 20pc. Even these are worth avoiding if you can. Remember, a 50pc fall in the value of a portfolio requires a 100pc recovery simply to get back to square one.

So if like most people you feel the pain of a loss more than you enjoy the pleasure of a gain, you are probably thinking about protecting what you’ve got. How might you do that?

If you are really risk-averse, you may decide that the market has been driven by excessively loose central bank policy which is now reversing, that valuations have gone too far and that the market has had a fantastic run. You will swap all your investments for cash. Anyone doing this needs to understand that it comes with a significant cost. It’s not just the opportunity cost, it’s the fact that assets like cash with the lowest risks also guarantee the lowest returns. All the while that you are ‘de-risked’ you will be losing money in real terms. 

The good news is that you don’t need to do this. If you are prepared to accept that a portion of your portfolio will indeed go ‘over the cliff’ when the market inevitably turns you can still minimise your losses and maintain some exposure to any final ‘melt-up’ phase in the market by injecting some balance into your investments.

To see how this worked the last time an equity market bubble burst, let’s jump back in time to the 1999-2003 boom and bust. In 1999, emerging market equities delivered a total return of 72pc while Japanese shares returned 67pc. A well-diversified global equity fund would have given you 31pc while the defensive assets in your balanced portfolio would have looked drearily pedestrian at 6pc for cash, 3pc for corporate bonds and a modest fall in the value of any government bonds you held.

The following year as the equity bubble burst, the emerging market equities that topped the table in 1999 were the worst performers, losing more than 25pc of their value and the Japanese shares were not far behind. Offsetting those falls, however, were cash, with a slightly higher return than the previous year and double digit returns from all types of debt: emerging market, corporate and government. In 2001, it was the same story. By 2003, however, the tables had turned with emerging market equities the top performer and government bonds at the bottom of the list.

One of the problems with how we think about our investments is that we are encouraged by the media to think it is all about equities. This is natural. Shares are more newsworthy because they bounce around more than bonds and are more closely linked to the ups and downs of corporate news. But this focus on shares encourages us to think in black and white terms about the market. If your New Year’s Resolution is to take some risk off the table, don’t overdo it and don’t swap one unbalanced portfolio full of equities for another stuffed full of cash. At this uncertain point in the cycle you can’t be too diversified.

 

Source:

Written by Tom Stevenson, Investment Director, Fidelity Australia.

Reproduced with permission of Fidelity Australia. This article was originally published at https://www.fidelity.com.au

This document has been prepared without taking into account your objectives, financial situation or needs. You should consider these matters before acting on the information. You should also consider the relevant Product Disclosure Statements (“PDS”) for any Fidelity Australia product mentioned in this document before making any decision about whether to acquire the product. The PDS can be obtained by contacting Fidelity Australia on 1800 119 270 or by downloading it from our website at www.fidelity.com.au. This document may include general commentary on market activity, sector trends or other broad-based economic or political conditions that should not be taken as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be taken as a recommendation to buy, sell or hold these securities. While the information contained in this document has been prepared with reasonable care, no responsibility or liability is accepted for any errors or omissions or misstatements however caused. This document is intended as general information only. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity Australia’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. Reference to ($) are in Australian dollars unless stated otherwise.
© 2018. FIL Responsible Entity (Australia) Limited.

Important:
This provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. 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

Beyond share prices

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Beyond share prices

Investors shouldn't overlook that there are two components to sharemarket returns – dividend yield and capital gains (or losses).

Few investors would have missed the news reports of late pointing out that although Australia's sharemarket has broken through the 6000-point mark, it's still below the record pre-GFC high. (See What's in a number? – Smart Investing, November 24.)

But looking at share price movements alone can give investors a misleading impression and encourage them to overreact to short-term market shifts and other market "noise".

And by excessively focussing on asset price movements, investors may overlook the rewards from compounding total returns (as returns are earned on past returns) and from taking a strategic, long-term approach to investing.

Once reinvested dividends are taken into account, the performance of the Australian sharemarket in the GFC aftermath looks much better – particularly considering the benefits of dividend franking.

On 1 November, 2007, the S&P/ASX200 (prices only) closed at 6828.7 points, its pre-GFC closing high. And on 6 March, 2009, this index closed at 3145.5, its lowest close in the depths of the GFC.

By contrast on 1 November, 2007, the S&P/ASX200 accumulation index (share price plus reinvested dividends) closed at 43,094.3, its pre-GFC high. And on 6 March, 2009, this index fell to 21,298.1, its lowest point in the depths of the GFC.

Now move forward to the beginning of 2018.

On 2 January, 2018, the S&P/ASX200 Index (prices only) opened at 6065.1 points. This was still below its pre-GFC closing high yet 93 per cent above its GFC closing low.

And on the same day, (2 January, 2018), the S&P/ASX200 accumulation index opened at 60,387.4. This was 40 per cent above its pre-GFC closing high and 184 per cent above its GFC closing low.

Figures from super fund researcher SuperRatings reinforce why investors should take a disciplined, long-term approach without being swayed by day-to-day movements in asset prices.

SuperRatings estimates that $100,000 invested in a median balanced super fund on November 1, 2007 – remember that is the day when the Australian market reached its pre-GFC closing high – would have increased to $163,218 by the beginning of 2018. Critically, the total doesn't include contributions.

 

 

Source:

Written by Robin Bowerman, Head of Market Strategy and Communications 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

Four issues for investors to keep on the radar in 2018

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Four issues for investors to keep on the radar in 2018

“The inevitable never happens. It is the unexpected always.” 
John Maynard Keynes (1883 -1946)

2017 was a year of surprises and shocks. This year is likely to bring its own remarkable events in economics and politics. So rather than trying to predict precisely the twists and turns of the future, here are four broad issues that investors should keep on the radar in 2018.

1. The exuberant US share market may not last.

Last year Wall Street reached record highs, boosted by rising corporate profits and the prospect of lower taxes under President Trump. The unemployment rate, at 4.1%, was the lowest in the past decade. Retail spending surged, while inflation remained modest. The US Federal Reserve (Fed) signalled that future US interest rate rises should only be ‘gradual’.   

However, in several possible scenarios, this fairy tale could easily fracture. First, President Trump could face the spectre of impeachment as a result of the Mueller investigation into collusion with Russia during the 2016 election campaign. The US mid-term elections in November 2018 could also see Republicans lose control of Congress. If the White House is under siege, the much-publicised ‘permanent’ corporate tax cuts may become only ‘temporary’.

Second, the Fed’s guidance for gradual interest rate rises isn’t a guarantee. The Fed has a new Chair, Jerome Powell, and new committee members.  If inflation starts to rise, the Fed could surprise with more aggressive interest rate rises in 2018.

Any of these developments in the US could deflate the buoyant share market.

2. Political challenges could threaten China’s growth.

China’s economic growth has been remarkably strong and stable in recent years, averaging near 7%. Yet this masks some deep fault lines. With robust growth in borrowing, China’s debt obligations have surged to 242% of nominal GDP.1

Over the past year, credit conditions in China have become tougher to slow this debt locomotive. China’s government has the ability to mitigate any debt crisis by bailing out the state-owned enterprises, local governments and banks which have exceeded their authority. However, given President Jinping’s anti-corruption campaign, there may not be the political will for this. If there is no bail-out, the current comfortable expectations of China’s economic and financial stability could be challenged in 2018, with repercussions for the global economy.  

3. Europe faces considerable economic and political risks, and the geopolitical climate elsewhere remains troubling.

After recent solid economic growth, in 2018 the European Central Bank will scale back its long-term program to stimulate lending by purchasing assets. However, some other signs are much less healthy. In particular, unemployment rates remain high in countries like Greece (21% unemployment), Spain (17%), Italy (11%) and France (9%). The exit of some countries from the European monetary system, or even the European Union, are still possibilities in 2018.

Spain’s political problems with Catalonia, Italy’s general election in March 2018 and even German Chancellor Angela Merkel’s difficulties in forming a coalition government all signal that Europe political climate is more fragile than investors may assume.

Beyond Europe, there is a shopping list of major geopolitical risks that will continue in 2018. The hostile relationship between the US and North Korea, Syria and Iraq teetering on the edge of becoming failed states and the simmering tension between Iran and Saudi Arabia are all highly unpredictable situations.

4.    In Australia, there are hints that interest rates could rise.

The cash interest rate has been set at the remarkably low rate of 1.5% since mid-2016. Many investors expect it will be stuck there throughout 2018. Australia’s slow wages growth and mild inflation have seemed to give the Reserve Bank of Australia (RBA) little choice but to keep interest rates low.

However, there are some early signsthat interest rates could move higher. Australia’s unemployment rate is grinding downwards due to stronger jobs growth. Workers are beginning to feel more secure about their jobs, which should lead to a revival in wage pressures. As a result, it seems likely that the RBA will contemplate raising interest rates later in 2018. An increase in rates would come as a shock to those borrowers who are carrying a high level of household debt on the assumption that interest rates will stay low.

 

Source: nab asset management January 2018

Author: Bob Cunneen, Senior Economist & Portfolio Specialist, NAB Asset Management

1 Source: The International Monetary Fund at www.imf.org/en/News/Articles/2017/08/09/NA081517-China-Economic-Outlook-in-Six-Charts

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 230 686) group of companies (NAB Group), 105-153 Miller Street, North Sydney 2060.

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

Any opinions expressed in this communication constitute our judgement at the time of issue and are subject to change. We believe 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 their accuracy or reliability (which may change without notice) or other information contained in this communication.

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

2017: The year in review

By | MLC General News | No Comments

2017: The year in review

A very rewarding year for investors

2017 was a very positive year for investors, particularly those with substantial exposure to shares (see Table 1). Growth across the global economy was more synchronised than for some time due to a recovery in the eurozone, promising signs of improvement in Japan’s economy and solid conditions in the US and China. All of these strongly supported share markets in both the developed and emerging world.

However, the strong market returns seem to indicate widespread investor complacency about some clear potential risks. In particular, valuations in some markets look stretched and monetary policy will be tightened further in important parts of the world in 2018, with uncertain consequences.


Table 1: Mainstream asset class returns in Australian dollars – periods to 31 December 2017
 

Asset class

Returns*

1 yr

3 yrs (pa)

5 yrs (pa)

10 yrs (pa)

Cash

1.7%

2.1%

2.3%

3.6%

Australian bonds

3.7%

3.1%

4.2%

6.2%

Global bonds (hedged)

3.7%

4.1%

4.9%

7.1%

Global high yield bonds (hedged)

4.5%

5.7%

–**

–**

Australian property securities

6.4%

11.3%

13.4%

1.8%

Global property securities (hedged)

9.2%

7.1%

10.7%

5.7%

Australian shares

11.8%

8.6%

10.2%

4.1%

Global shares (hedged)

21.4%

11.5%

14.9%

7.5%

Global shares (unhedged)

15.4%

11.6%

17.9%

6.4%

Emerging markets (unhedged)

27.5%

11.2%

10.8%

3.2%

* Annualised returns. Past performance is not a reliable indicator of future performance.
Sources: FactSet, NAB Asset Management Services Limited.

** No data available

Benchmark data include Bloomberg AusBond Bank Bill Index (cash), Bloomberg AusBond Composite 0+ Yr Index (Aust bonds), Barclays Global Aggregate Index Hedged to $A (global bonds), Composite benchmark of indices for MLC’s high yield managers (global high yield bonds hedged), S&P/ASX200 A-REIT Total Return Index (Australian property securities), FTSE EPRA/NAREIT Developed Index hedged to $A (global property securities), S&P/ASX200 Total Return Index (Aust shares), MSCI All Country World Indices hedged and unhedged in $A (global shares), and MSCI Emerging Markets in $A.

The global economy performed well

As the year progressed, the global economy improved. A welcome feature ‒ and one absent for years ‒ was that all the major economies were growing at the same time.

Across the eurozone, economic conditions improved markedly as the year unfolded. In Japan, signs of more consistent and sustainable growth emerged after the numerous false starts of recent years. Economic growth in the US and China remained strong throughout 2017. As a result, the year concluded with considerable optimism about the outlook for 2018.

In emerging economies, stronger global growth and trade also helped lift many countries from their depressed levels of 2016. Foreign capital gradually returned due to better growth, significantly lower exchange rates and attractive yields on bonds compared with developed world peers. Positive sentiment about the outlook for emerging economies helped the MSCI Emerging Markets Index deliver a substantial return of 27.5% (unhedged) for the year.

Global shares provided strong returns

The global economy’s strength and consequent recovery in corporate earnings was very positive for share market returns, with  global shares returning 21.4% on a hedged basis. The 15.4% unhedged return was lower (though still substantial) because the Australian dollar strengthened against the US dollar and Japanese yen but weakened slightly against the euro and sterling.

After modest returns in 2016, European share markets performed well in 2017 due to the eurozone’s economic upturn, employment growth and improved consumer and business confidence. The failure of anti-eurozone parties to achieve political success in elections in The Netherlands and France also helped reassure markets. Although Germany’s post-election political stalemate remained unresolved at year’s end, its share market was up 12.5% during 2017. In France and Italy, share markets gained 12.7% and 13.6% respectively.

In the UK, despite continuing uncertainty about Britain’s withdrawal from the European Union (‘Brexit’) and its impact on the economy, the FTSE 100 Index provided a return of 11.9%. The mechanics of the withdrawal process were complicated by the ruling Conservative Party losing its majority in the mid-year general election. With the complex negotiations due for resolution in March 2019, this political saga still has a long way to go.

In the US, the S&P 500 Index gained 21.1% in local currency terms and achieved record high levels towards the end of 2017. Optimism about President Trump’s significant corporate and personal tax cut reforms, which passed into law late in the year, was a significant driver of the market’s performance. US economic data was also very supportive, with solid jobs growth, lower unemployment and encouraging business survey results.

In Asia, Japan’s Nikkei index rose 21.3% in response to the economy’s marked improvement. Despite continued robust growth in China, the impact of fiscal and monetary policies designed to cool the economy meant the Shanghai Stock Exchange Composite Index provided a return of just 6.6% for the year.

Global listed property performed well, with a hedged return of 9.2%, as property market conditions in many countries were favourable. The sector continues to provide strong earnings growth and an attractive distribution yield. Financing costs have remained low, new supply has been limited since the global financial crisis and improving global growth has supported demand for space and property valuations.   

Bonds generally delivered modest returns

Global and Australian government bonds delivered modest returns as yields increased, partly due to action by a number of central banks to raise rates (as in the US, UK and China) or take steps (like the ECB) to curtail monetary stimulus measures. However, there was some positive news for bond investors in that hedged global high yield bonds had a comparatively good year with a return of 4.5%, outperforming nominal bonds. Rising corporate profits and the promise of lower US corporate taxes saw credit spreads sharply narrow and corporate bond values rise.

Some central banks began to shift to a tightening phase

After years of substantial monetary stimulus, including large-scale asset purchase programs, a number of central banks decided in 2017 to change course to a tightening stance. However, these central banks are doing so very cautiously and gradually to avoid undermining markets and ensure they preserve the economic recovery that has been successfully engineered.

In the US strong economic growth, solid jobs creation and the lowest unemployment rate since early 2001 have had a benign impact on inflation so far. However, this didn’t stop the US Federal Reserve (the Fed) from raising interest rates by 0.25% three times during 2017, taking its benchmark cash rate range to 1.25%-1.5%. The Fed also plans to begin a gradual reduction of its swollen balance sheet by selling down its holdings of US government bonds and mortgage securities. Having upgraded its economic growth forecast for the US economy in 2018 to 2.5% (from 2.1%), the Fed has also signalled that it expects to raise rates three more times in 2018.

In Europe, the broad-based improvement in economic conditions enabled the European Central Bank (ECB) to cut its monthly bond purchases by half to 30 billion euros for a period of nine months, commencing in January 2018. However, the ECB has also permitted itself the discretion to change course and increase its money printing if economic conditions deteriorate.

Late in the year the Bank of England reversed its 2016 post-Brexit rate cut of 0.25% as it attempted to bring inflation (which reached 3.1% towards year-end) back to its preferred 2% target.

Another good year for the Chinese economy

China’s economy continued to perform well, with industrial production growth stable at an annual rate of 6% and retail sales growth of around 10%. Most important economic indicators were positive, with few surprises.

However, the extraordinary expansion of China’s economy compared with its global peers has been achieved with an excessive rate of credit growth. At 13% on an annual basis, China’s credit growth is nearly double the economy’s growth rate. As a result, China’s central bank implemented a number of measures during the year to curb credit growth. These included pushing interest rates higher, increasing the interest rate at which banks lend to each other by 1.6% to 4.7% over the year and restraining the asset management industry’s use of leverage.  

An important political development in 2017 was the confirmation of President Xi Jinping’s second five-year term by the Chinese Communist Party Congress in November. At the Congress, a number of important policy priorities for the next five years were flagged, including strengthening financial regulation  through the creation of a new super-regulator, the Financial Stability and Development Committee. There will also be greater emphasis on improving welfare, education, controlling pollution and improving quality of life in China’s cities. The Congress renewed its previous commitment to double the value of gross domestic product (GDP) and per-capita income in 2010 by 2020. To achieve these targets, China’s economy will need to grow at over 6% per year for the next three years.     

Political risks moderated, but didn’t go away

After 2016’s unexpected Brexit referendum result and election of Donald Trump as US President, market focus moved to Europe, where a string of national elections were scheduled in  2017. However, concerns that electoral success by extreme anti-European Union and anti-immigration parties could threaten the cohesion of the European Union proved misplaced.

In The Netherlands, the incumbent VVD party won the most seats, soundly defeating the anti-immigration Party for Freedom. In the French Presidential election, moderate and pro-Europe candidate Emmanuel Macron decisively defeated National Front President Marine Le Pen, who had campaigned strongly for France to reassert its sovereignty by exiting the eurozone. A month later, Macron’s newly formed En Marche! Party won the majority of seats in the National Assembly election.

In Germany, Angela Merkel secured a fourth term as Chancellor, though the loss of seats by her Christian Democratic Union/Christian Social Union coalition has required extensive negotiations with minority parties to try to form a government. The year concluded with no resolution in sight.

Across the English Channel, Britain finally triggered the Brexit negotiation process. This process was further complicated by the surprise outcome of Britain’s general election in June 2017, which saw the Conservative Party lose its parliamentary majority and compelled Prime Minister Theresa May to seek the support of the Democrat Unionist Party in order to maintain power.

In Asia, tensions escalated as a result of North Korea’s nuclear missile testing program and claims it now has the capability to strike US cities. However, markets were largely unfazed by these threats and the potential for US military action.

Ups and downs for the Australian economy

Australia recorded mixed economic data over 2017, though the economy picked up speed as the year progressed. Real GDP grew by 2.8% over the year to 30 September, which was significantly better than the sluggish 1.9% growth for the year to the end of June. Business investment improved, with annual growth of 7.9% (to 30 September) as the downturn in mining investment neared an end and non-mining investment showed signs of life. Surveys of business confidence and business conditions also showed positive results.

Substantial public sector infrastructure spending provided added stimulus. However, one concern was that the housing construction boom is rapidly fading. Higher mortgage interest rates for housing investors and concerns of a potential oversupply of inner city apartments in Sydney, Melbourne and Brisbane caused residential construction to fall over the year.  

The jobs market was very strong, with the creation of more than 380,000 jobs, mostly full time ones, in the year to 30 November. However, wages growth was subdued due to considerable spare capacity in the labour market. The unemployment rate remained at an elevated 5.4% and 8.3% of the Australian workforce was underemployed (working fewer hours than they would like).

Low wages growth, high debt levels and sharply higher utilities costs meant 2017 was a difficult year for many Australian households. This undermined consumer sentiment and slowed retail spending to just 2.2% annualised growth. The fall in the savings rate to 3.2% suggested that many consumers were being forced to fund their consumption by saving less.

With subdued wages growth and only mild inflationary pressures, the Reserve Bank of Australia (RBA) has left the cash rate at 1.5% for the last sixteen months.

In the housing market, action by regulatory authorities and the banks to tighten lending standards had an impact on prices by year’s end. Sydney and Melbourne prices came down marginally from their previous highs and in mining-related markets such as Perth and Darwin there were more substantial declines.

Australia's share market was a solid performer

The S&P/ASX200 Total Return Index (which includes dividends) returned 11.8% in 2017. While it lagged the performance of global market peers like the US and Japan, its 2017 return was its best calendar year performance since 2013 and the sixth consecutive positive year for investors. Favoured sectors were Materials, with the resources-laden S&P/ASX 200 Materials Index rising 22.9% over the year, Healthcare (up 26.4%) and Energy, which increased 23.3% in response to higher oil prices.

Despite generally favourable office and industrial property market fundamentals, the return for the listed property sector was just 6.4%. Retail property trusts underperformed due to the challenging conditions in the discretionary retail sector and concerns that the entry into the Australian market by online global giant Amazon would harm shopping centre owners. A notable global transaction during the year which impacts the Australian listed property sector was the proposed acquisition of Westfield Corporation and its global portfolio of shopping centres by European retail giant Unibail-Rodamco.  

The Financials sector returned just 5% due to headwinds for the major banks, including a new levy announced in the May Federal Budget, competitive pressures, low earnings growth and the Royal Commission into bank conduct.    

In a risky environment, a defensive portfolio stance remains justified

The strong market returns in 2017 indicated widespread complacency among investors, despite potential risks being well known. This under-appreciation of risk was also reflected in measures of market volatility such as the VIX Index, which remained at unusually low levels.

Significant risks and uncertainties remain. After such a long period of good returns, valuations in both share and bond markets are stretched. Very low interest rates and large asset purchases by central banks have been significant contributors to strong market returns. That stimulus is now being wound back and it’s highly uncertain how this policy reversal will affect financial markets and the real economy.

MLC has believed for some time that where possible, it’s appropriate to defensively position our MLC Horizon, Inflation Plus and Index Plus portfolios. At the start of 2018, given the potential risks that are being overlooked by the market, risk management remains uppermost in our mind.

Our defensive positioning has been achieved in a number of ways. We have maintained a low exposure to Australian shares. Our portfolios are holding more cash than usual, as are those of our investment managers who have the discretion to hold cash to manage risk. We’ve maintained allocations to alternative strategies which we believe will help preserve investors’ capital in volatile markets. After extensive research, we have implemented new currency and derivatives strategies to expand the number of investments generating returns and to carefully manage risks in our multi-asset portfolios. And we remain highly selective about the type of fixed income we invest in, limiting exposure to securities that will fall in value if interest rates rise quickly.

While these positions may not prevent negative returns in weak share market conditions, our caution should provide some insulation.

Source: NAB Asset Management January 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 230 686) group of companies (NAB Group), 105-153 Miller Street, North Sydney 2060.

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

You should obtain a Product Disclosure Statement (PDS) relating to the financial product mentioned in this communication issued by MLC Investments Limited, and consider it before making any decision about whether to acquire or continue to hold the product. A copy of the PDS is available upon request by phoning the MLC call centre on 132 652 or on our website at mlc.com.au.

An investment in any product referred to in this communication is not a deposit with or liability of, and is not guaranteed by NAB or any of its subsidiaries.

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. The returns specified in this communication are reported before management fees and taxes.  Share market returns are all in local currency.

Any opinions expressed in this communication constitute our judgement at the time of issue and are subject to change. We believe 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 their accuracy or reliability (which may change without notice) or other information contained in this communication.

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.

Bloomberg Finance L.P. and its affiliates (collectively, “Bloomberg”) do not approve or endorse any information included in this material and disclaim all liability for any loss or damage of any kind arising out of the use of all or any part of this material.

The funds referred to herein is not sponsored, endorsed, or promoted by MSCI, and MSCI bears no liability with respect to any such funds.

Source: MLC General article newsletter