The final Federal budget before the imminent Federal election has been released. Given the proximity between these two events, the budget wasn’t expected to be overly frugal and there are goodies. There are one off payments and tax rebates coming to try and keep everyone happy. Some warranted, others debateable.

It’s worth remembering we’ve had strong equity markets, record house price growth, record stimulus and the lowest interest rates the country has seen. There’s $250 billion sitting in household savings accounts and the unemployment rate is projected to fall below 4% (even if the basis of this figure is questionable). The idea that a large number of people in the middle class need a boost from government after such a boom is an interesting one.

Forecasts for net debt have improved, expected to now peak at $864 billion in 2025/26. Last year the forecast was sitting at $980 billion for 2024/25. No doubt the government was keen to avoid the one trillion mark in forecasts, along with the potential headlines that would accompany it. The budget deficit for 2022-23 is $78 billion.

The budget has an optimistic outlook on lower inflation and higher wages growth. Over the next few years wages are expected to grow at their fastest pace in a decade over, from 2.75% to 3.25 per cent next year and 3.5 per cent by 2025. At the same time, despite all the additional spending, the budget suggests inflation will “peak well below that in most other advanced economies”. There’s no mention of what that peak is, but budget forecasts have the consumer price index at 4.25% before subsiding to 3% by June 2023 and 2.75% in 2024 and 2.25% in 2025.

Some continue to be worried about inflation, believing these figures will come under pressure. From veteran business journalist Robert Gottliebsen:

Treasury has told Frydenberg that we can control inflation partly because higher commodity prices are boosting the dollar and wage increases will be moderate. They say that while the increase in the hourly wage rate in the 12 months to June 30 is five per cent it will slump to 3.5 per cent in the next financial year. And that will happen because the CPI index, having risen by 4.25 per cent in 2021-22, will rise by only three per cent in 2022-23.

Those estimates look incredibly low given that the Treasurer is campaigning for higher wage rates and the core of the ALP campaign (and they are way ahead in the opinion polls) is for higher wages.

Onto the relevant points from the budget.

Income Tax/Individuals/Families

Low and Middle Income: The low and middle income tax offset has been retained and increased for the current financial year. Those earning up to $126,000 will see up to a $1500 offset when they file their tax return for this financial year.

However, workers should be aware the low and middle income tax offset has been omitted from the next financial year. If you’re filing your tax in July 2023, there will be no more relief unless it is extended at the next budget.

Employee Share Schemes: Access to employee share schemes has been expanded. Where employers make larger offers in connection unlisted companies, participants can invest up to:

$30,000 per participant per year, accruable for unexercised options for up to 5 years, plus 70 per cent of dividends and cash bonuses; or any amount, if it would allow them to immediately take advantage of a planned sale or listing of the company to sell their purchased interests at a profit.

Digitalising Trust Income Reporting: Trust and beneficiary income reporting and processing will be digitised, allowing all trust tax return filers the option to lodge income tax returns electronically, increasing pre-filling and automating ATO processes.

Paid Parental Leave: Single parents can now access the full 20 weeks of paid parental leave. Couples will get greater flexibility in deciding how paid leave is divided between them. Eligibility criteria will also be broadened. Under the current laws, mothers earning up to $151,350 can access paid leave, but anyone earning more is not entitled to it. The government is broadening the threshold so that any household with an income of up to $350,000 can use of the 20-week scheme.

Superannuation/Retirement

Superannuation Minimum Drawdown Reduction Extension: The 50% reduction of superannuation minimum drawdown requirements for account-based pensions has been extended until 30 June 2023. This has been done to ensure retirees have certainty and don’t have to draw down on assets and potentially sell at a loss. Thankfully this was the only superannuation change or non-change as it were. It’s not a bad one, but it does pose a question: if we’re going to change drawdown rates every time there’s a market upset or scary world event, why not just lower drawdown rates permanently?

Social Security

Cost of Living Payment:  This is a $250 economic support payment to help eligible social security recipients with higher cost of living pressures. The payment will be made in April 2022 to eligible social security recipients such as pensioners, carers, veterans, job seekers, eligible self-funded retirees and concession card holders.

Pharmaceutical Benefits Scheme Lower Safety Net Threshold: From 1 July 2022, the Government is reducing the PBS Safety Net threshold, from $1,542.10 to $1,457.10 for general patients and from $326.40 to $244.80 for concessional patients.

Housing

Home Guarantee Scheme Increased

The Government will increase the number of guarantees under the Home Guarantee Scheme to 50,000 per year for 3 years from 2022-23 and then 35,000 a year ongoing for homebuyers to purchase a home with a lower deposit.

35,000 guarantees per year ongoing for the First Home Guarantee (formerly the First Home Loan Deposit Scheme) 5,000 places per year to 30 June 2025 for the Family Home Guarantee. 10,000 places per year to 30 June 2025 for a new Regional Home Guarantee that will support those who have not owned a home for 5 years to purchase a new home in a regional location with a minimum 5% deposit.

The merits of the government backing 2-5% deposits as house prices are at record highs, interest rates are at record lows, and inflation is increasing, are very questionable, but politicians are addicted to buy side housing “affordability” measures, and we note the opposition is proposing something similar.

Business & Training

Apprentices: A $2.8 billion investment to increase take up and completion rates of trade apprenticeships.  New apprentices will access to a $5000 payment, while employers who take them on will be entitles to wage subsidies up to $15,000. $38 million over four years to support women starting trades on the national apprenticeship priority list.

National skills agreement: $3.7 billion for an additional 800,000 training places to help find employment for disadvantaged youth, Indigenous Australians, the mature aged and Australians with a disability.

Small Business Training: For every hundred dollars a small business spends on training their employees, they will receive a $120 tax deduction. Capped at $100,000.

Small Businesses Technology Investment Boost: For every $100 small businesses spend on digital technologies such as cloud computing, eInvoicing, cyber security and web design, they will get a $120 tax deduction. Capped at $100,000.

Additional Cost of Living Relief

Temporary Reduction in Fuel Excise: With fuel prices moving over $2 a litre, the government has reduced the fuel excise by half from March 30 for six months. The rate of excise applying to petrol and diesel is 44.2 cents per litre, which will cut it to 22.1 cents per litre. GST is also levied on excise, so consumers may see a little bit more than a 22.1 cent reduction.

As always, to ensure to you make the most of your money, your adviser can offer advice on how to best apply it to your circumstances.

_{This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.}

“It has been a really tough weekend,” said Harold Camping as he answered his door to reporters on a Sunday afternoon back in May 2011.

Given the circumstances, it could have been a lot tougher. The 89-year-old Christian fundamentalist radio preacher had been telling anyone who would listen that the rapture would occur a day earlier at 6pm Saturday. Massive earthquakes would strike, believers would ascend to heaven while everyone else would be left to wander a godforsaken hellhole. After enduring five months of torment, the detritus left behind would see the world explode into a fireball by late October.

It didn’t take long for Camping to straighten his spine and revise his call. After finding some errors in his calculations, Camping suggested the May call was premature and October 2011 was “probably” the right forecast for both the rapture and the end of the world. Thankfully, Harold missed on that call also.

Camping started his forecasts in the late 1980’s. Back then, 1994 was the initial target for his prophecy of doom. When 1994 didn’t come to pass, he was forced to admit he’d found some calculation problems which explained the miss. After forgetting about the idea for a while, in 2005 Camping came up with the 2011 target for the end of days. The genius of such a long lead left plenty of time to sell some books and build a following for the apocalypse. Camping had a radio show where he spruiked to the gullible and garnered some media attention.

You might wonder why the media would give any space to Camping, but they did. He spent up a storm trying to promote his forecast. Many of his acolytes followed his lead by buying billboard advertising and handing out pamphlets around the world. It was this strange circus of doom that likely caught the media’s attention as an oddity.

Thankfully, the media didn’t give Camping the most balanced coverage. Any perceptive reader could sense there was an undercurrent of ridicule in most stories and there was always a prominent reminder of his previous failed predictions. When Camping passed away in December 2013 the failed predictions featured prominently in his obituaries, and with good reason, as illustrated by New Jersey pastor J.A. Jones’ conversation with The Philadelphia Inquirer in 2011.

Many of his parishioners have heard Camping’s warnings, Jones said, and asked him anxiously if the May 21 date is true. “I tell them, ‘No, but if you’re so concerned, why don’t you deed us your house and car?’ and then they laugh. … Everyone who ever made those predictions got egg on their faces,” Jones said.

Some others, without access to such a sober second opinion, took Camping seriously and were left dealing with the consequences. Mostly it was frustration and some wounded pride among his spooked acolytes. Eighty of Camping’s South African believers booked out a hotel for an end of the world shindig, all with the expectation they wouldn’t be around to pay the bill! Not so funny were some tragic outcomes. A suicide, an accidental drowning, and attempted murders were all prompted by panic among believers of Camping’s forecast.

While Harold Camping was well removed from the investment space, he’s someone we never fail to think of at least a couple of times a year because of forecasts like this:

Billionaire investor says historic sharemarket crash is ‘nearly certain’

Jeremy Grantham of asset manager GMO published his historic crash forecast just as markets were swooning in January. It quickly caught the attention of many in the media, who had little problem acting as “his master’s voice”.

Is Jeremy Grantham a dangerous kook like Harold Camping? No. Grantham is interesting, he has views that are worth considering, he has 50 years of experience behind him, and he has been right in the past. He’s also been catastrophic and alarming on a regular basis over the past decade, without success. Anytime you hear someone predicting a crash, put their name into google and include a year, in this instance maybe 2010, and see what shows up.

Then try 2011.

Anyone who cares to look can see this has been going on for a while. The galling thing is it’s not noted when the mainstream media report on Grantham’s forecasts. Previous misses are excluded, and the new forecast is put up in lights to spook investors without any of the baggage that this has been occurring almost annually. However, we don’t see this as a Jeremy Grantham issue. He’s very much entitled to his views. Grantham has been writing on GMO’s website on a regular basis over an extended period. It’s only when he has a disaster forecast that the media chooses to pay it attention, and then amplify it further.

This is not uncommon. Crash forecasts are treated with the utmost seriousness by the media and the forecaster’s track record is selectively referenced by highlighting the wins and excluding the many misses to make the story seem more prescient. In contrast, if you’re predicting the end of the world there’s immediate skepticism, an undercurrent of ridicule and prominent reminders of prior forecasts that didn’t pan out, as the Harold Camping example shows.

The issue with news about “nearly certain” crashes and selective reporting of track records is investors panic when hearing this stuff. We’ve had questions about it. All we can do is play the role of Pastor Jones. Offer a sober second opinion and some perspective beyond the one offered up. Most crash forecasts miss because the market rarely crashes. No one can time markets with any real and consistent success. Every decision prompts another decision, which sooner or later results in a costly mistake. We’ve always found doing nothing is the best course of action. Our most successful clients are the ones who’ve sat dispassionately in their seats for decades.

What’s notable about this story is what we didn’t hear and what we weren’t asked about. No one mentioned tech companies such as Microsoft, Apple, and Google are currently smashing earning expectations, so this conflicts with the idea of a massive market decline when these companies help drive the market. No one asked: “should we buy emerging markets, resources, and value stocks?” Because that’s also where Grantham said was the best place to be positioned, he didn’t say sell everything and sit in cash, but that’s not a great headline. In contrast “historic sharemarket crash” gets a chest tightening reaction.

We understand the oversight and the fear, but we run diversified portfolios spanning asset classes and sub asset classes. A core component of those portfolios is exposure to those big winners in the US and value stocks both in Australia and globally. There is also a small exposure to emerging markets. The portfolios are constructed on an all-weather basis because returns are never consistent. Today’s winner can be tomorrow’s loser and vice versa.

March 2020 seems like a long time ago. The Covid panic was quickly swept away by fiscal and monetary largesse. It wasn’t normal and has to end. As the animation shows, sharemarkets see a double-digit dip almost every year. Last year markets moved upward with hardly an incident. That is an exception, not the rule. Market volatility is normal, last year wasn’t normal and many investors quickly grew accustomed to that investment Disneyland. Recent weeks offered a reality check. We can’t put too fine a point on it, but we all need to get used to volatility again.

Your decisions are relative to your goals.

If you’re in your 40’s and your retirement is two decades away, just keep doing what you’re doing. There will be plenty more volatility and plenty of corrections ahead in the next twenty years. To get where you’re going, you’ll have to put up with them.

If you’re retired, in general, your portfolio is likely constructed and managed in a way to ensure short term spending is covered with cash and short-term fixed interest. Profits should harvested after a good run because that’s tomorrow’s spending.

Aside from the incendiary media coverage, experienced investors are worth listening to, in their totality, but never be overawed by the terms “billionaire” or “legend”.  Keep perspective, no matter how persuasive someone seems, history will show they don’t always get it right. Someone may be able speak at length and seem convincing because they’ve seen everything.

But just like Harold Camping, there’s still one thing they haven’t seen: the future.

_{This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.}

It’s one of the most vexing finance questions there is. While it seems like a straightforward one, it’s really a question that only invites further questions. Not about the money, but about the person or persons who are retiring. There will never be a one-size-fits-all pot of money. Primarily because of how many different variables come into play.

What do you want to spend?

Will your spending change?

What your returns will be?

What is the sequence of those returns and how volatile will your portfolio be?

The first two questions are the most controllable. Everyone will have fixed costs based primarily on their shelter, transport, food, clothing and possibly healthcare. These can be elastic to a point. There may also be bigger ticket items that need addressing along the way. It’s a heroic assumption to assume a 30-year retirement will chug along without a repair to a house or an appliance replacement. There are other living related costs we may have the ability to tweak such as entertainment and holidays, depending on lifestyle demands.

The second two questions aren’t controllable and they’re not even knowable. The best anyone can do is assess the range of historical outcomes from various portfolios and make a choice based on the risk they are willing to bear to achieve their spending goals.

This is where the dollar figure comes in, but it needs to be paired with a sensible withdrawal rate. If you’ve got $1,000,000 and you want to spend $100,000 a year for 30 years, you can certainly try, but you’ll need a lot of good market fortune early in the piece for the portfolio to compound and outpace the withdrawals. A 10% withdrawal rate is doable, but it’s not advisable.

For example, if you tried this using a million-dollar portfolio with 80% in growth assets starting in January 1991, today you’re left with $622,000, after withdrawing $4.4 million along the journey. Proving it can be done, but if you tried this starting exactly 12 months earlier your portfolio would be exhausted in 2008.

There are inevitable questions here. The big one is the aggressiveness of the portfolio. It’s a brave retiree who charges into retirement holding 80% of their portfolio in shares and real estate. It’s an even braver one who draws 10% of the portfolio annually adjusted for inflation, so there’s really no choice about increasing risk. It must be done. A 10% withdrawal rate must aim for something higher than a 10% annual return, and that’s not feasible by being heavy in cash and bonds. Start with a less aggressive portfolio in 1991 and it’s exhausted earlier than 30 years.

Even so, these are very optimistic scenarios. Getting 19 years or even 30+ years starting with a 10% withdrawal rate should be considered best case outcomes. Using a very unwelcome event offers the most sober assessment. Try this in 2008 with the financial crisis and you would have been lucky to get ten years out of any portfolio while withdrawing 10%.

Going back to the original questions, it’s the “what do you want to spend” that’s more in a retiree’s control, so how does a 5% withdrawal rate look?

Much better. Starting from one of the worst possible times, no matter whether a portfolio was an aggressive 80% in growth assets, a middle of the road 60%, or a more conservative 40%, by well into 2021 all were above their initial starting position. And the most important thing, all had provided more than $800k in retirement spending.

The outcomes above are also factored on monthly withdrawals. Run them again annually, or biannually, and they present different results again. The long-time rule of thumb is a 4% withdrawal rate should ensure certainty of inflation adjusted spending from a 60/40 portfolio over 30 years. Recently this has been brought into question. Low returns from bonds and lower expectations going forward from shares, after some strong returns in recent years, have prompted suggestions 3.3% is the new safe withdrawal rate.

Which is it?

A 10% withdrawal rate will be more luck than common sense. A 5% withdrawal with a bad start followed by a decent tailwind can get you 15 years with your principle intact, whether it makes it another 15 years is unknown. A 4% withdrawal will look even better to weather rougher seas. What about a 3.3% withdrawal rate?

Wouldn’t a 2.3% withdrawal rate look even better? It would, but at some point, you need to settle on a feasible amount to live and enjoy life! No matter what is chosen, a retiree is always heading into the unknown. The focus shouldn’t be 4% or 3.3% because life doesn’t exist on a spreadsheet. It should be what leads to getting the most out of life. The scenarios used earlier have multiple different inputs, but they’re also static in their withdrawals. Inflation is factored, but real-life investor decisions aren’t.

Goals change. Spending may change. A portfolio may fall below the level that triggers social security eligibility. Inflation will change. Human emotion may trigger a panicked decision. A retiree may get bored and take on a part time job. A portfolio may look like a number on a screen, but it’s subject to so many variables that it may as well be a living and breathing entity. Getting the most out of will be an ongoing conversation an investor needs to have with their adviser.

So how much do you need to retire?

It depends.

_{This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.}

Data Source: 80/20: Bloomberg AusBond Bank Bill Index 2.00%, Bloomberg Global Aggregate Bond Index (hedged to AUD) 13.00%, Dimensional Australia Global Core Equity Index (AUD) 16.7500%, Dimensional Australia Global Core Equity Index (hedged to AUD) 16.7500%, Dimensional Emerging Markets Index (AUD) 3.00%, Dimensional Global Real Estate Securities Composite Strategy 7.00%, FTSE World Government Bond Index 1-5 Years (hedged to AUD) 5.00%, Dimensional Australia Core Equity Index 36.500%. 60/40: Bloomberg AusBond Bank Bill Index 2.00%, Bloomberg AusBond Composite 0+ Yr Index 8.00%, Bloomberg Global Aggregate Bond Index (hedged to AUD) 10.0%, Dimensional Australia Global Core Equity Index (AUD) 12.500%, Dimensional Australia Global Core Equity Index (hedged to AUD) 12.500%, Dimensional Global Real Estate Securities Composite Strategy 10.0%, FTSE World Government Bond Index 1-5 Years (hedged to AUD) 20.0%, Dimensional Australia Core Equity Index 25.00%. 40/60: Bloomberg AusBond Bank Bill Index 3.00%, Bloomberg AusBond Composite 0+ Yr Index 17.00%, Bloomberg Global Aggregate Bond Index (hedged to AUD) 10.0%, Dimensional Australia Global Core Equity Index (AUD) 8.500%, Dimensional Australia Global Core Equity Index (hedged to AUD) 8.500%, Dimensional Global Real Estate Securities Composite Strategy 6.00%, FTSE World Government Bond Index 1-5 Years (hedged to AUD) 30.0%, Dimensional Australia Core Equity Index 17.00%. Constructed under AUD. Rebalance: Per 12 Months. Inflation is calculated by Australian Consumer Price Index: Returns are restated after CPI for the quarter is released. Interpolated Quarterly data into Monthly data. Scenarios are calculated by drawing income monthly and drawings are adjusted annually for inflation.

Economic Overview

Labour and supply shortages, shipping bottlenecks, COVID delta variant, inflation, vaccine hesitancy. There were plenty of worries in Q3, but markets remained mostly positive across the quarter as economies continued to open and society resumed some normality. This led to an increase in demand in many areas and a struggle to supply that demand. Something governments, businesses and central banks will be dealing with in the year ahead.

In the US, the Fed Reserve stated tapering of quantitative easing will be announced at the November meeting and will finish by mid-2022. Interest rate expectations also moved higher. The 2023 interest rate expectation moved from two increases to three, with another three increases expected in 2024. While 2021 real GDP growth was revised down to 5.9% from 7% growth previously estimated, GDP projections for 2022 and 2023 were increased. Notably, inflation has risen with the Fed now seeing inflation running at 4.2% across 2021, above its previous estimate of 3.4%. Inflation did slow in July and August at 5.35% and 5.25% on the year, but edged up in September to 5.39% annually. These figures are around 13-year highs.

COVID continues to hamper the supply chain, the third largest container port in China was shut for several weeks in August due to one positive COVID case. The backlog stretched across the Pacific to the Los Angeles and Long Beach ports, which together handle about a third of all containers arriving in the US. Such disruptions reverberate along the supply chain, then in the US there was an added problem of a shortage of long-haul truck drivers.

Source: RBA 2021

The shortage of labour became a bigger issue in Q3. There has been confusion as to why US businesses are having trouble hiring and hanging onto workers. In something that has been termed “the great resignation” there could be several factors. The desire for flexibility is one reason. According to the job site Glassdoor, searches for remote work are up 460% in the two years through June 2021. Clearly jobs in restaurants, hotels, and retail can’t be done remotely, but recent articles in publications such as the Wall Street Journal, The New York Times and The Atlantic highlighted changing attitudes to work. Many workers used the pause the pandemic offered, via stimulus payments and free time, to either retrain or look for different work. Some service industry employees returned after lockdown to find the American consumer increasingly rude and verbally abusive, so they tossed in their job. Others simply retired.  As the Fed recently highlighted, there is a financial cushion. The net worth of U.S.households was $142 trillion in Q2 2021, up from $110 trillion pre COVID. Beyond investments, there was $17 trillion in cash and cash equivalents on household balance sheets as of June 2021.

In the Eurozone, the Delta variant of COVID continued to spread, but vaccinations rates in the larger eurozone countries now sits around 75% which has seen restrictions on travel and other activities lifted. As the quarter progressed, inflation, due to supply chain issues became a concern. Eurozone annual inflation was estimated at 3.4% in September, up from 3.0% in August. The European Central Bank suggested “inflation is currently being pushed up largely by temporary factors that are expected to fade in the coming years”, announcing a reduction in the pace of asset purchasing, noting it would tolerate a moderate and transitory overshoot of the 2.0% inflation target. The end of the quarter saw a surge in power prices due to low gas supply and weather-related issues over the summer. Germany held a general election, with the Social Democrats (SPD) receiving largest share of the votes. Coalition talks are under way to form a new government.

In the UK, inflation hit 3.2% annually in August, up from 2% in July and the Bank of England took a hawkish tone, voicing concerns publicly that inflationary pressures were surpassing expectations and likely to peak above 4% and remain high until 2022. At the same time, it reiterated its position that it won’t take action for the time being. Like the US and EU, supply bottlenecks constrained output, while natural gas and fuel shortages cropped up towards the quarter’s end. The vaccination programme continued to reduce the number of virus-related hospitalisations despite the emergence of the delta variant. As a result, the UK government moved to the final easing of lockdown restrictions in July.  Payroll figures moved above pre-pandemic levels and furloughed workers continued to decline across the UK. GDP figures showed the UK economy grew by 4.8% in Q2.

In Japan, politics dominated as Prime Minister Suga stepped down as leader of the Liberal Democratic Party (LDP). Fumio Kishida took over as party leader and Japanese PM. He will lead the LDP into November’s general election. While Suga faced widespread criticism over his handling of the pandemic and his popularity was fading, the announcement was still a shock given he’d only spent 12 months in the role. PM Kishida has flagged additional fiscal stimulus to support the economy through the pandemic.

China’s woes began to unnerve investors in the quarter as the government looked to assert more control in the technology and property space. In technology, China has dished out large fines for monopolistic practices, Alibaba was hit with a record $3.8 billion AUD fine. In property, authorities are looking to rein in debt and bring prices under control, with Evergrande Group struggling to clear $300 billion of debt potentially being a casualty. Evergrande sparked global investor concerns as a default for the group would not only be disastrous for China’s real estate sector (28% of GDP) but would have a significant domino effect throughout the economy, and potentially globally. China is also facing a power shortage, impacting factories and homes, while also trimming economic growth forecasts.

Emerging market countries saw winners and losers due to power and supply chain issues; this was particularly notable across Asia. In South America, Brazil saw several months of interest rate increases to tackle excessive inflation, flagging another to come in October, while metal prices capped growth for other South American nations such as Chile and Peru. Those with significant energy resources such as Russia and several Middle Eastern economies did well. India continued to make progress against the spread of COVID and by the end of the quarter had administered nearly one billion doses, second only to China.

Back in Australia, data released in September showed the economy grew 0.7% for Q2, with year-on-year growth 9.6%, but showed growth slowing from Q1 before the COVID outbreaks in NSW and Victoria. The continued presence of COVID in the two largest states led to more vaccination urgency. By the end of the quarter, 77.8% of Australians over 16 had been administered their first dose and 54.2% of Australians over 16 were fully vaccinated.

Towards the end of the quarter there were media rumblings there would be an intervention in the mortgage market by the Australian Prudential Regulation Authority. There were suggestions of a limit on borrowing, as various housing markets had increased over 25% annually, fuelled by low interest rates. This followed the OECD and International Monetary Fund both calling on Australian regulators to step in to cool the Sydney and Melbourne property markets.

In its September minutes the RBA again said it “will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range”. Inflation increased to 3.8% in Q2 2021 with the largest increases coming in fuel, pricing for furniture due to timber prices and supply shortages and childcare as free childcare was ended.

Global economic growth is expected to be 6% for 2021 and 4.9% for 2022, according to the International Monetary Fund. If realized, this would be the fastest growth in several generations as 1973 was the last time growth was 6% or higher.

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Market Overview

Asset Class Returns

The following outlines the returns across the various asset classes to 30th September 2021.

Global sharemarkets in Australian dollar terms were reasonably strong in Q3, albeit with some headwinds emerging in September, which is historically the worst performing month for equities. Yields rose in longer dated bonds in the US and UK, the 10-Year US Treasury yield edged higher from 1.47% to 1.50%, while the UK 10-year yield moved sharply upwards from 0.72% to 1.02%. Despite falling early in Q3, the Australian 10-year yield pushed upwards sharply with the release of Q2 inflation data to finish flat at 1.488%.

In the US, shares notched a positive return in Q3 with the S&P 500 up 0.58%. Strong earnings had lifted US shares in the run up to August, when the Fed Reserve struck a dovish tone, confirming its hesitance to tighten policy too fast. However, a double whammy of growth and inflation concerns late in the quarter saw US shares pull back in September and deliver their worst month since March 2020. Across the sectors, financials and utilities outperformed while industrials and materials struggled, although the September sell-off hit almost every sector. The exception was energy, as supply constraints drove natural gas and oil prices to highs.

Eurozone shares were mostly flat in Q3. The energy sector was one of the strongest performers, along with information technology with semiconductor-related companies due to the shortage in that space. Consumer discretionary companies struggled, with luxury goods area specifically under pressure with talk China could seek greater wealth redistribution, which could hit demand. Like elsewhere the quarter started positively, due to a series strong corporate results, but pulled back as through the quarter.

UK shares rose made gains in Q3, driven by a variety of factors. The clear sector winner was energy due to rising crude oil prices. Consumer discretionary companies struggled while consumer staples were strong. Merger & acquisition was again a theme. Wm Morrison Supermarkets takeover bid was recommended, US sports betting group DraftKings made a bid to acquire Entain, and US parts manufacturer Parker Hannifin made a bid for UK aerospace and defence equipment supplier Meggit. It was strong quarter for UK shares, outperforming all other major developed markets, with the exception of Japan.

In contrast to much of the world, Japanese shares were rangebound through July and August before rising in September to record a total return of 5.2% for Q3. While corporate results for the previous quarter were strong, sentiment was impacted in August as Toyota announced production cuts in September and October, due to the global shortage of semiconductors.

The rest of Asia and Emerging markets were negative in Q3. This was driven by the significant sell off in China, but also continued supply chain disruptions, worries over the implications of higher food and energy prices weighed on many emerging market countries. Brazil was the weakest market overall, as inflation took hold and its central bank responded with rapid fire rate rises. By contrast, the energy exporters generally outperformed, most notably Colombia, Russia, Kuwait, Saudi Arabia, Qatar and the UAE.

The Australian market (All Ords Accumulation) backed up its strong Q2 with another positive quarter. Transportation, consumer services, insurance and energy were the strongest performers. The strength in transportation can be attributed to the interest of superannuation and global pension funds in infrastructure assets such as airports. Sydney and Auckland airport shares were up sharply for the quarter, along with Qantas. The worst performer was the second largest sector, materials. The iron ore sell off hit BHP, Rio Tinto and Fortescue hard, the trio also went ex-dividend with big payments, but the juicy dividends couldn’t offset the price falls.

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This material is provided for information only. No account has been taken of the objectives, financial situation or needs of any particular person or entity. Accordingly, to the extent that this material may constitute general financial product advice, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation and needs. This is not an offer or recommendation to buy or sell securities or other financial products, nor a solicitation for deposits or other business, whether directly or indirectly.

On the 4^th of August, CommSec, Australia’s largest online broker released a statement. It began:

The limits on trades without a cash deposit are changing from 04 September, 2021.

In light of recent market volatility, CommSec is changing trading limits to help protect our customers and minimise risk associated with investing and settlement.

In the good old days, there was something known as T+3. You could buy a stock and your broker would give you 3 days to settle the trade, i.e. come up with the money. It provided an open window for retail traders to chance their arm on buying a stock, hoping it went up and then selling out before having to put down any money. If you were lucky and brave, you might have been able to scalp a profit. More recently, the T+3 became T+2 as the ASX changed its trading rules.

Same principle applied, but retail traders could still jump in and out of stocks on a short-term basis without needing to have much (or any) cash in their account. The more risk averse and experienced wouldn’t hold beyond the trading day, lest they woke up to a surprise the next morning. A poor announcement or a trading halt, which meant they couldn’t exit their position and would have to stump up the capital.

The first few words of the second sentence of CommSec’s statement were curious. Anyone who has been watching the market recently could tell you volatility has been low, especially in the past two months, so to make this change due to “recent market volatility” seemed strange. Unless you recall Commonwealth Bank’s half year result from February.

CommSec, the bank’s brokerage service, added more than 230,000 new users in the last six months alone as Australia experiences its own share of market mania. Seven in ten of those are trading via the normal app or the micro investment app CommSec Pocket, suggesting much of the growth is being driven by a younger demographic.

Putting two and two together, it would seem some of these new users have taken the opportunity to T+2 trade without having the money to settle. They’ve likely been caught out by a poor announcement which left them heavily down, or trading halt which left them unable to exit their position before settlement date. CommSec now wants more skin in the game. Prior to the announcement, Commsec had a $25,000 limit without needing a deposit for leading stocks (bigger/known) and $7,500 for non-leading stocks. They’ve cut them to $5,000 and $1,000 limits respectively.

Occasionally, posts have appeared on social media investment groups, where a panicked user asked what to do because they didn’t have money to clear a trade that went against them. While some thought these posts were people trying to wind the group up for attention, CommSec’s policy changes would suggest they were truthful. Some played a dangerous game and were caught with their pants around their ankles, and without the money to settle their trades.

With the pandemic lockdown turning investing into a video game for new entrants, it’s no surprise people have gotten themselves into trouble. The suggestion is a lot of it’s coming from social media influencers egging the naïve on. Something ASIC has some trouble dealing with, as noted when an ASIC manager spoke to a recent conference.

“There’s a fragmented nature when we’re talking about social media and the internet; there’s the scale of information that we have to monitor, there’s ease of access to that information and the rapid churn rate – these are considerations that make it a quite complex environment for us.”

“While social media can be okay as a means of getting background information. Use your judgement and think about risks like the fact that advice on social media may not be licensed, you might be getting information on something that is inaccurate.”

And:

“Those providing it might have interests in the advice, they might be promoting a certain product so that’s something to bear in mind.”

The Federal opposition was keen to weigh in on the matter, with Labor MP, Julian Hill suggesting

“Everyday Australians are being left to look to social media and TikTok influencers,” and “the minister doesn’t think this is a problem as it is no different to speaking to someone in the pub, but ASIC are concerned. These ‘influencers’ are taking kickbacks, that is what the Government is leaving people to, and it is a return to the bad old days of commission.”

While it’s opportunistic from the opposition, especially as they’ve never been friends of the professional advice community, the MP makes a good point. The person in the pub talking about stocks previously had an audience of one or two. Now some have an audience of several hundred thousand and it’s often not clear if they’re partnered with a stock or investment service for promotion.

More than ever it’s easy to get online and pose like an expert. If someone gathers enough of a following, companies will want them to push their products. Finding unbiased, common-sense information isn’t becoming any easier.

Which brings us to a question posted to an online financial independence forum recently. A person had concluded they and their partner were ready to delegate their affairs to a financial adviser, so they asked how should they go about finding one? How useful were the answers to their question? What followed was the equivalent of an online pub brawl.

Without knowing a thing about the couple, several said they shouldn’t bother working with an adviser and just do it themselves. Two people got into an argument about active and index management, while others got into an argument about investment platforms, with one claiming they were designed to rip off clients – if only fraudster Melissa Caddick’s clients had known about the value of having their funds with a verifiable third-party platform!

The person asking the question was likely more confused after reading through the mess.

There’s never been so much freely available information, meaning information has never been more valuable and worthless at the same time. The right information – priceless. The rest? Not so much

Always consider the source.

_{This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.}

Economic Overview

Attention turned to vaccinations and reopening economies in the second quarter of 2021, by the end of the quarter over 3 billion vaccine doses had been administered globally. There are now strong indicators of a robust and lengthy economic expansion ahead. Around the world there are now businesses desperate to hire new employees, millions of consumers with money burning holes in their pockets, and ongoing fiscal and monetary support from governments and central banks.

In the US, the positive news around COVID was vaccinations. While President Biden had set a goal of 70% of all adults vaccinated by July 4, analysis by The New York Times in late June suggested the US would fall short, with around 67% of adults partially vaccinated. The Centers for Disease Control and Prevention (CDC) figures showed 45% of Americans had been fully vaccinated near the end of Q2. The laggards were those aged between 18 and 26. The negative news was the Delta strain of the virus. Delta is more contagious and according to the CDC was accounting for over 20% of US cases at the end of June.

The increasing vaccination rate is contributing to the resumption of travel and dining out across the US. Various data points have shown restaurant traffic back to, and even above, pre-pandemic levels. Air traffic remains 24% down and hotel occupancy down 10%, but significant progress has been made across the quarter. Since March, the US economy added 1,702,000 jobs and net growth in payrolls since last May 2020 totals 15.6 million. In late June, President Biden also secured a deal on a $1 trillion infrastructure package to upgrade roads, bridges and communications networks.

Late in the quarter there was some panic around potential responses to inflation as the Federal Reserve’s Open Market Committee unveiled unexpected rate hike projections for 2023. These were accompanied by increased inflation and economic projections for 2021. However, Fed Chair Jerome Powell attempted to dampen the hawkish forecasts by noting much progress is still needed and future changes to the asset purchase program will be “orderly, methodical and transparent.”

In the Eurozone, the pace of vaccine roll-out accelerated as many countries saw COVID cases fall through the quarter. Falling cases combined with increasing vaccination rates saw social and economic restrictions loosen. Economic data was positive and pointed to a strong rebound in Q2. The flash Markit eurozone composite PMI rose to 59.2 in June, this was its highest level since 2006. Eurozone inflation was estimated at 1.9% in June, down from 2.0% in May. The European Commission signed off on the first of the national recovery plans which will receive funding from the €800 billion Next Generation EU fund. This forms part of the largest stimulus package ever in Europe, a total of €2.018 trillion. The first countries to have their spending plans approved under the Next Generation fund were Spain and Portugal.

In the UK, the vaccine rollout stood at 65% of the population with at least one dose by the end of Q2. The Delta strain of the virus saw the UK government postpone the final easing of lockdown restrictions until 19th July. Economic data continued to highlight a robust recovery. Retail sales rose by 10% in May compared to the pre pandemic measure of May 2019. The Bank of England (BoE) increased its GDP growth forecast for 2021 to 7.25% from the 5.00% it predicted in February. The Bank of England left monetary policy unchanged in June and sought to calm fears over rising inflation. The Bank acknowledged that inflation would rise but suggested the surge in prices was transitory and should not affect monetary policy.

In Japan, vaccination rates increased in May getting past some of the hurdles seen in the previous quarter, but were still slow. Though infections were lower than in many other countries, cases continued to grow, leading the Suga government to delay lifting the state of emergency until June 20. Industrial production was weaker than expected, the primary reason being a slowdown in auto production caused by the global shortage of semiconductors.

China saw factory activity fall in June as raw material costs and the semiconductor shortage began to bite. While year on year GDP growth was 18.3% in Q1, this was expected to fall back into single digits in Q2 as most of China’s recovery has already occurred. Chinese manufacturing PMI slipped to 50.9 in June versus 51.0 in May. Consumer spending has been sluggish, with figures showing household expenditure lagging disposable income as Chinese consumers continue to save.

Emerging market countries saw a particularly severe third wave of covid infections. Vaccinations generally lagged developed markets as emerging market countries struggled to procure developed country vaccines. Despite spike in virus cases, the Brazilian economy rode the booming global demand for iron ore and copper, along with agricultural commodities. The Russian economy benefited from agricultural demand despite ongoing political frictions with western countries. Higher oil prices were also supportive in Russia, along with Saudi Arabia.

Back in Australia, data released in June showed the economy grew 1.8% for Q1, with year-on-year growth at 1.1%. The household saving rate also increased to 12.2% showing some caution from consumers, but also a capacity to spend. Q2 also coincided with the end of the JobKeeper program, with the economy seemingly having no problem digesting the withdrawal of support. The unemployment rate fell to 5.1% in May. On the virus front, Australia was somewhat of a victim of its own previous success when it came to getting the population vaccinated. The reports of blood clotting from AstraZeneca recipients in Q1 led to public hesitancy and changing advice around the vaccine. Notably, there was no countrywide vaccination awareness campaign from the Federal Government, while PM Scott Morrison suggested getting vaccinated “was not a race”, indicating the government may have been at ease with a longer-term border closure.

In its June minutes, the Reserve Bank noted it would “maintain highly supportive monetary conditions until its goals for employment and inflation were achieved.” And it “would not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range” something the board highlighted would require significant wages growth to occur.

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Market Overview

Asset Class Returns

The following outlines the returns across the various asset classes to 30th June 2021.

Global sharemarkets delivered strong returns in Q2, while yields fell in longer dated bonds in the US and UK, reversing some of the sharp upward moves of Q1. The 10-Year US Treasury yield declined from 1.74% to 1.47%, while the UK 10-year yield fell from 0.88% to 0.72%.

In the US, the S&P 500 and NASDAQ reached a new all-time high in late June, with nearly all sectors notching gains over the quarter. The tech titans such as Apple, Alphabet (Google) and Microsoft made strong gains over the quarter. Notably, Facebook joined Apple, Microsoft, Amazon, and Alphabet (Google) in the exclusive $1 trillion market-cap club. By sector, energy, IT, communication services and real estate were amongst the strongest areas of the market. Utilities and consumer staples were the laggards.

Eurozone shares advanced in the quarter, supported by a strong corporate earnings season and an acceleration in the pace of vaccine roll-out in the region. The top performing sectors were defensives, areas such as consumer staples and real estate, which had lagged in Q1 as investors focused on more economically sensitive areas of the market. Information technology was also strong, while utilities and energy were laggards. As noted, earnings for Q1 were robust across the board, with healthcare the exception.

UK shares were largely driven by lower valued and economically sensitive sectors during April and May and as sentiment improved, global investment managers reported being “overweight” the UK for the first time since 2014. However, June was a different story amid a rise in Covid-19 infections and falling inflation expectations. Defensive large cap companies were resilient in June, particularly healthcare and consumer staples. Energy also performed well in June, while financials were poor.

The Japanese market fell during Q2 despite a decent corporate results season where the majority of companies reported inline, or slightly ahead of expectations. The number of companies reporting profits below expectations has been significantly lower than normal.

The rest of Asia was mostly positive in the Q2 as investors were optimistic about economic normality. However, returns were tempered towards the end of the quarter due to a resurgence of Covid-19 infections and lockdowns due to the Delta strain. The stronger US dollar also weighed on June returns. The Philippines was the strongest index market in the quarter, while Taiwan and India also achieved positive gains during the quarter. By contrast, Pakistan, Indonesia, and Thailand all struggled as rising Covid-19 infections weighed on their respective markets.

The Australian market (All Ords Accumulation) notched a 8.66% return for the quarter. Sector strength was similar to the previous quarter, coming from financials and consumer discretionary, although most sectors posted gains. Over the financial year, consumer discretionary led the way with 42% return, followed by financials at 39% and financials 35%. Utilities continued their poor run in Q2 and were the poorest performing sector in the year to June 30, down 23%.

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The Easy Money…

One of the ongoing challenges of investing is to set aside the distractions of the “here and now” to focus on the long term where true wealth is usually made. Not only do investors have to digest real events that seem concerning in the moment, but they also need to block out the commentary from market watchers that can shape opinions about what the future holds.

One of the regular lines trotted out in the financial media is how “the easy money has been made”. We’ve plotted several of these calls on a chart that tracks the growth of $1 invested in global stocks over the past 12 years. For some more context, we’ve added in a few concerning historic events in red. $1 in January 2010 turned into $5.22 at the end of June 2021. This, despite calls “the easy money had been made” 13 times.

While there’s no easy money in financial markets, the easiest money is often made by looking beyond concerns about the present, ignoring narratives about the future, and doing nothing.

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This material is provided for information only. No account has been taken of the objectives, financial situation or needs of any particular person or entity. Accordingly, to the extent that this material may constitute general financial product advice, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation and needs. This is not an offer or recommendation to buy or sell securities or other financial products, nor a solicitation for deposits or other business, whether directly or indirectly.

From pooches to second-hand cars, to homes in regional areas, to ground beef in the supermarket. Everyone has a story about how their money is buying less.

Eight years ago, you could get this good girl delivered to your front door for $1300. Today, or more precisely back in January, she went for $7990, and you had to front for delivery. While that’s a jump over 8 years, a good part of it has occurred recently. The pandemic had a spike of people wanting dogs. Breeders can only supply so many dogs, so they had the luxury of pricing according to demand.

Which is essentially Inflation. A supply constraint which leads to a shortage of labour and products, resulting in a higher bid for labour and products and higher prices. The gauge we are given is the Consumer Price Index figure.

There are a lot of theories about what’s included and not included (and why), and not sure if miniature spoodles make up part of Australia’s CPI number, so anecdotes about random observations are interesting, but not that useful. You can only work off the data you’re gifted, no matter how much you dislike it. At the last print in Australia, it was running at 1.1% annually. In the US, where there are bigger concerns, it hit 4.2% in April which led to a small ruckus on world markets in recent weeks.

We know where inflation is, but anyone claiming they know where inflation is going is guessing. There is no shortage of opinions about inflation’s direction.

Macquarie strategist, Viktor Shevets has a theory about why inflation will remain low, at least in the US. In a recent podcast Shevets highlighted 60% of the U.S. private sector economy is intangible assets such as software, patents, brand equity and databases. Previously, tangible assets such as plant equipment and machinery comprised the majority of wealth.

Previously when demand increased in this more tangible based economy, price increases were slow to be addressed, as supply, such as constructing factories and then hiring workers to fill them took time. Software and pharmaceuticals are quicker to respond, meaning demand-based price increase aren’t as common. There’s rarely a supply constraint in software.

Shevets also argues the flexibility of the labour will prevent inflation, with 20 to 25% of people employed in the gig economy. He suggests workers will move quickly to fill sectors requiring increased production and this will keep a lid on wages in contrast to the past.

Noting this, after a spike in 2020, US hourly earnings growth has fallen to the lowest level in years. Back in Australia, wages growth is still nearing 20-year lows. At the same time, we’ve heard plenty of screaming from business and industry groups who have become overly reliant on groups like international students for staffing, and in some instances reliant on paying them under the table at a reduced rate, which contributes to that anaemic wage growth.

With the borders closed we haven’t seen wage inflation show officially, yet the agitating to open the borders or grant special exemptions continues furiously from businesses claiming they can’t find workers. On that front, if there is no spike in wage growth, there may not be a labour shortage, just a shortage of wages.

The pandemic has seen many people hunker down in their own fortress. Spending up big on durable goods around their house as their hair and beards grow, instead of taking holidays, eating out, seeing a show, movie, or getting a haircut. When the demand for durable goods increases sharply, it results in shortages and supply constraints that drive up prices. This set of circumstances seems unlikely to last. Eventually people will be vaccinated, and their spending will transition from durables to services.

The big question. If inflation does come raging back, how does that affect your portfolio?

The last big occurrence of inflation was back in the 1970’s and 80’s. Anyone around then would remember double digit spikes. The prospect of double-digit inflation seems outlandish given where we currently are, but it’s still useful to get an understanding of how assets have performed. The longest data available across various asset classes is in the US. We’ll only focus on the 70’s because that’s when inflation broke out, while in the 80’s you might say it was an embedded part of life.

Here’s how the 70’s looked:

For stocks it was a volatile decade, note the best and worst years. On average across the three stock categories noted, the 1970’s were more volatile than either the 1960’s or 1980’s and stocks were brutalised across 1973/74 when inflation really broke out. Like always an investor had to hold on because it was followed by a massive rally, particularly in small and value stocks.

Inflation will prove frustrating when holding longer dated bonds. In 1974 and 1979 when inflation hit double digits, long term corporate bonds were negative and long-term government bonds were also negative in 1979. Both lagged the CPI figure as a measure of inflation. Stocks, as viewed by the major indexes such as the S&P 500 did terribly. 5.86% looks ok, but then add in inflation at 7.36% and you’ve gone backwards.

This is why you will often hear screaming about gold, hard assets and commodities as the thing to hold if inflation takes off. The comparison will be made with an index such as the S&P 500 and how poorly it performed during the 1970’s. If you want to add a little nuance into the discussion, take a look at US Small and US Value stocks, both kept an investor well ahead of inflation over the decade.

Inflation won’t be pretty, but is it coming? We don’t know. Our only conclusion to draw from this is the same as always. Remain diversified and have a portfolio tilt towards value and small to capture those factors when they emerge. They may play a part in ensuring your portfolio isn’t left behind. Otherwise, you could always breed miniature spoodles.

_{This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.}

The first post COVID federal budget has been released and while the numbers are slightly better than what was previously expected, it wasn’t a budget where the reins were pulled. Given the spending, Labor must be wondering what to do with themselves. On a surface level, the LNP are seemingly occupying more of what is often marketed as Labor’s bigger spending space. Where this leaves Labor ideologically, as the LNP projects budget deficits for years with net debt pushing $1 trillion dollars, who knows?

With an early election supposedly coming up off the back off this budget, there is plenty of space if Labor want to rebrand themselves as fiscal conservatives!

As former PM Tony Abbott once said, “I just want to assure people this is a debt and deficit disaster that this government is grappling with.” That was when net debt stood at $210 billion in 2014, add seven years and an extra $500 billion and any talk of a debt and deficit disaster has evaporated.

The idea of all the debt is to help grow our way out of the problem. This will be the sport to watch. Some commentators are suggesting it is not targeted in the right places, so growth isn’t likely to be strong.

On this issue, Treasury has not substantially amended wage growth forecasts, expecting 1.25% this financial year, and 1.5% next financial year. Yet Treasury has forecast the consumer price index to rise 3.5% this financial year up from its previous forecast of 2.25%, and 1.75% next financial year up from its previous forecast of 1.5 per cent.

Keen eyes will note that will amount to a pay cut in real terms.

Others are worried about a breakout in inflation. Veteran business journalist Robert Gottliebsen who has been speaking to all and sundry in the business community, suggests that businesses he’s speaking to are being forced to raise wages sharply to secure employees. He offers this warning:

“If you believe Treasury and the Reserve Bank then there is no need to lock in rates on borrowing. But if I am right interest rates will rise in 2022 so its urgent that highly indebted households borrow for as long a period as they can arrange at a fixed rate. The same applies to companies.”

As always, forecasting is an unknown. Someone will be right. Someone will be wrong.

On to the relevant points of note from the budget.

Income Tax

Low- and middle-income workers: Tax cuts of up to $1080 for individuals, or $2160 for dual income couples, for those earning between $48,000 and $90,000.

Employee share schemes: Leaving an employer will no longer be a taxing point for employee share scheme entitlements. This means that tax deferral for the employee share scheme entitlements will continue until forfeiture conditions have passed and shares are held that are freely able to be sold.

While the tax cut is being promoted by the Government and many in the media who are asleep at the wheel, don’t fall for it. There are no tax cuts. The Low and Middle-Income Tax Offset (LMITO) is only being maintained at the current level. It was due to expire and increase taxes. A big change on the share schemes, Australia was the only jurisdiction in the world where an employee was taxed on company shares granted as an income package the moment the employee left the company. This meant someone often owed tax on something they hadn’t yet received a benefit from.

Superannuation/Retirement

Downsizing: Australians aged 60 and over will be eligible to make post-tax contributions of up $300,000 into superannuation per person when they sell their homes. Previously eligibility was age 65 and over.

Work Test: The work test will no longer apply to those aged 67-74 when making non-concessional or salary sacrificed contributions to superannuation. This age group are now also able to access the non-concessional bring forward arrangement, subject to eligibility.

Minimum Income Threshold: Previously there was a $450 monthly minimum income threshold before the Superannuation Guarantee was paid by their employer, this has been abolished. This means those earning under $450 a month will now receive superannuation from their employer.

Pension Loan Scheme Lump Sums (PLS): The PLS is a reverse mortgage type loan offered by the Government and designed to assist older Australians to increase retirement income via the equity in their Australian property. Users of the scheme could receive fortnightly payments accrued as a debt against their property. Now there will be the option of two lump sums of up to 50% of the Age Pension in a 12-month period.

Residency requirements for SMSFs: The Government will relax residency requirements for SMSFs by extending the central control and management test safe harbour from two to five years for SMSFs. This will allow SMSF members to contribute to their superannuation fund if overseas pursuing career opportunities.

All are options that should offer more flexibility around retirement and retirement planning.

Seniors and Home Care

As a response to the Royal Commission into Aged Care the government has announced $17.7 billion in funding for the aged care space.

Of note, an additional 80,000 Home Care Packages over two years. Extra funding to ensure compliance and a star rating to allow Aged Care recipients and their families to compare providers on performance, quality, and safety. Funding for informal carers. A $10 daily supplement for aged care residents for care and nutrition. And further measures to increase the size and skills base of the age care workforce.

Hopefully this will go someway to increase dignity and choice in the aged care space.

New Homeowners

New Home Guarantee: The Government is providing a further 10,000 places under the New Home Guarantee. This is for first home buyers either building a new home or purchase a newly built home with a deposit as low as 5%.

Family Home Guarantee for single parents: This is for single parents regardless of whether they have previously owned a home or not. From 1 July 2021, 10,000 guarantees will be made available over four years to eligible single parents with a deposit of as little as 2%, the government will guarantee the difference up to 18%. There are property price caps depending on location.

First Home Super Saver Scheme: Introduced in the 2017/18, this scheme allows people to save money for their first home inside their super. The Government will increase the maximum amount of voluntary contributions that can be released under this scheme from $30,000 to $50,000.

Australia has housing affordability challenges in various locations around the country and the reaction to COVID has essentially exported unaffordability far and wide as many people departed cities. The incentives for new housing are good, but buy side incentives like 2% down government backed mortgages do nothing to alleviate the problem and they are likely an accident waiting to happen with rates at record lows. The Super Home Saver Scheme is being reported in the media as first home buyers being able to take $50k from their super, which isn’t exactly correct, it is from voluntary contributions.

Business

Temporary full expensing: The temporary investment tax incentive has been extended 12 months until 30 June 2023. Business now has additional time to utilise the incentive. Businesses with a turnover up to $5 billion will be able to deduct the full cost of eligible assets purchased for their business, including the cost of improvements to existing assets.

Temporary loss carry-back provision: Companies will now be permitted to carry back tax losses for an extra 12 months from the 2019/20, 2020/21, 2021/22, and now 2022/23 income years to offset previously taxed profits in 2018/19 or later income years. Again, this applies to businesses with a turnover up to $5 billion.

ATO Dispute Mediation: A new umpire will also be introduced to mediate in disputes over debt between the Australian Taxation Office and businesses with a turnover of less than $10m.

As always, to ensure to you make the most of your money, we will offer advice on how to best apply it to your circumstances.

_{This represents general information only. Before making any financial or investment decisions, we recommend you consult a financial planner to take into account your personal investment objectives, financial situation and individual needs.}

Economic Overview

As to be expected, the ongoing and dominant economic and market theme remains COVID-19. More so than ever, with COVID present no quarter will be quite like the previous. While Q1 was one of steep decline and pain, Q2 was sharp recovery and euphoria, while in Q3 markets took a slightly more subdued, albeit positive direction. Accommodating monetary and fiscal policy kept markets happy.

In the US, the economy continued something of a recovery. The Federal Reserve noted it will use average inflation targeting in setting the interest rate, allowing for overshoots in inflation. This means the Fed will allow inflation to move above 2% before it responds. The Fed’s projection path of interest rates indicates it will likely hold rates around 0-0.25% into 2023. The US unemployment rate dropped to 8.4% in August, down from 10.2% in July, while labour force participation also improved. Industrial production rose for the fourth consecutive month in August, but at a much lower rate than earlier in the summer.  Similarly, retail sales increased in August, but again at a slower rate and below expectations.

Source: RBA 2020

In the EU, a €750 billion fund was approved to help member states recover from the pandemic. It comprises €390 billion of grants and €360 billion of loans to be distributed among member states. Unfortunately, Covid-19 infections rose rapidly in several countries throughout the quarter, particularly in Spain and France. In response, restrictions to contain the virus were announced. Although these restrictions were localised, opposed to the countrywide restrictions witnessed in the first phase. Various European countries, including Germany, extended furlough schemes designed to support jobs through the crisis. Business activity stalled in September with the flash purchasing manager’s index (PMI) falling to 50.1, down from 51.9 in August. 50 is the level that separates expansion in business activity from contraction.

In the UK, Brexit reared its head again with the potential for a disorderly exit beginning to flare. Not far behind were concerns for a second wave of COVID-19 infections, this saw the localised restrictions imposed in the North, similar to those imposed in some of Europe.

In Japan, the dominant news story was the resignation of Prime Minister Shinzo Abe due to a long-standing health issue. Abe claimed the record as the longest continuous Japanese Prime Minister, then resigned four days later, on August 28. Yoshihide Suga, the Chief Cabinet Secretary, quickly emerged as the frontrunner, being confirmed as PM on September 16. Data for the second quarter showed Japan’s economy recorded a decline for the third consecutive quarter, with the Q2 decline of 7.9% being the largest in GDP data going back to 1955.

In China, economic data signalled ongoing recovery and Q2 corporate earnings results were positive. Q2 GDP growth rebounded to 3.2% year-on-year, after a fall of -6.8% in Q1, and was stronger than expected. However, tensions with the US escalated, including new restrictions on Chinese telecoms company Huawei, and as President Trump signed an executive order to prevent US companies from doing business with TikTok and WeChat. In India, good monsoon rains were supportive, while towards the end of the quarter the government passed agricultural and labour reforms. This was despite further increase in the number of daily new cases of Covid-19, and as tensions with China on the Himalayan border persisted

In Thailand, the lack of improvement in the tourism sector was a drag on the economic recovery. In Indonesia, Covid-19 cases rose and had an increasing impact, especially in rural areas. As a result, tighter restrictions were brought in for Jakarta.

Back in Australia, the fallout from COVID-19 became evident in headline economic data from Q2. A 7% decline in the three months to June following on from a 0.3% decline in the March quarter, confirming Australia’s first recession since the 1990’s. It was also the largest fall in quarterly GDP since records began in 1959. With borders still essentially shut to most overseas visitors for the foreseeable future the government was looking at ways to revive the economy.

One of the more interesting announcements was the Australian government flagging the removal of responsible lending laws, something many commentators flagged was a strange pursuit, given the country has the second highest household debt in the world. When it came to monetary policy, the RBA left the cash rate at 0.25%, noting in the September release that it expects inflation “between 1 & 1.5% over the next couple of years” and it will not increase the cash rate until progress is made towards full employment and  inflation is sustainably between the 2–3%.

Market Overview

Asset Class Returns

The following outlines the returns across the various asset classes to the 30th September 2020.

Global stocks gained in Q3 but regional performances diverged with Asia and the US outperforming Europe and the UK. Government bond yields were little changed, however, corporate bonds enjoyed a positive quarter. As we noted last quarter government and central bank stimulus are playing their part, while ultra-low rates on cash and bonds means some investors are forced to take additional risk, which may be more supportive of higher stockmarket valuations.

US stocks gained in Q3, but struggled across September amid a resurgence of Covid-19 cases and political fighting over refreshed fiscal stimulus measures. Worries also grew over language used regarding a smooth transition of power if President Trump loses his re-election bid. Consumer discretionary areas, such as restaurants and appliances or apparel retailers performed well. Distribution companies were stronger and helped lift the industrials sector, while several airlines still facing headwinds from languishing passenger numbers, offered slightly positive returns. Energy companies remained weak on poor expectations for fuel demand.

Eurozone stocks were basically flat over the quarter. Economic data slowed over the quarter and worries took hold over sharply rising Covid-19 infections in many European countries. The energy and financial sectors saw the largest falls while materials and consumer discretionary advanced, automotive companies also generally fared well.

UK stocks lagged behind other regions during the quarter. This extending their year-to-date underperformance due to the market’s significant exposure to stocks in the oil and financial sectors. Performance was further undermined when UK focused areas of the market were hit in September with the re-imposition of localised restrictions and fears about the impact of these on the UK economy. Pound strength against a weak US dollar weighed on large UK companies with exposure to international markets.

Japanese stocks performed strongly with the Topix Index recording a 5.2% total return. This was despite a gradual strengthening of the yen against the US dollar over the period. Although corporate profits are still under pressure, the earnings season which concluded in early August, brought more positive surprises than many expected.

Asia ex Japan stocks recorded a strong return in Q3, led by Taiwan, where IT sector stocks underpinned gains. India, South Korea and China all posted double-digit returns and outperformed the MSCI Asia ex Japan index. Emerging market equities registered a robust return in Q3, aided by optimism towards progress on a Covid-19 vaccine and ongoing economic recovery. US dollar weakness proved supportive. The MSCI Emerging Markets Index increased in value and outperformed the MSCI World.

In Australia, the ASX managed a positive total return, despite some of the largest companies such as the big banks, BHP and CSL finishing slightly lower. Darlings such as Domino’s and buy now pay later company Afterpay continued to power on. The strongest performing sectors were consumer discretionary and information technology. This seemingly still reflects stimulus and early superannuation release sloshing around the economy, while IT is still benefiting from technological changes as workplaces adapt to various COVID related changes. Energy slumped further, as it did elsewhere across the globe.

From an Australian perspective looking globally, unhedged international stocks again trailed their hedged counterparts as the Australian dollar strengthened with the recovery. International small caps trailed their larger counterparts over the quarter, something that has become a theme for much of the last decade. A similar theme has emerged in the laggard value space. When will these risk premiums return to favour? Unsure, but they can never be ignored. That’s why they’re called risk premiums because they’re not always present. There’s always the next quarter.

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Additional material sourced from Schroders.

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