31
Jul 2020

Covid-19 is on the Rise and so are World Share Markets - WHY?

Covid-19 is on the Rise and so are World Share Markets - WHY?

Written by Hudson Adviser Phillip McGann

If you would rather see this article as a webinar please click here

The news out there is bleak. The virus is on a tear around the world. Melbourne has gone back into lockdown. The government budget is heavily in the red, unemployment is high, the economy has entered its worst recession since 1992.

And yet world share markets are on the rise.

Something is wrong with this equation.

When the real economy is tanking why do financial markets seem to be ignoring this and continuing to rise?

The answer is both simple and complicated, in equal measures, but in reality boils down to three major points:

  • Fundamental attribute of share markets being a forward looking indicator
  • Massive fiscal and monetary stimulus to economies
  • Investor psychology leading to FOMO

SHARE INVESTING FUNDAMENTALS

Fundamentally share markets are forward looking indicators of economic activity. Share investors are looking 12 to 18 months into the future to see both what the economy will bring and how it will impact individual companies prospects look overtime.

Investors don't really care what happened yesterday or what a company has done up till now. They are fundamentally focused on prospects going forward.

On an economy wide level share prices give a very good barometer of the mood of investors as they are immediate and very liquid investments.

If the economic outlook as a whole is poor the market as a whole will be sold down as investors retreat from risk assets.

If conversely things are likely to be buoyant going forward, or there is anticipation this will be the case in the near term then investors will drive prices higher to reflect the new "future" value of the share market due to these favourable conditions flowing through to likely higher business profits in coming years.

This is how share markets operate and this is how markets are operating now.

Yes, there is a flow of bad news presently with virus cases continuing to rise around the world and locally but look a little deeper and you see a lot more hope than is being portrayed in the media.

Death rates are lower even as cases rise due to better treatment and a younger healthier lower risk age bracket catching the virus.

Hopes of a vaccine are on the rise with well over 100 vaccine candidates under research around the globe and half a dozen of those in human trials right now; including one from the University of Qld. Initial results are proving promising and accelerated development is leading to a contraction in the likely time frame of a vaccine release down from the traditional 3 to 5 years to potentially next year.

Case loads in countries that caught the virus early are receding. Major outbreaks in Italy and Spain from a few months ago are a lot lower now as lockdowns have had the desired effect and a change in people behaviours pays dividends.

Economic activity has been crushed and the OECD has forecast the first world wide substantial drop in GDP since WW2.

However we appear on many parameters to have seen the worst of the economic slide and the major economies are showing signs of "bottoming out" with activity beginning to improve.

The share market looks at these figures and using its "forward looking prism" decides collectively that the worst is past and now is a good time to buy shares.

FISCAL and MONETARY SUPORT in SPADES

At the recent low point for shares in late March the US central bank - the Federal Reserve - lead the world in declaring that it will do "whatever it takes" to keep the US economy afloat.

It has open up the floodgates and sprayed cash in every direction.

With interest rates at historical lows of near zero the traditional route of rate cutting to stimulate the economy was not available so the Fed went further and entered into the debt markets to buy securities with the idea of keeping rates low and liquidity buoyant

The Fed announced it was open for business, it has said it will "buy anything" the market will sell. This includes all Federal government debt and state government debt and municipal debt and corporate debt and junk debt.

By doing this it avoided the pitfalls of the GFC in 2008 when the credit markets seized up for a time hampering the real economies recovery. The Fed learnt from this and its actions as a "buyer of last resort" has given massive confidence to the markets and led to a relatively stable market for corporate debt so they can actually refinance their debt levels and stay afloat as they await recovery in the real economy

Central banks around the world including the RBA have followed suit and pumped massive , even unprecedented amounts of funds into there economies via the debt markets ensuring companies stay afloat as there cash flows dry up and interest rates remain extremely low.

On the fiscal front governments around the world have also opened up their wallets (funded by central bank purchases of their bonds) and lavished cash on their populations.

Whether it is direct individual cheques in the US or increased welfare payments and JobKeeper in the local economy the idea is to keep the economy functioning, keep business open and employees engaged as much as possible until the economy can reopen fully.

Share markets reacted very favourable to this government largesse as it underpins the economy and makes a worst case scenario less likely.

An added impetus is that lower interest rates globally mean bonds and fixed interest investments (even money in the bank) are relatively less attractive to investors than shares.

Fear of Missing Out

Psychology of investors is very important in share markets. Fear and Greed are the two basic emotions and in early March Fear of an unknown pandemic took over and share investors disappeared "under the doona."

Since then those same investors have seen the braver amongst them dive back into the markets at the lower levels.

When coupled with the massive Fiscal and Monetary stimulus as well as medical updates they have now decided that maybe, just maybe, shares are the way to go at these levels.

Investors who have seen shares rise at a rapid rate are now jumping back in for fear of missing out.

So does this mean that the share market will continue to power along from here and have no handbrakes to future rises? No, not at all, as we have seen uncertainties in all for all of these scenarios and we will likely have more volatility from here.

Now the virus figures could roll over and get worse.

The virus could come back in second and third waves (as we are seeing in Melbourne currently as well as in parts of Spain) and the share market may be wrong and it may well retreat as investors digest new information.

However over recent months the figures coming out appear to suggest the worst is over economically and the recovery has begun and share investors have dived in at the lower levels

But the fundamentals are still there to support the markets with lower interest rates for many years to come and continuing government support for economies.

The underlying issue is - as it has always been - the virus.

If we can get in control of the virus either via an effective vaccine, better treatments, herd immunity or simply learning to live and operate society and our economy with it in our midst this will go a long way to providing comfort for investors from here. If we cannot the volatility may return.

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31
Jul 2020

What's on Offer for First Home Buyers and Those Home-Owners Looking to Upgrade

What's on Offer for First Home Buyers and Those Home-Owners Looking to Upgrade

Written by Juanita Wrenn

There has NEVER been a better time to buy a home if you are a first home buyer. This is the first article I have written for the Hudson newsletter for a very long time! Anything relevant to helping the next generation get ahead is something that I am passionate about. I find myself constantly having conversations with my older boys, aged 15, about saving some of their part time cash, the importance of buying a house sooner rather than later and the wonder of compounding interest. I figure if I keep talking they'll listen eventually. They are however, too young to benefit from the current government grants on offer, so I am hoping that this article will help many of our members and their children take the first step to owning their first home instead.

There is so much help that the Government is offering that makes it such an attractive time to purchase a home. There are 3 grants currently on offer, The First Home Loan Deposit Scheme, The First Home Owners Grant and the Homebuilders Grant. For members that have a home already the homebuilders grant may offer some incentive to either upgrade your home or substantially renovate it. I will give a quick run down on the three grants to see if this is something that you or someone you know could take advantage of.

The First Home Loan Deposit Scheme

There is some urgency to reserve your place with a 90 day pre-approval for the First Home Loan Deposit Scheme. The Government released the last tranche of the spots remaining in July, with half of these spots going to the CBA and the NAB. There are 10,000 spots in total. In a nutshell, if you have a 5% deposit, and you have never owned a home before, the Government will effectively guarantee your insurance to the bank. In other words the lenders mortgage insurance (LMI) that you would usually have to pay on the remaining 15% to take your deposit to 20% will be paid for by the government. This not only offers a huge cash saving but it also guarantees a lower interest rate with the bank. Because the government is guaranteeing for you the Bank will offer lower interest rates. A first home buyer, eligible for the first home Loan deposit scheme, could now be offered rates as low as 2.29%.

There are criteria that need to be met in order to qualify for the First Home Loan Deposit Scheme, and these vary in each state. We urge you to contact our finance team to check the rules for your state.

First Home Loan Deposit Scheme

  • Must be your first home.
  • Can be an existing or a new home.
  • Purchase price must fall within limits e.g. Regional South Australia the home must be $250,000 or less. In NSW metro the home must be no more than $700,000. Our finance team can help with each scenario.
  • It is means tested on income, a couple up to $200,000 and an individual $125,000.

On top of this benefit, the Government is also offering the First home owners grant. This grant is different in each State/Territory and the stamp duty concessions vary considerable between states and territories also. Criteria for First Home Owners

First Home Owners

  • Must be your first home.
  • Must be a new home.
  • The amount offered is different each state/territory e.g. QLD is $15,000, $20,000 regional Vic and $10,000 metro Victoria.  Each state /territory also offers concessional stamp duty, with NSW offering substantial savings here.
  • NOT means tested.

Call 1800 804 296 or email finance@hudsonfp.com.au to ask Nicole, Matt, or Heather any more specific information on your state/territory.  We can email you with the information you require or give you a call. Instagram and Facebook for a quick response.

Home builder grant - available to new and existing home buyers that meet criteria

  • $25,000 grant from the government to build a new home or renovate.
  • Is an additional grant for first home buyers to the two grants outlined above.
  • Means tested $125,000 for an individual or $200,000 for a couple.
  • Must be your principal place of residence for at least 6 months straight after build or reno.
  • Renovations must cost between $150,000 - $750,000.
  • Value of new home (or house and land before reno) is less than $1.5 million.
  • Building or renovation must start within 90 days of contract being signed and must be signed by 31st December.
  • Companies and Trusts cannot apply.

Case Study outlining the use of all of the Government Grants - detailed by Nicole Green

Sam and Tracie are first home buyers who have been saving with a view to buy their own home. They have accumulated $33,000 in savings over the past 18 months and they are looking at a new house or appartment for $600,000 in Melbourne.  In the current environment there has never been a better time to buy a first home.   

Income - Sam earns $84,000 and Tracie earns $82,000 - they both work full time.

Expenses - They have two car loans with combined repayments of $950 per month and small credit card with a $3,000 limit.

Savings - they have been saving in addition to paying rent of $550 per week and have $33,000 accumulated. If possible they would like to keep a little bit of cash as a reserve.

The table below shows the different grants available to them and how this would impact their home purchase. They could be paying $690p/w (worst case scenario with minimum deposit) to $485 per week - best case scenario and access to all the Government help.  It's a huge difference - over $10,000 per year in repayments!

Example buying a home in Gladstone Park Victoria….

 

Option 1

Option 2

Option 3

Option 4

 

Buy existing
FHLDS

New Home
FHOG

New Home
FHOG
Homebuilder

New Home
FHOG
Homebuilder
FHLDS

 

 

 

 

 

Type of Home

Existing

New

New

New

Purchase Price

$600,000

$600,000

$600,000

$600,000

Personal savings

$33,000

$30,000

$30,000

$30,000

FHOG

-

$10,000

$10,000

$10,000

Homebuilder

-

$25,000

$25,000

FHLDS (no LMI)

yes

no

no

Yes

Loan Amount

$570,000

$563,000

$547,000

$547,000

Plus LMI payable

nil

$19,252

$16,593

Nil

Total Loan Amount

$570,000

$581,252

$563,593

$547,000

LVR (Loan to value ratio)

95.00%

96.88%

93.93%

91.17%

Variable Indicative interest rate

2.74%

4.62%

2.74%

2.74%

Weekly payment

$535

$690

$530

$514

3 year Fixed indicative interest rate

2.29%

not applicable

2.29%

2.29%

Weekly payment

$505

not applicable

$500

$485

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31
Jul 2020

Tax Deductible - Personal Super Contributions

Tax Deductible - Personal Super Contributions

Written by Hudson Adviser Ivan Fletcher

Historically, salary sacrifice (via your employer) was the only way to tax effectively boost your super whilst reducing your own taxable income at the same time.

Under Legislation enacted as of 1 July 2017, personal contributions (funded from personal accounts) may now also be classified as 'Concessional' allowing for a tax deduction in your personal tax return and thus achieve the same outcome as Salary Sacrifice.

This is an extremely flexible way to manage your super contributions and means you do not have to deal with the HR of your employer and can make the contributions when it suits you (including leaving it till late in the year when you have more information about how your finances and taxes are tracking).

Criteria

This opportunity to claim a tax deduction is available to anyone (self employed, a wage earner or retired ) who:

  • is under the age of 75, and
  • is eligible to contribute to superannuation, and
  • has room left in their concessional contributions cap and
  • has enough assessable income to be able to benefit from the tax deduction.

Note - that if you are between age 67 and 75, you will need to satisfy the Work Test.

Timing  of Contribution

Personal contributions can be done as one lump sum towards the end of the financial year (or via several deposits as funds are available).   The Contribution(s) must however be received by your super fund by 30 June (if it arrives on1 July it becomes part of next years figures).

The Process

  1. Make a personal contribution to a complying superannuation fund (before 30 June).
  2. Submit a valid Notice of intent to claim a deduction for personal super contributions, on the approved form, to the superannuation fund trustee within required timeframes. Please see the tips and traps below on what makes a notice invalid and the required timeframes.
  3. Receive Confirmation from the Super Fund trustee that the valid notice of intent has been received.
  4. Use the above confirmation back from your Super fund as evidence to claim a ‘personal’ tax deduction in your tax return.

The Deadlines

A Notice of intent to claim a deduction for personal super contributions will not be valid unless it is submitted in writing to the Super fund trustee by the earlier of: 

  • the end of the day the taxpayer lodges their income tax return for the income year in which the contribution was made or
  • the end of the next income year (30 June) following the year of contribution.

Circumstances Where Personal Contributions – may be suitable  (as opposed to Salary Sacrifice)

  • If your employer doesn’t offer salary sacrifice.
  • If you have a one off event such as a big Capital Gain or Bonus.
  • If you are self employed (sold Trader or via company or Family Trust structure)

Other ways this strategy can be utilised to your advantage:

  • fund insurance within super.
  • make in-specie contributions of direct shares into SMSFs.

Salary Sacrifice still lives on

Many people may want to continue their salary sacrifice contributions, adding a consistent amount each week/month. But they will also have the choice to put in large sums towards the start, or end, of the financial year, if it is more suitable to them. You can effectively use both methods of contribution to super (provided the total is within the annual $25,000 CAP).

Ineligible contributions

A deduction cannot be claimed for a personal contribution that is: 

  • a downsizer contribution
  • a CGT exempt amount contributed to super as required under the small business retirement exemption 
  • made to a Commonwealth public sector superannuation scheme in which the you have a defined benefit interest
  • made to an untaxed fund
  • made by a minor unless the minor derives income from employment or carrying on a business.

INVALID - notice of intent

A notice of intent to claim a deduction for personal super contributions will not be valid in any of the scenarios below:

    • the notice is not in respect of the actual contribution amount made
    • the trustee no longer held the contribution (example since rolled into another fund or split the contribution to a spouse)
    • the trustee had begun to pay an income stream (pension) based in whole or part on the contribution

tips and traps

 

  1. Tip – TWO RECORD OF the CLAIM ARE REQUIRED

For the concessional Contribution to be recorded accurately – it must be consistently reflected in two locations:

  • 'Notice of Intent' to you Super fund that you will be claiming the deduction
  • Inclusion in your tax return as a Deduction.
  1. TRAP - Exceeding $25,000 cap

The amount of personal deductible contributions must be considered in total with all other concessional contributions for the income year to ensure the contributions do not exceed the CAP. 

Remember to consider all concessional contributions made or scheduled to be made in a financial year including the following

  • superannuation guarantee,
  • salary sacrifice,
  • employers paying for insurance premiums
  • If you are a member of a Defined Benefit account you will need to consult with that super fund for amounts classified as 'concessional'
  • In some cases insurance polices are framed in super such that the premiums are classified as Super Contributions.

Concessional contributions that exceed the your concessional contributions cap are effectively taxed at a your marginal tax rate and you will also be subject to an excess concessional contributions charge.

Note   - In certain circumstances (specific criteria applies) you may be able to carry forward unused Concessional Contributions from the previous two years 2018/19 and 2019/20 which may increase your maximum capacity above $25,000 for a given year.  It is recommended you seek specific advice to see if this applies to your personal situation.

  1. TRAP - incorrectly categorising contributions

A member who incorrectly classifies a personal contribution as an employer contribution and also claims a tax deduction for the contribution risks receiving an excess concessional contributions tax determination, as the ATO will count the contribution twice.

Super funds need to know what type of contribution you are making so that it can be reported correctly to the ATO and so the fund knows whether to deduct 15% tax. The ATO then uses the information reported from the fund and your income tax return to classify employer and personal contributions into concessional and non-concessional contributions.

  1. Trap – Claiming co-contribution or spouse tax offset

If you intend to qualify for either the government co-contribution or a tax offset for a “spouse contribution” then you CANNOT claim a deduction for the contribution (i.e. you cant receive two benefits).

Co-Contribution – if you contribute up to $1,000 in an attempt to qualify for the maximum co-contribution of $500  - DO NOT claim the $1,000 contribution as a deduction.

Spouse Contribution Offset - If a spouse tax offset (maximum $540) will be sought, ensure the contribution (up to $3,000) is classified as a ‘Spouse Contribution’ and not as a personal super contribution (in which case you CANNOT claim this as a deduction).

To avoid missing out on co-contributions or a spouse contribution tax offset, carry out more general contribution planning first. If you plan to claim a co-contribution or Spouse Contribution offset, ensure a notice of intent is NOT submitted for that contribution.

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31
Jul 2020

If Not Now, When?

If Not Now, When?

Written by Hudson Adviser Michal Park

Covid has certainly put a dent on anyone planning to invest. And try as we Hudson Planners might to encourage a contrarian approach, some investors are more comfortable sitting on the sidelines waiting for a bell to ring, signalling the perfect time to invest. Others are even more comfortable switching the bulk, if not all, of their funds to cash in a time of historically low cash rates (deemed to stay lower for longer).

To illustrate my point about converting to cash, the chart below shows how $10,000 invested in the S&P 500 index for the 20-year period of 1999 through 2018, would have performed under various scenarios.


If you had invested $10,000 in the S&P 500 index at the beginning of 1999, it would have grown to nearly $30,000 by the end of 2018, provided you hadn't touched it. In contrast, missing out on the 10 best-performing days during that 20-year period would have cut your returns in half.

It's very important to understand that there will always be events that trip up markets. For long term investors (and yes, even retirees are long term investors!) the advice we continually spout is to remain invested even when stocks are down. Sharemarkets can turn on a dime over a number of factors including demand and supply, interest rates, dividends, management, politics, investor sentiment, world events, the list goes on. The market is an unpredictable beast and anyone who tries to tell you otherwise is pulling your chain.

This is not game of Survivor. The best approach is to try not to outwit, outplay, outsmart a playing field with a global market cap in excess of $70 TRILLION. Instead, why not take a consistent approach and work with what is known. The one thing we do know right now is that markets are VOLATILE. And the antidote to volatility is discipline and routine. Regular investing is key. If you are looking to invest a lump sum, why not drip feed it in to markets over a number of months? If you are looking to increase your investments, why not invest on a regular monthly basis to get the average price over time?

Below illustrates an example of investing $100 a month. As the price per share and number of shares purchased fluctuates, $500 purchases 75 shares at an average share price of $7.20.


So rather than use volatility and uncertainty as an excuse not to invest, see how you can use it to your advantage.

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31
Jul 2020

How is the Government Faring Raising all this New Debt and Who is Buying It?

How is the Government Faring Raising all this New Debt and Who is Buying It?

Written by Hudson Adviser Phillip McGann

With the COVID 19 fiscal response in full swing the Federal government has gone headlong into the debt markets to raise the billions needed to keep the economy functioning and building the "bridge to the other side" after the pandemic.

What with JobKeeper, JobSeeker, JobMaker + many other government programs translating into massive (even eye watering) government debt levels the debt markets have been tapped to provide the funds.

Just this week the government finalised the issuance of a $15 billion 30 year bonds at a yield of 1.94%.  And the government body responsible for the issuance - the Australian Office of Financial Management (AOFM) - was swamped with offers of TWICE that amount.

Two weeks ago the AOFM issued FIVE YEAR government bonds at a yield of 0.495% and again were inundated with offers from market investors. The government raised $17 billion but had offers for over $50 billion.

So the AOFM has no problem raising funds presently at very low rates. So who is buying them all?

Over two thirds of the current offer was taken up by offshore players;

22.8% UK

17.63% North America

12.67% Asia ( excluding Japan)

Domestic 33.1%

Europe 9%

Japan 3.1%

Other 1.7%

Source: AOFM

The type of investors were mixed;

Fund managers 2/3

Banks 10%

Overall Australian Government debt is predicted to be $835 Billion by the end of the financial year. However with interest rates at historical lows it appears that this level of debt is not an issue for global investors looking for quality AAA rated government debt with longer durations.

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