29
May 2020

Where to From Here for the Economy and for the Markets?

Where to From Here for the Economy and for the Markets?

Written by Hudson adviser Phillip McGann

State of Play for the local economy

Whilst reports on the economy seem to be very clouded at present the share market is more buoyant and seems to be "looking through the doom and gloom" to a more vibrant future 12 months out.

Consider:

  • The economy has been in a government induced coma for the past two months. Whole industries (tourism, hospitality, most of discretionary retail, tertiary education) have been shut down and their workers on government support.
  • The Job Keeper program has been a "big success" with over 3.1 million workers receiving it via their employers (and actually at only half the cost of what Treasury predicted 2 months ago - see quote below)
  • Jobseeker (the renamed Newstart or Dole) has over 1.6 million recipients after 600K extra people were added last month.
  • The banks (in a valiant attempt to redeem their shattered reputation after the Royal Commission) have extended loan honeymoons (not loan forgiveness, just interest deferments) to over 500K clients.
  • The June quarter GDP figures are forecast to show a decline in economy of as much as 10%.
  • China has started to flex its' considerable financial muscle via our trade interactions due to a perceived slight from the government in relation to actually wanting to know more about the origin of the virus that has closed down half the globe.

And in the midst of all this doom and gloom the Share market, following leads from offshore, has recovered 18% since its nadir in late March as investors try to look through the gloom to a brighter future.

So what to make of it all?

The economy is in desperate straights right now and will need continued fiscal (government) and monetary (RBA) assistance for a while yet.

And the help is coming in truck loads. The government has decided to abandon its long held surplus hope months ago and will not die wondering if it had done enough to support a fragile economic environment. The government is shovelling funds out in all directions. The RBA likewise is deep into the debt markets doling out our version of quantitative easing after it cut rates to effectively zero and now has run out of conventional means to stimulate the economy.

So the support is there but the issues are global and ongoing.

Internationally countries are faring way worse than us medically and economically. A cursory glance at the global situation in the US, UK, Spain, Italy, Russia and now South America gives us all pause for thought and potentially a guilty feeling while pondering "thank god I live here and not there"

The outlook for Australia in comparison to others is very appealing over the longer term if we take the opportunities we have been given and run with them.

Our major resources (exports) are enjoying strong demand from China and others and prices are holding up well for iron ore, though softer for coal. A weaker oil price has impacted energy prices as well.

The International student market is in big trouble in the short term but can turn things around over the next 12 to 24 months.

The $40 Billion annual industry needs the University sector and the Federal Government to work together to build on our strong appeal to the affluent middle class of China and India as they decide where to send there children for offshore education over coming years.

If you were the parent of a University aged child living in China or India deciding now where you were going to send them in 2021 or 2022 what would you do?  Would you rather send them to a country that performed amongst the best in terms of number of cases during the Covid-19 pandemic or (our main competitors) such as the UK or the USA that performed poorly?

Likewise international tourism has been a top five export earner for Australia for the past two decades and that has more or less closed for the time being.

However, as the world opens up again and the tourist dollar looks for exotic destinations that are appealing in a post covid world Australia should be very high on the list of the "clean, green and covid free"

So how to Invest into the sharemarket in a post-Covid World?

Well, we are not in a "post-covid world" yet and will not be until treatments and/or a vaccine is developed and deployed and that may be 6 to 12 months+ away. However there are good signs that the curve has been flattened locally and offshore and the virus is under control.

Also there is always the fear of second and third waves which is playing on the economic outlook with continuing lockdowns and also reluctant consumers not as yet comfortable to go back to anything like there pre-covid lifestyle and this is what is leading to market gyrations still.

Volatility is the order of the day for the last 3 months and will likely be so again over coming months.

The bear market from late Feb to late March was a massive correction in a very short period of time only matched by the recovery since where the local market has rapidly risen to retrace half of the declines. The US market has seen an even more dramatic rise from the low point of 23rd of March.

Is this sustainable in the midst of horrific economic news and forecasts?

Is this recovery merely a "bear market rally" whereby the punters have been keen to resume "normal times" and "buy the dips" in the volatile market?

Time will tell and it will likely be over coming weeks and months when we will know for sure. The share market is a forward looking indicator and investors are trying to predict the economic outlook in 12 months time, not today.

Hudson recommends the best time frame for share investing is at least seven years

So if you are already invested "Stay the Course"

If you are seeking to enter do so gradually over the next 6 to 12 months.

As always consult you Hudson adviser before making major decision on your portfolio. Call 1800 804 296 to book in a call.

QUOTE:

"Josh Frydenberg says there are three reasons for the JobKeeper miscalculation: Human error and an inability to count"

Source : Satirical news site The Shovel

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29
May 2020

COVID 19 - STRATEGY - How to Turn a Capital Loss Into a Tax Deduction

COVID 19 - STRATEGY - How to Turn a Capital Loss Into a Tax Deduction

Written by Hudson adviser Ivan Fletcher

As Financial Planners, it is our role to look for advantages for our clients based on the circumstances presented. Circumstances could be based on changes in legislation, personal circumstances and/or broader economic circumstances. Today I look at what COVID-19 may have provided.


In Brief
- This strategy involves selling personally owned growth assets such as shares or managed funds with nil to low CGT impact (on the back of recent market losses as a result of the COVID-19 Pandemic) and use those funds to make deductible personal super contributions and boost your tax refund.


CRITERIA REQUIREMENTS

  • You have unused capacity in your $25,000 Concessional Contribution CAP.
  • You have positive equity (net of debt) in shares or managed funds (or similar liquid assets) sitting in an unrealised Capital loss (or at least minimal Capital gain) position.

1. Concessional Contribution Capacity


Hopefully, you are all now aware that you can give yourself a tax deduction by making a personal contribution to your own super. This is well documented in past Hudson Reports (refer to 30/3/18 Hudson Report).

Provided you are within the qualifying criteria, you can make personal contributions within the regular $25,000 CAP for personal contributions and claim a tax deduction against your Marginal Tax Bracket.

Example

Sean expects to earn $105,000 for the financial year and receive a total of $10,000 in employer (SG) contributions. This means Sean has a further $15,000 available in unused Concessional contributions for the 2019/20 tax year.

Sean can therefore make a personal contribution (from his own bank account) to his super fund and claim a tax deduction in his personal tax return.

In this example, however, Sean has 2 children in private schooling and there is no spare cash from the household income to cover a $15,000 contribution to super.

2. Unrealised Capital Loss Position

Sean and his wife Melissa have a $50,000 portfolio of managed funds and direct shares (with nil debt). Whilst the overall portfolio has a net unrealised Gain position, some of the investments are in an unrealised Loss position.

Example

$20,000 of investments have an unrealised LOSS of $1,500
$30,000 of investments have an unrealised GAIN of $3,000
$50,000 Total Investments with net Gain of $1,500

If they were to sell $15,000 of select investments from the unrealised Loss part of the portfolio, there would be no CGT to pay and the sale proceeds could be used to fund a personal super contribution.

Warning - If your portfolio is originally funded by debt, then the effectiveness of this strategy may be significantly reduced or not viable. If your loan value is higher than your investments valuation then this strategy is likely unviable. You will need to consult with a tax agent on whether part of your portfolio could qualify for this transaction without compromising the tax deductible interest on the loan.

ORDER OF EVENTS FOR A SUCCESSFUL STRATEGY

  • Assess the unrealised gain / loss position of your existing portfolio. Broker Reports of Managed fund reports may make this task considerably easier where available.
  • Hand pick investments that you know will collectively avoid a Capital Gain overall and then sell to cash.
  • Consult with your tax agent if you have borrowings involved in your existing portfolio.
    You will need to have investments of greater value than your associated borrowings.
  • Make a personal contribution to your super before 30 June.
  • Lodge a Notice of Intent (to claim a tax deduction) with your Super Fund.
  • Provide the Confirmation of your Personal Concessional contribution (which will come from your super fund) to your tax agent to ensure you claim the deduction in your tax return. THE MOST IMPORTANT STEP.

TAX BENEFIT

$5,850 Additional Tax Refund ($15,000 x 39% Marginal tax Rate inclusive of Medicare Levy)

($2,250) Less Contributions tax Paid by Super Fund ($15,000 x 15%)

$3,600 Net Tax Saving

This is the equivalent of a 24% net return on the strategy.

In addition you will continue to benefit from future investment returns on the funds now in super where a lower tax rate (15% compared to Sean's personal tax rate of 39%) is applied to the investment earnings.


OTHER CONSIDERATIONS

Alternative use of funds - The funds will not be accessible in super until age 60 for most people, so if the shares are designed to fund a personal goal such as a child's wedding, car upgrade, renovation or once in a life time holiday - then this may be a show stopper for this strategy - or maybe you have enough to do both.

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29
May 2020

Update and New Legislation Pertaining to the Work Test and Bring Forward Rule

Update and New Legislation Pertaining to the Work Test and Bring Forward Rule

Written by Hudson adviser Kris Wrenn

The landscape relating to pre and post-retirees Superannuation contribution limits has been rapidly changing in recent times and continues to do so now with the submission to parliament of the "Treasury Laws Amendment (More flexible Superannuation) Bill 2020".

First a re-cap of all previous rules and also what has already been legislated in the last year or so.

What is the Bring Forward Rule (BFR) and who can use it? 

The annual limit on non-concessional (post-tax) contributions is $100,000 p/a. However, it is potentially possible to use up the following two financial years and contribute $300,000 in one go.

In terms of who can use it, there are various scenarios to cover off on here, all of which assume that the person has not triggered the BFR within the preceding two financial years, and that they had less than $1.4 million in Super as at the previous 30th June;

1/ If the person is aged 63 or under on July 1st, simple, they can use the BFR.

2/ If the person was aged 64 on July 1st, and makes the contribution prior to turning aged 65, they can use the BFR.

3/ If the person was aged 64 on July 1st, has turned age 65, but has satisfied "The Work Test" (working 40 hours in a consecutive 30 period), they can use the BFR.

Point to note - if the person was aged 65 on July 1st, they cannot (currently) use the BFR.

Recently legislated - The Work Test Exemption

There is now a one year extension to the work test available to those that are aged between 65 and 74, that had a Super balance less than $300,000 on the previous 30th June. N.B This includes Pension balances also. So this opens up an additional scenario to those listed above.

4/ If the person was aged 64 on July 1st, has turned age 65, has not satisfied the work test, but is eligible for the Work Test Exemption they can use the BFR.

Announced April 2019 but as yet not legislated - The Work Test Extension

In the 2019/20 Federal budget the Government announced it intended to extend the age at which the work test starts to apply, from 65 to 67. As it stands this has not yet been legislated but the intention was that it kick in on July 1st 2020. Assuming this goes through, then all FOUR categories listed above become ONE category. That is;

1/ If the person was aged 64 or under on 1st July, they can use the BFR.

Submitted just a couple of weeks ago on 13th May - Treasury Laws Amendment (More flexible Superannuation) Bill 2020

This bill will amend the Income Tax Assessment Act 1997 and will enable those people aged 65 and 66 to use The Bring Forward Rule.

If they are going to extend out when the work test is required, this makes complete sense, so a prudent measure in my view. I'd also argue, given that the Age pension age has been pushed out from 65 to 67 (for those born after Jan 1st 1957), all of the current and proposed legislation has been a long time coming. Clearly we are being expected to work longer, so it makes sense that we should be able to contribute to Super for longer.

Downsizers Legislation

Another welcome change in recent times has been the ability for those over age 65 (there is no upper limit on age) to make contributions to their Super in the event of selling their long-term Principle Place of Residence. I have now assisted multiple Hudson members in doing this and the process has been very easy.

If you have lived in your home for over 10 years, and you choose to sell, an individual can contribute $300,000 into Super ($600,000 for a couple). It does not use up your Non-concessional contribution limit. You do not actually have to downsize, neither in size nor monetary value. In fact you don't even need to purchase a new home. The only restriction is that the contribution cannot be greater than the sale price of the property, so you can't sell for $250,000 and contribute $300,000.

Spouse contributions

Are also intended to now be pushed out from age 69 to age 74. (This can be combined with the fact that the receiving spouse doesn't have to satisfy the work test if they are aged 65 or 66).

If you are nearing or have just retired, and want to consider additional Super contributions using any of the above methods, book a call in with Hudson Financial Planning on 1800 804 296.

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29
May 2020

Sharemarket Scrabble

Sharemarket Scrabble

Written by Hudson adviser Michal Park

The market crash we experienced over a matter of weeks in the first quarter of 2020 was the fastest in history. The cause of the crash - COVID-19 - was unprecedented. Yet a market decline does not last forever. It will eventually recover, but it is difficult to know how the recovery will look with new data being delivered daily to make already jumpy markets even jumpier. So just like Paul the Octopus*, the animal oracle who made many accurate predictions during the 2010 World Cup, today we'll let a light game of scrabble determine the type of market recovery we have in front of us.

Generally, there are four shapes that define a sharemarket recovery:

V shaped sharemarket recovery - steep decline, quick recovery

As the name suggests, a VICTORIOUS or V shaped recovery (21 points) means the markets will rebound as quickly as they fell. We have already had a whiff of this with the US market up 14% since the market bottomed on March 23. Is it sustainable? In order for markets to remain on an upward trajectory, absolute certainty is required and this will come in the form of a vaccine. Given that restrictions are easing globally and economies are beginning to "reopen ", a V shaped recovery may seem likely, but in reality, a reopening of an economy does not mean things will immediately go back to normal.

U shaped sharemarket recovery - long period between decline and recovery

UNRAVELLING (19 points). This type of recovery suggests a longer period between markets bottoming and rebounding. Economies reopening gradually and consumers slowly returning to their normal ways, albeit with some changes (social distancing) suggests a U shaped recovery is very plausible. Everything really is weighing upon how the virus is managed over the next few months including whether the curve continues to flatten on a global scale.

W shaped recovery - Quick recovery, second decline

W shaped as in second WAVE (10 points). The double dip market decline, a W shaped recovery is very likely in my opinion with all the information we currently know. We've seen the market lift strongly already based upon curves flattening and economies reopening, however, is it too soon? Will we see a second wave of the virus? Any hint of a second wave will bring fear back into markets, stall a recovery and lead an inevitable second decline.

L shaped recovery - an extended downturn

This is the LENGTHIEST (18 points) recovery of all, the worst case scenario and possible only if everything goes wrong. I think this is the least likely shaped recovery due to government intervention, controlled virus outbreaks and future economic stimulus plans.

So there you have it. I personally lean towards a W shaped recovery, yet a V shaped recovery is clearly the winner in this game.

 

*RIP Paul (28 January 2008 - 26 October 2010)

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29
May 2020

Share Market Update May 2020

Share Market Update May 2020

The month of May began with a shocker and the All Ords fell just shy of 5% in one day. Since then however it has steadily gained ground and as at close on 28th May sits at 5,957. This is an increase across May of 6.4%.

Likewise in the States, the Dow Jones and the S&P500 performed well, both rising just over 4%, with the Dow closing at 25,400.

This positive share market movement has been despite job losses continuing to rise, predictions of government debt levels to be twice as high as during the GFC, unemployment in the US as high as after WW2, and escalating tensions between the US and China.

The confidence is largely being put down to the lockdown conditions increasingly being eased.

The $AUS has gained a little ground on the $US, rising from 65c to 66.3c across the month of May.

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