Written by Hudson Adviser Phillip McGann
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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.Read in full + comments 0 Comments
Written by Hudson Adviser Kris Wrenn
It’s fairly common news now what we can expect NOT to happen after the unexpected re-election of the Coalition, with respect to negative gearing, CGT, franking credits, etc.
But what CAN we expect from the Coalition based on recently legislated and proposed Bills?
INCOME TAX CUTS
Some of this is legislated and some proposed. In the 2018 budget we saw a range of cuts proposed, between then and 2024. For the current financial year the second tax bracket of 32.5% has been extended out from $87,000 to $90,000. For the 22/23 and 23/24 FY however most brackets are set to change, with the 19% rate extending out from $37,000 to $40,000 and the 32.5% extending from $90,000 out to $120,000. From the 24/25 FY a huge change is planned, with effectively a removal of a tax bracket and anyone earning between $41,000 and $200,000 will pay a marginal tax rate of 32.5%.
Note that all of the above is now legislated, however they have now proposed that the $41,000 threshold in tables 2 and 3 increase to $45,000 and the 32.5% tax rate in table 3 decrease to 30%.
Additionally to the above, in the April budget they introduced the “Low and Middle income tax offset”, which would provide up to an additional $530 to low income earners, which reduces as you earn more, and becomes nil once you earn $125,333. This is legislated, and they have since proposed to increase the “benefit” to $1,080 from $530 and have it phase out at $126,000.
So in summary, we are talking income tax cuts across the board already legislated, with further cuts now proposed.
COMPANY TAX WRITE OFFS
Already Legislated – Instant tax write off for small businesses up to $20,000, set to rise to $25,000 next year and $30,000 the year after.
As per last years budget, the coalition will continue its plan to allow “catch up” concessional contributions. This is whereby if you haven’t used the previous financial year’s $25,000 contribution limit, you can use it the following year in addition to the $25k for that year. This will now be available from July 1st and any unused contributions from 18/19 can be contributed in 19/20.
Work test requirements to be pushed out to age 67. Reminder that the work test is whereby after the age of 65 you need to work 40 hours in a consecutive 30 day period in order to contribute to Super. This has been brought in to reflect the fact that the age pension age has increased from 65 to 67 and for mine, is a welcome change allowing a bit more flexibility.
Likewise, the use of the bring forward rule will apply to those aged up to 67, instead of 65. Another way of putting it is that you need to be aged 66 at some stage of the financial year in order to use the bring forward rule in that year.
Possible related changes – Given that the work test is to be pushed back to age 65, there is the belief that other aspects of Super relating to age 65 may also be pushed back. For example, the “condition of release” that is turning 65, may be put back to 67. Similarly, regards the downsizers rule allowing a $300k contribution if you sell the family home – currently it is only available to those over 65. Will this become 67 also?
Spouse contributions – age of eligibility being extended from age 69 to age 74.
Insurance to be cancelled for inactive Super accounts – as per our recent one-off publication.
Super exit fees banned.
FIRST HOME DEPOSIT SCHEME
The Government is set to “guarantee” loans for first home buyers, and further more that no lenders mortgage insurance will apply. Eligibility requirements include the fact that you must save a 5% deposit. You will need an individual income of under $150k or combined income (with spouse) of under $200,000. Finally, the value of the properties will be capped to a level not yet specified. The cap will be regionally done, i.e. higher value allowed for Sydney, etc. Interestingly the Government is saying that the number of people allowed to do it will be capped at 10,000, so presumably they will be working on a “first come, first served” basis. This kick starts on 1st January 2020.
As well as additional funding from the Government they intend to try and simplify the means testing forms for those entering an aged care facility.
LAPSED BILLS gone by the wayside due to the election
SS not to affect SG – Currrently, believe it or not, if a person earns $100k and salary sacrifices $10k, the employer only technically has to pay Super Guarantee (9.5%) on the $90k. This was due to be prevented but the bill has lapsed, and it is suspected this proposal will be reinstated.
NON RESIDENTS CAN’T USE CGT exemption – currently, if a person goes over seas they can still use the 6 year rule and sell their old PPR CGT-free within a 6 year period. This allowance was set to be removed for non-residents and the bill has now lapsed and it is unsure if it will be re-instated.
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Written by Hudson Adviser Phillip McGann
The local and international markets are up strongly this calendar year after a very poor last quarter of 2018. The overall market movements for December Quarter 2018 make sombre reading for investors but the start of 2019 is very promising.
The US markets tend to lead markets around the globe and the past 4 months have been no exception.
The Dec quarter capped the worst year in a decade for the US markets and the December result of itself was the worst monthly performance since 1931.
So why did the market collapse so spectacularly last year and why has it now staged such a dramatic recovery?
As always there are many reasons with a few as follows;
China / US trade wars: President Donald Trump has confronted China about intellectual property rights theft and dumping practices that have led to a huge trading surplus with the US. This was a signature election promise and he has not backed down.
Trump has slapped large and escalating tariffs on many Chinese goods and the Chinese have reciprocated in a “tit for tat” fashion that has (almost) gotten out of hand.
A truce of sorts has been called with negotiators lined up to sort out the mess in the next month which has left many economists predicting dire consequences for both economies - and by extension - the rest of the world. Financial markets have reacted to the threat and the potential compromises in equal measure and now we wait for a final outcome in coming weeks.
Negative: If no resolution achieved will weigh heavily on the markets.
Positive: Self preservation likely to find out as both sides will see “something” needs to be done or both sides lose out
US government shutdown: Again President Trump is at the epicentre of this issue and (again) it is an election promise that he is following through on.
He promised to confront illegal immigration into the US by building a Wall at the southern border with Mexico and he has now called on the Congress to fund it (or else)!
He has held up government funding for other depts. in the process and hence the shutdown of some of these depts. over the past month.
The issue has now been resolved – temporarily – but it will come up again in three weeks. Financial markets have (slightly) reacted to this issue over the past few weeks and will likely do so in the near term if the shutdown returns.
Negative: We may be back here again in three weeks.
Positive: Trump is a pragmatic individual and this has hurt his standing with his base so likely will resolve the issue with a use of executive powers to declare an emergency and fund the wall with Defence funds.
US economic activity and projections: Many economists are worried about the state of the US expansion which has been in full swing for the best part of 8 years. How long can the cycle continue is the big question and financial markets are fluctuating on the answer.
Positive: Current reporting seasons shows on balance the economy is powering along so expansion continues albeit it at a slower pace.
US interest rates: This issue is tied to the previous one and will impact the expansion directly if rates are raised too soon too fast. The inflation outlook for the US is fairly benign but with an economy the size of the US growing at a very quick historical pace and un-employment falling to historically low levels many pundits are asking where will it all end?
Will it be in a burst of inflation? Which the Fed is vigilant to ward off with higher interest rates whilst not trying to kill the “golden goose” by increasing interest rates too soon A delicate balancing act is in play and the financial markets are second guessing the way it will “tip” everyday.
Negative: If Fed continues to rise to keep ahead of inflation may “cause” a recession and market rout.
Positive: Fed is making the right soundings about being conscious of the role of interest rates in the expansion and has indicated that it will take on the markets concerns.
Brexit: What a debacle! A mess that is getting messier as the end of March approaches and the UK has to leave the EU with or without a deal. This is on some levels a very UK focused issue but is one that has echoes around the world as it shows how democracy if struggling to reconcile the wishes of the populace with their leaders.
Interesting times await and markets – again – react day by day.
Positive: Likely the end game will not be the unmitigated disaster many have speculated but perhaps a shock to the economy that can be worked through.
Domestic issues in Australia centre on the economy and how our record long 27 year expansion will play out over the next couple of years. Interest rates are stuck at a very low level and appear destined to stay there for a while or maybe even drop lower if the economy slows further.
At the same time the economy is in the midst of a credit squeeze as banks run scared of pending adverse findings from the Banking Royal Commission – out next week - and regulators baying for blood after being shown up as “asleep at the wheel” on their duties to regulate the banks.
The overall financial sector makes up 40 odd % of the local market and has proven very soft over the pat 12 months impacting portfolios.
Oh and also we have a looming federal election with the Labour opposition providing a huge target with promises of a huge tax increase on the back of a clamp down on investors through negative gearing changes on property investments, a reduction in the capital gains tax discount and a rescinding or franking credit refunds for certain tax payers.
Currently Labour is ahead in the polls but the government is closing and Australian Federal Elections are usually very close run affairs.
Positive: Australian has survived many changes of government over the past 27 years and the expansion has continued.
So there you have it A “wall of worry” everywhere you look but share markets continue to rise higher around the globe as investors sense “too much bad news” has been baked into already very low prices from late last year and are eager to dive in when only a few weeks ago they cowered on the sidelines.
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Written by Hudson Adviser Phillip McGann
A recurring phrase in share investing circles at this time of the year is;
“Are we going to see a Santa Clause Rally this year”?
What this really alludes to is the observation of a year end rise in share prices from late November to early January.
Here is a seasonal graph of the last 30 years (until Dec 2016) for the US based S&P 500 index (I could not find similar data for the Australian market but as the US market usually has a large impact on our market the effect can well be similar);
What this graph appears to show is a definite rise in share prices at the tail end of the calendar year.
Why is this so ?
It is likely due to fund manager activity trying to “window dress” their holdings to make things look better for the end of quarter / year reports and potentially to secure bonuses etc. Also they may well be adding investment funds before calendar year-end as part of their investment mandates.
It also could relate to year-end consumer activity feeding into large retail stocks which are increasingly a larger part of the share market – think Apple and Amazon etc.
And also it could well be a more positive attitude from individual investors at this time of year feeding into trading activity. No one really knows for sure.
So is this a reason to rush out and buy shares? No not really, but it is a potential counter point to a lot of the doom and gloom around of late that has infected a lot of investors.
Ho Ho Ho !
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In the 2018 May Budget, the Government announced the proposal to allow individuals with smaller super balances (under $300,000) who are recent retirees and who have attained age 65, to make last chance voluntary contributions by providing a one year exemption from the work test. The proposed start date is from 1 July 2019 for the 2019/20 and subsequent financial years.
DISCLAIMER –this is only DRAFT legislation (released 2nd October 2018) yet to go through parliament for approval, so it is definitely early days. However this is a space worth watching especially if you are approaching retirement at age 65 or above in the coming years and looking to dispose of personal investments to top up super which is under $300,000.
Refresher - When does the Current Work Test Apply (aged 65 to 74)
The work test applies to individuals who have attained age 65 but who are less than age 75 wanting to make voluntary contributions to super (including personal contributions, salary sacrifice and even voluntary employer contributions in excess of the award or mandatory Super Guarantee). The work test does not apply to mandatory employer contributions and it also does not apply to “downsizer contributions”.
Refresher - What is the “Work Test”?
If you are currently over the age of 65 you must first satisfy the work test in any given year before qualifying to contribute to super in that same financial year.
A member meets the work test if the member has been ‘gainfully employed’ for at least 40 hours in a period of not more than 30 consecutive days in the financial year of the contribution. This test must be met prior to contributions being made.
Gainfully employed: is employed or self-employed for gain or reward in any business, trade, profession, vocation, calling, occupation or employment. The gain or reward must be tangible (e.g. salary, wages, business income, commissions, etc) and charity work is not generally considered gainful employment.
So what is the Proposed Work Test Exemption?
The exemption is that in respect of the first financial year in which the individual does not satisfy the work test, the individual can make member contributions up to their non-concessional contributions cap (currently $100,000) and also member contributions up to their concessional contributions cap (currently $25,000).
There are a number of preconditions for making work test exempt contributions which must all be satisfied:
- The individual must have satisfied the work test in respect of the financial year immediately preceding the financial year in which the contribution is made.
- The total superannuation balance of the individual immediately before the start of the financial year in which the contributions are made must be less than $300,000. In determining the total superannuation balance, the withdrawal value of any account-based or account-like income streams must be used.
- No work test exempt contributions must have been made in respect of the individual in respect of a previous financial year (whether to a superannuation fund or to a retirement savings account).
Example of work test exempt contributions:
Roger celebrates age 65 with a bang on 1 November 2020 and ceases full time work the same day .
- Contributions before his 65th birthday 1/11/20 are not subject to work test.
- Contributions between his 65th birthday (1/11/20) and 30/6/21 in the same year qualify under the regular work test scenario as he has met the work test many times over in the first 4 months of the 20/21 year before retiring.
- Under the Proposed legislation, Roger would be able to make “Work Test Exempt” contributions within the legislated CAPS for the following year as well (2021/22) without meeting the work test provided his Total Super balance as at 30 June 2021 is under $300,000.
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