July 2010

Well a month can be a long time between newsletters as the country adjusts to a new Prime Minister. While a surprise to many in Australia it was a complete shock to our international trading partners and overseas fund managers who have in the short term taken a wait and see approach. Markets were very weak in late June in part due to year end selling by institutional investors but recovered to record a strong start to the new financial year. At a macro level our share market still remains at only 2/3 of its high several years ago while dividends have in the main held up and looks relatively cheap on a longer term bases. The annual earnings season commences shortly which will give a more accurate read on future expected trends .Analysts will be looking at company outlook statements in trying to assess 2011/2012 earnings expectations. 

The “resources super tax” which had been so contentious and public over the last few months seems to have been resolved and renamed. In summary there will now be no retrospectivity for taxing existing projects, tax will now cut in at an investment return rate of 12% not the previous 5%, the actual tax rate reduces from 40% to an effective 22.5% (there is a 25% allowance for profits made earlier in the production cycle). Finally only coal and iron ore will now be included significantly reducing the number of companies affected. There are diverging views as to the actual tax take which will ultimately be a function of the assumptions on the future selling price and volume of these commodities. In general it is better that I abstain from personal opinions in this area but it is fair to say there are policies from the coalition which would also have the potential to increase the cost of doing business. 

Overseas the International Monetary Fund upgraded its growth forecast for world GDP to 4.5%.The challenge remains in Europe for the austerity measures being implemented to be carefully managed at the same time as trying to stimulate their economy this will not be easy and is already causing civil unrest (sort of having one foot on the brake and the other on the accelerator at the same time).The goal being to restore investor confidence without harming economic prospects. Challenging the recovery in these economies are high levels of public debt, unemployment and constrained bank lending. This is a build up from many years of some member countries living beyond their means and will require strong coordinated leadership across the European Union to get the region back on a sustainable growth path. 

More locally Asia continued its strong recovery in the first half of 2010 driven by rising exports and strong domestic demand. Regional GDP is now projected to be 7.5% with China and India expected to do even better. As much of the consumer consumption is now internally driven within the region and living standards improve there is less reliance on exporting to the US which has to be a good thing from a longer term investment prospective. The region remains our favoured overseas sector with a number of new managed funds seeking to offer opportunities to benefit from the increasing prosperity in the region. The obvious hard work and enthusiasm by entrepreneurs with limited means in these countries, contrasts markedly with the restrictive work practices of the US and Europe. This is also good for Australia as we benefit from our exports doing well with our current terms of trade being very strong and in surplus. 

From a financial planning point of view our key challenge remains ensuring that an adequate income can be drawn down from investments to fund retirees living expenses. This is not easy particularly with smaller balances and we continue to lobby Government to provide a more integrated retirement solution using ‘guaranteed return products’ which should interface with the Government Pension and eliminate petty means testing which costs more to administer than it does in savings. It is a sad fact in a country like ours that self funded retirees should have to regularly provide Centrelink with investment statements and be penalised for working or increasing their assets. A better solution would be to eliminate means testing pensions and encourage greater self reliance and independence. 

We are holding our next function in Manly next week which is a movie and dinner night.  As this will take some organisation can I ask you to RSVP via email so we can purchase tickets and advise the restaurant. As always we value your referrals and are proud that we are a privately owned and operated financial planning practice and licensee offering real consumer choice. We remain absolutely committed to providing stable long term advice throughout the various economic cycles and to stay close and support all our valued clients as they go through various life changes.

Dr Anthony D Virtue Certified Financial Planner & Principal Partner