Greetings to you all
Upcoming US Election
Once every four years much of the world stops to witness the US presidential election and equally importantly voting for both their Senate and House of Reps. The election is on Tuesday the 5th of November. At this stage it looks like the vote will be very close and indeed there may need for several recounts as there have been in previous elections.
Generally, markets do not like uncertainty and there may be some volatility in equity markets as this result plays out. Both parties are campaigning on spending more money which would increase the US debt and is marginally inflationary. US bond markets have reflected this with rates rising and an expectation that interest rates may not fall as quickly as was previously expected.
It is worth looking back at history and seeing what has happened in previous elections and ultimately life has continued, and equity markets have continued to go up over time driven by innovation and better ways of providing essential services to the public. The actual result tends to revolve around seven swing states, and we should have a good idea by the Wednesday morning as to the likely outcome.
Historically equity markets have not been particularly affected by a Republican or Democrat leaders, both of whom need to see a strong economy that’s one of their principal jobs in being a successful president. The US economy now is quite strong and importantly is benefiting from much of the artificial intelligence to run more efficient and profitable businesses. This is reflected in the profitability we see coming through in their quarterly earnings.
Equity markets over the long term overlaid with the President Of The Day (Source: YCharts)
CPI Figures Released
The CPI figures have been released, bringing the annual rate down to 2.8%. While a bit distorted by government paying electricity subsidies, the trend is definitely coming down as the graph below demonstrates.
Rebates Slow Inflation (Source: Challenger, Macrobond, ABS)
US Equity Markets
This is an important week for earnings as most of the magnificent seven (Amazon, Apple, Alphabet, Microsoft, Meta, Nvidia and Tesla) are reporting and our expectations remain very high. Each of these companies now have a higher market capitalization than the entire Australian market reflecting very strong pricing power at a fixed cost base leading to very significant profits over time. As they have minimal debt interest rate decisions are less important than say the property or infrastructure sector.
The growth of the US equity market really has been limited to these seven companies, which has distorted the overall performance of the sector. The expectation now is that the next tier of companies will begin to improve profitability based on using the efficiency gained from the Nvidia’s and Microsoft’s of this world. Much of our clients’ international funds are invested in these companies which have led to some very strong investment returns over the last few years.
Magnificent 7 compared to the rest of the Index (Source: YCharts)
Australian Equity Markets
We are currently in the AGM season, and I have been attending a number of these on behalf of the firm and our clients. Generally, these are somber affairs with the most sensitive information being communicated via our continuous disclosure obligations prior to markets opening. It is important though to get a sense of the purpose of companies and of their management and whether they are likely to perform well in the future. There are three main ways in which we invest in Australian equities.
- Direct Shareholding: where we have a lot of confidence in the company future growth in a sustainable market with a stable management team
- Exchange Traded Funds (ETF): where we have confidence in the overall direction of the market and are looking to duplicate returns accurately with the low cost
- Active Fund Managers: where we believe there’s an opportunity for managers to outperform particularly in the small company area where there is lower levels of research
There have been several cases of high-profile problems relating to owner shareholders struggling to adjust to the obligations of corporate life. It is a very different skill running a public company and in both cases the company has had to adjust its management team to reflect the expectations of the public.
Australian Residential Property
Last weekend was one of the busiest on record for auctions in Sydney. On balance, markets are holding up well while the expectation of interest rates falling to reduce borrowing costs may still be several months away. The issues of supply shortages are well documented throughout Australia and various initiatives are now being introduced by both the federal and state governments to try to loosen things up.
The Victorian government, which has been one of the weakest over the last few years for property growth, has now waved stamp duty for all of the planned properties for the next 12 months. The general trend towards people living near the city in medium density is only going to grow, particularly as the community ages. For clients interested we have good access to properties in all the major states capitals that meet these criteria.
APRA Borrowing Buffer
There has been a further Senate inquiry into this buffer which effectively forces banks to add a further 3% in their calculation for servicing for mortgages. That’s the effective rate being around 9%, which is clearly excessive relative to the likely trend of interest rates in the future. It is far easier for this buffer to be reduced than to drop interest rates and you should anticipate some action on this very soon. The graph below shows that this buffer has been adjusted regularly over the last decade and it is generally a precursor to wider changes to monetary policy. Currently it is stopping a lot of refinancing and forcing clients to pay a higher level of interest than they would if they could have moved to a more competitive alternative.
While the public reason for this buffer is to protect borrowers from default, the practical effect is to put a ceiling on the likely growth of the middle property market due to a lack of accessibility to get a mortgage. To be clear the regulators are concerned that as interest rates fall property prices will go up substantially, which could become inflationary. There is an awful amount of equity sitting in Australian property which can be leveraged up into further properties and this is something that is quite a political football at the moment.
Loan Serviceability and APRA Borrowing Buffer (Source: Morgan Stanley/AFR)
Christmas Function
With our numbers growing it is getting difficult to squeeze into the Manly Skiff Club function room in one night. Based on client feedback we will run multiple smaller events in both Manly and in the city to give clients a choice of functions and dates to attend. Invitations will be coming out in the next couple of weeks explaining the various choices available.
Client Referrals
A big thank you for the referrals coming through from your family and friends who we prioritise before taking on external new clients. Planning effectively for the future really does give a sense of certainty particularly when we’re moving into the pre- and post-retirement area and the need to consider the right type of accommodation and family needs a circumstances change.
Retaining control of the future and planning properly makes such a difference for the wider family and this includes preparing in some cases for aged care assistance. We have strong expertise in this area and encourage you to bring your families in so that we can explain in a safe environment the wide number of options still available to them.
We thank you for your loyalty and support
Tony and Fiona
