Christmas Greetings
Good to see the sun shining as we come into the summer season here in Sydney and I very much look forward to seeing many of you at our upcoming client functions.
US Election
It is amazing how quickly people adjust to changing circumstances. It was just two weeks ago that Donald Trump was elected as president of the United States. The graph below shows that to have control over all three levels of government is not an unusual circumstance in US politics. This will provide an opportunity for Trump to quickly introduce his policies particularly that of America first. As he has been President before, this will be a straight four-year term with a two-year interim election for the Senate and Congress.
Equity markets so far have been quite strong. Based on an expectation that policies will be both pro-business and pro-growth. The downside is that if there are significant tariffs introduced this will be inflationary which in normal circumstances will lead to higher interest rates. At least with a clear decision, there has not been a vacuum waiting for votes to be recounted which has been seen as positive for decisions being made and followed through.
Historical Single Party Control of US Congress (Source: PEW Research Centre)
While the transfer of power is to take place on the 20th of January 2025 it is already clear that decisions are being made in Mar-a-Lago in Florida with a number of foreign leaders already meeting Trump to perhaps pre-empt future policy decisions. The proposed administration has also been selected including family members so we should anticipate a fairly nationalistic approach by the new administration over the next four years.
Some sectors of the economy have already benefited on the so-called Trump Trade including Crypto currency and right-wing media with News Corp hitting a new all-time high. In aggregate both the US and Australian stock markets have hit recent highs with growth orientated shares doing particularly well. The corollary of this is that at some stage there may well be a correction of 5% to 10% in the stock market as reality sinks in that there are still some very serious trade deficits in the US that need attention, and difficult decisions will need to be made.
Australian GDP
The quarterly GDP came in at 0.3% and 0.8% annualised. This marked the 7thconsecutive quarterly negative return per capita on productivity – our worst on record.
The graph below shows this in stark detail.
The RBI was budgeting on a 1.5% annualized for the year so again this puts pressure on interest rates to drop. The economy was effectively propped up by public sector spending and the effect of very high levels of migration. Retirees drawing down on the allocated pensions also added to spending of discretionary items including travel
The practical effect of this is that living standards have fallen which is something that is self-evident to all of us in our daily lives. Relative to other comparable countries we are not doing as well as we should be doing, and we simply have to be more productive in our working environments
Real GDP Growth (Source: AFR, ABS)
Australian Share Market
Our market is also at an all-time high driven by our own growth orientated shares such as Wise Tech, REA And Goodman Group. Our four main banks are also at or around all-time highs partly reflecting some improvement in their cost base through a greater use of artificial intelligence which should improve profits and then dividends. It is these dividends that still underpin the income stream needed to provide for the communities living needs and the four major banks still in aggregate make up 50% of the dividends on the ASX.
A substantial amount of this is held by Superfunds and the sector ticked over $4 trillion worth of assets for the first time late last week. This does provide an enormous capital base to support Australian business including future credit facilities. It is important that these funds are directed into investments or public good. Including affordable housing so that the whole community can benefit from the windfall of rising equity and property markets.
Index compared to REA and Wise Tech (Source: Commsec)
Australian CPI and Interest Rate Direction
Australia quarterly CPI was updated last week showing trimmed mean coming back towards the top of the 3% RBA target. Most of our comparable economies have now dropped interest rates, including the US, UK, Europe and New Zealand and there is much debate now as to whether we will drop rates in February 2025. Our current interest rate settings are very restrictive and in essence stop capital being allocated effectively into economically useful activities (including employment) due to funds having to be allocated into meeting interest repayments.
While we see this in our households and businesses daily this is also a reality for the federal and state governments who also have significant interest payments that are much higher now than would be the case with lower interest rates. Provided inflation is kept in check it is the wider communities interests for interest rates to drop down to more manageable levels. The corollary being that retirees are benefiting from some very good, fixed interest returns at this stage of the market cycle.
Total Government Debt (Source: Institute of Public Affairs)
One of the last pieces of legislation to be passed in this parliamentary cycle was a changing in the operation of the RBA including breaking up Director’s appointments into two distinct Boards and allowing the Treasurer to override the Governor on future interest rate policies. New arrangements start in March of 2025 and may materially impact the way that interest rates are set in Australia.
We will have a federal election by May 2025 at the latest with the cost of living being a key concern within our community. In many ways the community now is asset rich and income poor with living standards declining over the last six quarters where we have had negative growth per capita. It has been a record high immigration that has kept us out of technical recession and there is a limit to how much the economy can grow in a sustainable manner until some of the supply issues, particularly in housing are addressed.
Australian Residential Property
The sector has now grown to over $11 trillion and is by far the largest asset class in Australia with shares being $3 trillion. This has provided a windfall to homeowners some of whom now have the capacity to downsize and reallocate some of the capital into superannuation contributions and then income streams in retirement. Issues of equality and intergenerational transfer of wealth remain major policy decisions.
There have been some initiatives to improve supply, particularly by state governments through medium density housing closer to our major cities. This will take some time to materialise into increased dwellings. The additional cost of building is now around 30% higher over the last three years. Which is in itself inflationary. Some initiatives have included Victoria eliminating stamp duty on new strata-based properties for the next 12 months. Ultimately this is a tax that needs to be replaced nationally by a more modest land tax on an annual basis.
The APRA buffer of 3% on home loans is still keeping a number of clients In mortgage prison and is excessive in a declining interest rate market. While variable rates remain in the low 6%, we are seeing two-year fixed rates dropping quite quickly now. It is very much a case of waiting for the interest rates to fall before we get the market confidence for both owner occupiers and investors to consider further purchases. The handbrake now is limitations on borrowing capacity, and this is something that can easily be resolved through making a reduction in the buffer to a more relevant number. This is a matter before the Senate over the last couple of weeks and I would anticipate some movement shortly. It is much easier to drop the buffer than public interest rates.
Christmas Break Ahead
It has been a busy year for our community particularly with the cost of living and absorbing international events including wars. We are a resilient group and manage change well including the growing use of Artificial Intelligence and the commensurate increase in knowledge and information. After our functions we will seek to get a good break over the Christmas period and return refreshed.
Thank you for your support and referrals
Happy Christmas
Tony and Fiona
