Good morning to you all
First a big congratulations to all our Olympians who have made us proud in Paris over the last two weeks.
Market Volatility
After a good run with the stock market achieving new records over the last few months, perhaps predictably markets got into a more volatile environment accumulating in a decline of around 5% from the all-time highs.
The catalyst for this was Japan increasing their rates for only the second time in 17 years in an attempt to increase the value of the yen and to reduce the so-called carry trade of buying in the end and then reinvesting into the US stock market.
This caused a higher level of volatility as positions were unwound and was exacerbated by unexpectedly poor wage numbers out of the US.
As has historically been the case, markets bounced back quickly afterwards primarily on the basis that interest rates would fall in the US quicker and harder than had originally been anticipated.
Bank of Japan Rate Rise(Source: LSEG Datastream, Reuters)
As always when you see events like this there is something to learn and in particular the impact of automated trading exacerbating short-term market movements both ways. The VIX jumped sharply over a few days before declining rapidly, reflecting the amount of short-term volatility perceived to be in the stock market. There have been some questions about the makeup of the index and whether this created unnecessary excessive computer-based trading and the potential effect of artificial intelligence on seeking to benefit from this market disruption.
Volatility Index Movement (Source: Google Finance)
Productivity
Ultimately the wealth and prosperity of the country is a function of how productive its economy is and at this stage on a per capita basis at best we are standing still. To get interest rates down in a sustainable fashion and keeping employment strong requires a commitment to be more efficient and use technology to drive innovation.
Capital should then be allocated to the most innovative businesses and withdrawn from segments of the economy which refused to adjust to the economic world we now live in. Examples of this are particularly in the building sector where outdated labour agreements have substantially increased the cost of building and many projects that should have been built are not viable, thereby exacerbating the supply shortage of housing particularly in Sydney. The federal government today put the CFMEU into administration, which is the main union causing the problems.
When compared to other countries our restrictive employment contracts compounded by unnecessary government red tape has acted as we wait to hold the country back. Over the last five quarters on a per capita basis the country has been in a minor recession only technically kept out of it by a high level of migration.
Labour Productivity (Source: Michael Read, ABS)
Australian Earnings Season
We are now in our annual earnings season, which is an important time of the year, particularly looking at outlook statements from companies as to how they see economic conditions in the future. Without continuous disclosure requirements on the ASX we are not expecting too many shocks. The usual bellwether, CBA who has just announced an increased dividend of $2.50. For most investors it really is best to look through the noise and retain a clear long-term investment strategy, accepting that there will be greater volatility for equity type investments which over time have historically done better than fixed rates.
Market expectations is for a steady but unspectacular financial year end reporting with a particular emphasis on sustainable dividends which is of course used by investors to fund their cost of livings. There are several exceptional businesses that we do invest in directly, including REA, JB Hi Fi, Temple & Webster and Goodman Group, all of whom have produced outstanding results.
Asset movement over recent days(Source: ASX)
Future Interest Rate Movement
We are now well into the loosening cycle globally with Canada, the UK Europe and New Zealand all dropping interest rates. There’s an expectation that the US will drop at least 25 basis points in September, possibly more. It really is a matter of time before Australia joins this cycle with markets currently anticipating 150 basis points drop over the next two years. This will be a relief to mortgage holders and will provide a fairer cost of capital for investors.
Again, the caveat being that productivity improves to support a lower rate for capital and that wasted, and inefficiency are eliminated from our economy. There has been quite a divergent of views between the RBA and the federal government as to the timing of these rates which need to be seen in the context of a future federal election over the next nine months.
Annual Inflation and Projections
Domestic Property
Residential property remains by far the largest asset class in Australia with a tax system that supports home ownership as no capital gains tax is payable on the principal place of residence on the sale of the property. This remains by far the safest way to accumulate wealth in Australia subject to any personal liability four debts.
Internally we are working hard with clients to get both themselves and in many cases their children into property and remain part of our precious community. Clearly interest rates reducing quickly would increase people’s borrowing capacity and this must be a priority of all levels of government.
The state government has indicated that additional medium density housing will be approved close to our metropolitan train stations, which again should improve the stock available for purchase. The trend towards living closer to the city with easier living close to health and education is becoming increasingly apparent and is reflective of major developments closer to the city such as Zetland/Waterloo.
With an aging community we are seeing significant downsizing from standalone homes into secure apartments with good access to amenities and this again is a trend that we are actively supporting and where possible financing.
Client Data Security
We have upgraded our website and in particular access to client portals to reduce any prospect of fraud. Client privacy and data security is the highest priority for all Australian businesses particularly those in the financial services sector. Our job is to help you circumnavigate some of the guardrails put in place to protect data while still allowing you to enjoy day-to-day living without the concerns of spam emails or phone calls from overseas seeking to persuade you to part with your money. If you have any concerns about security, please contact us directly immediately and wherever possible use client portals as a Safeway of communicating with the firm.
As always, we welcome referrals from your family and friends who require independent financial planning advice. As we tick over 35 years of being in business we remain as committed as ever to the needs of our community and understanding the great honour it is to interact with so many people’s lives. We are fortunate to live in one of the best parts of the world and must not take this for granted as we continue to seek to be more efficient, utterly client focused and committed to helping clients achieve their economic and life goals.
With our thanks for your ongoing support
Tony and Fiona
