Intro
Greetings to you all and particularly those I visited in Europe over the last few weeks.
While it does look like travel has now recommenced globally it reminded me of how fortunate we are to live in Australia with all the natural advantages we possess. This also reflects in investment decisions from global organisations who see Australia as a safe haven to invest and a high level of quality immigration candidates choosing to make Australia home.
Interest Rate Policy
The RBA kept interest rates at 4.1% for the second successive month last Tuesday with an outlook statement that indicated that this should stay at a similar level for the immediate future. It is helpful to look at our interest rates in comparison to our global equivalence which show that our rates have risen slightly lower than our major competitors which in part is a reflection of the large amount of loans on variable rates relative to other countries that means that interest rate rises have a greater impact here than elsewhere.
Global Interest Rate Comparison (Source: IMF)
Inflation does appear to be declining quite rapidly and according to RBA data should return to the 2 to 3.5% band over the next 12 months or so. This should also lead to longer term interest rates to declining as the effect of technology reduces the cost of labour and ultimately the cost of providing goods and services. Currently our mortgage broking business continues to refinance client loans as they come off fixed rates to ensure clients benefit from some of the competition from smaller mortgage providers haydn.dale@virtueandpartners.com.au.
Headline Inflation (Source: RBA)
Interest Rate Impact on Government
While the main media focus has been on individuals having to meet higher mortgage payments, it has perhaps been overlooked that many countries significantly increased their Government Debt to help their citizens through Covid. This means that national Governments are also having to deal with rising interest rates which is leading to a greater percentage of revenue being allocated to debt payments rather than building schools and hospitals.
The attached table shows how Australia compares with the rest of the world. It is therefore imperative that Governments gets interest rates down as soon as the immediate concerns about inflation abate and return to long term averages.
The quarterly outlook statement released by treasury on Friday has projected inflation back to 3.25% next year with interest rates coming down at a similar pace. Leading indicators such as equity and residential property have picked up on this likely trend with growth assets beginning to increase in value again over the last few months.
Government Debt as a % of GDP (Source: IMF)
Australian equities Reporting Season
The Australian stock market commences the annual reporting season this week which will provide good guidance as to the likely impact of higher interest rates on company profitability. With ongoing continuous disclosure most bad-news stories should already be reported to the ASX and as such we’re not anticipating too many shocks.
It is important to note that rising interest rates have reached a point where guaranteed returns from term deposits are now similar to the average dividend yield on the ASX this will impact on investment decision making as there is now a real alternative to taking equity risk while still earning a reasonable return on capital (see attached graph – aust asx dividends compared to fixed interest – govt treasury site and Charlie Aitkin). This is particularly important for clients in the drawdown phase or their allocated pensions where it is natural to become more risk averse as we become older. In addition to term deposits guaranteed lifetime annuity rates do look quite compelling and can eliminate investment risk completely.
ASX Dividends Versus Fixed Interest Yields (Source: Bloomberg)
International Equities
Internationally reporting from the larger US technology sector has been strong but limited to 7 large organisations. The net effect of this has been quite an increase in the valuation of managed funds specialising in these areas and reminds us of the need to have some of our money invested globally where the Australian market is unable to provide access to these kinds of organisations. In context Apple has now reached a market valuation all $3 trillion US which far exceeds the entire valuation of the Australian stock market. Perhaps counterintuitively Fitch ratings, the smallest of the three ratings houses actually downgraded the US economy below AAA due to concerns of potential breakdowns in economic policy between the two major parties.
Where technology organisations have reached enough scale and market dominance to control pricing, they can quickly increase profitability and hence the value of their shares. The most recent company to demonstrate this is NVIDIA which is the largest of the Artificial Intelligence providers in an obvious area where companies can gain greater efficiencies by targeting their ideal clients in an efficient and time critical manner.
Domestic Property
Locally residential property continues to bounce back strongly partly due to the lack of supply available supported by a sense that interest rates have peaked and will decline over the next 12 to 18 months. The wealth effect of rising asset prices provides confidence for the community to continue spending which is important in avoiding an unnecessary recession due to excessive pessimism as to the future prospects of the country.
With 520,000 people emigrating to Australia the wider prospects for capital growth for residential property still remains strong providing clients have a long enough time frame and realistic expectations as to rent that can be charged to clients. If rents do become excessive governments tend to move to provide some level of control as we are seeing in Victoria at the moment. In aggregate most of the decline in property pricing from last year has now reversed itself and Sydney prices increased by around 5% for the quarter.
Quarterly Change in Home Values (Source: CoreLogic)
Company News
Finally at a local level we have increased our team to meet the increasing demand for financial planning advice in our community. We are committed to helping as many people as possible in what can be a daunting and challenging time of life particularly prior to retirement when sometimes difficult decisions need to be made. With a wealth of experience and an absolute commitment to independent client first advice we are here to support you and your families a living the best financial lives possible irrespective of the many changing circumstances that we need to deal with in our lives.
Our website covers much of the above in far greater detail and I particularly encourage you to use the client portal as a safe and secure way to communicate to us any confidential matters. Where online systems are proven and efficient, we are trying to reduce the friction of getting business done through the use of DocuSign and secure attachments while at the same time providing personalised face to face service including access to the office on Thursday evenings and Saturday mornings.
www.virtueandpartners.com.au
Yours sincerely
Tony Fiona
tony.virtue@virtueandpartners.com.au
fiona.goodland@virtueandpartners.com.au
