Oliver's Insights – The death of 'risk on/risk off'?

Key points:

• The 'risk on/risk off' pattern that has prevailed in investment markets since the global financial crisis (GFC) is showing signs of breaking down.

• This reflects reduced risks associated with the United States (US) and Europe and should be seen as a good sign.

• It means that individual assets and investments can go back to better reflecting their underlying fundamentals

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Planes, trains and automobiles, the merits of infrastructure investment by Alicia Low, Senior Credit Analyst, Schroder Investment Management

"Planes, trains and automobiles" 

Alicia Low, Senior Credit Analyst - Fixed Income, discusses the merits of infrastructure from an investment perspective and how to access opportunities

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"No time for complacency" by Martin Conlon, Head of Australian Equities, Schroder Investment Management

"No time for complacency"

Martin Conlon, Head of Australian Equities, reviews the investment landscape and discusses the likely impact of further quantitative easing, deciding it's not the time for complacency. 

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Australian Taxation Office publication on Self-managed super fund and you

Self-managed super and you

Like other super funds, SMSFs are a way of saving for your retirement. Generally, the main difference between an SMSF and other types of funds is that members of an SMSF are the trustees. This means the members of the SMSF run it for their own benefit.

SMSFs are not suitable for everyone and you should think carefully before deciding to set one up. It is a major financial decision and you need to have the time and skills to do it. There may be other, better options for your super savings. If you are considering an SMSF for your super savings, the publication Thinking about self-managed super (NAT 72579) provides you with some practical information. Licensed financial advisers, tax agents and accountants can also help you understand what is involved.

If you decide that an SMSF is the appropriate vehicle for your super savings, you need to ensure the fund is
set up and maintained correctly so that it is eligible for tax concessions, can pay benefits and is as easy as possible to administer. Setting up a self-managed super fund (NAT 71923) provides some basic information on this and the steps you need to follow to set up the fund correctly.

Once your SMSF is established, you as trustee control the investment of the contributions and fund earnings.
Your SMSF must have a trust deed that forms part of the governing rules for operating the fund. You must also prepare and implement an investment strategy and ensure it is reviewed regularly. There are rules and regulations you must follow to ensure the fund’s assets are protected to provide benefits in retirement.

While contributions are being made to the fund it is considered to be in the accumulation phase. The publication Running a self-managed super fund (NAT 11032) explains the responsibilities and obligations of trustees operating an SMSF. When one or more members retire, you as trustee need to understand and follow the requirements of the law and regulations governing the payment of benefits. This publication is designed to assist trustees who are required to make payments out of their SMSF. It is important to
note the rules and regulations that apply to funds in the accumulation phase continue even when one or more
members retire; however, additional rules apply to the retirement phase.

You should continually reassess the circumstances of the fund and each individual member to determine whether an SMSF is still the most appropriate option for your retirement savings. In some cases you may find that you no longer have the capacity to deal with the complexity or the time required to manage your SMSF.

You may decide that it is not cost-effective to continue to run your own fund. Depending on the circumstances it may be necessary to transfer member benefits to another complying super fund.


Other reasons why you might wind up your SMSF include when all members have left the SMSF (for example, they have rolled over their benefits to another fund or have died) or all the benefits have been paid out. Winding up a self‑managed super fund (NAT 8107) details the process you need to follow to wind up your fund.


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MLC: 2013 Federal Budget Analysis

14 May 2013

The 2013 Federal Budget only contained a few surprises as many of the measures had already been announced.

Note: These measures are proposals only and may or may not be made law.

Summary

• The Medicare levy will increase by 0.5% to 2% pa from 1 July 2014.
• The $5,000 Baby Bonus will be removed from 1 March 2014. Instead, families eligible for Family Tax
• Benefit (Part A) will receive $2,000 following the birth of their first child, and $1,000 for each subsequent child.
• The superannuation concessional contribution cap will increase from $25,000 pa to $35,000 pa from:

             - 1 July 2013 for people 60 and over, and
             - 1 July 2014 for people 50 and over.

• From 1 July 2014, all pension asset earnings above $100,000 will be taxed at 15%.

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Oliver's Insight: The 2013-14 Australian Budget – struggling back to surplus

Key points

• The positives in the Budget are more for education, disability care and roads together with savings in middle class welfare.
• However, the deficit is worse than expected, with a surplus pushed out at least three years.
• While the Government has announced more budget savings, their impact is zero for the year ahead.
• It’s hard to see major implications for investment markets. 
• Australia’s public finances are benign compared to other advanced countries, but they should be much stronger given the biggest resources boom in our history. 

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Colonial FirstTech 2013 Budget Briefing

Introduction

Federal Treasurer Wayne Swan has handed down his sixth Budget, which confirms a range of recently announced proposed changes to superannuation, income tax and the Medicare Levy. It also announces a range of proposed changes to the social security and tax systems.

This FirstTech briefing discusses the impact to clients and recommended client strategies of the proposed changes announced in the Budget, particularly focusing on the following six key announcements:

• confirming proposed changes to superannuation announced on 5 April 2013
• increasing the Medicare levy by 0.5% from 1 July 2014
• not proceeding with tax cuts that were legislated to apply from 1 July 2015
• phasing out the Net medical Expenses Tax Offset
• limiting tax deductions for self-education expenses
• trialing means test concessions for pensioners looking to downsize their homes.

It is important to note that all announcements mentioned are proposed only at this stage, and may change prior to being legislated.

Please click here to read the Colonial FirstTech Budget briefing

What’s happening with Chinese stocks?

In this investment perspective, Martha Wang, the Portfolio Manager of the Fidelity China Fund, gives her views on China’s economy and highlights where she finds risk and opportunity.

May 2013

What your macro-economic outlook for China?

China’s economic growth for 2013 is likely to reach the high single digits and mildly increase from 2012 when the economy expanded about 8%. The current economic recovery is supported by an improvement in the export sector and the investment cycle, while the liquidity environment is largely accommodative. Over the medium term, with export growth likely to decline, China’s economy is expected to slow to high-single-digit from recent double-digit growth. Although this is a decline from the growth rates of the past decade, it is still a healthy and enviable growth rate compared with major developed economies. However, I believe that the government will be willing to accept a lower GDP growth rate as it will focus on the quality rather than quantity of GDP growth. Government efforts will be more focused on rebalancing the economy towards consumption and away from investment and improving efficiency. We could see more reforms in areas such as the financial sector, state-owned enterprises and the rural economy.


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The folly of the Cyprus bailout

by Michael Collins, Investment Commentator at Fidelity

May 2013

Cypriots, already reeling from the toughest conditions tied to a eurozone bailout, then learnt from a Reuters
exclusive that their humiliation extended to the Central Bank of Cyprus being forced to sell three-quarters of the country’s gold reserves to help meet a shock 25% jump in their rescue bill.1 The gold sale was outlined in a leaked European Commission document on the revised, and since-approved, bailout for Cyprus estimated to cost 23 billion euros (A$29 billion), a sum that exceeds the 20-billion-euro GDP of
the Greek-speaking southern half of the partitioned Mediterranean island that is part of the eurozone.

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Japan goes all out for renewal

by Michael Collins, Investment Commentator at Fidelity

May 2013

Quirky terms accompany a daring experiment that is underway on the world’s second-biggest modern economy. “Abenomics” formulated by the “reflationists” is about firing “three arrows” to thrust Japan’s economy out of two decades of deflation-ridden, stop-start growth. The weapons include full-bore monetary and fiscal policy and structural reform. If successful, policymakers around the world could adopt the strategy. Second-time Prime Minister Shinzo Abe, whose Liberal Democratic Party prevailed in lower-house elections in December, wants his brand of economics to end how Japan best serves as a warning of the damage asset bubbles can inflict. The country has failed to perk its economy since the bubbles popped around 1990, despite interest rates at almost zero, the invention of quantitative easing in 2001 and massive government fiscal stimulus that has boosted net public debt to about 130% of output (and gross debt beyond 230% of GDP). The reason is that the monetary and fiscal stimulus have been muddled, half-hearted and randomly applied.


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"Onshoring" and innovation

by Nick Armet, Investment Commentator at Fidelity

April 2013

Apple’s headline-grabbing decision to make computers in the US is not an isolated case. Last year, General Electric moved the manufacture of washing machines and refrigerators from China to Kentucky. Ford has bought home car production from China and Mexico to Ohio and Michigan. Google is assembling its Nexus Q media streaming device in California, while Caterpillar is opening a new factory in Texas. A 2012 survey by MIT of 198 US manufacturing firms with foreign operations found that 15% of them had firm plans to bring back some production to the US, while as much as one-third are considering such a m1o vTeh.e trend
is happening elsewhere too. In the UK last year, GlaxoSmithKline revealed plans to invest 500 million pounds (A$725 million) in a new bio-pharma manufacturing facility; the first time in 40 years the company has built a factory on British soil.


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Beware the rage of Europe’s dispossessed

by Michael Collins, Investment Commentator at Fidelity

April 2013

The political uprisings that have swept across north Africa and the Middle East since Tunisian street vendor Mohamed Bouazizi set fire to himself in December 2010 to protest against harassment and the confiscation of his goods have surprised analysts. No one should be shocked, though, if similar upheavals ripple through austerity-hit European countries. There is a growing risk that the resentment, despair and anger brewing among the eurozone’s dispossessed, including its 19.1 million unemployed, will explode.

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China’s shrinking workforce has big repercussions

by Michael Collins, Investment Commentator at Fidelity

April 2013

The coming years will be favourable ones for Chinese workers seeking hefty pay rises. A big contraction in the labour force will help their bargaining position no end, as it upturns China’s economy.

To understand the test confronting China it helps to canvass the work of an economist from the Caribbean island of Saint Lucia who won the Nobel Prize in Economic in 1979 for his theories on development. The “dual sector model” of Sir Arthur Lewis (1915-91) purports that economies advance without triggering inflation because the expanding industrial sector can scoop up labour from the subsistence primary (agricultural) sector . Basically, an unlimited supply of peasants willing to work in factories for low, but not subsistence, wages allows the industrial sector to power ahead by earning, then reinvesting, excessive profits. But there comes a time when the supply of surplus labour peters out and developing countries confront a labour shortage. The point at which an abundance of labour is about to vanish is known as a “Lewis turning point”. Among its symptoms: wage increases outstrip productivity, industrial profits decline, investment drops and inflation becomes a threat.

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Interest rates still falling, more to go - AMP Capital's Head of Investment Strategy and Chief Economist, Dr. Shane Oliver.

Key points

• The Reserve Bank of Australia (RBA) has cut interest rates again and they are likely headed even lower, probably to 2.5%. Global interest rates also appear to be remaining low for an extended period.
• Low and falling interest rates mean low and falling bank deposit rates. The chase for yield will continue.

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Weekly Market Update by Shane Oliver of AMP Capital

Weekly Market Update by Dr Shane Oliver, Head of Investment Strategy & Chief Economist

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Vanguard Australia - Low yields and rising rates concerns: the implications for bond market investors

Vanguard Research

Executive Summary. The global fall in interest rates to very low levels post the 2008 financial crisis has provided fixed income investors with returns from rising bond prices that are significantly above average. Fear that “bond market bubble” conditions exist, and that the bubble could burst if yields start to rise rapidly, has become a frequent discussion topic amongst investors.

In this paper, first we re-address the role of bonds and their important diversifying characteristics within a portfolio of growth and defensive assets. We discuss how the maths of bonds influence returns after an interest rate rise and the difference in the performance dynamics of bond markets and equity markets, as well as the diversifying benefits of bonds in a portfolio with growth assets. We show the likely outcome from an unexpected interest rate shock on a bond portfolio. We also analyse the strength of forward yields as a predictor of the future direction of interest rates with respect to the short end. And finally, we show the
difficulties involved in trying to predict short term movements in interest rates and thus how counterproductive it could be to engage in investment strategies based on strong views about the direction of interest rates.

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Checking in on the equity market

Vanguard | 30 April 2013

We checked in with Angus McLeod, Portfolio Manager in Vanguard's Equity Investment Group, to discuss the questions facing equity investors as well as the enduring role that equities play in a diversified portfolio.
The equity market has made some positive gains over the past nine months. Is now a good time to invest in equities?

After moving sideways for 18 months from January 2011 the Australian and US equity markets have both risen sharply: the S&P/ASX 300 by 25% and the S&P500 by 17% on a total return basis. Much of this strength has been driven by signs that central bank efforts in developed economies to stimulate demand with low interest rates and money printing are working as planned. Lower interest rates have encouraged investors into equity markets in search of better returns. Strong equity market performance has also been
driven by more positive economic news from the US; news from Europe and Asia has been mixed. The IMF forecasts higher global growth in coming years and as more global economic data releases reveal ongoing signs of an enduring recovery it's to be expected that equity market prices will improve further. As regards structuring a well-diversified investment portfolio, equities will always have a role to play in the growth component of an investment strategy.

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Vanguard Australia - The best of times, the worst of times: Why indexing is relevant in both

Over the past couple of decades the Australian share market has offered laboratory conditions for testing many theories about index versus-active investment strategies. In this article, we take a look at the performance of index and active managers through both bull and bear markets and discuss the subsequent portfolio construction implications. A common misconception among investors is that actively managed funds will outperform index funds in a bear market or that indexing only works in a bull market.


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Oliver's Insight - The Australian dollar - the best is behind it

Key points:

• After doubling in value against the US dollar (US$) over the last decade, the best is likely over for the Australian dollar (A$).
• The commodity price boom is starting to fade in response to a moderation in Chinese growth as commodity supply starts to increase. The impact of quantitative easing in the US is being blunted by rate cuts in Australia with the prospect of more to come, and the rise in the A$ has exposed the high cost base of the Australian economy.
• While further gains are likely in the value of the A$ against the yen (to around ¥110 by year end), the A$ is likely to remain range bound this year against the US$ with the risks on the downside, particularly over the next few years.
• For Australian based investors, this means less need to hedge global exposures back to A$. 

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