Investing in residential property versus shares – which is better?

There are many investment strategies you can implement to help you build real long-term wealth.

Investing in residential property or shares are some of the most common ways to do this, given these investment options have proven to deliver consistent returns over the long-term.1

But here’s the thing.

When looking at how the two compare in terms of investment performance over a 20 year period, there’s actually not much difference. In fact, residential investment property returned just 1.4% more than Australian shares in the last 20 years to December 2017.2

So, in addition to performance, there are two other factors to also consider when choosing an investment approach – your comfort with risk and your investment timeframe.

Learn more about investing your wealth or speak to a financial adviser.


Appetite for risk

While all types of investment classes will come with some degree of risk, given the nature of shares being highly volatile, you are generally likely to experience greater fluctuations with your returns and losses compared to residential property, particularly in the short to medium term.

As the value of shares can change daily, it’s important to consider how comfortable you are with risk and whether you can stomach your portfolio experiencing extreme gains or losses on a regular basis.
Investment timeframe

Residential investment property is generally viewed as a long-term investment that over time may offer positive returns.

Shares on the other hand, are generally used as a short to medium term investment as timing the market is a lot more important than time on the market. This is because it’s mostly about buying low and selling high.
Investing in shares versus property: some of the pros and cons

Regular income stream

Investment property offers access to a passive income stream or a regular cash-flow as a result of your rental income which you may choose to reinvest.

The share market does have dividend paying stocks too, which provide a regular income stream. These are often not as much as what you could earn from an investment property however.

Ease of access

One of the main advantages of investing in the share market is it’s relatively easy to get into. You can use an investment platform, invest via a managed fund or simply download an app. It also doesn’t cost a significant amount to get started, although there may be fees that you could be required to pay.

Residential property on the other hand, requires a substantial upfront investment as well as ongoing expenses to maintain the property.

Diversification

Unlike with residential property, one of the great advantages of investing in the share market is the ability to spread your money across many industries, sectors, geographic areas and large cap or emerging markets. This means you have a greater opportunity to diversify your portfolio and reduce your risk. For instance, if one of your shares plummets, your other investments may help to level out your losses.

Liquidity

One of the main benefits of investing in shares is the ability to convert your investment into accessible cash. This means if you need to access your money quickly, you can simply sell part of your portfolio.

Residential property doesn’t offer the same luxury. It may take a few months or longer to sell your property depending on the market.

Tangibility

One of the great benefits of property is it’s tangible – something you can see, feel, and touch. This means you have complete control over how your investment is managed.

With the share market this isn’t the case. In fact, the success of your investment is largely impacted by the people who run the company. For instance, if the company was to go bankrupt, you would lose your entire investment.

Tax breaks

There are tax breaks available in both shares and property.

If you invest in a dividend paying stock – companies that pay you a regular income– the money you receive from your dividends is taxed at a lower tax rate than the money you’d make from your income.

With a residential investment property, you may also be able to claim against your taxable income for things such as repairs and maintenance to the property, insurance costs, agent and strata fees.

Bottom line: if you’re considering whether investing in residential property or shares is a better option to build your wealth, factor in your investment timeframe and comfort with risk.

5 things to consider before investing

Investing your money may be one of the most effective ways to help you build long-term wealth.

While it can seem overwhelming at times, given the breadth of options available, the truth is you don’t need to be a financial expert to be successful at it. But as Warren Buffet says: “Risk comes from not knowing what you’re doing,”1 so understanding the basics is important.

To help better prepare you and potentially help to reduce your risk, here are five things to consider before investing.

Learn more about investing your wealth or speak to a financial adviser.

  1. Consider your investment strategy 

    One of the main things to consider before investing is to have a plan. This helps you put into perspective not only your investment goals, but when and how you want to achieve them. It can also help to remove the likelihood of emotions influencing your investment decisions.There’s no denying that the nature of investing can be emotional. There are times where you may feel tempted to change your investment strategy because an area of your portfolio is not doing well, or you received recent news the market is going to plummet.

    While these events may cause you to react quickly, such as selling off your assets, it’s important to take a moment to consider your investment strategy. If your approach is intended to be a long-term plan, making decisions based on short-term market fluctuations, may greatly affect what you set out to achieve.

  2. Consider your timeframe and risk tolerance 

    It’s important to consider how much time you’re giving yourself to build towards your financial goal and how much risk you’re prepared to take on to get there.For example, an investment plan for retirement may look very different to someone who is much older or younger. If you’re looking to access your money in a shorter time frame, remaining invested through ups and downs in the market may be unlikely, so a less risky investment approach may work to your favour.

  3. Consider where to invest your money 

    You may choose to divvy up your money across a variety of asset classes such as shares, cash and bonds, or you may choose to invest your money in a single asset class, such as a residential property.

    Diversification
     

    One of the main advantages of investing in different asset classes, is the ability to diversify your risk. This means, if one of your investments doesn’t perform well, your losses may not be as significant as if you only invest in the one asset class, as your other investments may help to level it out. On the flip side, it does take more effort as you’ll need to remain up to date across a variety of markets.

    Consider the company not just share price
     

    If you’re investing in shares, it’s also important to look beyond the stock price and consider the company you’re buying into. If it’s values and goals don’t sit well with you, then it may not be the best investment option for you.

  4. Consider how to invest your money 

    There are many ways you can go about investing your money depending on how confident you feel and whether you’d prefer to take a more passive or active approach to managing your money.

    Managed investment funds
     

    Managed investment funds offer fund managers that manage your investment portfolio by buying and selling shares on your behalf. This provides a more hands-off alternative so you don’t have to worry about the day-to-day management of your portfolio. If you do invest in a managed investment fund, you’ll be required to pay a range of fees, which are usually set out in the relevant Product Disclosure Statement (PDS).

  5. Research the market 

    It’s critical to take the time to research what factors may have an impact on your investments so you can make informed decisions.Understanding what’s going on in the market, domestically and globally, is important as it may have an impact on your investments. This can include things such as growth, unemployment rates, interest rates and inflation and even political events.

Consider speaking to a financial adviser

You can work with a financial adviser to develop an investment plan based on what you want to achieve from your investment portfolio. They will then be able to help you manage your investments and advise you about where is best for you to put your money. You will be required to pay fees for these services.

Bottom line: investing your money can be an effective way to help you build long-term wealth. Sticking to a plan, understanding your timeframe and risk tolerance, and being in-the-know about what’s happening in the market, may also help to reduce your risk and set you up for success.

 

SOURCEhttps://www.mlc.com.au/personal/blog/2020/02/5_things_to_consider

4 strategies to help manage debt

Thinking about debt probably doesn’t spark a positive reaction for most people, but it is something that we will all need to contend with at some point in our lives.

Although not all debt is bad, if you’re finding that it’s causing you anxiety or it just seems to keep mounting up by the minute, take comfort in knowing there are ways to help alleviate it.

Here are four strategies that you may consider implementing when it comes to managing your debt, depending on your circumstances.

Learn more about investing your wealth or speak to a financial adviser.


Help manage your debt by understanding the amount and what it’s costing you

Laying all your cards out on the table can be extremely confronting, especially if you’ve never done it before. But as harsh as it may be, this is a critical step to seeing the bigger picture of your financial situation.

Being aware of the total amount you owe enables you to forecast future payments and potentially allocate some of your income to help pay off these debts. Making at least the minimum payment required each month will also help you avoid any additional interest and charges.

Consider how much it’s costing you

It’s important to understand how much your debt is costing you too. A higher interest rate will require more money to repay the loan so you may want to consider paying it off faster or look into other loan options.

  1. Seek professional support to help manage your debt 

    Managing your finances is not something that comes easily to most people.Sometimes speaking to a professional can help put your mind at ease. They’ll be able to help you assess your situation and provide you with a manageable repayment plan which may see you pay off your debt faster.

  2. Help manage your debt by knowing what you earn versus spend 

    One strategy that may help to remove or reduce your debt is finding ways to free up the money you already have available.Staying on top of what you earn versus what you spend will provide a clearer picture of what you’re spending your income on. You may then be able to identify ways to cut down on expenses and allocate any additional income you save to help pay off your debts.

  3. Help manage your debt by setting priorities 

    Depending on what type and how much debt you have, one option may be to prioritise repaying debts with the highest interest rate first, given these will be costing you the most to keep them around longer. However, another approach you may prefer is to pay off your smallest debt first. This often helps to motivate people by process of elimination so the debt doesn’t seem so cumbersome.

  4. Consider balancing debt repayments with saving 

    While managing your debt may be your key priority, it’s important not to dismiss other financial goals like saving for your future.Making additional contributions to your super is a great way to save for retirement while you’re working, and may still be achievable even if you’re paying off high interest loans. Speaking to a financial adviser may help you determine whether this is suitable for you and the best approach for doing this.

Bottom line: managing your debt is really about taking control of your financial situation by implementing strategies that will make your money work for you.

SOURCEhttps://www.mlc.com.au/personal/blog/2020/02/4_strategies_to_help

3 retirement income strategies for you to consider

One of the biggest misconceptions about retirement is that in order to have enough to last the distance, you need to have accumulated a significant amount during your working life.

While this is in fact true, it’s not the complete story.

In addition to your super, you can continue to generate an income in retirement to create a steady cashflow. And there’s other benefits too.

By continuing to accumulate wealth, you’ll not only place less pressure on your retirement savings to keep up with the rising costs of living, you’ll also help to safeguard your money from external factors such as market volatility.

So, if you’re wondering what retirement income strategies are available that you could consider implementing depending on your circumstances, here’s three.

Learn more about investing your wealth or speak to a financial adviser.

  1. Manage your retirement income spendingManaging your spending in retirement sounds like a no brainer, but it’s not uncommon for retirees to access too much of their savings too soon.

    Having a retirement income strategy that controls how you drawdown on your savings, may help to ensure your money lasts the distance.

    And it doesn’t necessarily need to be complicated. Using an online calculator to understand how long your money will last, and then keeping an eye on what you’re spending, is a great starting point.

  2. Keep your retirement income in line with inflation 

    Most people are now living to around 851 years of age which leaves roughly 25 years in retirement. To maintain your current lifestyle throughout this period, your retirement income will need to keep up with the rising costs of living.Having a conservative investment portfolio – primarily focused on low growth assets like cash – will certainly help to protect you from market volatility and short-term losses. However, it may not be enough to keep pace with inflation.

    Diversifying your investment portfolio to include both low and high growth investment options, may help to even out your risk and return ratio so you continue to grow your capital (original investment).

    If you are considering diversifying your portfolio, working out how to do this well does take some effort so you may want to seek professional financial advice. Alternatively, investing via a managed investment fund provides access to a broad range of assets or markets without having to do the background work – this is taken care of by investment managers. There are fees associated with this approach however, which are usually set out in the relevant Product Disclosure Statement.

  3. Use Government benefit entitlements to help boost your retirement income 

    Age Pension 

    You may be able to receive the Age Pension depending on how much income you generate from other sources like investments and what your assets are worth.2 If your income or assets exceed a specific threshold however, your pension payments will be reduced or you may not be eligible to receive these benefits.

    Concessions and health cards
     

    Even if you don’t receive the Age Pension, you may be able to access other government benefits to help boost your retirement income. This includes things like travel concessions, reduced rates on prescription medicine and other health services as well as reduced council/water rates.The Department of Human Services also offers loan options if you’re unable to access this via a bank.3

    Tax

    There are additional income tax offsets which may also be available to you depending on your age, income and eligibility for government pensions. These enable you to earn more income without paying additional tax.4


Consider financial advice for managing your retirement income

If you’re unsure about whether you’ll have enough income in retirement, a financial adviser can help you formulate a plan. This may include strategies to help you generate more retirement income or may help you reduce your tax. Better still, they may find ways to help you retire early depending on your circumstances.


Bottom line

A steady source of income in retirement is possible, but it takes planning. Being able to save diligently, invest with diversification in mind, and utilise government concessions available to you, may help to ensure you continue to grow your retirement savings to keep pace with inflation.

SOURCEhttps://www.mlc.com.au/personal/blog/2020/02/3_retirement_income

How to help grow your money through compound interest

Einstein has repeatedly said that compound interest is the eighth wonder of the world.

While it may appear complicated, it’s actually a relatively simple concept that can accomplish extraordinary things over time.

What is compound interest?

Compound interest enables you to earn interest on interest which is accumulated over time.

Metaphorically speaking, it’s like planting a tree. When that tree grows, it produces seeds that allows you to plant other trees. Those trees will also grow and produce seeds of their own. So with enough time, you could turn one tree into an entire forest.

Learn more about investing your wealth or speak to a financial adviser.


Difference between compound and simple interest

When it comes to earning interest, or a return on your money there are two types of interest you could earn.

Compound interest enables you to earn interest when you invest a sum of money. But in addition to this interest, you’ll also earn interest on the interest you’ve earned.

With simple interest however, you’ll only earn interest on your original sum of money invested.

For instance, if you invest $10,000 into a savings account and earn 5% interest compounded annually, in the first year your interest earnings will be $500 (5% x $10,000). However, in the second year, your interest will be calculated based on the original amount you invested, plus the interest you earned in the first year – $10,500. In total over 3 years, you would have earned $1,576.25 in interest.

With simple interest, your interest earnings won’t increase year on year so you’ll continue earning just $500 over the 3 year period leaving you with $1500 in interest earnings.

Compound interest is a long-term investing strategy

The effect of compound interest becomes extremely powerful over a long timeframe as the amount of interest earned grows.

Warren Buffett is the epitome of someone who values long-term investing. He attributes the majority of his success to identifying good businesses and companies with strong fundamentals to buy and hold for the long-term.1 He then let the magic of compound interest work for him.

One thing that is important to remember is that investing in the beginning doesn’t reap many rewards. It isn’t until years later that you feel the true power of compound interest working for you.

Get started early

Because compound interest is generally most effective over a long timeframe, in order to truly see its potential, the earlier you start investing your money, the better. So it’s generally really not about how much you’re investing, but more about how much time you’re allowing your money to grow.

How you can earn compound interest

Bank account

One way to earn compound interest is through a bank account. While this approach carries very little risk, it’s generally unlikely that your returns will be enough to outpace inflation so this is something to keep in mind.

Super

Investing in your super is one of the most effective ways to potentially maximise the benefits of compound interest.

Why?

Time is on your side. The more you contribute to your super early on in life, the higher potential for that money to grow by the time you need it as a result of compound interest. Of course though, you need to bear in mind that you cannot access your super until you meet a condition of release.2 This includes reaching the legal age for retirement, among other things.

Dividends

When you’re paid dividends from shares, you can withdraw that dividend as cash or you can reinvest it back into the issuing stock. This means you’re earning dividends on dividends, also known as compound interest.

Bottom line: When it comes to investing, compound interest and time are truly your best friends.

 

SOURCEhttps://www.mlc.com.au/personal/blog/2020/02/how_to_help_growyou

How much do you need to start investing in shares?

Investing in shares can be one of the most effective ways to help you create long-term wealth. In fact, in a report published in June 2018, it showed over the 20 years leading up to December 2017, Australian shares returned a solid 8.8% and global shares (hedged) returned 7.4%.1

So, the question remains… how much do you need to start investing in shares?

Unfortunately, there isn’t a simple answer to this as it really depends on a number of factors. This includes things like how much you can afford to invest, how long you intend to invest for, your goals and your risk tolerance.  You also need to consider how you’re looking to invest your money.

In this article, we’ll address these factors in more detail as they will be the best guide in helping you determine how much you need to start investing in shares.

Learn more about investing your wealth or speak to a financial adviser.


Consider why you want to invest in shares

If you are considering how much you need to start investing in shares, the question you really want to be asking yourself is what you expect to gain from your investment over the long and short term.

Once you’ve identified what your objectives are, you’ll then be able to develop an effective strategy, including how much you need to invest initially to get you there.

Build your experience and knowledge first

Like with anything you’re not familiar with, it takes time to learn and understand how the share market works and which strategies work best for you.

This means you’ll need to consider having a baseline investment amount that will enable you the flexibility to make mistakes and learn from them.

Once you’ve built your experience and confidence, you may then feel more comfortable investing greater amounts to truly help build your wealth.

Consider adding to your portfolio regularly

If you’re trying to figure out how much you need to start investing in shares, consider not only your initial upfront investment but how much you’re willing to contribute to your investment portfolio on a regular basis, if you choose to.

The main benefit of consistently adding to your portfolio is it may help to smooth out the rises and lows caused by market volatility. It may also help you achieve your goals faster.

If you decide to take this approach, creating a detailed budget or doing a rough calculation of your typical expenses, will provide an indication of how much you have leftover to invest so you can manage it effectively.

Once you’ve worked out your investment goals and how much you can contribute each month, this will set you in a good position to start investing.

Consider how you want to invest

If you’re considering investing in shares but don’t feel comfortable managing it yourself, you can gain access to the share market indirectly through a managed investment fund such as a mutual fund or Exchange Traded Fund (ETF). In this case, managed funds normally require you to have at least $1000 – $50002 invested initially. These funds also charge fees for managing your money so this will add to your total investment amount.

Consider getting professional financial advice

If you’re unsure about where to start and how much you’ll need, a financial adviser can help you formulate a plan. This may include strategies to help you generate a higher return on your investment income.
Bottom line: How much you need to start investing in shares depends on a number of variables which only you can answer. Thinking about what you aim to achieve from your investment, is the backbone of any successful investment strategy.

 

SOURCEhttps://www.mlc.com.au/personal/blog/2020/02/how_much_do_you_need

The China Coronavirus outbreak – economic and investment market implications

Key points

  • The China coronavirus outbreak has led to concerns of a global pandemic triggering an economic downturn.
  • Our base case is that the outbreak will be contained allowing share markets and bond yields to rebound.
  • However, uncertainty is high given that the coronavirus is more contagious than SARS albeit with lower mortality. Key to watch for is a peak in new cases and contained transmission in developed countries.

Introduction

The last few weeks have seen escalating concern that a new coronavirus (called 2019 novel coronavirus or nCoV) originating in the Chinese city of Wuhan in Hubei province will become a global pandemic. Concern has been heightened after the World Health Organisation (WHO) declared the outbreak an “international public health emergency” on 30 January and the number of cases has continued to escalate.

While this is first and foremost a human crisis, there has been increasing concern that the associated disruption to economic activity will trigger a global economic slump. Consequently, share markets have seen falls (ranging from 3% for global and Australian shares to around 7% for Asian shares and 12% for Chinese shares), commodity prices have fallen, and bond yields have collapsed again. While the current situation is highly uncertain, the experience with SARS, bird flu, swine flu & Ebola highlight worst-case pandemic fears don’t usually eventuate.

What do we know about this Coronavirus

Here is a summary of information regarding nCoV:

  • Coronaviruses circulate in animals but can be transmitted to humans and affect the respiratory system. SARS in 2003 & MERS in 2012 were examples. Symptoms can be treated but there are no vaccines or antiviral drugs for them (at present). Like SARS, nCoV looks to have originated in wildlife markets in China.
  • So far there are over 24,500 confirmed cases worldwide, with 99% of cases in China. But the number of cases is still rising rapidly and more/faster testing could mean many more with spikes in the number of new daily cases.
  • So far the mortality rate is running at 2% which puts it above swine flu but well below SARS (which settled around 9%). And of those dying, its mainly been older people or those with pre-existing conditions (as with common flu).
  • Against this, nCoV has been more contagious with total cases well above those for SARS (8000) and patients can be contagious but without symptoms for 1-2 weeks.
Source: PRC National Health Commission, Johns Hopkins CSSE, AMP Capital
Source: PRC National Health Commission, Johns Hopkins CSSE, AMP Capital
Source: PRC National Health Comm, Johns Hopkins CSSE, WHO, AMP Capital
Source: PRC National Health Comm, Johns Hopkins CSSE, WHO, AMP Capital
  • Containment measures – notably in China – have been more aggressive and started earlier than in the case of SARS. These include restricting travel into and out of Hubei province and various countries have restricted (and in some cases banned) foreign travellers entering from China.

Past experiences

To provide some context it is worth reviewing past pandemics – both real and feared. There were three influenza pandemics in the last century: 1918-19, 1957 and 1968. The 1957 and 1968 pandemics are estimated to have killed up to 4 million people. However, the 1918 Spanish flu pandemic was the most severe. While the mortality rate was low, up to 50 million people died worldwide. With a big proportion of the population staying at home, economic activity was severely disrupted, although this was compounded by the ending of World War I. US industrial production slumped 18% between March 1918 and March 1919. Australian real GDP slumped 5.5% in 1919-20 (but then rebounded 13.6% in 1920-21). The share market impact is hard to discern given the ending of WWI, however US and Australian share markets rose through much of the pandemic period.

The SARS outbreak of 2003 is a more useful guide. After emerging in China around February 2003, SARS infected about 8000 people (mostly in Asia) in 30 countries over a five-month period and had a mortality rate of about 9%. SARS had a big negative impact on the countries most affected as people stayed home for fear of catching it. GDP in China, Hong Kong and Singapore slumped by over 2% in the June quarter of 2003. Growth then subsequently rebounded.

Source: Thomson Reuters, AMP Capital
Source: Thomson Reuters, AMP Capital

Reflecting SARS, Asian shares fell in April 2003, even though global shares started to move out of a three year bear market from March. The April 2003 low in Asian shares coincided with a peaking in the number of new cases.

Source: Thomson Reuters, AMP Capital
Source: Thomson Reuters, AMP Capital

Most pandemics have taken 6-18 months to run their course and peter out as measures are taken to slow their spread (eg, hygiene, quarantining, banning gatherings, preventing travel). SARS ended quicker due to the nature of the virus and rapid action by authorities. In 2005/2006, there was significant concern that a severe strain of bird flu (called H5N1), which was resulting in human casualties, mainly in parts of Asia where people had contact with chickens, would mutate into a form that was readily transmissible between humans. However, this didn’t really eventuate and as such the economic impact was modest although it did cause bouts of volatility in share markets. Similarly, concern that the spread of swine flu would become a global pandemic rattled share markets for a while around April 2009, and Ebola did the same in 2014, but both quickly faded.

The economic and financial impact of nCoV

After strong double-digit gains over the last year and with investor sentiment pushing up to high levels indicating a degree of complacency, share markets were at high risk of a correction in mid Jan and the fears around coronavirus have provided the trigger. Given their greater sensitivity to Chinese growth, commodity prices like Chinese shares are down by more and the Australian dollar has fallen to October lows below $US0.67. What happens from here depends on how long it takes for the outbreak to be contained. The higher number of cases than with SARS or swine flu suggests a greater economic impact. But given the range of possibilities, the best way to get a handle on the economic and investment market impact is to consider several scenarios. Here we consider two.

1. Containment within the next month or two – the number of cases continues to rise but it remainsmainly contained to China (and Hubei) and the number of new cases starts to peak in the next month or so. This would allow travel restrictions to be removed by the June quarter. Under this scenario:

  • GDP in China and parts of Asia would likely take a 2 to 3% hit (taking Chinese GDP growth from 6% year on year in the December quarter to 3-4%yoy in the current quarter) as workers stay home and travel dries up. With the Chinese economy now being four times the share of global GDP it was at the time of SARS, this along with some drag on growth in developed countries would knock world growth to around 2.5% year on year (from around 3%). However, growth would rebound in the June quarter as travel restrictions are removed and things return to normal.
  • Australian growth could see a 0.2% hit in the current quarter mainly due to the loss of Chinese tourists (which account for 20% of tourism earnings and 0.2% of GDP) but also lower raw material demand and an impact on confidence. With the bushfire impact this could see GDP contract, but growth would rebound in the June quarter.
  • Against this background share markets, commodity prices and the $A could still fall a bit further in the near term but would quickly rebound by the June quarter. Easier than otherwise monetary and fiscal policies – with more stimulus measures already announced in China – would aid this.

2. Global pandemic – the number of cases continues to escalate beyond China and aren’t contained until say mid-year.

  • This scenario would see a bigger and longer negative impact on economic activity. Global travel would collapse. Many would simply not come into work – a reasonable estimate is around 20% of workers, although this might be spread over time. This would see a sharp slump in global GDP and the risk of global recession. Australia would not be immune and would likely see two negative quarters of growth with flow on to education exports to China (which accounts for another 0.6% of Australian GDP).
  • Share markets would likely fall sharply – maybe by 20% or so – reflecting the huge economic uncertainty. Cash would be the place to be. The $A could fall to around $US0.60.
  • However, economic activity would rebound quickly once it’s clear the pandemic is under control. Share markets are likely to anticipate this. But this wouldn’t occur till the second half of the year.

Concluding comment and what to watch

While there is reason for concern and it is easy to dream up nightmare scenarios, the experience with SARS, bird flu (with “predictions” it could kill as many as 150 million people) and the mini panic regarding swine flu and Ebola tell us that the worst case fears of pandemics usually don’t come to pass. Rapid containment measures provide some confidence this will be the case. As such, our base case scenario (with 75% probability) is one of containment over the next month or two. This could still see more downside in share markets and bond yields in the near term, but they are likely to rebound by the June quarter as economic growth rebounds. The key things to watch are:

  • The daily number of new cases – the SARS experience saw markets rebound once this showed signs of peaking.
  • The spread of new cases and deaths in developed countries – if this remains limited then markets will also get more confident that the economic fallout will be short lived.

SOURCEhttps://www.ampcapital.com/au/en/insights-hub/articles/2020/february/the-china-coronavirus-outbreak-economic-and-investment-market-implications

Five charts to watch regarding the global economy and markets this year

Key points

  • Shares are at risk of a short-term correction or consolidation after a strong run over the last year and with sentiment now very bullish. However, this year should still see good returns for investors as global growth edges up and interest rates remain low.
  • Five key global charts to watch are: global business conditions PMIs; global inflation; the US yield curve; the US dollar; and global trade growth.
  • So far so good, with PMIs improving a bit, inflation remaining low, the yield curve steepening, the $US showing signs of topping and the US/China trade truce auguring well for some pick up in world trade growth.

Introduction

Our high-level investment view for this year is that a combination of improving global growth boosting profits and still easy monetary conditions will help drive reasonable investment returns, albeit more modest than the very strong gains of 2019. This note revisits five charts we see as critical to the outlook.

Chart #1 – Global business conditions PMIs

Global Purchasing Managers Indexes (PMIs) – surveys of purchasing managers at businesses in most major countries – are an excellent and timely guide to the state of the global economy. Although services sector PMIs held up better than for manufacturers – which tend to be more cyclical – both softened through 2018 and into mid-2019. Since then they have shown signs of improvement suggesting that the global monetary easing seen through 2019 with interest rate cuts and renewed quantitative easing is working. Going forward they will need to improve further to be consistent with our view that growth will pick up this year.

Source: Bloomberg, AMP Capital
Source: Bloomberg, AMP Capital

But so far, the 2018-19 slowdown in business conditions PMIs (and hence global growth) looks like the slowdowns around 2012 and 2015-16 as opposed to the recession associated with the global financial crisis (GFC).

Chart 2 – Global inflation

Major economic downturns are invariably preceded by a rise in inflation to above central bank targets causing central banks to slam the brakes on. At present, core inflation – ie inflation excluding the volatile items of food and energy – in major global economies remains benign. In the US, the Eurozone and Japan core inflation is well below their central bank targets of 2%. Inflation in China spiked to 4.5% through last year, but core inflation has been falling to 1.4% and is well below the Government’s 3% target/forecast. A clear upswing in core inflation would be a warning sign that spare capacity has been used up, that monetary easing has gone too far, and that the next move will be aggressive monetary tightening. But at present, we are a long way from that.

Source: Bloomberg, AMP Capital
Source: Bloomberg, AMP Capital

Chart 3 – The US yield curve

The yield curve is a guide to the stance of monetary policy. When short-term interest rates are low relative to long-term rates businesses can borrow short and lend (or invest) long and this grows the economy. But it’s not so good when short rates are above long rates. An inverted US yield curve has preceded past US recessions. So, when this happened last year there was much concern that a US recession was on the way.

However, in recent months various versions of the yield curve – with the gap between the US 10 year bond yield and the Fed Funds rate and the US 10 year bond yield and the 2 year bond yield shown in the next chart – have uninverted as the Fed cut rates and hence short-term yields fell, good economic data provided confidence that recession will be avoided and the US/China trade war de-escalated reducing the threat posed by the trade war.

Source: NBER, Bloomberg, AMP Capital
Source: NBER, Bloomberg, AMP Capital

While the US yield curve has uninverted in the past and yet a recession has still come along, the uninversion seen in recent months coming after such a shallow and short-lived inversion provides confidence that the inversion seen last year gave a false signal as occurred in the mid to late 1990s (as circled).

In addition, it’s also worth noting that other indicators suggest that US monetary policy was far from tight – the real Fed Fund rate was barely positive, and the nominal Fed Funds rate was well below nominal GDP growth and both are far from levels that in the past have preceded US recessions.

So it’s a good sign that the US yield curve has been steepening in recent months. A return to yield curve inversion – which became deeper than seen last year – would be a concern of course.

Chart 4 – The US dollar

Moves in the value of the US dollar against a range of currencies are of broad global significance. This is for two reasons. First, because of the relatively low exposure of the US economy to cyclical sectors like manufacturing and materials the $US tends to be a “risk-off” currency, ie it goes up when there are worries about global growth. Second, because of its reserve currency status and that a lot of global debt is denominated in US dollars particularly in emerging countries, when the $US goes up it makes it tough for emerging countries.

Source: Bloomberg, AMP Capital
Source: Bloomberg, AMP Capital

So when global uncertainty is rising this pushes the $US up which in turn makes it hard for emerging countries with $US denominated debt. If we are right though and global growth picks up a bit, trade war risk remains in abeyance and the Iran conflict does not become big enough to derail things then the $US is likely to decline further which would be positive for emerging countries.

Chart 5 – World trade growth

It’s reasonable to expect growth in world trade to slow over time as services become an ever-greater share of economic activity and manufacturing becomes less labour dependent. However, President Trump’s trade wars since 2018 combined with slower global growth saw global trade fall last year. This year should see some reversal if the trade wars remain in abeyance as Trump focuses on keeping the US economy strong to aid his re-election and global growth picks up a bit.

Source: CPB World Trade Volume Index, Thomson Reuters, AMP Capital
Source: CPB World Trade Volume Index, Thomson Reuters, AMP Capital

US recession still a way away

In recent years there has been much debate about whether a new major bear market in shares is approaching. Such concerns usually reach fever pitch after share markets have already fallen 20% or so (as they did into 2011, 2016 and 2018). The historical experience tells us that what happens in the US is critical to how deep share market falls get. Deep (“grizzly”) bear markets like the 50% plus fall seen in the GFC are invariably associated with US recession. So, whether a recession is imminent in the US, and more broadly globally, is critically important in terms of whether a major bear market is on the way. The next table summarises the key indicators we are still watching in this regard.

Source: AMP Capital
Source: AMP Capital

These indicators are still not foreshadowing an imminent recession in the US. The yield curve is most at risk if it inverts again. But other measures of monetary policy in the US are not tight and we have not seen the sort of excesses that normally precede recessions – discretionary or cyclical spending as a share of GDP is low, private debt growth has not been excessive, the US leading indicator is far from recessionary levels and inflation is benign.

Concluding comments

At present, most of these charts or indicators are moving in the right direction, with the PMIs improving a bit, inflation remaining low, the yield curve steepening, the $US showing signs of topping and the US/China trade truce auguring well for some pick up in world trade growth. But to be consistent with our view that this year will see good returns from shares we need to see further improvement and so these charts are worth keeping an eye on.

Bushfires and the Australian economy

Key points

  • The bushfires are expected to result in around a 0.4% hit to GDP mainly in the March quarter followed by a rebuilding boost.
  • The hit to consumer spending and tourism is likely to linger longer.
  • The drag on economic activity has increased the pressure for more monetary and fiscal stimulus. We still see the RBA cutting the cash rate to 0.25%.
  • The bushfires likely increase the pressure for more action on climate change and highlight the need for investors to be aware of industries and businesses that are vulnerable to climate change risk.

Introduction

The Australian bushfire season that began in September has been horrific with more than 7 million hectares of bush destroyed, more than 25 deaths, significant loss of livestock, estimates of more than a billion wildlife animals killed and more than 1800 homes destroyed. More than 200 fires are still burning. Following the intensification of the bushfires over the Christmas/New Year period attention has now turned to the impact on the economy. This note looks at the key impacts.

The short-term impact on GDP and wealth

Physical disasters invariably cause a brief disruption to economic activity as measured by GDP followed by a boost as wealth destroyed by the disaster is rebuilt. In this sense measured across a year or so they are often seen as positive for economic growth, albeit this seems perverse particularly for those directly impacted.

The damage to property and wealth flowing from the bushfires will likely run into many billions. For example, the Victorian Black Saturday bushfires are estimated to have cost $4.4bn, whereas the current fires have covered an area 15 times bigger. So there will be a very big rebuilding boost to economic activity to come once the fires are brought under control. But the fires have been very widespread, have been going on for several months now and the crisis is continuing, so there will be a significant short-term negative impact and it likely will involve more than a short-term disruption to economic activity.

  • Activity related to farming, manufacturing, transport, tourism and business generally in the affected areas will be disrupted – this will involve around 2-3% of the population and will be concentrated around the March quarter. It will also be partly offset as affected people have to undertake spending that they otherwise wouldn’t have had to.
  • A bigger impact on economic activity is likely to come via a hit to consumer spending as the constant news of the fires and the smoke haze in several capital cities weighs on confidence. Australians were already very hesitant about the economic outlook after the slowdown in growth seen last year and continuing weak wages growth and high underemployment. A Roy Morgan survey released late last year found that 40% of Australians thought that 2020 will be worse than 2019, which is the worse reading since the early 1990s recession. At the same time a record-low 12% thought it would be better resulting in a net negative reading of 28% which is the worst in the survey’s 40-year history.
Source: Roy Morgan; AMP Capital
Source: Roy Morgan; AMP Capital

This may exaggerate how bad things really are. The economy is still in far better shape than it was at the time of the early 1990s recession (I was there, I remember!). But a combination of more negative news flow today due to the rise of social media, more divisive politics and expectations rising faster than reality may be altering perceptions of the economy in a negative way and exaggerating the gloom. Nevertheless, a range of other surveys also show that consumers are uncertain and depressed, and this looks to have intensified since Christmas. The constant terrible news since October about the bushfires along with the smoke in cities is likely weighing further on the national psyche adding to weakness in consumer spending as Australians feel less motivated to spend when their fellow Australians are suffering. The hit to household spending power from higher prices for food and a likely rise in insurance premiums flowing from the fires will only accentuate this.

  • Inbound tourism is also likely to be impacted by the heavy coverage of the bushfires globally – with ridiculous maps showing much of Australia on fire (including where I am right now) – likely to adversely affect perceptions of Australia. This may be short lived (just as the positive boost from the 2000 Olympics was) but it could still last a year or so.

Taken together we expect a detraction from GDP due to the bushfires of around 0.4% starting in the December quarter but mainly impacting the March quarter before a rebuilding boost kicks in from the June quarter. Given the uncertainty, the range around this negative impact is -0.25% up to a worse case of -1% of GDP should the fires continue on a widespread basis through the rest of summer. The rebuilding boost should reverse much of this drag later in the year, but there is considerable uncertainty around this as the impact on tourism and consumer spending may linger longer.

A big proximate contributor to the severity of the bushfires is the severe drought gripping much of Australia. This has already driven a decline in agricultural production, which has been directly detracting around 0.2 percentage points from GDP growth for the last two years. Unfortunately, the Southern Oscillation Index is still in El Nino territory pointing to ongoing relatively dry conditions in eastern and top-end Australia.

Source: ABS, Australian Bureau of Meteorology, AMP Capital
Source: ABS, Australian Bureau of Meteorology, AMP Capital

More policy stimulus

With the bushfires likely to contribute to a flow of weak economic data for the next several months, questioning the RBA’s “gentle turning point” in the economy and resulting in a movement away from the achievement of the RBA’s full employment and inflation goals, the fires have only added to the pressure for more policy stimulus. We remain of the view that the RBA will cut the cash rate to 0.5% in February (with the market probability now up to 53.4% from a low of 36% before Christmas) and to 0.25% probably in March. The bushfires will push up food prices and insurance premiums but the RBA’s focus on underlying inflation will mean that it should look through this. In fact, increases in such prices will act as a tax on consumer spending power and are negative for spending and so could depress underlying inflation.

The pressure for further fiscal stimulus has also intensified. The Federal Government has already committed an additional $2bn for bushfire recovery to be spent this year and next (which is relatively small at 0.05% of GDP per year) and the NSW Government has committed another $1bn. However, the total hit to government budgets from the bushfires is likely to be much greater than this given assistance under existing disaster programs, extra expenses associated with fighting the fires and the impact of slower growth in the short term on revenue flows.

More broadly given the hit to confidence a circuit breaker is arguably needed to help boost economic growth. Monetary policy alone is unlikely to be enough. So there is a need for a broader fiscal stimulus – maybe in the form of a bring forward of the personal tax cuts, an increase in Newstart and broad based investment allowances. To have an impact it needs to be at least 0.5% of GDP (or around $10bn).

Rightly in the face of the pain caused by the bushfires the Government has relaxed the focus on achieving a budget surplus and it is now questionable as to whether it will be achieved this year and next. That is not a major problem in the relative scheme of things given the relatively good state of Australia’s public finances.

Some longer-term challenges

The bushfires pose a number of longer-term challenges.

First, increased pressure to adopt a tougher stance in reducing carbon emissions. While Australia has always had droughts and bushfires we have been warned for more than a decade now that the world and Australia is getting warmer, that increasing global greenhouse gas emissions are likely contributing to this and that in the absence of actions to reduce emissions the world will get significantly warmer with the outcome being rising sea levels and more extreme weather events – including storms, floods and droughts – with more severe bushfires an outcome of the latter.

* Number of extreme heat days each year. Source: Bureau Meteorology, RBA
* Number of extreme heat days each year. Source: Bureau Meteorology, RBA

Second, the damage inflicted by the extreme bushfires highlights the need for investors to be aware of industries and businesses that are vulnerable to climate change risk – whether it comes from the physical impact from climate change or via measures to reduce emissions.

Thirdly, the severity of the bushfires and the risk that this is the new normal will necessitate better strategies for reducing the risk to property posed by future bushfires.

Finally, in the absence of policy action the bushfires risk accentuating the decline of some regional communities particularly where key industries have been destroyed by the fires – with some taking their insurance and rebuilding elsewhere. This will only further centralise Australia in its big cities adding to all the costs that entails – notably congestion and expensive housing.

What does it mean for investors?

The likelihood of more RBA monetary easing and continuing weak economic growth in the short term will likely keep Australian bond yields down relative to global bond yields, possibly pushing them lower.

This will also keep the Australian dollar relatively soft.

So far the Australian share market appears to be looking through the short-term hit to economic growth focusing more on the rebuilding boost, but the negative impact of the bushfires risks seeing it remain a relative underperformer versus global shares.

SOURCEhttps://www.ampcapital.com/au/en/insights-hub/articles/2020/January/bushfires-and-the-australian-economy

2020 – a list of lists regarding the macro investment outlook

Key points

  • Despite ongoing bouts of volatility, 2020 is likely to provide solid returns, albeit slower than seen in 2019.
  • Recession remains unlikely (it’s a bigger risk in Australia) & so too is a long deep bear market in shares.
  • Watch US trade wars, the US election, the US/Iran conflict, global business conditions indicators, and monetary versus fiscal stimulus in Australia.

Introduction

After the poor returns for investors in 2018, 2019 turned out surprisingly well with average balanced growth superannuation funds looking like they have returned around 15%.

Source: Mercer Investment Consulting, Morningstar, AMP Capital
Source: Mercer Investment Consulting, Morningstar, AMP Capital

But can it continue this year? Particularly with an intensification of the US/Iran conflict adding to global uncertainty and the drought and horrendous bushfires further weighing on the Australian economy. Here is a summary of key insights and views on the investment outlook in simple point form.

Five reasons 2019 turned out well for investors

2019 saw slowing growth and weak profits amidst an escalating US/China trade war and tensions with Iran and yet it turned out well for investors. Here are five reasons why:

  • Easy money – central banks eased monetary policy in response to the growth slowdown and various threats to growth reversing the tightening seen in 2018.
  • Cheap starting point for assets – after the falls of 2018 shares started 2019 cheap and they and other assets were made relatively cheaper as interest rates & bond yields fell.
  • The crowd was very gloomy at the start of 2019 with much fear about the outlook – when this is the case it’s always easier for assets to rise in value.
  • While geopolitical threats remained high there was some relief by year end – with the US & China reaching a Phase 1 trade deal; Iran tensions not seeing a major or lasting disruption to oil supplies; and a hard Brexit avoided for now.
  • Global growth was not as bad as feared – despite a mid-year recession obsession as yield curves inverted. In fact, global growth indicators looked to be stabilising by year end.

Seven lessons from 2019

  • Don’t fight the Fed, ECB, PBOC or RBA – as long as recession is avoided monetary easing is positive for investment returns from growth assets.
  • The starting point matters – when assets are cheap, and the crowd is negative as they were at the start of 2019 it’s relatively easier to get good returns.
  • Post GFC caution remains but can be both negative and positive – yes it periodically weighs on growth, but it is keeping economies from overheating and thereby is helping to extend the economic and investment cycle.
  • Geopolitics remains a significant driver of markets and economic conditions – but it can be positive whenever there is any relief and things don’t turn out as bad as feared.
  • Just because Australian housing is expensive & household debt is high does not mean house prices are going to crash.
  • Stick to an investment strategy – 2019 started in gloom and had its share of distractions but investors would have done well if they just stuck to a well-diversified portfolio.
  • Remember that while shares can be volatile and unlisted assets also come with risks, the income stream from a well-diversified mix of such assets can be relatively stable and higher than the income from bank deposits.

Five big picture themes for 2020

  • A pause in the trade war, but geopolitical risk to remain high. President Trump is likely to want to keep the US/China trade war on the backburner but it could still flare up again and other issues include the escalation seen so far this year in the Iran conflict, a return to worries about a “hard Brexit” at year end if UK/EU free trade talks don’t go well and the US election if a hard left Democrat candidate gets up.
  • Global growth to stabilise & turn up thanks to policy stimulus with business surveys recently showing stabilisation.
  • Continuing low inflation and low interest rates. Growth won’t be strong enough to push underlying inflation up much and some central banks will still be easing (including the RBA).
  • The US dollar is expected to peak and head down as global uncertainty declines a bit and non-US growth picks up.
  • Australian growth is expected to remain weak given the housing construction downturn, weak consumer spending and the drought with bushfires not helping.

Key views on markets for 2020

Improving global growth & still easy monetary conditions should drive reasonable investment returns this year but they are likely to be more modest than the double-digit gains of 2019 as the starting point of higher valuations for shares & geopolitical risks are likely to constrain gains and create some volatility:

  • Global shares are expected to see total returns around 9.5% in 2020 helped by better growth and easy monetary policy.
  • Cyclical, non-US and emerging market shares are likely to outperform, if the US dollar declines as we expect.
  • Australian shares are likely to do okay this year but with total returns also constrained to around 9% given sub-par economic & profit growth.
  • Low starting point yields and a slight rise in yields through the year are likely to result in low returns from bonds.
  • Unlisted commercial property and infrastructure are likely to continue benefitting from the search for yield but the decline in retail property values will still weigh on property returns.
  • National capital city house prices are expected to see continued strong gains into early 2020. However, poor affordability, the weak economy and still tight lending standards are expected to see the pace of gains slow leaving property prices up 10% for the year as a whole.
  • Cash & bank deposits are likely to provide very poor returns, with the RBA expected to cut the cash rate to 0.25%.
  • The $A is likely to fall to $US0.65 as the RBA eases further, then drift up as global growth improves to end little changed.

Seven things to watch

  • The US trade wars – we are assuming the Phase 1 trade deal de-escalates the trade war, but Trump is Trump and often can’t help but throw grenades.
  • US politics: the Senate is unlikely to remove Trump from office if the House votes to impeach and another shutdown is also unlikely but both could cause volatility as could the US election if a hard-left Democrat gets up (albeit unlikely).
  • The US/Iran conflict – which could escalate further with Iran unlikely to negotiate and Trump wanting to sound tough, potentially disrupting oil supplies.
  • A hard Brexit looks like being avoided but watch UK/EU free trade negotiations through the year.
  • Global growth indicators (PMIs).
  • Chinese growth – a continued slowing in China would be a major concern for global growth.
  • Monetary v fiscal stimulus in Australia – significant fiscal stimulus could head off further RBA easing.

Four reasons global growth is likely to improve a bit

  • Global monetary conditions have eased significantly over the last year. China has also seen significant fiscal stimulus.
  • The stabilisation seen in business conditions PMIs in recent months suggests monetary easing is getting some traction.
  • We still have not seen the excesses – massive debt growth, overinvestment, capacity constraints or excessive inflation – that normally precede recessions.
  • The de-escalation of the US/China trade war should help reduce a drag on business confidence (at least for a while).

Five reasons Australia is likely to avoid a recession

The bushfires are estimated to knock around 0.4% mainly from March quarter GDP mainly due to the impact on agriculture, tourism and consumer confidence and spending. Coming at a time when Australian growth is already weak it risks knocking March quarter growth to near zero or below. However, while the risk of recession has increased, it remains unlikely:

  • Infrastructure spending is strong.
  • Mining investment is starting to rise again.
  • The bushfires will be followed by a boost to spending from the June quarter as rebuilding kicks in.
  • Already weak growth, made worse by the bushfires in the short term will likely force further fiscal stimulus.
  • The $A is likely to remain weak providing a boost to growth.

Three reasons why the RBA will cut rates this year

  • Growth is likely to disappoint RBA expectations for 2.8% growth this year.
  • This will keep underemployment high, wages growth weak and inflation lower for longer.
  • Fiscal stimulus is unlikely to come early enough.

We expect the RBA to cut the cash rate to 0.5% in February & to 0.25% in March, with quantitative easing likely from mid-year.

Three reasons why a deep bear market is unlikely

Shares are vulnerable to a correction after the strong gains seen over the last year, but a deep bear market (where shares fall 20% and a year after are a lot lower again) is unlikely:

  • Global recession remains unlikely. Most deep bear markets are associated with recession.
  • Measures of investor sentiment suggest investors are cautious, which is positive from a contrarian perspective.
  • The liquidity backdrop for shares is still positive. For example, bank term deposit rates in Australia are around 1.3% (and likely to fall) compared to a grossed-up dividend yield of around 5.7% making shares relatively attractive.

Nine things investors should remember

  • Make the most of the power of compound interest. Saving regularly in growth assets can grow wealth substantially over long periods. Using the “rule of 72”, it will take 48 years to double an asset’s value if it returns 1.5% pa (ie 72/1.5) but only 9 years if the asset returns 8% pa.
  • Don’t get thrown off by the cycle. Falls in asset markets can throw investors out of a well thought out strategy at the wrong time – as some were at the end of 2018.
  • Invest for the long term. Given the difficulty in getting short term market moves right, for most it’s best to get a long-term plan that suits your wealth, age & risk tolerance & stick to it.
  • Diversify. Don’t put all your eggs in one basket.
  • Turn down the noise. Increasing social media and the competition for your eyes and ears is creating a lot of noise around investing that is really just a distraction.
  • Buy low, sell high. The cheaper you buy an asset, the higher its prospective return will likely be and vice versa.
  • Beware the crowd at extremes. Don’t get sucked into the euphoria or doom and gloom around an asset.
  • Focus on investments that you understand and that offer sustainable cash flow. If it looks dodgy, hard to understand or has to be based on odd valuation measures or lots of debt to stack up then it’s best to stay away.
  • Accept that it’s a low nominal return world – when inflation is 1.5%, a 15% superannuation return is very pretty good (and not sustainable at that rate).

SOURCEhttps://www.ampcapital.com/au/en/insights-hub/articles/2020/January/2020-a-list-of-lists-regarding-the-macro-investment-outlook