ANNUAL ECONOMIC & INVESTMENT SEMINAR
Our annual Economic & Investment Seminar was held on Wednesday 17th October at The Pavilion, Whitehorse Road, Box Hill. This is the home of the Box Hill Hawks (VFL) team.
Our presenters this year were drawn from a wide range of aspects and topics covering the economic situation and outlook, fixed interest markets, the agenda for the ALP should it win office at the next general election and finally, investment in international equity markets and the influence of technology in that.
Brad Matthews – BMIS
Our business engages with Brad Matthews Investment Services – Brad has a long industry background of providing investment advisory services to businesses like ours.
Brad spoke about the general economic conditions and the outlook in a general sense. Key points from Brad’s presentation were:
- Australian GDP growth on a per capita basis is stable at a touch over 1% growth, having spent most the last few years around 2% growth. Australia’s GDP growth has generally been above other countries but has slipped a little in recent times.
- The boom in residential construction is waning now as interest rates rise and demand is tapering due to macro prudential measures being imposed.
- The employment growth in building and construction will ease off a bit in the coming year as activity eases off.
- Household debt has risen to all time high levels and house prices have risen to all-time highs also.
- Interest rates have started to lift, and this has seen a steady decline in the savings ratio leading to the likely reduction to some degree in consumption spending over time. This has been compounded with low wages growth (real terms) in recent years.
- In the background the Resources industry has been exporting raw materials at ever increasing amounts and value.
- As demand has been modest the domestic interest rate scenario is subdued with the Reserve Bank not seeing a need to increase official rates for a while yet. This has led to a softening in the value of the $A with the $A weakening against the $US in particular by some 11.25% this calendar year from 81c to 71c.
- Opportunities exist for investment in non $A investments still. The domestic economy is not predicted to steam ahead at full speed due to short term cyclical factors.
Tyler Purviance – Bentham Asset Management
Bentham Asset Management is Australian based Global Fixed interest markets manager. Based in Sydney they manage about A$8billion of both wholesale and Institutional money. Tyler (who is a portfolio specialist) spoke about the current movements in the Fixed Interest markets and their direction. Key points from Tyler’s presentation were:
- Bond yields have been falling now since the early 1980’s, but more so in the period since the GFC in 2008 to mid-way through 2016. The Brexit vote heralded a shift in the direction of bond yields and they have been rising ever since, particularly since Donald Trump was elected as President of the USA in late 2016.
- The rates of return from Bonds which have been excellent for the last six to eight years are now looking far more modest in the near term. This is due to rates rising and therefore the value of bonds declining on a capital value basis. However, value exists in certain segments, particularly Corporate debt and some emerging markets debt.
- Bentham believe the Corporate debt segment offers value and have been buying and holding debt in this space as companies’ issue in their own name at more attractive returns than via banks.
- The outlook for yields is to see yields rise further, but not sharply, nor quickly. This makes the fixed interest segment still very attractive.
- In the USA – where Bentham source a high proportion of their holdings the level of confidence of business is very high and thus the issuance of corporate debt is attractive to both the borrower and the investor.
- However, as an offset, the Government sector in the US and to some degree Australia, has yields rising, driven in part by expectations of rising inflation. This will play out more clearly in the next year or so.
David Stogdale – Senior Financial Planner at MFM Group
David joined MFM Group this year to enhance our capability following the retirements of Maurice Kelly and Gary Snell. David spoke about the changes that are on the agenda should the ALP win the next federal election. Key points from David’s presentation were:
- There are about seven major policies that the ALP has in place (so far) that relate to investment and business. The big one is the cancellation of the refund of excess franking credits. This is a policy that has many investors and in particular, self-funded retirees very concerned. At the moment, the provision of franking credits allows for excess franking credits to be refunded as cash to the entity, usually via a tax refund. The ALP policy will cancel this refund provision, meaning that franking credits can be used to reduce tax liability, but not be paid out. David’s point here was that if it occurs, the policy must pass the Senate, and this will likely see a few changes to the final legislation and David’s view was that it is too early to be making changes to portfolios as yet. David also suggested that before any adjustments, do the numbers and assess the impact as it may not be as bit as it might seem.
- The ALP also proposes to change the capital gains tax calculation. They will change the discount for gains from 50% to 25%. The only exemption will be new housing stock. The change will not be back dated and will only apply for a date (to be set).
- Negative gearing would be not allowed. Under this change the value of any expenses deducted for tax purposes, would only be allowed to the extent of income - not more. Therefore, the best outcome one could obtain is neutral gearing. This would affect all those that claim negatively geared investments. The only exemption would be new housing stock.
- Tax on discretionary Trusts will be applied to reduce the use of trusts to split income and use low tax rates of beneficiaries. The tax rate for Trusts will be 30%. Thus, is will extinguish the value of trusts as a tax minimisation structure.
- Non-concessional contributions to superannuation will be reduced from $100,000 to $75,000 per annum.
- Employer superannuation contributions rises will be reinstated to achieve 12% by 2025. Currently it is 9.5% and has been that for some years. This is likely to see changes in the way employees are remunerated with a salary plus super package disappearing and replaced with salary including super package offered. Therefore, shifting the super payment onto the employee.
- 293 tax threshold will change from $250,000 to $200,000. This threshold is for extra contributions tax on super. It applies to those who have high taxable income. The rate of contributions tax for Div. 293 is 30%, vs 15% for normal contributions tax. This plan if implemented will see individuals use other means to save for their retirement.
Overall, the list is likely to change as we approach the election, that must occur by 18 May 2019.
Alan Evans – Magellan Asset Management
Finally, we heard from Allan Evans, a key account manager from Magellan. Allan focussed on the importance of the developing technologies and how they at Magellan are investing to take advantage of this rapidly changing field. Key points from Allan’s presentation were:
- Longer term as well as shorter term investment in International investments has been a good bet for Australian investors with returns higher across most time periods.
- The composition of the ASX is highly skewed to Financials whereas this is not the case for the rest of the world.
- Growth in technology and related areas has been exponential in recent times whereas the more traditional industries have had linear growth – ok, but less exciting.
- A core theme of the Magellan portfolio is the leadership of technology going forward - for the world. It is not the only theme, but certainly a major one. Once case in point is the growth in driverless cars – where this technology is already in daily use in Phoenix Arizona after a lengthy trial. This is the thin end of the wedge, others will follow. It is anticipated
that this kind of vehicle will be available in less than 5 years and in widespread use within ten years. If so, it will have material impact on the need for car parking and new car sales.
- Other elements such as home assistants, provided by Google and Amazon etc… will enable personalised targeted advertising and business generation for household purchases. This is already happening.
- The portfolio of the Magellan Global Fund has been based on value not fad. Where they see the value has not been demonstrated they will either not buy or exit if holding.
This presentation was excellent and shows that the opportunities are not all on our backyard.
This year’s seminar showed that there is always something worth listening to and that the world of investment is constantly changing. Indeed, the world is constantly changing and our approach to portfolio positioning is also changing based on the best information that we can source.
As we approach the festive season, may we take this opportunity to thank you for your support over the year as a client of MFM Group. Our commitment to delivery of quality service and demonstratable value for you is our mantra.
If you would like to discuss this article, please call us on 03 8394 0300 or email us at firstname.lastname@example.org
This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.
Melbourne Financial Management Group Pty Ltd (ACN 600 540 378), trading as MFM Group, is an authorised representative and credit representative of Hillross Financial Services Limited, Australian Financial Services Licencee and Australian Credit Licensee (232705).
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Oliver's Insights is a specialist commentary by AMP Capital's Head of Investment Strategy and Chief Economist, Dr Shane Oliver, on key market issues and investment trends. Shane is a regular media commentator and you can also follow him on Twitter.
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