Newsletter 40: Will Crypto-currencies Survive?
Much of the early discussion on crypto currencies was whether it was a currency or an investment? This debate appears over and now the debate is whether crypto currencies will survive as an investment class?
Crypto currency: Is it a currency? No.
Simply, they are not currencies for many reasons, including they are all effectively priced against USD and governments globally will not countenance private currencies usurping their national currency. There are still some advocates claiming that crypto currencies will replace fiat currencies and the USD as the world’s reserve currency. This is fantasy! Despite the deficiencies of fiat currencies as yet there is no better model. These deficiencies are really a result of the failure of governments and central banks in not adopting sound fiscal and monetary policies over the long-term debt cycle and short-term business cycle.For example, there is empirical evidence that national debt to Gross Domestic Product (GDP) ratio should not exceed 130%, because of the destructive economic impacts, e.g., inflation, stagflation, etc. Unfortunately, high levels of national debt and low economic growth is now a global phenomenon.
Crypto currencies: Is it an asset class? Yes.
It is an asset class. When reviewing commentary on them, most commentators now refer to them as an asset class, i.e., as an investment with frequent comparisons with gold; however, they have little, if any intrinsic value. Bitcoin with its wide distribution network and limited number available (although it can be split infinitely which draws into question the claimed benefit of limited supply) provides some basis for a valuation.
As with all new successful products and ideas comes a proliferation, and as at 1 January 2022 there were over 10,000 crypto-currencies with an estimated market value of USD3trillion. About 6 months later the value is less than USD1trillion and all crypto-currency types, e.g., stable coins, have incurred significant losses. Bitcoin, the best known crypto currency is down 55.88% while the S&P 500 index is down 21.08% in the period 1 January to 30 June 2022. So, their investment performance is very poor during tough economic times which is when good investments do well compared to other asset classes. Another benefit claimed was they would be an inflation hedge which is obviously not the case.
Blockchain: Evolutionary not revolutionary
Double entry book-keeping (balanced ledgers) was invented by the Monk, Luca Pacioli in 1494. With the implementation of the Marshall Plan after World War 2 came the development of the Eurodollar market (system) which is where banks outside their national geographical boundaries can operate free of central bank regulation. Institutions that operate in the Eurodollar market maintain private distributed ledgers of holdings in USD, EURO, JPY, CAD, CHF, etc., but no physical cash. Blockchain is a further evolutionary step in ledger systems with the blockchain technology facilitating what previously was private now being publicly disclosed.
What does the future hold?
There will be a clean out of most of the 10,000 crypto currencies, as has happened with other asset classes over the years, e.g., Dot Com bubble. Another benefit that crypto currency advocates have strongly argued is its regulation free environment. How times have changed! Since the 2022 stock market correction there are cries from those in the industry and folks that have lost money for regulators to step in and “protect” the industry. Regulation will constrain development, increase costs and limit access which will likely be the final nail in the coffin for most crypto currencies.
More countries may follow China’s lead and ban them, as they will be issuing Central Bank Digital Certificates and will not want any form of private competition given it is already a very difficult task in managing a national currency in this highly competitive global fiscal and monetary environment. Regulation and banning may drive crypto currencies underground back to its “silk road” roots, where it was used as a medium of exchange (currency). This is where Bitcoin initially gained traction.
Despite these challenges crypto currencies will likely survive because of its wide distribution capability, the utility that the technology provides, its ability to disintermediate and the global interest in blockchain technology which will likely mean that second generation products will evolve.
Newsletter 39: Global Economic and Geo-Political Update
As outlined in previous newsletters, we have entered a new economic world of increasing interest rates with asset prices adjusting accordingly. The US Federal Reserve raised their target Fed Funds Rate (akin to the Australian Cash rate) by 0.75%, and with US inflation over 8% interest rates must go higher. Similarly, the Reserve Bank of Australia (RBA) has flagged its intention of increasing interest rates as inflation is predicted to reach 7.1% by Christmas 2022. The bottom line is that real returns remain negative and will continue to be so until interest rates are higher than the inflation rate.
Limitations of Central Bank Activities – Impact on demand not supply
Central Banks including the RBA can directly impact demand for goods and services through monetary policy, e.g., increasing interest rates. An increase in interest rates has an immediate impact on household budgets, as there is less disposable income available for discretionary spending, thereby affecting demand. Conversely, central banks have no ability to directly impact the supply of goods and services, although if demand falls then companies will reduce supply.
Prior to 2007/8 the short term global interbank debt market operated on trust, i.e., that a “known” counterparty was “good” to borrow unsecured money overnight, as the funds would be returned the next day. With the collapse of Lehman Brothers this trust disappeared and now the short term interbank debt market requires collateral (primarily US treasuries) to transact. We mention this because there is a global shortage of collateral that is causing tighter liquidity positions which is flowing through to all markets.
Stagflation leads to Recession
In addition, to the slow down in discretionary spending, the Ukraine/Russian war is causing a dislocation of supply chains particularly in the energy and food sectors. This is exacerbated with China continuing with its Covid lock downs that are disrupting supply lines out of Shanghai. Time will tell whether the Chinese regime will have a change in heart with its zero tolerance policy to Covid. The result of the above is greater mortgage payments along with higher petrol, gas and electricity, food and consumer good prices which are all placing pressure on family budgets.
Companies globally are saying there are staff shortages. Recently, I saw that the CEO of Sydney Airports on television say there was 5,000 vacancies at the airport and supporting services after 15,000 staff had been laid off because of Covid. This surprises me because Job Keeper was meant to ensure staff were not laid off because of the Government shutdowns. Where did the money go?
For over 2 years we have predicted that the world would move into a period of stagflation (high levels of debt and low economic growth). We are here, and it is likely the US with USD 30 trillion of national debt will fall into a recession as all the Covid assistance packages have ended, interest rates are on the way up and US property prices are falling. Mass layoffs have started in the US mortgage and technology industries which will flow through into other sectors. If the US falters, so will the rest of the world when the factors above are combined into the global economic outlook.
Since 1 January 2022, the S&P 500 index is down around 25%. When will it end you may ask? We will only know 6-12 months after the bottom is reached. That’s why at sometime soon (1-9 months) it will be time to be fearless while others are fearful. Markets tend to over-shoot on both the up and down side. This we need to watch.
The crypto-currency market is being smashed. The total market value of all coins has fallen from USD3 trillion to under USD1 trillion. Falls of this magnitude mean that many folks across the globe have suffered significant losses. These investors mainly younger people will need time to absorb their losses before they recover financially, particularly if they borrowed (leveraged). The loss of wealth has a significant impact on people’s psychology, i.e., negative wealth effect, and it takes time for folks to feel confident again. They generally need to feel financially secure and perceive the economy is in good shape before they take risks again.
Global Debt Markets
Based on the above global debt market yield curves are starting to indicate that the US Federal Reserve may limit the interest rate increases proposed for later this calendar year. We will watch this space closely because it could trigger a surge in equity markets. It is important to remember that equity markets tend to trade on future company earnings, i.e., they look 12 months forward, not at the current economic environment.
Diversification and Paying Down Debt
Sound diversification continues to be the strategy. We see opportunities arising in mining, agriculture and energy in the shorter term. In the medium term, financial services and residential property (after the shakeout that will take at least 12months) will arise. Paying down non-tax-deductible debt continues to be a sound tax effective strategy, so is holding cash.
P.S. If you wish to invest in capital notes then we are now required to prepare a Statement of Advice. Capital Notes are in great demand and the offer is frequently closing within 24 hours, e.g., the recent Westpac Capital Note 9 with a yield of about 5% closed in less than 24 hours. Therefore, you will need to act quickly.
As usual if you have any questions, please feel free to reach out to the team.
Newsletter 38: Market Correction
Even though we recently sent out a newsletter, we thought it critical given the further correction in all markets to communicate once again. It is important to understand that when changes to the global economic environment come into play, no asset class is protected. This is currently the case.
As the last newsletter outlined, the world is entering a new economic climate after 30 years of falling interest rates fuelling increases in all asset prices, e.g., property, bonds, equities, private equity, venture capital, etc. We have also seen the new products, e.g., crypto-currencies evolve although we have never been convinced of their merit as an asset class. We note that Bitcoin has fallen over 50% since November 2021. The recent increases and forecast rise in interest rates is driving the prices of all these asset classes down. Adding to the uncertainty is the inflationary and geo-political problems caused by the breakdown in supply chains because of Covid and Ukraine war.
The table below shows the Year to Date corrections:
*Over the last 12 months. Information on Australian residential property takes at least 6 months to flow through into available statistics, so this figure does not reflect what’s happening in the market.
**As at 30 April 2022.
Some of the volatility is caused by algorithmic trading models. These are computer-based trading models that hedge funds and Commodities Trading Advisers (CTAs) use. The models have buy/sell signals based on pre-determined factors and when one model signals a sell, another may signal a buy, etc. where they trade on very thin movements in the price of an index/commodity/currency, etc. They are complex so it is important to understand the role they play in the market.
This is not the time to panic! We are confident that the steps we have taken over several years, including selling out of international and Australian bonds which were negatively yielding. For new clients that held hedge funds, private equity and venture capital funds we sold out and we avoided them for existing clients. We instead invested in store value assets, e.g., miners and diversifying portfolios has been the correct step. We did this because we saw a stagflation coming and the need to protect capital as far as possible.
In time markets bottom and the unrealised losses are clawed back when the economy turns. Buying opportunities will present themselves, so when they do arise it will be time to act reasonably quickly. Everyone always wants to pick the bottom of the market; however, this is rare and visible only in hindsight. It is for this reason that time in the market is better than trying to time the market.
We continue to monitor the global economic environment and geo-political developments closely. We do have some views about which sectors that will provide new opportunities once markets start to stabilise. We will be outlining these in the future and of course available to discuss.
Newsletter 37: Global Economic and Geo-political Update
Our newsletters always focus on macro-economic and geo-political developments because at the end of the day it is changes in these that impact on returns. We acknowledge that individual stocks can “shoot the lights out” or “fall like a rock”, however you need to be very lucky or unlucky and that is why we generally avoid stock picking. Our approach is aimed at capital protection through diversification and themed based investing.
Changing Global Economic Framework
The war in Ukraine and resulting sanctions on Russia has increased the pace of change in the global financial system that started a number of years ago when Saddam Hussain stopped selling oil in USD and it is now impacting on all countries. In previous newsletters we have referred to them, including the de-dollarisation, rise of crypto-currencies, shift in economic power from the west to the east with the rise of China and India, 3D printing/Robotics and Artificial Intelligence (AI) which means that manufacturing can become localised again as the cost of distribution becomes the major cost of production, and the high level of debt as a percentage of GDP in all major democratic countries, e.g. USA, Japan, Euro-zone, etc. This debt cannot be repaid through tax increases without causing a global depression, so central banks have taken the only route available by printing money and creating inflation to “devalue” the real value of the debt or viewed another way reduce the purchasing power of money.
China’s zero covid policy is now impacting on world trade as ships are lining up off Shanghai with lock downs now spreading to Beijing, and there is no end in sight. In Europe, Poland has stopped purchasing gas from Russia and Germany has indicated it will do likewise.
It is too early to tell whether the “west’s” strategy of financially strangling Russia while simultaneously weakening their militarily is working. We note that historically major regional and world wars occur after a series of “calculated steps/mis-steps” and it is very concerning that Russia is now threatening use of nuclear weapons and attacking Ukraine western based supply lines. Further “mis-steps” could see the world stumbling into another world war.
Debt and Equity Markets
It is well reported in the press that interest rates are rising because of inflation. There are predictions of between 6-8 increases this year in the US and a lesser number in Australia.
The Australian Consumer Price Index (CPI) rate published on 27 April 2022, shows the inflation rate of 5.1%. This is the highest in many years and makes a mockery of a cash rate of 0.10%. This means that real returns are now negative 5%. The cash rate will be increased.
Since 1 January the S&P 500 index has fallen 12.95% (as at 26 April 2022). This in part reflects the factors outlined above, e.g., war in Ukraine, but also the market is factoring in the impact of interest rate increases on stock valuations. Specifically, one key valuation measure is the discounted future cashflow of a stock. An important assumption in this formula is the discount rate (interest rate) that is used. As interest rates rise then so does the discount factor and the higher the factor the lower the value. Hopefully, this simple explanation helps in understanding one of the reasons why equity markets have moved down.
The following graph shows the trend of interest rates and asset prices over the last 30 years and what may happen in the future.
Therefore, as equity markets revalue stocks because of predictions on future interest rate settings, at the same time analysts will be considering changes in company earnings which may be very positive or negative. Netflix is a case in point where its valuation has been hit by both the changes in earnings because of the loss of subscribers and the impact of expected interest rate increases. Equally, BHP has had a major run up in its share price this calendar year because of its strong earnings and flight to hard assets, (e.g., commodities) and countries see Australian miners replacing Russia as a source of minerals.
At this stage because markets globally are down, including Australian residential property that has turned the corner, so we see no point in converting any unrealised loss into a realised loss. Equally, we can see some opportunities in store value assets while sitting in cash for the immediate future cannot be faulted. In some instances, we are adopting dollar averaging strategies for specific investments where we believe it will either turn around in the future, or pay a good dividend yield, or both.
If you wish to discuss, please feel free to reach.
Newsletter 36: Just because the RBA has not increased interest rates, it does not mean that they have not gone up!
Why did the RBA keep interest rates on hold while the Fed increased?
Consumer Price Index (CPI) inflation in the US is running at over 8% while reported Australian CPI inflation is around 4%. The Fed decided that it was time to act increasing the Fed Funds rate (equivalent of the Cash Rate) while the RBA seeing that inflation in Australia is half that of the US has held fire. The RBA knows that the markets described below will do some of their work for them. Although, if CPI continues to increase, the RBA will act.
Will the increase in US interest rates impact Australian mortgage rates? Yes, because Australian banks and non-bank lenders source about 50% of their funds from the wholesale global debt capital markets, i.e., from institutions in Australia and internationally, as their retail deposits, i.e., our savings accounts, are not large enough to support the demand for credit.
Why do US interest rate increases impact the whole world?
The simple answer is because the USD is the world reserve currency. A more detailed analysis reveals that forward exchange rates (AUD/USD) are determined by interest rate differentials, i.e., the 3 month forward AUD/USD rate is calculated from the current spot exchange rate (the rate you get when buying foreign currencies at a bank before you travel) and 3 month interest rates in Australia and the US. Any interest rate increase changes the AUD/USD forward exchange rate, which is passed onto Australian organisations and investors when they are transacting. As mentioned above there is also the global debt capital markets, and their activity impact Australian interest rates. The largest debt market in the world is the Euro dollar market.
What is the Euro Dollar System?
The Euro dollar system is comprised of all USD deposits and USD loans held outside of the US. It should not be confused with the USD/Euro foreign exchange rate. The size of the Euro dollar system is unknown as it is not regulated by any organisation although there are rules. The Fed cannot regulate it because it does not operate on the US mainland. It is a bottom-up system that started in the mid-1950s with the rebuilding of Europe under the Marshall Plan following the end of World War 2. It is called Euro dollar (system) because USDs were sent to Europe as part of the Marshall Plan were held in European banks. We are referring to it as a system because it plays an important role in supporting the USD as the world reserve currency status. A discussion on this for another time.
The Euro dollar and US treasury markets generally move in the same direction. Therefore, any increase in interest rates in the US will be reflected in the Euro dollar rate and passed onto to those companies raising debt, e.g., Australian companies and banks.
Russia/Ukraine and sanctions
The Russian/Ukraine war and associated sanctions will also have an impact on global interest rates because of supply line shortages as inflation may continue to rise. It has been reported that BMW and Volkswagen have both shut down automobile production lines because of their inability to obtain a simple cable wiring harness part that is supplied by production facilities in Ukraine. Airbus gets 50% of its titanium from Russia and Boeing gets 35% of its titanium from Russia. Russia and Ukraine together control 30% of the global output of titanium, so there will be delays in airplane production. Sixty-five percent of all the processed neon gas in the world comes from one company in Odessa, Ukraine. In a “tit for tat” Russia having been cut off from semiconductors, has cut off the western world’s access to neon gas used in its production. There are over 1,400 semiconductors in late model cars alone.
Net Interest Margin not Cash Rate
It is important to understand that banks when managing their assets (loans to customers) and liabilities (deposits from customers including debt capital market loans) manage Net Interest Margin (NIM). This is the difference between their average lending rate (mortgages – variable and fixed) and the average borrowing rate (deposits and institutional debt raised). They do not manage to the Cash Rate as the mass media continually says.
Increasing Mortgage Rates
Because of the above, banks and non-bank lenders will continue to raise mortgage rates. If you have high levels of non-tax-deductible debt now is a good time to focus on paying it down even though during periods of high inflation the real value of the debt falls.
If you have any questions about this newsletter or any other matter, please feel free to reach out.
Newsletter 35: Global Geo-Political and Economic Update
Given the recent invasion of Ukraine and the unfolding geo-political events we thought it important to provide an update.
Geo-Political – Russian Ukraine War
In our most recent newsletter, we considered “the democratic countries” reaction to an invasion of Ukraine by Russia. The sanctions will have downstream consequences for all Organisation for Economic Co-operation and Development (OECD) countries, as Russia and Ukraine are major suppliers of grain, minerals and energy products.
Russia is about the 12th largest economy in the world but probably has the largest asset base in the world of natural resources, e.g., gas, copper, oil and nickel. So, its exit will have a huge impact on the global economy, including shortages leading to price hikes (inflation) as impacted countries seek alternative suppliers. Does this represent an opportunity for Australia? Yes, as it has been well reported that China is actively seeking alternative iron ore suppliers to Australia. Perhaps fortuitously, Australia is positioned to replace the Chinese market with markets that Russia previously operated in which they will now be excluded.
Russia has been reducing its holdings of US treasuries for several years now and replacing them with Chinese, Euro and Yen bonds and gold, as part of their response to earlier US sanctions. Russia as at 31 December 2021 held just USD3.9 billion in US treasuries, so this aspect will have little, if any impact on financial markets. Russian investors will not receive their coupons or principal when their US, Japanese and Euro bonds mature as they are frozen. For investors in Russian bonds the news is equally not good, as Putin has signed a decree saying the bond holders can be paid in rubles (not USD, Yen, etc.), although it is unlikely any payment will be made, and if in rubles, the bondholders will have massive realised losses given the significant devaluation of the ruble against the USD. A game of “tit for tat”!
It would be a very different situation if China invades Taiwan, as China holds USD1 trillion in US treasuries. They are the second largest holder of US treasuries after Japan. If a scenario arose where sanctions froze Chinese holdings of US, Japanese and European bonds occurred this would lead to a major conflict. At a minimum China would immediately cease funding the US budget (estimated to be USD3.3 trillion and increasing) and current account deficits leading to massive hikes in interest rates and a deep recession in the US, as America would have to live within its means. China, US and the world have too much at stake for this to occur, and our comment is to highlight that the situation with Russia is serious, but very different to a conflict involving China.
The world is splitting into “Democracies” v “Autocrats” with Russia and China being the leaders in the dictatorship world. Each hemisphere has its supporters. Iran historically and culturally falls into the democracy campaign even though it has a supreme leader; however, its relationship with America is so fractured that it could easily fall further into the dictatorship camp. The US is keen for the Iran Nuclear Deal (JCOPA) to be re-instated and has now made overtures to Venezuela to return to the fold, as both countries have major oil reserves.
The de-dollarisation as the world’s reserve currency has been a goal of Russia and China for many years, and the invasion of Ukraine and the resulting sanctions is accelerating this move. In future, countries will likely limit their foreign reserves as a sanction risk management strategy. We previously reported that central banks generally had been increasing their gold reserves.
Markets – Equity and Property
Equity and debt markets are responding to the above with increased volatility, and we may possibly be at the start of a bear market. On 5 January 2022, the S&P/ASX 200 and S&P 500 index were 7,596 and 4,796 respectively. At the time of writing this newsletter (8 March 2022) they were 7,042 and 4,201, which are falls of 554 and 595 points respectively. Equally, our market intelligence is that residential property prices in some areas have fallen by 10-20% since Christmas, despite media hype that prices will continue to rise this year.
Increasing Interest Rates, More Fiscal Stimulus and QE
It is likely the US Federal Reserve (Fed) will increase interest rates by 0.25% later in March; however, this is next to meaningless in the fight against inflation which is running between 7% and 12% in the US, where interest rates are close to zero. It is the psychological aspect of a small increase that is important as the Fed wants to slowly deflate the asset price boom in property, equities, commodities and bonds.
Globally governments have withdrawn their Covid stimulus programs meaning free money has come to an end, or so we think. Similarly, central banks have flagged their intention to end accommodative monetary policy, e.g., increase interest rates having engaged in it for 20 plus years. This desire by governments and central banks to return to responsible fiscal and monetary policy will now be put on hold, as they will need to act to combat the disruption caused by the Ukraine/Russian war and associated sanctions. There will likely be more QE and possibly further fiscal stimulus packages. Australia is also faced with a huge clean up bill from the terrible floods which are requiring Federal and State Government action.
We expect there will be a very slight rise in US interest rates, and this will have flow on impacts to Australia, there will be more QE because of a USD liquidity shortage in global debt and equity markets and further fiscal stimulus, as much of the OECD population income is government subsidised. People need to be able to live! These along with shortages in agriculture and energy products and supply chain issues mean difficult times ahead.
Hold the Course
In mid-2019 we re-structured portfolios because of negative yielding international bonds. In 2021, we sold out of Australian bonds because of concerns of stagflation and moved into Inflation Linked Bonds and increased allocations to hard assets, e.g., energy, mining, agriculture, gold and infrastructure. In particular, we identified lithium, copper and nickel as minerals that will be in great demand in the future. These have been correct calls as these sectors have been increasing in value while others have fallen. We still believe that in the medium term that holding investments in technology, industrials and financial institutions are necessary part of your portfolio.
It’s time to be patient and watch while holding the course with some portfolio tweaking as required. Now is not the time to panic. We observe that well known investor Jeremy Grantham recently said, “If your do not lose money in the next period of time then you are doing well”.
If you wish to discuss the above or any other matter, please feel free to contact us.
Newsletter 34: Global Economic Update
The world is watching events in Ukraine and Taiwan very closely and folks are trying to determine whether Russia and China respectively will invade. Are western countries willing to go to war over Ukraine and Taiwan?
At one end of the spectrum wars will lead to major supply chain disruptions, e.g., gas pipelines from Russia to Europe potentially being closed. At the other end of the spectrum an invasion without war will lead to more economic sanctions being placed on Russia and China which would be a further step in splitting the world economically.
At the same time the parties to the JCOPA (Iran Nuclear Deal) are working with Iran to bring all parties back into compliance. If this does occur, a consequence will likely be lower oil prices. If the deal can’t be resurrected, then oil prices may continue to rise.
These geo-political events are adding to the volatility in markets.
In our previous newsletter we expressed concerns about stagflation, i.e., rising prices (inflation) and low economic growth because of the huge government debt overhang.
The U.S. gross national debt recently exceeded USD30 trillion for the first time. This figure does not consider contingent liabilities, e.g., unfunded pension funds, private debt, e.g., student loans and mortgages, and corporate debt. If any other country had this level of indebtedness they would be punished by global markets as Turkey has been. The US for the moment can get away with it because it holds the world reserve currency and is the largest economy in the world, although there will be a day of reckoning.
Fiscal stimulus provides a short-term Gross Domestic Product (GDP) kick, although there is significant academic research that shows once National Debt to GDP exceeds 60%, as in the case of the US, Japan and Eurozone, then each additional dollar of fiscal stimulus has diminishing benefits. It’s because of this that we closely watch debt market, as well as equity markets.
Inflation - Australia and US
Our concerns have turned out to be realised as the official inflation rate in Australia rose to 3.5% in December 2021 which was more than market estimates of 3.2%. We believe it is greater because Consumer Price Index (CPI) as a measurement tool is open to manipulation from changes in the basket of items that make up the index. This increase was primarily due to rising fuel prices, material shortages, global supply chain issues and increased demand ahead of Christmas holidays. Inflation in the US according to the latest CPI figure is now 7.5%, so with 12 month treasuries yielding about 1%, then the real 12 month return (after inflation) is negative 6.5% (1.0-7.5%). The below table from Bloomberg shows the price changes for 9 key US items since January 2021.
It has been reported that Walmart is now putting its meat under lock and key due to the level of theft, as the price of meat has increased by around 16%. Similarly, pharmacies are now locking up toothpaste and deodorant. These are more examples of the breakdown in US society because of the growing inequality.
You may already be aware there has been an increase in global markets volatility. The US market in January 2022 saw a major correction where the NASDAQ fell about 9% and the Dow Jones Industrial Average (DJIA) dropped around 3.3% making it one of the worst performing Januarys since 2009 for NASDAQ and since 2016 for DJIA. Subsequently, all international markets corrected including Australia with the S&P/ASX 200 falling about 6%.
In the short-term, stock markets are likely to be more volatile because of concerns over interest rate increases. Central Banks and governments want to deflate asset prices by signalling to the markets that rates will be increased, but they do not want a crash as this would severely impact on consumer and business confidence. This game of “bluff” between the markets and central banks will continue for the foreseeable future. We do not see major interest rate increases but rather small incremental ones, although the banks will be eager to increase mortgage rates more than an increase in the official cash rate, and similarly they will pass on less than the full rate increase to depositors. This is because banks manage their books to Net Interest Margin (NIM), not the cash rate.
Our strategy continues to be asset diversification by country, currency and asset class. It is important to have exposure to assets that have a stored value, i.e. property, commodities, precious metals and those companies with high levels of intangible assets, e.g. Google, as they should protect your purchasing power.
Aitken Investment Management, AMP and Magellan, etc.
Normally, we would not comment on competitors; however, as these organisations have been in the media a lot lately, we believe it warrants a comment. We recognise that no one can predict the future and no fund manager/advisor is immune from making investment mistakes which is why it is important to understand what happened in these organisations and what are the learnings.
Magellan fund performance and share price have crashed while AMP continues to go through major re-structuring and business model changes. The issues at Magellan appear to be personal and business related and appear to have a way to play out.
Aitken Investment Management (AIM) has also been in free fall with major investors, e.g., Kerry Stokes selling his 19.9% investment. Like Magellan although significantly smaller in fund size the problems appear to be both personal and business related. It appears that at the heart of the issues at AIM and Magellan are key person risk.
For the record we have never been an advocate of Magellan, AIM and AMP because their fees are much higher compared to similar product and we have been concerned about the “investment guru image” of the key individuals, so we have never invested client funds in these organisations. Ultimately, it is capital protection and returns after fees that matter.
Insurance companies across the board have increased their premiums. We have queried the insurers who say that historically the risk has not been correctly priced. It is another example of inflationary pressures. Despite the premium increases it is important to remember insurance is a capital and lifestyle protection product, and therefore plays an important role in financial risk management.
If you have any questions, please feel free to call.
Newsletter 33: Merry Christmas and Happy New Year
We thank you for your support in 2021.
It has been another challenging year for all of us, especially with lock downs brought on by COVID-19.
We have been communicating with you about our views on the global outlook during these uncertain times and the changes we see occurring in the global economy. After 40 years of deflation (as reflected in falling interest rates), the world is entering a new world with inflationary pressures and where all asset prices, e.g., bonds, property, and equities are at record highs while interest rates are close to zero. The latest US CPI showed an annual inflation rate of 6.8%.
It is important to remember that it is real returns that matter. A Real Rate of Return is calculated by deducting inflation. So, if the inflation rate is 3% and interest rate is 5%, then the Real Rate of Return is 2%. Over the last 40 years interest rates were higher than inflation. This situation has been turned on its head where inflation in Australia is now 3% and Cash Rate (interest rate) is 0.10%. This means the Real Rate of Return is (2.9%), i.e., a negative return. With the Australian dollar recently falling in value against the US dollar inflationary pressures will increase, as imports will cost more.
Because of our concerns about stagflation, (i.e., rising prices and limited or no economic growth because of high debt levels) and real negative returns, we have been rebalancing portfolios. The aim being to protect your wealth from loss of purchasing power brought about by inflation.
In mid to late January 2022 your portfolios will be receiving dividends, so we will likely be in touch in February regarding re-investment.
As in previous years, the office will be closed from Friday 17 December (last day) and will re-open on Monday 10 January 2022, although we are contactable via email and we will be checking phone messages.
We look forward to your support in 2022 and wish a very happy, fun and safe holiday period.
Merry Christmas and Happy New Year!
Newsletter 32: Director Identification Number now required
From 1 November 2021 company directors must obtain a Director Identification Number (DIN) from Australian Business Registry Services (ABRS). Directors can only have one DIN, even if you are directors of multiple companies. This requirement applies to Self Managed Superannuation Funds (SMSF). Therefore, if you have a corporate (company) trustee of your SMSF, and you are a director of that company, then you must apply for a DIN.
Directors must apply for their DIN within the following timeframes:
- On or before 31 October 2021: you have until 30 November 2022 to apply for a DIN.
- Between 1 November 2021 and 4 April 2022: you have 28 days from the date of appointment to apply for a DIN.
- From 5 April 2022: you must apply for a DIN prior to the appointment.
You can apply for a DIN with ABRS here.
It is an offence for a person not to apply for a DIN within the applicable timeframe. Please action at your earliest convenience.
Newsletter 31: High Asset Prices and Stagflation
Global Markets: All asset classes are expensive
As you will be aware global markets have recently been volatile. Specifically, on 20 September 2021 there was a US equity market correction where Dow Jones Industrial Average (DJIA) went down by 1.78% and Nasdaq went down by 2.1% after falls the previous week. As expected, the Australian equities market, as do all international markets take their lead from the US.
It is important to watch debt markets as it is this market where a financial crisis usually has their roots, e.g. the Global Financial Crisis of 2007/2008 was because of Mortgage Backed Securities (MBS) and Collateral Loan Obligations (CLOs) and much of the the current market jitters are around Evergrande, a major Chinese property development company which has massive debts and is in financial trouble. Unlike in 2007/08 when the MBS and CLO problem could not easily be quantified it then became a global problem, the Evergrande appears to be substantially limited to China and the risk can be quantified. However, it is possible there could be a negative impact on consumer and investor sentiment which could have a knock on effect of spooking markets.
It is not possible to predict the direction of markets although there appears to be downward pressure because the world has never seen a situation where nearly all asset prices, e.g. property, equities, bonds and precious metals are simultaneously close to all times highs and there are high debt levels and negative real interest rates. Historically, one asset class will be underperforming which opens the door to rolling funds across into it and out of the higher priced asset. This is not the case.
As asset prices are close to all-time highs should you sell? The answer depends on what your long term goals are and what is the alternative investment, i.e. where do you put your money? Cash is not earning anything. Selling also means you are realising any gains/(losses). If your time horizon is longer than 5 years, then holding on and riding out any market correction is the best solution. This is demonstrated by the 2007/08 crash. It took the S&P 500 index and S&P/ASX 300 index 4.5 years and 13 years respectively to return to their pre-crash peaks. This time period is referred to as left-hand tail risk. It is possible to hedge a “Black Swan Event”, i.e. a major market correction by buying out of the money put options. This is costly, although the cost must be weighed against the opportunity loss of holding an unrealised loss.
A falling market does present opportunities for finding good value in the market. Whereas, a rising market contains more risks of over valuation. Short-term volatility is an inevitable part of investing and it is smoothed over the long term. As you will be aware our focus is on capital protection and long-term performance.
Stagflation: Not inflation or deflation
We believe that Australia is heading into a stagflation environment where there is both rising prices and low economic growth because of the high levels of private and government debt. We have seen non-discretionary products, e.g. food and petrol prices increase which means consumers will have less disposable income to spend on discretionary items, if their wages do not keep pace with price increases. It is anticipated there will be a kick up in GDP growth as folks celebrate the end of lock downs by spending. People will get haircuts, go to the movies and restaurants, and plan Christmas/New Year events and holidays. However, once February comes around with school starting again and summer holidays ending many households will take stock of their finances and they will observe the economic stagflation. The GDP growth figure in March 2022 will reflect this spending spree and not sustainable economic growth that comes from increasing production.
We are exploring the best solutions for a stagflation environment and depending on your asset allocation will be writing to you about the strategies we propose.
If you have any questions, please feel free to call.
Newsletter 30: Global Economic Update
Covid-19 continues to impact on economies around the world. In Australia, with shutdowns occurring in most states and territories it means economic growth will fall with Government debt increasing as new financial assistance programs, e.g. Job Saver, are rolled out. The Australian Government spent AUD25 billion on Job Keeper alone which represents about 5% of total Federal Government revenue (AUD552 billion). The Job Saver program is less generous although it may have wider application as the lock downs are now occurring across all major capital cities and regions, except WA.
Australia is lagging the rest of the world with its vaccine rollout and this is delaying any further opening of the Australian economy and its impacting on consumer confidence and economic growth. Many folks are saving which is both sensible financial behaviour and a positive in reducing overall household debt. The good news is that the Federal Government does have a 4-step plan to re-open the economy so the lock downs can end although there may still be restrictions.
A major positive is that work practices have changed and many businesses have found that staff working remotely is not ineffective and is family friendly. It also means that companies will not be so reluctant to shift their head offices to suburban or regional centres. This may be attractive to many folks as there will be shorter commuting times with reduced distances to travel to work and less traffic congestion. It also should mean access to more affordable housing.
We are watching inflation closely and the CPI for the 12 months to 30 June 2021 was 3.8% which is a tick up in average levels of the last few years. What this highlights is the importance of seeking notional returns greater than 3.8% so you earn a real return. This is something we are focussed on.
On September 6th, 7.5 million Americans will lose all income support benefits unless they have a job (US unemployment is about 10 million), while US consumers who believe things will improve has fallen to 32% down from 49% in July and 50% in June. This lack of consumer confidence is in stark contrast to the bullish stock, bond and property markets. Consistent with this fall in consumer confidence is that the 50 day moving average of the S&P500 index is lower for all stocks except the FANGs (Facebook, Amazon, Netflix, Google) which dominate the index and are driving it higher. The average office occupancy rate is 32%.
Inflation levels in the US are up (5.4% in July) and would be higher if the US Federal Reserve did not remove food and energy from its core inflation measure. It is these non-discretionary items, e.g. food where prices have jumped up. It is likely that consumer prices on discretionary items will fall in line with consumer sentiment. International (including US) bonds are negative yielding (near zero interest rates - cost of currency hedge – inflation rate) and it is for this reason we moved out of international bonds a few years back.
Global growth is being driven by debt and this is unsustainable in the long run. 27% of US GDP goes to paying interest payments on US National debt of around USD30 trillion. The US budget deficit is running at USD3.5 trillion which means that US Treasury is issuing more and more bonds to pay for the debt which the US Federal Reserve is buying it back to the tune of USD20 billion per month. The US Federal Reserve Balance sheet is now USD8 trillion and increasing. If the US did not have the world reserve currency, then the party would have ended long ago. Despite inflationary pressures in the US and its twin deficit (current account and budget) the USD has appreciated against all currencies recently, including the AUD. Normally, it would be expected that the USD would fall in those circumstances; however, Quantitative Easing and slow down in the velocity of money (money supply is up) is causing a shortage of US dollars and is helping drive its appreciation.
The US Federal Reserve and then by implication the RBA and other central banks are trapped and cannot raise interest rates. So real interest rates (after inflation) will continue to be negative, particularly in international markets. If central banks do raise rates (not likely before 2023), then equity markets will respond negatively.
Chinese exports have reached record levels as China has worked hard to minimise the economic impact of covid-19. Despite this, factory production is down and household debt has risen from 18% of GDP in 2008 to 62% in 2020 which is well below its OECD counterparts. In the same time frame, Chinese GDP has nearly tripled to USD14.3 trillion (2019) firmly placing it as the second largest economy in the world.
Global Economic Outlook
Economic uncertainty continues to be the case with central banks manipulating yield curves and driving interest rates very low while driving up asset prices, e.g. residential property, while governments are engaging in massive stimulus programs (running budget deficits) and companies are re-structuring and changing their business practices. With the covid Delta strain running rampant and consumer confidence falling while the effects of government stimulus programs being short lived, it is anticipated that economic growth will be weak. In this environment we continue to believe asset, country and currency diversification is the best strategy.
The inflation vs deflation debate continues to rage amongst economists and market commentators despite early inflationary figures in OECD economies. Some commentators are arguing that inflation is transitory while others are saying its sustainable and will be around for some time although not at the levels of the 1970/80s. Those in the deflationary camp are arguing prices will fall as supply of goods/services is greater than demand (global trade has declined), real wages are static and Quantitative Easing are all deflationary.
Despite the above negatives we are very positive about the future because humans are very resilient. There are wonderful and exciting developments occurring across an array of areas, e.g. robotics, biotech, artificial intelligence, agriculture, clean energy and storage which provide good investment opportunities.
Historical Economic Milestone
On 15th August 1971, some 50 years ago is the anniversary of President Nixon “temporarily” ending the convertibility of US dollars to gold which was a hallmark outcome of the Bretton Woods Conference at the end of WW2. The Bretton Woods agreement required a currency be pegged to the US dollar which was in turn pegged to the price of gold. Nixon’s decision meant that currencies either freely floated or continued to be tied to the US dollar. The Australian dollar remained tied to the US dollar until 9 December 1983 when the Hawke Government announced the AUD would freely float.
The aim was to create a currency system that is less rigid than the gold standard while providing greater flexibility and financial stability.
This decision by Nixon was critical as it meant that the strength of a currency in the future would reflect a number of economic factors, these being the strength of a local economy, e.g. GDP growth, level of interest rates, unemployment rate, etc. It also in part reflected the strength of the economies of the that country’s major trading partners, as well as the US economy. A floating currency model has served the world well for the last 50 years and despite claims of better models, e.g. return to the gold standard and private crypto currencies, e.g. Bitcoin, there is no obvious new model that addresses the flaws of the current model.
Historically, world reserve currencies average life span has been about 70 years. Does that mean the USD as the world reserve currency has only another 20 years? No, although the trend is for less trade being priced in USD (currently about 70% of world trade is in USD) and we are seeing the Chinese and other international investors buying less US treasuries because they are negatively yielding and concerns over the US national debt.
We believe recognising this 50th anniversary milestone is important given its significance in global financial history and because many commentators are questioning the long term future of the USD as the world’s reserve currency.
As usual if you wish to discuss with us any matters regarding investing or debt management please feel free to contact us.
Newsletter 29: EOFY - Some opportunities and important regulatory changes impacting on gold and borrowing
End of Financial Year Opportunities
We are quickly approaching 30 June which as we all know is the end of financial year. Just a reminder to make if you can:
- A concessional contribution - This is the Superannuation Guarantee Levy at 9.5% plus any salary sacrifice amount up to $25k which is the maximum allowed, subject to having unused concessional contribution caps.
- A non-concessional contribution – This is a contribution from your after tax or from your take home pay up to a maximum of $100k, or $300k, if you use the 3 year bring forward provisions which allows you to make 3 years contribution in one year.
It is important not to inadvertently breach these maximum amounts as the ATO may penalise you. If you wish to make a contribution and unsure how to do it, or whether you should or not, please feel free to reach out.
On the debt management side, if you have an investment property loan you can pay 1 year’s interest in advance and gain 2 years interest tax deduction. Again, we are available to discuss if you want to re-structure your debt. You may wish to hear about our Aspire product (debt/investment) that we have been successfully running for a number of years now. If so, please contact us.
July is an important dividend and distribution month, so we may be in touch in August to check the proposed re-investment.
Asset Values – Property Prices
We emphasize that we are continually monitoring economic developments in Australia and internationally. As you know the current historical low interest rates have resulted in the residential property market globally taking off and of course it makes folks feel wealthier (wealth effect); however the downside is the locking out of the next generation from some residential property markets. Our Aspire program is also designed to help younger clients save and invest so they can get onto the property ladder.
There is minimal media attention being given to the declining fertility rates of males and females caused by toxicity in our foods from chemicals used and also micro elements in plastics leaking into packaged food. Combined with an aging population and choice by women in OECD countries to defer motherhood will impact on all asset prices as the world’s population will start to decline (not immediately), if this increasing infertility trend continues. This is something we should all watch closely.
Bitcoin – Legal Tender
We note that El Salvador has become the first country in the world to accept Bitcoin as legal tender. Given its ranked 103rd in the world in terms of GDP and its international debt is in USD we see this as a hedge on their debt. As you may be aware a Bitcoin transaction takes time to execute using significant energy and the value of each coin means it can only be used for the largest transaction. We still see Central Bank Digital Currencies as playing an important role in both monetary and fiscal policy in the coming years, as governments globally have no intention of allowing private digital currencies replacing their fiat currency.
Basel III – Implications for Gold and Borrowing
After many years postponement Basel III is scheduled to start on 1 January 2022. This is a global prudential standard that central and commercial banks must adopt. We believe there are some important implications at a monetary policy level and bank lending, i.e. borrower level that we will outline below.
Monetary Policy and Central Banks
As previously outlined in earlier newsletters some countries central banks have been aggressively buying gold, e.g. Russia, while others ban its export, e.g. China. Moreover, central banks main assets on their balance sheets are their own cash and bonds, US treasuries and other foreign government debt, and gold. Basel III allows central banks to carry gold at a zero risk weighting. What does this mean? If a Central Bank owns $100 of gold previously it could only recognise $50 on its balance sheet. Now it will be able to recognise its full value and in this example that being $100, i.e. it can revalue its physical gold reserves by 50%.
Furthermore, as we know central banks, including the RBA have been engaged in Quantitative Easing where they are buying bonds (liabilities) from the market so their debt levels have increased. With central banks being able to revalue their gold holdings by 50% this means their balance sheets will look more healthy. Therefore, it is likely there will be continued buying of gold by central banks. The ongoing pressure on the USD because of the US’s high national debt to GDP ratio, should mean the holding of gold although priced in USD continues to act as a hedge to the debasement of the USD. From an investor perspective we support increasing gold holdings as part of a diversification strategy.
An objective of Basel III is to address liquidity issues that could impact the financial system through the banking industry. Specifically, most banks “borrow short and lend long”. Basle III will oblige banks to finance long term assets with long term money, i.e. greater than one year in order to avoid liquidity failures. Simply, this means that banks will have limited ability to use short term deposits and short term debt, i.e. less than 12 months to fund a mortgage (a 30 year contract) with an average mortgage life of between 3-10 years. In the ideal Basel III world it wants banks’ assets and liabilities to be match funded, e.g. 10 year fixed term deposits to fund a 10 year mortgage (estimated life).
So what are the implications for a borrower? Banks will be constrained in the amount of debt they can take on, so they will impose tighter lending standards and borrowing money from banks will become harder and the cost (interest rate and fees) will increase.
In conclusion, we need to plan for these forthcoming changes as they will have an impact on the global investment and lending worlds.
As always please feel free to reach out if you have any questions or need help.
Newsletter 28: Global Economy Update
Global Economic Outlook
The global macro-economic environment continues to reflect a number of inter-related factors. Firstly, and most importantly global trade declined in 2019 and the figures for 2020 are not yet available although the effects of Covid will likely mean a further decline. Unless the “pie” grows then global GDP will fall and so will global wealth as reflected in the increasing wealth gap across most advanced economies. Another key factor is the world has become more indebted with countries embarking on major stimulus programs and “aggressive” monetary policy. Central bank manipulation of interest rates is disrupting the efficient allocation of capital, and this is best illustrated with corporations continuing to buy back their shares rather than investing in new technologies and business opportunities.
US and Chinese Economies
The ratio of US debt to GDP is now about 120% and increasing. The US Federal budget deficit in 2020 was $3.1 trillion. When Obama left office in January 2017 it was about $587 billion and trending down. This explosion in the budget deficit reflects the Trump tax cuts and the increased fiscal spending to counter Covid and fall in tax receipts also because of Covid. There is historical evidence that as national debt increases as a percentage of GDP, further stimulus measures have very short term and a marginal impact on economic growth. In the longer term it has a negative impact on growth. Japan is a case in point.
Recent inflation figures in the US indicate rising inflation; however it is important to look at the trend and successive figures not just a single published result. The Fed is trying to encourage inflation as it wishes to inflate the real value of the debt (as distinct from the notional value) away. This is leading to a loss of purchasing power (inflation) as prices have risen on critical food and commodity, e.g. lumbar items in the US.
China’s published macro-economic figures are questionable. Some key developments are China is buying less US treasuries and has banned crypto-currencies. It continues to wield market power as it is a low cost of production economy and with a population of over 1.4 billion it will continue to grow. India and China in the last 30 years each have developed a middle class of around 400 million people who are major consumers. Economic growth will come out of Asia.
Australian budget deficit is forecast to be $161 billion in financial year 2021. Total government (Federal, State and Local) debt as a percentage of GDP in 2019 was 48% compared to 120% for the US. This will obviously increase with the major stimulus programs outlined in the May 2021 budget. Australia comparatively to the US, Japan and Eurozone is well positioned to ride through the Covid crisis although there are challenges particularly Australia’s relationship with its major trading partner China.
Real returns (after inflation) are close to zero and as highlighted many times they are negative on international bonds even before taking into account the cost of currency hedging. It is for this reason that for a number of years we have very limited investing in international bonds.
The table below shows how yields across all asset classes have fallen over the last 10 plus years. For those who are retired or planning retirement it is important to understand that the income levels that a “standard” portfolio, i.e. 60% equities and 40% bonds previously generated is no longer the case. This means that to increase income, investors need to take on more risk, i.e. more equities. If you are willing to ride the market ups and downs, i.e. accept unrealised losses (do not sell) this approach should be adopted.
We have written a lot about this over the last 12 months and we continue to monitor this closely. There has been a slight “kick up” in inflation because supply chains that have been disrupted by Covid are coming back online despite the trade war between China and other parts of the world. Equally, “Government handouts” reduce the purchasing power of money and are a disincentive for some folks to work, however we believe inflation will be temporary. This is subject to these hand out programs not continuing as high levels of global debt, falling global trade, high levels of under-employment and lack of real wages growth are disinflationary. In our view the Australian dollar is more likely to appreciate against the USD in the medium term because Australia’s stronger economic fundamentals relative to OECD countries and Australia is viewed as having managed the pandemic well. As a safe haven economy a strengthening dollar means inflation is not imported. This could change of course and we need to closely watch for more sustained inflationary pressures. We do not see 1970/80s levels of inflation breaking out as the economic circumstances were very different, e.g. oil shock and breakdown in Bretton Woods agreement.
We continue to adopt a diversification by country, product, currency and theme approach to protecting your capital and generating the best returns.
As usual we are available to discuss. Stay safe!
Newsletter 27: Global Economy Update
Since our last newsletter a lot has happened in the post Christmas 2020 period.
There is a new US President while American society appears polarised, global stock markets are at all time highs, unemployment remains high in all major economies and global GDP in 2020 fell by 6.5%. Governments are continuing to enact fiscal stimulus through range of initiatives, e.g. Job Keeper, albeit at lower rates. The US government has extended its moratorium on mortgage foreclosures, eviction of tenants, and deferral of mortgage interest payments. In summary, governments are continuing to support their economy meaning that government debt levels are increasing and will do so for the foreseeable future. Central banks are manipulating the yield curve (interest rates) so as to keep interest rates very low and have signalled that interest rates will remain low (negative real – after inflation) for a number of years. This has generated an asset price boom, e.g. residential property market has taken off.
Because of the above approach by central banks there is no price discovery in debt markets which flows through to valuation of equity prices. In summary, investors are flying blind as historical measures of value do not make sense.
On a geo-political level Australia is in a trade dispute with China which is impacting exports of coal, fish and wine. This is part of the wider trade/geo-political dispute between the US and China.
Finally, COVID-19 vaccines are starting to be rolled out across the globe. Although this will take most of 2021 to vaccinate large numbers, it appears to be a turning point in the fight against COVID. Markets have factored this into their “valuations” as well as low interest rates for a number of years and current unemployment levels. Most of those jobs lost will not return although new job types will.
There are two ways of measuring inflation which are related. Firstly, through the velocity of money (M2), i.e. how far a dollar travels around an economy, e.g. a person earns a wage and then spends that money on groceries which the supermarket uses to pay more salaries, suppliers, etc. who then all spend it on more groceries, etc. Simply, the more that dollar moves through the economy the higher its velocity.
This example tells part of the story as groceries are necessities. The question is what does the wage earner do with the money which is not used for groceries. Do they save it or spend it on discretionary goods, e.g. buying a new car? If the wage earner saves it, then those dollars sit in the bank earning a low level of interest and does not flow through the economy so the velocity of money is not growing. In uncertain economic times folks tend to save for the “rainy day”, not spend. It is true that the bank may lend those funds but this is not for consumption. During economic slow-downs banks tend not to lend which they do by tightening their credit underwriting standards meaning they are only lending to people they believe can afford a loan.
The spending measure is CPI. We are not seeing a broad increase in CPI for a number of reasons. In our newsletter (June 2020) we predicted that the Australian dollar would appreciate against the USD. This prediction turned out to be correct as it has gone from about 65 cents to 79 cents. This means that imports are cheaper so we are not importing inflation. With unemployment at 6.4% there will not be wage push inflation. We are seeing increase in food prices for a range of reasons including effects of drought last year. This needs to be watched closely to see if it is a trend.
Inflation v Deflation
Japan is a very good case study as to what is happening globally. Specifically, Japan for over 30 years now has run major budget deficits and debt levels as a percentage of GDP. QE and large fiscal (Government spending) has been their primary methods for stimulating their economy and it has produced deflation, not inflation. The Japanese economy has staggered along for 30 years now with very low levels of GDP growth and its aging population has contributed to this problem. Only this last week did the Nikkei reach 30,000 again being some 32 years ago (1989), so equity markets can produce negative returns over many years, if they become grossly overvalued and the economic settings are not correct. Of course Japan has other challenges, notably aging population which is exacerbating the economic growth challenges as an increasing percentage of the population stop work.
Capital Protection Investment Strategy
About 12 months ago we adopted a capital protection strategy which has proved to be the correct approach. As we all know hindsight is a beautiful thing and of course the markets have roared along so being invested in bonds means the upside is missed. For our younger clients we did not adopt a capital protection strategy because they have time on their side meaning they can recover, if there was a major equity market correction.
Our investment strategy
There continues to be a disconnect between Main street and Wall street, as governments and central banks have signalled their intention to do what it takes to keep an economy from collapsing. We continue not to invest in international bonds because they are negative yielding, while adopting an asset diversification (by country, currency and product/theme) strategy as the best approach to capital protection.
If you wish to discuss, please feel free to contact us.
Newsletter 26: Merry Christmas and Happy New Year
We thank you for your support in 2020.
It has been a challenging year to all of us. Like so many others we have embraced the technological shift by working from home while complying with COVID-19 lockdown and social distancing requirements. We have been communicating with you about our views on the global outlook on a more regular basis during these uncertain times. It is important not to get caught up in the noise and follow the heard.
We look forward to your support in 2021 and wish you a very happy, fun and safe holiday period.
The office will be closed on Friday 18 December 2020 (last day) and re-open on Monday 11 January 2021, although we are contactable via email and we will be checking phone messages.
Merry Christmas and Happy New Year!
Newsletter 25: Global Economy Update
Continuing on from our last newsletter, the macro-economic outlook does not look good despite the massive fiscal stimulus by governments and central bank intervention. The latest figures reveal global Gross Domestic Product (GDP) growth being negative (6%).
In 2021, do not be surprised if governments’ fiscal programs substantially increase as they continue to try and bridge the demand gap that they created when they closed economies down. In the US for example, the current debate is whether the next fiscal stimulus should be $1.5 trillion (Republicans) or $3 trillion (Democrats) and will it be passed before the elections. We expect further packages in 2021 regardless of who wins the Presidential and Congressional elections and the size of the packages will be greater, as they will be in Japan and the Eurozone, and likely in Australia.
This is because global GDP growth is negative, unemployment (Australia 6.9%) is high and monetary policy is ineffective.
The comparisons with 1929 continue as shown by the graph below and reported in earlier newsletters.
It is still possible to get real returns from Australian bonds as shown in the chart below. Please note these figures exclude the cost of currency hedging for Australian investors in international bonds which effectively makes the returns negative.
The RBA has indicated that they will engage in yield curve control to suppress rates along the yield curve and start Quantitative Easing (QE) again. This announcement has slowed the appreciation of the AUD against the USD, as well as the recent budget announcements.
We continue to monitor global markets and macro-economic events closely. The best advice is to ensure you live well within your means and lowering your expectations of investment returns.
Our next article will be about the major macro and fiscal changes coming with central banks introducing digital currencies. On 15 October 2020, China was the first country to start trialling a Central Bank Digital Currency (CBDC) and in this last week, the IMF has called for a new Bretton Woods like agreement.
Newsletter 24: Global Economy Update
Prior to the end of the last financial year we undertook portfolio re-structuring. The driver being capital protection given the global economic uncertainty.
At the heart of this decision was reducing your exposure to equities. Of course in hindsight we recognise that this meant you have not fully ridden the recent stock market rally. A closer examination of the rally reveals that the increase in the S&P500 index has been driven by the FANG stocks, i.e. Amazon, Google, Netflix, Microsoft, Apple and Facebook whose Price Earnings ratios are at extraordinary levels. These companies make up 25% of the S&P 500 index up from 16% in March 2020, and their market capitalisation is greater than the whole German equities market. The rest of the stocks comprising the S&P 500 index have fallen over the same period.
For the first time ever in the week ending 18 September 2020, US derivatives markets (call options) was driving the equities (physical) markets. This shows that the equities markets are currently highly speculative.
The stock market boom has been driven by central bank activities, while at the same time Governments have been “bridging the income gap” through fiscal policy initiatives like Job Keeper. Despite this unemployment is still around 6.8% in Australia; whereas in the US there are 30 million folks out of work.
There are a few critical issues that are upmost in my mind:
- US Presidential elections
- US national debt and budget deficit
- Will there be inflation? And if so what steps should we take?
- China/US power struggle
US Presidential Elections
Regardless of whether Trump or Biden wins, it is likely that the Republicans will continue to control the Senate, unless there is a landslide to Biden. The Democrats shouldcontinue to control the House. With the divisive nature of US politics at the moment, it is unlikely that the national debt problem ($27 trillion and growing) will be addressed through increases in taxation. So the US Federal Reserve (Fed) is addressing this issue by inflating the value of the debt away.
US National Debt and Budget Deficit
When Trump took office in 2017, the US National Debt was just under $20 trillion. Today its nearly $27 trillion and growing, as further fiscal stimulus between $1 and $3 trillion is being considered by US Congress. The US National Debt/GDP ratio is now 136% and increasing. In 2000, it was 56% and 1984 it was 35%.
Comparatively, Australia’s National Debt as a percentage of GDP is about 50%, and also increasing as the budget deficit blows out.
The Trump tax cuts increased the US budget deficit to nearly $1 trillion in FY 2019 (ending 30 September) and it is expected to be around $4.5 trillion for FY 2020. With record unemployment, the US budget deficit is likely to increase further adding to the National Debt.
Who funds America’s lifestyle? China. See comments below on China reducing its holdings of US treasuries.
Will there be inflation?
Firstly, it is important to understand inflation. Everyone normally thinks of increases in the Consumer Price Index (CPI) as being inflation, where the CPI measures price increases of a basket of products. Inflation can also be created when money supply growth increases faster than economic growth. This is what central banks are trying to do at the moment.
The Fed has clearly stated that it wants inflation as the economic system is built around it; however through globalisation and technology we have seen deflation, i.e. your purchasing power is increasing, e.g. costs of laptop computers today versus 5 years ago in many products over the years.
So if the Fed wants inflation what does that mean for Australia? As the USD is the world’s reserve currency the US can export inflation and we are seeing this with the AUD appreciating in value against the USD. Since March the AUD/USD exchange rate has increased from 55 cents to 73 cents. The increase in value of the AUD means that imports are cheaper in AUD terms, and as yet we have not seen price inflation showing up in CPI or money supply figures. We do not anticipate wage push inflation because of the high unemployment rate.
At this stage we do not see inflation in the US being at 1970s levels. Rather with zero or near zero interest rates and based on the Fed statements we expect inflation (if they can achieve it) of 2% plus, although it is important to note that for 10 years now the Fed has trying to generate inflation, without success. This level of inflation is hard to identify as it is not readily apparent in price changes.
Importantly the RBA is the only major central bank in the world to rule out negative interest rates. The Bank of England on 18 September 2020 indicated again it was seriously examining this option. With negative real rates in Japan and the Eurozone, and the RBA holding out we see this as a positive (in the short term at least) for holding Australian Government Bonds even though there is yield curve control being practiced.
We understand that holding bonds when there is inflation is not a sound investment strategy. So rest assured if we start seeing increases in inflation coming through in official figures we will take steps to move out of bonds into stored value investments, including gold and other precious metals, inflation linked bonds, equities and property.
China/USA Power Struggle
History is repeating itself where an emerging power (China) is challenging the existing dominant power (US) in 3 areas. There is a trade war, intellectual property war and there is a geo-political war. Hopefully, there will not be a military war, although historically there is a strong possibility this could occur even though both parties have indicated they do not want one.
Nearly 45% of world trade is between China and the US. Full disengagement is not possible in the medium term and it certainly will be inflationary for the US to move supply chains back to the US or to other countries.
China is the second largest holder of US treasuries and they have said they will reduce their holding from USD1.3 trillion to $850 billion. This is China saying it will no longer fund the US “credit card”.
On the Geo-political front China/Russia/Iran who are all under US sanctions are teaming up to create their own trading bloc outside the US monetary system (SWIFT). China has made no secret of its long term desire for the Yuan to be one of the world reserve currencies. USD being the primary, then Euro and Yen. There are second tier reserve currencies being CHF, CAD and AUD. Importantly, China gets energy (oil) from Russia and Iran which are two of the world’s largest oil producers and it aids with its Belt and Road Initiative.
On a Geo-Political level, analysis shows that historically Iran has pivoted to the “west”, however US sanctions are pushing Iran to the “east” and in the long run this is not in America’s interests.
As usual if you wish to discuss this article or any other matter please feel free to reach out.
Newsletter 23: Portfolio Re-balance Update - ZYAU
As you will be aware this low interest rate and COVID-19 recession has seen income dry up. The cash rate is 0.25% and the RBA is engaging in yield curve control. International bonds are negative yielding and many companies have ended or reduced dividends. We spend a lot of time looking for income opportunities for you.
An ETF we have recommended over a number of years now is ZYAU. We did so because it paid dividends quarterly, it focussed on dividend yielding stocks and there was a high level of franking credits attached. It also re-balanced twice per year so that poor performers were dropped and replaced. Its performance had been generally solid and complementary to bonds which is how we position it in most portfolios.
COVID-19 recession has highlighted some weaknesses in ZYAU and it is pleasing to advise that the following 2 changes were recently introduced to the ZYAU ETF’s underlying index, i.e. S&P/ASX 300 Shareholder Yield Index. These changes will be applied to the ZYAU ETF from October 2020.
1. Monthly Dividend Review
S&P Dow Jones Indices (S&P DJI) will now review index constituents on a monthly basis. If S&P DJI determines an index constituent has (a) eliminated or suspended its dividend, (b) or omitted a payment in that month, it will be removed from the index effective prior to the open of the first business day of the following month and will not be replaced until the next reconstitution. The decision to remove an index constituent due to dividend elimination, suspension, or omission is based on information publicly announced by the company as of seven business days prior to month-end. The weightings of these deleted stocks will be redistributed among the existing constituents of the index. The Monthly Dividend Review rule is in effect as at 31 August 2020.
Following the implementation of the new Monthly Dividend Review, the index removed the below 5 stocks on 31 August 2020:
2. Constituent Weightings
Constituents are weighted by the product of their float-adjusted market capitalization and shareholder yield, now subject to a new single stock cap of 5%, revised down from a previous limit of 10%. Any excess weight is proportionally redistributed to all non-capped constituents. This rule will come into effect following ZYAU’s next balance on October 16th.
The above changes should strengthen ZYAU’s index for Australian yield, therefore ZYAU ETF could be in a better position to generate high income for investors.
If you have any questions please feel free to contact me.
Newsletter 22: Portfolio Re-balance Update
Recently we have re-structured your account to invest substantially in Australian Government and Investment Grade Bonds.
Australian Government bonds are AAA rated and the Investment Grade is BBB- and better. Global financial markets view Australia as having sound political and legal systems with a well-run economy (regardless of whether Labor/Liberal are in Government) and therefore the AUD is a safe haven currency, albeit commodity based.
The objective of this portfolio restructuring being to protect your capital. We foresaw 3 problem areas as follows:
- Uncertainty in corporate earnings, high unemployment (in Australia its around 10%) and globally GDP is forecast to fall in 2020/2021 and this could lead to falls in equity markets. Please click here to see diagram that shows the gap between S&P 500 price and earnings. It is recognised that the US Fed is doing what it can do to support financial markets by printing money and buying corporate debt. This is unprecedent and it has indicated it will continue these activities to support the markets.
- Negative yielding international bonds means you are paying to invest. This does not make sense.
- Falling (devaluing) USD produces currency losses on international investments depending on when and what the rate was when you purchased. We have seen a rise in the AUD against the USD from 0.55 cents to around 0.71cents over the last 4 months. So we determined it was best to realise any currency gain now before it is washed away. With all the money printing (Quantitative Easing by the US Fed) the AUD could easily go higher against the USD.
The sum of all these risks caused us to act. They will provide new opportunities in the future, e.g. if the AUD keeps rising in value and the US equity market corrects, then US equities will be cheap and many do represent a stored value.
State of the Economy
We are in a global “income” recession that has been triggered by Covid-19. Normally, recessions are triggered by a “credit crunch” as a result of an asset price bubble as part of a business cycle and central banks increase interest rates to “pop” the bubble. Once asset prices fall, interest rates are reduced and lending starts again as does the business cycle. This time interest rates were already near zero so the RBA could not reduce them any further. So the Government has stepped in to cover the loss in income by introducing Job Keeper and Job Seeker and along with action by the RBA this is also supporting the share market. Job Keeper now ends in March 2021, while the qualifying criteria has been tightened from October, which means the tap is slowly being turned off.
Investment Returns Impact
With low interest rates (cash rate is 0.25%) and corporates having cut or reduced dividends investment income is down, so adopting a capital protection strategy in a low interest environment where bonds are positively yielding makes sense.
Australian Government 30 Year Bond
The Australian Office of Financial Management (AOFM) has announced it is going to the market with 30 year bonds. The AOFM has not issued debt longer than 12 years since February 2020, and it is expected there will be strong demand for this paper. This is something we anticipated so hearing the announcement is pleasing as we see it as a positive for your investments in those bond funds, even though yields will be low they will likely be higher than 30 year US treasuries and other international bonds without the currency risk or hedge cost.
We trust this update provides some more context for the reasons why we recommended taking the portfolio re-structuring steps we did. If you wish to discuss please feel free to contact us.
Newsletter 21: Economic & Financial Impact of COVID-19
This calendar year I have communicated with you much more than in previous years because of the extraordinary times we are living in. I will recap on some important points I have previously made because as you know the news cycle can be counted in hours which creates noise rather than helps investors.
If you look back at 2019, the global economy and in particular the US economic growth was primarily driven by debt because of the Trump tax cuts. Real US GDP growth was about 0.25% because most of the income was going to paying interest on the national debt. US unemployment was at record lows and the stock market was booming although much of this was driven by share buy backs as result of the corporate tax cuts. Global interest rates were low and in the Eurozone and Japan there was negative yielding interest rates. Also, you may recall during 2019, the US 10 year Treasury yield curve on a number of times inverted (long term interest rates are lower than short term interest rates) which is a historical signal of a recession is coming. Normally, long term interest rates are higher than short term rates because investors must be compensated for tying their money up for longer periods of time. Next time you are looking at a Term Deposit Rate you will see that the 1 month rate is less than the 6 month rate.
COVID-19 – Government Induced Recession
Even though Governments around the globe triggered the recession, as 2019 revisited shows the global economies were not travelling so well as it was a debt fuelled economic boom, so COVID-19 was the “straw that broke the camel’s back”.
Equity markets have re-bounded quickly led by the US from the March crash despite the massive unemployment which is being partially offset by fiscal policy, e.g. Job Keeper and Job Seeker. Governments are trying to bridge the gap between the natural capital investment by business and consumer consumption demand for goods and services. At the same time Central Banks, e.g. RBA and importantly the US Federal Reserve has been actively using monetary policy, e.g. printing money to support the markets. The steps they have taken have been unprecedented and have contributed to the bullish equity markets.
It is likely that aggregate demand for discretionary spending, e.g. overseas holidays will take some time to come back and once Job Keeper and Job Seeker stop, as they are masking the real impacts of the downturn. Of course, there are some folks that have kept their jobs, so they have not been impacted by COVID-19. In fact, they are better off as they are saving money because they are not paying bus, rail fares and are not driving as much so are using less petrol and incurring fewer tolls. They are not buying lunches or eating out as much or going out as they are working from home. So overall they are financially better off. Even some folks on Job Keeper are better off as they are earning more than when they work.
The flip side is there are some folks whose jobs are gone forever and they will need to re-skill and have become part of the long term unemployed.
Wall Street and Main Street
It is often said that Wall Street (or the stock market) bears no relationship to what happens in the real world (Main Street), and now is a time when this saying appears to be so true. This is in part because equity markets trade on future earnings 6-18 months away, i.e. what they see the world economy will look like and the earnings of companies then. Whereas, Main Street is about today and the pain and suffering folks are currently living through. Of course, Wall Street can get it wrong, because if the pain and suffering continues for a lot longer than expected then equity markets will adjust downwards.
Macro and Geo-Political Considerations
The US trade dispute with China is the most important Geo-political matter occurring at the moment. It impacts all economies, including Australia and to suggest that a country with a population of 1.4billion can be contained is ridiculous. Brexit is a side show.
US Debt - Sovereign Risk
The US is facing a sovereign debt crisis as their debt situation has deteriorated. National liabilities are about $23trillion (not billions) with assets of $5trillion. There is $100trillion in off balance sheet liabilities (promises) and then each state is either bankrupt or close to it and will be bailed out in the next package to pass Congress. There is also the unfunded pension liabilities for firefighters, etc. in the many billions of dollars. Not included in the above debt figures is personal debt which is also very high. Personal debt levels are also high, crossing over credit cards, mortgages and student debt.
All of these debts (excluding personal) are serviced by the national income (budget), but this is in a deficit of $1.4trillion and increasing. National income is adding to the National debt, not reducing it which is what it should be doing. America is broke and can’t service its debt. The US Federal Reserve cannot increase interest rates as it will make the servicing of the debt situation worse and it could cause the stock market to crash. Therefore, the debt will be serviced by printing money until the rest of the world says no more and we are starting to see this with the USD depreciating.
World Reserve Currency
There is no natural successor to the USD as the world’s reserve currency, as 60-70% of world trade and capital movement are in USD, despite the Chinese making no secret of their desires for the Renminbi to take up the mantle. Equally, calls to go back to the Gold standard do not represent progress and a more likely longer term outcome is there will be 2-3 reserve currencies or a weighted index. It is only 50 years since the Bretton Woods Agreement ended when the US Government defaulted bringing the Gold Standard to an end. It is likely with the rise of China and the coming of India this approaching a new world order will bring a new form of monetary system.
Rise in AUD
We have seen a rise in the AUD against the USD because of all this money printing by the US Fed more so than demand for commodity prices. This trend is likely to continue. In time this will make international equities cheaper.
Trends - Digitalisation, Unemployment and Coastal/Country Properties
As to the immediate future there are risks of a second wave of COVID-19 forcing a second lock down in some countries while others may choose to ignore the risks and continue to open up. Because of these different approaches international travel will be limited and companies will use the opportunity to restructure with middle management likely to lose their jobs and corporations will embrace digitisation. The demand for office space will reduce as working from home will become the norm and more folks will move to country/coastal areas as telecommuting works. Interest rates will remain low for the foreseeable future so mortgagees should look for better deals (speak to us) and for investors there are yield opportunities that we are pursuing.
In the longer term asset diversification including exposure to China/India as well as the US is important as the new world order unfolds.
If you wish to discuss the above or your circumstances, please feel free to contact us.
Newsletter 20: Economic Impact of COVID-19
The human cost of the forced shut down by the coronavirus is immense. Unemployment is predicted to reach 10% and many folks businesses and jobs are gone forever. I’m sure we all know someone who has been affected. Pleasingly, there are positives notably the manner that communities have come together around the world. We have seen film clips of people singing on balconies, driveway ANZAC services and clapping in thanks for the health workers. Dolphins have been seen in the canals of Venice as well as cleaner air due to less traffic.
So what is happening on the economic front? Of course no one can predict the future, although some elements are reasonably apparent. There will be price deflation of products and services because demand has dried up. People worried about their jobs will save and limit their discretionary spending, e.g. the new car purchase will be put on hold for 12 months or so. Even when international travel opens up folks concerned about the health risk will likely stay at home preferring a less risky local holiday.
Equity markets appear to have recovered; however this may be a false dawn. Companies are unable to forecast future earnings which is used in the calculation of Price Earnings ratio. As you may be aware stock markets trade on future (9-18 months) PE ratios. So if the “E” in PE is not known, how can the market continue to trade as these levels? This is why I say it may be a false dawn.
It is important to understand that central banks and governments across the globe have co-ordinated their fiscal and monetary responses. In particular, the US Federal Reserve has taken extraordinary and unheard of steps to ensure that debt and equity markets remain open.
If you are a younger client then it is important to ride it out as it is time in the market and not trying to time the market that matters. You only know 6 months in hindsight when the bottom occurred.
For clients approaching retirement or that have retired, we believe the strategies we have put in place will limit the downside impacts.
If you wish to discuss the above or your circumstances, please feel free to contact us.
Newsletter 19: Global Market Correction
As you will be aware global markets have been correcting. The message I wish to pass on is not to panic and sell. If you sell any unrealised loss will be crystallised. At the moment, if you have a loss then it is a “paper loss”.
In reviewing your portfolio I observe your overall returns have significantly decreased as your unrealised profits have been reduced. Most of you have bonds (a capital protection product) in your portfolio and these are a hedge against equities.
The next point I wish to make is that now that the market has come back when you are buying you are doing so at lower prices. This is called dollar averaging down and is a normal element of a regular investment plan. It is important to continue to invest and receive the benefits of compounding and regular investing.
The coronavirus will have an economic impact and the Federal Government is preparing a stimulus package in an attempt to counter it. The RBA stepped in first reducing the cash rate to 0.50% this means term deposit and deposit account returns will be less than inflation (about 1.5%) which means your real returns will be negative (0.50%-1.50% = 1.00%). This means that holding large amounts of cash over the long term is not a sensible investment strategy
Finally, when the “herd is fearful it is the time to be fearless”.
If you wish to discuss, please feel free to call.
Newsletter 18: 2020 and Beyond
Happy New Year and the WealthMaker team wish you are very successful 2020.
As you will be aware we spend a lot of time considering global macro-economic and geo-political factors and what those mean to investing. This newsletter is longer than normal because we see a lot of factors in play and its important to provide some explanation and context.
Geo-political and global economic environment
Global interest rates are very low (money is free or as Ray Dalio of Bridgewater recently said “cash is trash”) and central banks are boxed in. They can’t significantly increase rates to historical normalised levels or decrease rates as they are close to zero or in some cases negative (after adjusting for inflation). So for the foreseeable future rates will remain low. The Price Earnings Ratio on the S&P 500 index is around 19 which is historically expensive, but not so when viewed on a discounted cash flow basis against the 10 year US treasury. Does that mean that equity markets may go higher? Possibly, if the US economy continues to perform and business confidence remains high and Trump’s proposed tax cuts 2.0. Interestingly, historical analysis shows that after a high performing return year, the S&P 500 index the following year does well again.
China and US have signed a phase 1 trade deal which I believe Trump needed more than China, as it is a Presidential election year. The announcement came with a lot of hype and without substance, as tariffs remain in place while the Chinese have committed to possibly increasing their purchases of US farm product in 2 years’ time. Simply, no change in the current situation where the average tariff on imported Chinese goods continues to be 20% when before the trade war it was 3%. Furthermore, the World Trade Organisation now has no dispute resolution process because Trump has refused to appoint a new US representative.
The Middle East and in particular the tension between Iran and the US could lead to a formally declared military war which is the last step in their current undeclared cyber/economic and proxy wars. The US will need to determine whether it really wants to be in the Middle East, as Arab/Persian countries have found a rallying point in asking the US to leave the Middle East.
In the short term the British economy will be negatively impacted by BREXIT, as the EU have made it very clear they will not allow Britain to be “half pregnant” in regards to leaving. Fortunately, for the UK, they never joined the monetary union, so the pound can adjust (devalue/revalue) as required, although with most countries wanting lower value currencies this may be easier said than done. This is particularly so for the UK because of the of QE program being undertaken by the European Central Bank.
US and global economy
Trump needs the US economy to be booming to improve his re-election prospects. It is important to remember that the US and China combined make up about 35% of world GDP and there is a global economic shift to Asia (including India) happening. For example, about 25 years ago the Chinese per capita income was about USD300 per annum, it is now around USD11,000. The same trend is occurring across Asia and notably India. As we all understand this transition will take a number of years to play out.
Trump has indicated that they are working on tax cuts 2.0 which are focussed on the middle class. These will also improve his chances of re-election although the great wealth divide in the US may produce a surprise Democratic candidate, and this time some swing voters will not be voting against Hillary Clinton, as they did in 2016.
The US budget deficit is increasing and is now running at about USD1 trillion per annum (or 4.7% of GDP which is double its historical average 2.9%) and on an accumulated basis about USD23 trillion. The growth in US national debt is significantly greater than growth in nominal GDP. If the US Government (fiscal stimulus) and US Federal Reserve were not expanding US national debt there would be negative nominal GDP. The US Secretary of the Treasury, Steve Mnuchin says that he believes that the US economy will grow to fund the debt (and tax cuts V2.0) and that they are looking at launching a 20 year bond as part of this exercise. The question is will the rest of the world notably China, Arab countries and Japan continue to support the US deficit at the same time that the US Federal Reserve adopts policies to fund it that could impact on the value of their holdings?
So where is the bubble?
Sovereign debt where central banks are undertaking quantitative easing and government debt is negative yielding (Eurozone and Japan). Why would you buy a negative yielding asset? It may take 10 years to fully understand the implications of QE which has been going on for over 10 years.
In September 2019, the US Federal Reserve was forced to intervene in the US repo market (overnight interbank deposit/lending market) as there was a liquidity event as arguably the market participants no longer accept the US Federal Reserve interest rate settings. The intervention has resulted in an expansion of the Fed’s balance sheet back to near end of QE levels. Does this mean that interest rates must rise? (see point above on foreign investors continuing to support US debt).
With the high levels of US corporate and OECD sovereign debt there must be a pick-up in global growth, as secular dis-inflation forces will more than compensate cyclical inflation forces. The yield curve continues to switch between normal, flat and inversion. Arguably it would be inverted, if it was not for activities of the US Federal Reserve. An inverted yield curve is an indicator of a future recession.
The Impeachment trial appears to be going down party political lines, so Trump at this point in time appears very unlikely to be removed from office. This matter will likely haunt Trump and the Republican Party for many years as evidence will leak out blotting their legacies.
As outlined on many occasions we see Australia as a yield play with growth coming from overseas markets and themes, as our investment approach is macro economically based. We will continue to diversify across asset classes and economies while identifying themes, e.g. robotics, cyber security, etc. that reflect structural economic changes.
If you wish to discuss the above or any other matters, please feel free to call us at +61-2-9233-1111.
All the best for 2020!
Newsletter 17: Superannuation Top Performers
WealthMaker is No 1 again delivering a return of 19.4% which we benchmarked against
Chant West Top 10 performing superannuation funds as at 31 December 2019.
It can also be seen that our Balanced fund returned 14.8% which was better than the median return of 14.7% for Growth Funds as determined by Chant West.
Our performance reflects our investment philosophy which flows through into our asset allocation and that it is returns after fees that matter. The challenge will be to do it again in 2020.
We thank you for your support and trust!
Newsletter 16: US Economy is Booming
Last week the Dow Jones broke through the 28,000 mark for the first time. Similarly, the S&P 500 index is now at the 3,100 level with talk of it reaching 3,200 by Christmas.
From my previous visits to the US it is apparent the US economy is booming with the usual tell tail signs of strong business activity, e.g. cranes across skylines, lots of home building and restaurants full on Monday and Tuesday nights, not just the back end week and weekend nights. Despite this, only 2 months ago many commentators were predicting a recession shortly with a major equity market correction.
The US Presidential election cycle is in full swing with less than 12 months to go. For Trump to be re-elected the economy must be going well and this is why he is pressurising the US Federal Reserve to lower them again and he also wants a trade deal with China that will help drive growth through increasing exports. The Chinese may be happy to wait until after the election and possibly deal with a new President.
US fund managers are yield (income) hungry and some of the fixed income managers we have been speaking with advise that this calendar year returns may be very low or negative. One reputable manager with more than 20 years fixed income experience advised that this calendar year returns will likely be negative. This is only the 2nd time in their history of negative returns.
Our investment strategy that Australia is a yield play and growth comes from the international equity markets and themes, e.g. Robotics, Battery, Cybersecurity, etc. continues to prove to be the right play.
Newsletter 15: Market Downturn - Don't Panic
As you will have read there are many factors, e.g. China/US trade war, BREXIT, etc. contributing to the global equity market correction. My simple message is not to sell and to ride out the volatility. By selling you are crystallizing a loss.
For our older clients you will be aware that we have been increasing your exposure to Australian bonds to protect capital while continuing to generate an income stream. We are limiting exposures to international bonds because of the negative yield.
For our younger clients its all about riding the “ups and downs”. The correction means that you will be dollar averaging down and in time when the market returns you will have been buying at a lower level. This also applies to our Aspire mortgage clients, and all should remember that the historical dividend yield on the ASX 300 index is about 4% per annum. Although it is important to recognise that past performance is not an indicator of future returns.
If you have any questions or concerns about your portfolio please feel free to contact us.
Newsletter 14: The Cause of the Next Economic Crisis - Central Bankers
The media is full of predictions of a recession in 12 months’ time. No-one knows of course when and if it will happen, although as night follows day it is likely there will be a downturn at some point. Globally we have entered a new world where the price of money is basically free while there is a cost for holding cash. So what behaviours is this combination driving. All those that can borrow will do so; whereas some of those with cash may seek riskier investments in seeking income (yield) and driving up asset prices rather than being penalised for holding cash. Those staying in cash will reduce their investment in new ventures and expenditure due to a lack of confidence in the economy.
Unless central banks reverse course there will be a solvency crisis (loss in confidence) in those borrowers (governments, corporates and individuals) that cannot (real or perceived) service their debt. Central Banks may be able to create liquidity; however they have no control over solvency.
The Global Financial Crisis (GFC) required aggressive global fiscal and monetary policy with significant government and central bank intervention, as there was a real threat of a global melt down. In Australia, the Federal Government created fiscal stimulus with a major spending package that was broken down into 33% (cash handouts), 33% (short term projects) and 33% (infrastructure projects) and it guaranteed bank deposits while allowing banks to use its AAA credit rating when accessing the debt capital markets. The RBA played its part by cutting interest rates. It worked, as Australia did not go into a recession.
It was apparent that by 2014/2015 these and similar policies had worked and most governments and central banks took steps to return to more traditional policy settings. By the start of 2019 the US Federal Reserve had reduced its balance sheet through Quantitative Tightening (QT) from $4.5 trillion to about $3.5 trillion and had increased interest rates as they wished to return them to more normalised levels. The US budget deficit was trending down.
Although US GDP growth was weaker in 2016 at 1.6%, compared to 2.6% and 2.4% in 2015 and 2004 respectively, it was not a dire situation. Despite this, in 2017/18, the US Government reversed course and implemented policies to further stimulate their economy increasing the budget deficit. Specifically, US Congress passed tax cuts and increased government expenditure and more recently the US Federal Reserve reduced interest rates.
Current key US economic indicators reveal the US Federal Budget deficit is USD1 trillion and increasing while its accumulated national debt is USD22 trillion all of which must be funded while interest rates (US10 year treasury is 1.56% on 23 August 2019) and unemployment is 3.7% (July 2019) are at record lows. There is talk that the US Federal Reserve may introduce 100 year bond (as have some other countries) and it appears that it will start Quantitative Easing (QE) again, re-joining the Europeans and Japanese that have been doing it for years now. The Eurozone and Japan interest rates (after inflation) are zero or negative, economic growth is sluggish and there is uncertainty over BREXIT. One important consequence of the US/China trade war is that China is no longer the major buyer of US treasuries which is something we predicted. In the immediate term, the trade war could create significant economic disruption. A not so obvious implications of the trade war is the changing world trade flows as both countries seek new markets, as to whether this is a long term outcome, only time will tell. The US consumer will be the loser.
The Japanese Budget deficit is now 3.8% of GDP, up from 3.7% in 2018 and GDP growth at 0.8%. The Eurozone GDP growth is estimated to be 1.4% in 2019 down from 2.0% in 2018. This is partially explained by BREXIT.
In summary, there was no threat of a global melt down in the same way there was in 2007/08 when central banks (notably the US Federal Reserve) changed course. Unless central banks reverse course there will be a solvency crisis (loss in confidence) in those borrowers (governments, corporates and individuals) that cannot (real or perceived) service their debt. Central Banks may be able to create liquidity; however they have no control over solvency. It’s their baby although the average punter will wear it!
Newsletter 13: Investment Returns for Financial Year Ending 30 June 2019
Welcome to the new Financial Year! We are very pleased to share our investment returns for Financial Year Ending 30 June 2019. We have compared 3 portfolios of Balanced, Growth and High Growth against Australian Super and for each category our returns were significantly better as it can be seen below.
Of course many of you have different risk profiles and are adopting different strategies, however we consistently apply our investment strategy of Australia providing income (dividends and/or attached franking credits and bond coupons) and growth coming from the international markets and themes, e.g. Robotics.
If you have any family or friends that are concerned about their superannuation or if you have any questions, please feel free to contact us.
PS - Please remember past performance is not an indicator of future returns.
Newsletter 12: Hegemony Reality - USA v China
Historically, bond and equity markets have moved in opposite directions although in the long run there is strong correlation in returns. Recently, we are seeing a new phenomena where bond yields have fallen and so have the value of equities. So what appears to be driving this? Of course there is no single factor, but a range, including the US Federal Reserve Quantitative Tightening (QT) where its balance sheet has shrunk from $4.5 trillion to around $3.5 trillion, the US budget deficit is now $1 trillion and this needs to be funded, nervousness about future economic growth, as bad times generally follow good ones.
The US economy has benefited from the Trump tax cuts, unemployment is very low and money is cheap. This year the US 10 year treasury continues to fall and is now 2.24% and the inversion with the 3 month and 2 year treasuries continues to swing between normal/flat and inverse.
Over the last few weeks it has become apparent from actions taken by the US and Chinese Governments that the dispute is much more than a free trade and intellectual property ownership battle. President Trump’s executive order barring Chinese technology companies accessing the US market reveals this is a power struggle over “the mechanisms used to control access to data” which is part of the broader battle between Democracy based Capitalism v Communism controlled Capitalism, and between these two super powers exerting hegemonic influence across the global.
Previously, the consensus was that a trade deal would be reached and the world would move on; however this battle has morphed into this high level order matter, so it will take some time to play out. This dispute has significantly impacted on the value of Asian equities and theme based investing, e.g. Robotics, although in time valuations must return as Asia is the fastest growing region of the world with the majority of the world’s population, if you include India living in the Asian region. BREXIT has already been well factored into valuations a long time ago even though BREXIT is a debacle.
China’s annexing the Spratly islands and building a military base is an example of these super powers confronting each other militarily, while the Chinese ‘Belt and Road’ initiative is another aimed at extending its influence. Foreign Government’s central banks buying and holding Chinese bonds and the inclusion of Chinese A class shares in key global indices are further examples of China’s economic integration and growing influence. The Chinese see its currency, the Renminbi, as being a world reserve currency.
If recent Australian economic data continues on the current trend, e.g. increasing unemployment and zero CPI, along with the US/China trade war that will flow through to Australia, then after 28 years the Australian economy may be heading for a downturn, particularly if the rest of the world does. Interestingly, tariff increases in the US which imports a lot more of Chinese goods than China does of US goods may lead to price driven inflation in the US, and as the USD is the world reserve currency any inflationary pressures will be exported to countries like Australia, increasing the downward pressure on the AUD. As we all know a lower AUD makes exports cheaper while simultaneously driving up the costs of imports and making overseas holidays more expensive.
As China continues to grow economically and militarily, the global hegemonic battle with the USA has become a reality rather than a theoretical matter.
Newsletter 11: Australian Federal Election
As the Federal election is 2 weeks away I thought it important to make a few comments, not about the policies of Liberal/Nationals/Labor/Greens/One Nation etc. or who I think will win, but rather using history and facts, add some calm to the election noise.
Firstly, it is well documented that Australia has not had a recession in 28 years and during that time both the Liberal/National Coalition and Labor have been in Government. Both parties during this period have concentrated on micro-economic reforms because the major macro-economic reforms, e.g. floating of the Australian dollar, independence of the Reserve Bank and targeting of inflation in the 2-3% band, de-regulation of the financial services industry, etc. were implemented in the previous decade. As a consequence of these macro-economic reforms Australia is integrated into the global economy and our economic fortune will in a significant part be dictated by events overseas.
The second point is that both parties support a progressive taxation system which means they both use fiscal policy as a wealth re-distribution tool, and they support handouts in the form of grants and subsidies, as well as universal health care.
As we all know change is inevitable and some policies of both parties will be dumped and amended after the election. Regardless of which party wins then it is highly likely they will not have a majority in the Senate, so compromise will be necessary for legislation to be passed. Compromise is the hallmark of democracy and it has served Australia well since federation. This leads to my final point.
I urge all to exercise your right to vote as you are lucky to live in a “Full” democracy which is a rare and wonderful thing. If you go to the Democracy Index published by Economist Intelligence Unit or the Wikipedia website you will see that Australia is ranked 9th in the world and that there are only 20 “Full” democracies. USA is 25th and is scored as a “Flawed” democracy and there are 53 countries scored “Authoritarian”, including China which is our largest trading partner.
Finally, the world will not end if your party does not win. The sun will rise on the morning of Sunday 19 May 2019!
Newsletter 10: US Federal Reserve - Interest Rates & Financial Crisis
I recently attended an event in the US where the former Chairperson of the US Federal Reserve (Fed), Ms Janet Yellen spoke. As one of the architects of the Quantitative Easing (QE) program after the Global Financial Crisis (GFC), then being responsible for starting the Quantitative Tightening (QT) program, her comments are important and reflect current Fed monetary policy.
When the GFC occurred in 2007/08, the Fed’s balance sheet was USD1 trillion. The QE program expanded the balance sheet to USD4.5 trillion, as the Fed purchased all types of loans, including Mortgage Backed Securities (MBS) where historically the Fed through open market operations only acquired US Treasuries. QE combined with lower official interest rates devalued the USD and distorted the yield curves disrupting debt capital markets. It also allowed banks to repair their balance sheets without necessarily raising equity capital.
With QT, the aim is to reduce the Fed’s balance sheet down to USD3.5 trillion, not USD1 trillion (pre-GFC levels). So far the balance sheet has been shrunk by USD500 billion which means there is only USD500 billion to go. Chairperson Yellen stressed that the intention is to maintain a large balance sheet and that the Fed was not in any rush or feels any pressure to reduce it at a faster rate, and equally, the Fed would progressively increase interest rates depending on economic conditions.
So what does this mean for investing – Rates will continue to rise over time., if economic conditions allow, e.g. low unemployment and inflation, as well as strong consumer demand. So keep your eye on the 10 year US Treasury interest rate as many products are priced off this rate. Prior to Christmas it was around 3.2%, now its back at 2.8% range. This compares with the historical yield on the S&P 500 index of 2.15%.
In response to questions regarding another financial crisis Chairperson Yellen outlined that no-one could guarantee another would not happen; however she outlined the significant steps that have been taken to mitigate the impacts. These steps included:
- Requiring all banks to hold more capital
- The capital being held is of better quality
- Banks are required to hold more liquidity
- Major banks must stress test
- Better regulations
- Large investment banks are now part of Federal Depository Banks
- Reforms to shadow banking and derivatives clearing
- Dodd Frank Act.
I trust the above is helpful, and as usual if you have any questions please feel free to contact us.
Newsletter 9: Superannuation Top Performers
Chant West has released its superannuation performance figures as at 31 December 2018. We benchmarked our funds against the equivalent funds as shown in the tables below. It is important to note that many of these funds invest in unlisted investments so the valuations are based on assumptions, ours are not.
- Scored 5th in the 5 year returns for its High Growth with 7.9%
- Scored 19th in the 5 year returns for its Growth with 7.2%
- Scored 28th in the 1 year returns for its Growth with 0.91%.
Newsletter 8: US Planning for Poverty
There is an old saying that commentators use to say “if the American economy catches a cold, then Australia gets the flu”. As China is now our largest export destination and along with Japan and Korea who are also major trading partners this saying is no longer true; however the US economy still makes up about 23% of the world GDP, so it is important to monitor US economic statistics. US inflation is low, wage growth minimal, unemployment at very low levels and although there is a trade war going on between the US and China, in time this will be resolved as its in both countries interest to do so. The current US corporate earnings season so far has revealed that the majority of companies are reporting earnings above forecast, and this is reflected in the partial recovery in the S&P 500 index since Christmas.
It does appear that US property prices have peaked. The US National Association of Realtors reported that in December, US existing-home sales (number not dollar amount) fell to 4.99 million, which is 10.3% below the equivalent period in 2017. Home sales dropped in every month in 2018, except February with the trend increasing in the final quarter of the year.
The US Federal Reserve’s, Credit Access Survey in October reported that mortgage applications fell to 6.7% from 9.2% over the previous year and the portion of respondents that experienced a mortgage application rejection increased to 19%. This trend is occurring in Australia because of tightening of bank lending standards and RBA monetary policy.
Consistent with these statistics at Wells Fargo, mortgage-banking income fell by 50%, to USD467 million, in the fourth quarter, while originations declined by 28%, to USD38 billion. JP Morgan suffered the same fate, as its mortgage income fell to USD203 million, a 46% drop from the same period last year while their originations fell by 30%, to USD17.2 billion.
At the same time as this decline, the fastest growing investment area in the US is REITs (Real Estate Investment Trusts) for Multi-Family Residences (US definition of an apartment block being built or renovated for rental purposes). At the Alternative Investment conference in Vegas in November 2018 it was reported that this area has grown by 2,900% over the previous 5 years.
Key statistics assist in understanding the growth in this sector:
- 9 million Americans lost their homes from foreclosure following the Global Financial Crisis. Most of these Americans have become permanent renters locked out of the home ownership market and joined the 19 million Americans that sold before foreclosure and many of whom also joined the rental market.
- US home ownership is at a 50 year low of 62% with 119 million Americans living in apartments. As in Australia, property price growth has out stripped wage growth meaning that millennials and the lower socio-economic demographics (Hispanics and African American) cannot save the required deposit.
- The median age of renters is 40 with an income of USD37,300 per annum and rental households are forecast to grow by 500,000 per annum from now to 2025.
- There is a demand/supply imbalance even though an estimated 225,000 new units are delivered annually. At the same time 11.7million units need refurbishment.
So what does the above tell us? Firstly, the residential real estate sector is being driven by investors which from an economic growth perspective is more than compensating for fall in owner occupier activity. With interest rates forecast to rise further, it is likely the Federal Reserve will move very slowly, if at all in 2019 as US Government policy is to encourage and support home ownership. At a socio-economic level, the significant increase in investor activity in the multi-residence sector shows that America is planning for poverty. The American home ownership dream is alive and well, although the reality is that the US is becoming a nation of renters.
Newsletter 7: Merry Christmas and Happy New Year - Reflection 2018 and Beyond
We are well into December and our thoughts are on having happy and safe holidays over the Christmas and New Year break.
It is also a time to reflect on 2018, which of course may include considering our wealth creation and management strategies. Recently, volatility in financial markets has returned for a whole host of reasons from US/China trade battles, BREXIT, US sanctions on Iran and Russia, US interest rates, etc.
The yield curve has inverted again which historically is an indicator of a recession in 12-18 months’ time, while many market analysts are wondering how corporations will increase earnings in the next 12 months. Of course those that have read Ray Dalio, in which he speaks frequently on the convergence of “debt” cycles (which run for 75 years plus) with “business” cycles (which are for 7-10 years) and given the level of leverage of central banks and the US Budget deficit being $1trillion dollars, there is good reason to think about a recession in 2020 or beyond.
Against this back drop is that the four largest economies in the world, US, China, India and Eurozone continue to grow with low levels of inflation (except India) and unemployment (US) particularly in the technology areas of robotics and AI. The costs of production continue to fall and with technologies such as 3D printing will mean that manufacturing in the future will become local again, as transportation costs will make offshoring uncompetitive. Half the world is now on the internet and it is expected that in another 10 years that 95% will be, so global growth will continue. It is important to remember that in the last 30 years India and China’s middle class has each grown to 300-400 million of their respective populations of 1.3billion and 1.4billion. With similar trends occurring in Indonesia, Nigeria, Brazil, etc. it should see the global demand for energy, goods and services increase.
The key point I wish to make is that economic times are always uncertain and historically that has always been the case. The difference is the rate of change has increased and this is exciting; however for many it is disconcerting.
Strategies for minimising the effects of a major crisis include increasing exposure to bonds and holding more cash. Another is to dollar averaging down on existing investments so as to reduce your cost base. Another benefit of this strategy is that historically yields on equities remain constant even in periods of economic downtimes. A further consideration may be to diversify and invest in themes, e.g. battery, infrastructure, bio tech, robotics and AI with an eye for the future.
I remind you our investment strategy is that investing in Australia is all about yield (income) as the growth will come from international markets overlayed with theme based investing. Consistent with our objective of achieving income and growth it is pleasing to report that the one of our key US products – ETFS High Yield Low Volatility ETF (ZYUS) since the market correction has outperformed, (i.e. not fallen as much) the S&P 500 index by 7.6% since 28 September 2018.
If you have any questions please feel free to reach out.
Our office will be closed from 21 December to 7 January 2019.
We wish you a wonderful Christmas and safe and fun New Year!
Newsletter 6: Market Volatility
The stock markets around the world have been correcting and as usual the US markets are providing the lead. The US reporting season is nearly over and it is important to note that 88% of companies making up the S&P 500 index reported earnings growth as the US economy is booming (I was recently in the US), and I cannot see any reason for panic. Equity markets trade on future earnings and there is concern that earnings growth of previous years will not occur in 2019, and when combined with the US Federal Reserve increasing interest rates to more normalised levels institutional investors are being cautious, and the key rates, notably the US 10 year treasury has increased accordingly. The US mortgage market is priced off this benchmark and company valuations as well. A pull back has been anticipated and the increase in volatility reflects this.
If interest rates continue to rise, as anticipated, thereby increasing yields on bonds, then having greater exposure to bonds makes sense. It is a time to sit and watch while taking advantage of buying opportunities in asset classes that have been over-sold.
Travelling around the US, there is a boom happening. In Salt Lake City, Dallas, Frisco, Plano, McKinney, Phoenix and Scottsdale there is a huge housing boom, as well as infrastructure projects, freeways and roads. Salt Lake City airport is doubling in size.
In conclusion, it is important to take a long term view, and the correction will mean buying opportunities while it is important to remember in the long run volatility is smoothed.
If you wish to discuss please feel free to contact me.
Newsletter 5: Why did the market crash and then re-bound?
Thank you all for the very positive feedback on my last email regarding the major stock market correction. As you will be aware financial markets have re-bounded recovering some, but not all the ground it lost. I thought I should provide my understanding of what has happened.
Firstly and most importantly we are all aware that interest rates have been very low (below historical levels) across the globe. In some countries real interest rates (after adjusting for inflation) have been negative. This situation of very low and negative real interest rates has been a deliberate policy of governments and central banks of the major economies (USA, Japan, Euro zone and UK) to counter the impacts of the Global Financial Crisis (GFC). Many of you may say that was 10 years ago and you are correct, but the effects are still impacting us today, albeit as time goes on less so. However, there are new challenges emerging that must be addressed by governments, notably government budget deficits, lack of growth in real wages (in Australia real wages are growing in the public sector and are falling in the private sector) and potential trade wars. Just before President Trump flew to Davos he imposed a 30% tariff of Chinese solar panels.
With very low interest rates there has been an asset boom (property prices and equity markets) have increased, as the cost of money is cheap. Central Banks and governments want to increase interest rates so they return to more “normalised” levels without impacting on the economy. This is a delicate balancing act.
The Dow Jones major correction started because there was good news about employment growth in the US. Why? Because financial markets saw the US economy overheating meaning interest rates would increase faster than anticipated, so investors decided to sell. 10 year US treasuries traded close to 3% (up from 2.5%) for the first time in many years. This is an important benchmark as US mortgage rates are priced on 10 year US treasuries.
Most of the trading on stock exchanges around the world is now driven by “algorithmic traders” (code words for computers) where sell and buy orders are automatically triggered by percentage movements in the market. So when a downward movement reaches a trigger point, then a sell order automatically happens and this then drives the markets lower which could trigger more sell orders. If you think about this at a macro level where there are many algorithmic traders all operating with the same or close trigger points, then the downward spiral become self-fulfilling. This is what happened. The few days since investors have taken a deep breath and looked at the economic fundamentals of economies and companies and came to the view that they had overreacted. This is not to say that the market will continue going up, but more likely trade side-ways (directionally neither up or down) for a while as investors wait for more economic news and corporate earnings before determining their next step.
So what’s next? Financial markets may be more volatile than they have been in recent years. It is therefore important not to panic and sell as this is when a loss is realised. It is important to accept the volatility and adopt a consistent and regular approach to investing. This approach means that you should accrue the benefits of dollar cost averaging (buying on the ups and downs) and should in the long run deliver returns.
If you wish to discuss please feel free to contact me.
Newsletter 4: Financial Market Correction
As you may be aware the US stock market has fallen over the last few days and consistent with previous corrections it has flowed across the world, including Australia. It is important not to panic as any potential losses are not realised unless you sell. Historically, the market will eventually recover to pre-correction levels. See Vanguard chart (Click Here) and look at the 1987, 2000/01 and 2007/08 corrections and you will see the recovery. Once the market stabilises it will be a good time to buy at lower prices. This means that you have dollar averaged your portfolio buying price and you are positioning yourself for the recovery.
The key point is that we wish to re-assure you and not to panic and remind you that financial markets are more transparent in terms of current pricing (value), unlike the property market where you only really know the value of a property on the day its sold.
If you wish to discuss, please feel free to contact me.
PS – It will be interesting to see if President Trump claims the credit for the market correction in the same way he has been saying he was responsible for its increase (rally).
Newsletter 3: Good Returns Equals Happy Customers
Successful investing is a medium to long term strategy!
The last five year returns for our Simple Managed Index Funds as at 30 June, 2017 is shown in the diagram below.
Newsletter 2: Good Returns Equals Happy Customers
The last one year returns for our Structured Portfolios as at 31 March, 2017 is shown in the diagram below.
Newsletter 1: This is how you spend your Life
The table below shows how you spend your Life.
This analysis was undertaken by WealthMaker and is used in helping its clients.
Warning: Any advice or information provided is general advice only, and has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any General Advice provided, you should consider the appropriateness of the advice, having regard to your own objectives, financial situation and needs. If you wish to discuss the contents on this page, please do not hesitate to contact us.