Changing Times – from the fall of the Berlin Wall to Trump

Investors need to be cognisant of significant geopolitical changes as these can undoubtedly influence investment markets. I’m of the opinion that the increasing economic liberalism and globalisation – the integration of economies worldwide – that gained impetus after the break-up of the Soviet empire at the end of the 1980’s and more so when China entered the World Trade Organisation in 2001 has probably ended.

Greater nationalism has taken hold in parts of Europe, such as the UK and France, and in the US under Trump. Many people in the US and Europe feel, correctly, that globalisation has not benefited them and that as well as increased economic uncertainty there has been a loss of their sense of cultural identity. There also seems to be increasing disillusionment with our democratic systems. Trump, Le Pen in France and Hanson in Australia have all tapped into these concerns.

This shift in the political pendulum may result in rising protectionism and emerging trade and currency wars, something Trump may welcome but many people think unlikely. I’m not so sure given Trump appears keen to do what he campaigned on; “America first”.

Whatever your personal thoughts on these issues, there is obviously a heightened potential for sudden and severe bouts of volatility in financial markets. An example would be if the US announces some new trade policies, such as taxes on imports, designed to hurt China or Mexico. Another example would be a confrontation with Iran or North Korea. Perhaps the catalyst for greater volatility will be something in Europe, such as Grexit (Greece leaving the Euro) or the election of Le Pen which could lead to the end of the Euro and a greatly diminished EU.

In these periods you would expect the stock market to fall and “safe haven” assets like Government bonds and gold to perform well, though every “crisis” is different. Investors should not panic during such periods as the good news is that markets typically recover fairly quickly from political and even economic shocks.

Will the Trump share market rally continue?

Despite all the stories about disfunction in the new Trump administration and behaviour by President Trump that many, including me, would regard as both unorthodox and concerning, the fact is that share markets worldwide have performed very strongly with the US market being up over 10% since Trump was elected back in early November. The Australian market has also performed strongly during the same period.

The reason for the rise in the US share market is that investors believe that Trump’s policies, such as tax cuts, deregulation and significant fiscal stimulus (spending on such things as defence and infrastructure) will boost US growth and be good for business. It seems to me that a lot of optimism has been factored in and that delivering on these policies will be challenging, though there’s no doubt that having experienced business people in many cabinet positions should speed up decision making for better or worse.

Consistently predicting shorter term share market movements is extremely difficult, if not impossible, but my expectation is that there will be a meaningful correction (fall) sometime during 2017, though possibly not until the market has gone up a bit further. The US stock market has had a very strong rise since 2009 so a significant correction, as typically occurs every few years, should not surprise. Inevitably if the US market corrects Australia and other markets will follow.

It is worth noting that what happens in the share market in the first few months of a new President’s term is not necessarily a good guide to what will follow in coming years. The US share market, which already had plunged in 2008 in the wake of the financial crisis, continued to collapse in the first few weeks after Obama was inaugurated. The Dow plummeted 20% from mid-January 2009 to early March 2009. But the market bottomed on March 6th 2009 and was up over 200% from then by the time President Trump took office.

Super contributions cap changes: what do they mean for you?

With the latest round of reforms set to come into effect in 2017, time is running out to take advantage of current super contribution caps.

The super reforms introduced in the 2016 Federal Budget are set to start coming into effect from 1 July 2017. So what are the changes to the super contributions caps, and how will they affect your savings?

–          Non-concessional contribution caps set to fall

For most super savers, the biggest change is the reduction in non-concessional contribution caps for savers with balances under $1.6 million.

What are non-concessional contributions? They’re simply extra contributions you make to your super from your after-tax income or from other sources, such as an inheritance or sale of an investment property. They’re also a very popular option for investors looking to top up their super before they retire.

Current rules allow you to make non-concessional contributions of up to $180,000 a year, or $540,000 by using the ‘bring-forward rule’ to combine three years’ worth of caps in a single year. But from 1 July 2017, the annual cap will be reduced to $100,000. That will reduce the maximum contribution under the bring-forward rule — from $540,000 to $300,000.

This means the coming months are your last chance to make the most of the higher caps, by adding as much as possible to your super.

–          Changes to concessional contribution caps

And it isn’t just non-concessional contribution caps that are falling. If you rely on salary sacrifice to boost your super, you may also be affected by the new cap for concessional contributions — super contributions made from your pre-tax earnings. Currently capped at $30,000 a year for those under 50 and $35,000 for people aged 50 or more, concessional contributions will be limited to $25,000 a year for all super investors from 1 July 2017. That’s a far cry from the $100,000 limit that used to apply to the over 50’s only seven years ago.

The silver lining is that the Government has also moved to allow some savers to carry forward any unused concessional cap amounts for up to five financial years. Set to come into effect from 1 July 2018, this change will only apply to people with super balances of less than $500,000. That could make a big difference if you’re looking to make up for lost time — if you’re returning to work after having children, for example.

–          Understanding your options

As so often with super, the new rules are complex, and their impact on you depends on your unique circumstances and retirement goals. That’s why it makes sense to seek advice now so you can be prepared when the changes take effect on 1 July 2017.

The importance of Immigration to the USA (and Australia)

Immigration is obviously a hot political topic in the USA, Europe and, to a lesser degree, in Australia though anyone with a sense of history will know that this is not new.

This US series of maps highlights various aspects of immigration to the US with a very clear perspective that sizeable immigration has been a reality for over 300 years. It is interesting to note that Map # 4 shows that immigration has been even more significant in Australia.

This newsletter contains general advice. It does not take into account your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision

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