Travel – observations from my recent overseas holiday

I have recently returned from a holiday in Europe – Croatia, Austria and Turkey – and thought I would share a few of my observations with you.

  • Croatia is undoubtedly a beautiful country and a wonderful place to visit in the summer months. Dubrovnik, in particular, is worthy of at least several days. The highlight is the justly famous high wall, built to keep out invaders, which surrounds the old city. The current wall, dating back as far as the 12th century, is remarkably intact and you can walk around it in roughly an hour, depending on the crowds at the time. There are numerous islands you can visit from either Dubrovnik or Split; all offer a relaxed atmosphere and easy access to numerous swimming beaches, though don’t expect large sandy beaches like in Australia. The water is clear and warm in the summer months. Food is generally good, coffee and wine okay and prices lower than in Australia. The country is very reliant upon tourism which is very seasonal so locals say the islands are very quiet outside summer.
  • We spent four days in Graz, the second largest city in Austria but with a population of only around 350,000, similar to Canberra. Perhaps the most remarkable thing from an Australian perspective was that property prices are only a fraction of what we are accustomed to. For example, we stayed in a small but well located flat that was purchased only a year ago for less than A$100,000. It was a five-minute tram ride into the centre of the city or a 15 minute walk. As in most Western European cities, you can’t help but notice that there seem to be a significant number of displaced persons from Eastern Europe or the Middle East hanging around with nothing to do and seemingly few prospects. On the positive side, we bought punnets of raspberries for 1Euro – a highlight!
  • The longest part of our trip was spent in Turkey, most of which is, of course, in Asia rather than Europe. A country of 75 million, it is noticeable that Turkey seems significantly more prosperous than I observed on a short visit in 1997, though there are still many poor, such as farm workers. Press reports suggest the country is in a degree of turmoil as a consequence of all the problems with its neighbours, Iraq and Syria in particular, and that it is becoming more Islamic under President Erdogan. I have to say that we saw very limited evidence of either, with the exception of substantial numbers of refugees in the southeast. While the country is largely Islamic there seems to be a relatively tolerant attitude towards others even in smaller, regional places where tourists are less common. People seem to be hard-working and the economy quite diverse with substantial agriculture, manufacturing and tourism. The road network is quite impressive and often superior to the Pacific Highway in northern NSW. Food is good but there’s less variety than we are used to.
  • Istanbul is justifiably famous and demands at least several long days to see the major tourist attractions, such as The Blue Mosque, the Hippodrome, Hagia Sophia, the Topkapi Palace, Cisterns, the Grand Bazaar and a trip on the Bosporus. There’s so much history but it’s also a thriving modern city of 14 million. Gallipoli can be reached in half a day and there is a lot to see there in addition to Anzac Cove. It’s a very moving experience to see where our troops landed in 1915; some of the trenches they dug remain. Further south are the legendary cities of Troy, Ephesus and Pergamum. Ephesus is very extensive and you can’t help reflecting on the achievements of the Roman Empire when you see what remains 2000 years later. Unfortunately the crowds, including busloads of Chinese, somewhat detracts from the experience so I wouldn’t recommend visiting in July or August but Ephesus is a “must”. Other highlights for us included a hot air balloon ride at daybreak in Cappadocia, a boat trip on the Euphrates River, seeing magnificent Roman mosaics in the Zeugma Museum in Gaziantep and sharing tea with a poor but very hospitable Kurdish family in their backyard 6 kilometres from the Syrian border. Despite a war raging relatively nearby we never felt unsafe.

 

Recent developments in financial markets that you should be aware of

  • Europe weakening

There is increasing doubt that the weak European economic recovery of recent times will continue, particularly given that it’s largest economy, the export-driven Germany, has slowed considerably in recent months. Their European neighbours (including Russia) can’t afford increased imports and the devalued yen is making Japanese companies more price competitive. There are signs of deflation across Europe, unemployment rates remain very high in many countries, budget deficits in some countries remain too high and reforms are very difficult to achieve. This has lead to widespread concerns that Europe could sink into recession and the European Central Bank might have limited ability to do anything about it. Investors are questioning the E.C.B.’s efforts to stabilize the European economy. Unfortunately this matters, particularly given Europe accounts for around 17% of global economic output.

  • Cheaper Oil

Oil prices have fallen around 25% in the last 3 months, though you may not have noticed that at the petrol pump. This is attributable to a range of factors, in particular increased oil and gas production in the USA. It’s a positive for global growth, though as Australia is a major energy exporter (coal & LNG) it’s less positive for us.

http://www.economist.com/news/international/21627642-america-and-its-friends-benefit-falling-oil-prices-its-most-strident-critics?fsrc=nlw|hig|23-10-2014|AP

  • Increased Share market volatility

Over the past month or so there has been a significant pick-up in share market volatility with prices up and down substantially from day to day. This seems to reflect  the growing unease regarding Europe and also what will happen when the US Federal Reserve stops buying bonds (which should happen very soon), though there are other factors also at work. A correction in the share market is normal after a long rise, as has occurred in recent years, and the US market remains close to its all-time highs. The strength of the US market reflects in part their improving economy with unemployment below 6% and the budget deficit for the year ending September down to 2.8% of GDP. Joe Hockey will be envious!

Some medium term caution is warranted but I feel there’s little likelihood of a major correction in the near term. I do, however, worry that low quality bonds are at silly (way too low) yields and there may be some havoc when that party ends in the next year or two. I also have some concern about China because of its overwhelming importance to Australia; it now accounts for 36% of our exports. If China experiences a major economic slowdown we will certainly feel it – lower exports, a lower Australian dollar, reduced tax receipts for State & Federal Governments, a loss of business confidence, etc.

  • The residential property market seemingly remains strong

Residential property remains strong, particularly in Sydney & Melbourne, according to the latest RP Data. Sydney prices have risen 13.1% over the last year, though, as always, some areas have risen much more strongly than others. The strong price rises have lead to a significant increase in listings which may be why there is anecdotal evidence of weakening in some areas despite what the data indicates. For example, I know of one auction of a nice home on the lower north shore that was cancelled last weekend as there were no bidders.

Medibank Private Float

I have had quite a few people asking, should I buy Medibank Private in the float. I don’t have any great insight into the future of health insurers but do note that even if Medibank Private is a great company it is only a great investment if you buy it at the right price. The problem I have with this float is there’s a wide price range ($1.55 to $2.00 per share) so you don’t know at what price you are going to be able to purchase it (until after it lists and is trading). At $2.00 the forecast price to earnings ratio (P/E) is 21x which is high for any company unless it has very strong profit growth prospects. Hence, this float is not for me. If you are interested you should read the prospectus and seek advice from a qualified person. At a minimum read some of the market commentary around, such as this from well known stockbroker Marcus Padley.

http://www.marcustoday.com.au/webpages/1332_free-advice.php?articleid=25052#content

 

Australian Interest Rates – not going anywhere anytime soon

The Australian cash rate set by the Reserve Bank remains at 2.5% and has now been at this record low level for fifteen consecutive months. The RBA governor commented that “the most prudent course is likely to be a period of stability in interest rates”. He was also downbeat on the Australian economy forecasting below trend growth for “several quarters” and characterising the labour market as having “spare capacity” and noticeably weaker wages growth.

Westpac says that they expect the governor will maintain the “period of stability” assessment for some time yet until he can better gauge the underlying strength of the Australian economy (currently described by the RBA as “moderate”); whether an effective macro prudential policy can be adopted to slow investor housing; and the outlook for policy by the US Federal Reserve. The RBA governor is also still not satisfied with the level of the Australian dollar. The governor described the currency as “high by historical standards, particularly given further declines in key commodity prices in recent months”.

Comparatively weak global growth is keeping interest rates low in all developed economies; for example, 10 year German government bonds are below 1%. This is a further reason I don’t expect an increase in Australian rates until at least the second half of 2015, perhaps later.

How would you like better wifi internet coverage, preferably for free?

Recent reports say that Google and Facebook are planning to launch very large helium balloons full of radios and cameras and float them up to around 20,000 metres above earth. Trials are currently happening in several locations. There are technical challenges but with about 40,000 balloons you can provide wireless internet coverage anywhere and everywhere on earth. Everywhere!

Imagine the opportunity if you are Google and you get the search revenue from connecting an additional five billion people. Some suggest Apple or Samsung may also use this technology to offer free or very cheap wifi access.

The predictions are that these new services will be rolling out in parts of the world in the next 5-10 years. Much better services are coming and perhaps for free!

Centrelink Deeming of Account-based pensions

The new Centrelink deeming provisions applying to Account Based Pensions (ABPs) will come into effect on 1 January 2015.

Persons most impacted will be pensioners who have other substantial assessable income in addition to their ABPs as they may see a reduction to their social security entitlement, such as the Age Pension. Persons not in receipt of a means tested pension or allowance as at 1 January 2015, such as those currently too young to qualify for the Age Pension, may also be adversely affected under the new deeming rules. Persons who may be better off are those who currently draw significantly more than their deductible amount (the amount Centrelink currently disregards under the income test). Persons with relatively large assessable assets will not be affected by this change as their entitlement will be determined by the assets test even if deemed income from the ABP is counted for income test purposes.

Grandfathering provisions will apply for many people with existing ABPs where they are also in receipt of a social security benefit when the new rules take effect.

Most self funded retirees will not be impacted by the changes, though some may lose access to the Commonwealth Seniors Health Card from January or in the future should their assessable income go above the cut-offs (currently $51,500 p.a. for singles and $82,400 p.a. for couples.

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

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