Have Share prices in Australia and in the US run too far ahead of earnings?


The US Dow Jones & S&P indexes are at all time highs despite the somewhat slow economic recovery in the US and on-going political wrangling. Share prices have appreciated substantially in the past year whereas earnings per share have been almost flat. My view is that US share prices are now somewhat expensive, driven, like our market, by low interest rates and the typical tendency of investors to chase returns in rising markets. Future returns for shareholders (dividends and capital growth) almost inevitably fall as share price/earnings ratios rise so skilful stock selection will become more important rather than simply benefitting from a rising market.

Tax on Superannuation Earnings over $100,000 not to proceed


Treasurer Joe Hockey has announced that the proposed tax on superannuation pension earnings above $100,000, announced by the previous Federal Government earlier this year, will not proceed. Labor’s plan was to cap tax-exempt investment earnings through super at $100,000 a year with earnings breaching this threshold to have been taxed at 15%. This announcement is good news and not just for wealthy retirees as it could have adversely impacted people with moderate superannuation balances, particularly those with self managed superannuation funds (SMSF’s). For example, in instances such as where they sold a long held asset, such as a residential property held within the SMSF, with all the capital gain being assessed in one year the cap could easily have been breached.


Commissions to Financial Planners for referring clients to real estate salesmen


There have been numerous press reports of late that financial planners are referring their SMSF clients to real estate agents in order to receive significant commissions. I very much doubt that this practice is widespread as, amongst other things, we are required to act in a client’s best interests and so any such referrals would need to meet that test which would be questionable if commissions were a motivation for the referral. What I can say definitively is that I have never accepted any commissions for referring any client to a real estate agent, a mortgage broker, an accountant, a solicitor or anyone else. Commissions for referrals are not inherently wrong provided they are properly disclosed but I have adopted a practice of not accepting any referral commissions from anyone so that my clients can be assured that any referral I make is based on my assessment of the ability of that person to assist my clients. Some of those referral partners do refer their clients back to me but no commissions are paid and if they ever were they would be clearly disclosed in writing.


Is commercial property worth considering as an investor?

There has been much publicity of late about investors rushing to buy residential investment property and some commentators arguing that there is a “bubble”, which implies prices well above fair market value. Without entering that debate here, for those considering a property investment it is worth considering whether commercial property might be a superior alternative at this time.

Commercial real estate, such as shopping centres, office buildings, industrial warehouses and the like typically offer higher income yields (rental income) than residential property and can be a very good inflationary hedge. Leases typically have annual fixed or CPI-linked escalators built into them so lease revenues should track inflation over time.

Of course, not all commercial property assets are alike. Tenant demand and negotiated rents will be determined by the fundamentals of the particular commercial property market and how attractive a particular asset is to prospective tenants. Relevant factors include vacancy rates, new supply and tenant demand and the general state of the economy.

Investors can gain exposure to commercial property in various ways including via Real Estate Investment Trust (REITs), which used to be known as Listed Property Trusts (LPTs), and through managed funds.  Australian REITs are the dominant owner of prime grade office towers in Sydney, with current occupancy rates on average at approximately 95%.

Is the Mining Boom Over?

We’ve heard a lot over the past year about the end of the mining boom but more accurately what we are seeing is
the end of the mining investment boom. There is a gradual shift from capital expenditure exceeding cash flows to the other way around, as companies move to selling new production – the harvest phase.  The new LNG plants being built in Gladstone, for example, will reach this harvest phase in the next year or two and much of the additional iron capacity developed in recent years is already adding to company revenues and Australian exports.

Another factor contributing to talk of the end of the mining boom is the fall in the price of many mining stocks, both in Australia and globally, and the fall in the price of many commodities. This has been particularly marked for gold miners and is evidenced in the table below.  China was and remains critical to the mining industry as the biggest buyer of many commodities, particularly iron ore. In the ‘halcyon’ days for resources, Chinese growth rates were upwards of 14%; this year’s target of 7.5% growth. However, to keep perspective, the Chinese economy grew by around $450bn in 2006 yet in 2012, despite talk of a slowdown, the economy actually grew by twice that, around $900bn. Well managed companies can still prosper in this environment and Australia’s volume of mineral exports, not to mention LNG, is forecast to grow strongly in coming years.

Source: Casey Research

Rock & Stock Stats


One Month Ago

One Year Ago

















Gold Producers  ETF(GDX)




Gold Junior Stocks ETF (GDXJ)




Silver Stocks ETF (SIL)






Is the US recovering and is the financial position of the US Government actually improving?


There are positive signs of a cyclical recovery in the US, though GDP growth at around 2% p.a. remains below where most would like it. The economic recovery is evident in the important housing market, which is a critical indicator of the health of the economy. After a big decline following the sub-prime mortgage crisis, house prices are rising in most parts of the US and new home construction is picking up.


Another place we can see the cyclical recovery is in the US budget deficit, which is now around 4% of GDP, down from 10% a few years ago. The unemployment rate is declining as well, though not sufficiently to cause the US Central Bank (the Fed) to start tapering their QE3 stimulus program yet, and possibly not until well into 2014.


During October, the US Federal Government announced that its latest fiscal deficit for the year ended September 2013 was about 4.1% of GDP with the 4 year deficit decline being the largest since World War 2. State and municipal finances have also recovered materially. The wind down of Fed asset purchases is inevitable at some point, although the unpredictable implications of winding down, and the effects of the normalisation of interest rates, are unknown.

This newsletter is not advice and provides information only. 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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