There are no cheap assets at present
The low interest rates that have persisted globally over recent years have seen most share markets rise considerably over the past year. Australia had a strong 2013 and some, such as the US, have rebounded since January’s weakness and are now at all-time record levels. Share prices have risen faster than earnings i.e. price/earnings ratios have increased in most markets so it has become harder to find cheap stocks.
Housing prices in many markets, such as Sydney, have risen considerably driven by low borrowing rates. Commercial property prices have also strengthened and the return on term deposits, bonds and cash accounts have fallen so investors are faced with an environment in which there are few, if any, bargains. In this environment it is important to look for quality investments that should produce “decent” returns over the medium to longer term and which should do comparatively well when the inevitable market downturn occurs. Diversification in order to reduce risk remains important.
Australian Bank Profitability
Most Australians have some ownership of Australian bank shares, either directly or via their Superannuation funds, so the strong profitability of our banks is of some benefit to you even if you don’t like their fees! Currently the big 4 banks (ANZ, CBA, NAB & WBC) are 4 of the largest 5 companies listed on our stock exchange (the other one being BHP).
APRA statistics at December 2013 show that over the year ending 31 December 2013, Authorised Depositary Taking Institutions (ADIs), which are essentially banks, building societies and credit unions, recorded net profit after tax of $31.0 billion. It has been reported that the big 4 accounted for over 80% of total profits and all have paid record fully franked dividends. The increase in profits was $6.1 billion (24.4 per cent) on the year ending 31 December 2012. Of interest is that ADIs’ total domestic housing loans were $1.17 trillion, an increase of $85.5 billion (7.9 per cent) over the year. There were 4.93 million housing loans outstanding with an average balance of $234,000.”
Deeming of Account-based pensions from January 2015
Important changes to the way Centrelink assesses the level of Age Pension a person is entitled to will come into effect from next year. In most circumstances this will only impact new pensions. The changes are likely to reduce the level of pension received for some people, such as people with other significant assessable income from sources such as part time work. The impact is likely to be small for most impacted people at first, though the reduction in pension entitlement will likely increase in the future when interest rates (and deeming rates) rise. Anyone with an entitlement to commence an Age Pension before the end of this year should seek advice as to whether they should take any action before the new rules come into effect.
Under the current Centrelink and Department of Veterans’ Affairs (DVA) income test, only annualised pension payments that exceed the deductible amount (the purchase price less any commutation then divided by life expectancy) are assessable. The current way of treatment often results in a more favourable income test treatment of an account based pension (ABP) compared to investments in other financial investments, which can lead to higher Age Pension payments. From 1 January 2015, ABPs will be added to the definition of financial assets in social security legislation, which means they will be subject to deeming rules (along with other financial assets) for both Centrelink and DVA income test purposes. Under the deeming provisions, all financial investments are assumed to earn a certain rate of income, regardless of the income actually generated.
ABPs commenced prior to 1 January 2015 will retain their current (generally more favourable) income test treatment where they are being provided to a person who is receiving an eligible income support payment (such as a partial Age Pension) immediately before 1 January 2015. This treatment will continue to apply into the future provided that the existing ABP continues and the client continues to receive an eligible income support payment.
Some reasons to feel good about the world despite constant bad news on TV
- Life expectancy continues to increase. The average newborn in Australia today has a life expectancy of close to 90 and most can expect to live an entire generation longer than his or her great-grandparents could.
- Despite a huge increase in the number of vehicles on our roads the number of people that die each year in traffic accidents continues to fall. New South Wales recorded its lowest figure since 1924, with 339 road fatalities in 2013.
- In 1949, Popular Mechanics magazine made the bold prediction that someday a computer could weigh less than 1 ton (907 kg). An iPad, that costs around $600, weighs less than half a kilogram.
- Despite a surge in airline travel, there were half as many fatal plane accidents in 2012 than there were in 1960, according to the Aviation Safety Network. Qantas is the world’s oldest airline to have never had a fatal accident.
- No one has died from a new nuclear weapon attack since 1945. Perhaps the most important news story of the past 70 years is what didn’t happen.
- Worldwide deaths from battle have plunged from 300 per 100,000 people during World War II, to the low teens during the 1970s and to fewer than one in the 21st century, according to Harvard professor Steven Pinker. “War really is going out of style,” he says.
- Google Maps is free. It’s really astounding that possibly the single most useful piece of software ever invented costs you nothing.
- You need an annual income of US$34,000 a year to be in the richest 1% of the world, according to World Bank 2010 book The Haves and the Have-Nots. To be in the top 10% you need US$12,000 a year and in the top 0.1% requires an annual income of US$70,000 (about A$78,000). Among Australian full-time workers, the ABS reports average total earnings of $75,000 per year. The median (if you earn the median salary, your wage is in the middle of the distribution – it’s higher than 50% of workers and lower than the other 50%) was $57,400 in August 2011 and would likely be above $60,000 now. This means that the average Australian is among the world’s richest. No wonder people from all over the world are keen to come here to live!