Australian Shares – overall 2014 was a lacklustre year
Australian companies continued to generate solid dividend yield but in 2014 there was very little capital growth, on average. Capital growth from Australian shares was around 1% for the 2014 calendar year so dividends accounted for the majority of the ASX 300 Accumulation Index’s (ASX300) 5.3% return.
The strong performance of some sectors, such as property (A-REITs) 27%, telecommunications 21% and health care 24% were offset by negative returns for the sizeable mining and energy sectors.
The balance sheets of Australian listed companies are, on the whole, sound so as a result there is no reason to believe that dividends are at risk and it seems likely that the market overall will continue to generate a dividend yield above 4% for investors. This return is not spectacular but still relatively appealing compared to the dividend yield of other major international equity markets or bank deposits, particularly when you add in the benefit of franking credits.
The key question for investors is whether Australian companies can increase revenues to generate more meaningful earnings growth in 2015 and beyond as, without that, the prospects for capital growth are not great. International shares have considerably out-performed Australian shares over the past two years and that trend may continue in 2015.
Interest Rates – why so low and how low can they go?
Anyone with a bank deposit knows that you are only earning a low interest rate (below 4%) and despite that many market commentators, such as Westpac’s Bill Evans, are suggesting rates may fall a bit further in 2015.
As low as our rates are, and they are at levels below what has ever been seen in almost anyone’s lifetime, they are above the interest rates in much of the rest of the world. While Australia’s 10 year Government bond rate is 2.60%, Japan’s 10-year bond rate is 0.24%, Germany’s is 0.40%, Britain’s 1.54%, Spain 1.65% and Switzerland is negative!. Even in the United States, where the economy is improving, the 10-year bond rate is currently just 1.83 %.
Why are interest rates so low? Contributing factors include:
- Zero Interest Rate Policy in US, UK, Eurozone and Japan as central banks attempt to promote growth.
- Quantitative Easing (QE) in US, UK and Japan: central banks buying of government bonds, aiming to reduce long term yields and stimulate growth.
- Falling inflationary expectations in many countries, even before the recent falls in the oil price
- Deflation concerns in Europe have increased market expectations for an expansion of the European Central Bank’s QE program to include sovereign debt.
- Downgrades to world growth forecasts, to around 3.5% in 2015, by the IMF
- In Australia, a slow growing domestic economy.
Can rates go lower? There’s little scope for interest rate falls in most countries, though because Australian rates are above those in other developed countries we may see some further small falls should the economy remain weak.
Term Deposits – new rules make it harder to get early access
All the major banks are changing the Terms and Conditions of their term deposits to comply with the Australian Prudential Regulation Authority’s new industry-wide regulations, designed to maintain the strength of the banking industry by minimising liquidity issues.
As a result, most banks have new rules being introduced for term deposits that will require 31 days’ notice if funds are to be withdrawn before the maturity date. Exceptions may be made in circumstances of hardship.
As a practical matter, you should no longer assume that you will be able to access your term deposits, at short notice, before maturity even if you are prepared to incur break costs.
Beneficiary Reversionaries for Pensions – why it matters
Where a person with a superannuation pension has a relationship with an eligible person, such as a spouse, most Superannuation Funds provide an option to nominate a reversionary beneficiary who would receive the pension should the account holder die before the balance of their account is exhausted.
Until now, the decision as to whether to nominate a reversionary, which can impact Centrelink entitlements as well as facilitating keeping money in the tax-advantaged superannuation system, had to be made at the commencement of the pension.
In September 2014, Centrelink clarified issues surrounding adding or removing a reversionary beneficiary from an existing account based pension (ABP). You now have the flexibility to add or remove a reversionary beneficiary at any time without losing grandfathered status under the social security rules (for deeming purposes).
Many pension providers have announced that they will change their rules to allow a reversionary to be changed after the pension has commenced. For example, Colonial First State (CFS) plans to introduce a new feature which will allow a reversionary beneficiary to be changed on a FirstChoice and FirstChoice Wholesale allocated pension and transition to retirement allocated pension (not available for Term Allocated Pensions) without having to recommence the pension.
Note that there are other considerations that should be taken into account before adding or deleting a reversionary pension.
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.