Federal Election – does it matter for your Super or other investments?
The Federal election was, as expected, very close and the returned LNP Government faces many challenges in delivering effective government. Business and financial markets don’t like uncertainty and it is difficult to see how any Government with a wafer thin majority in the House of Representatives and needing the support of a disparate group of independents (Hinch, Lambie, Hanson, etc.) in the Senate will be able to implement anything “courageous” or controversial. Compromise will likely be the name of the game and that means tough or unpopular decisions will be blocked.
If we end up with a weak Government that could see economic growth stagnate and that would likely see the Australian share market underperform relative to its potential, though there is only a weak linkage between economic growth and share market performance. Interest rates could be expected to stay low or go even lower and the strength in the property market may evaporate.
The good news is that the there has been little reaction to the election result; the share market has moved up following the rest of the world, interest rates and the AUD are basically steady. Despite our focus on domestic political uncertainty, Australia remains an oasis of stability in a volatile world.
Super Changes announced in the May 2016 Federal Budget
While the re-elected Liberal-National Coalition has indicated it proposes to proceed with the superannuation changes announced in the 2016-17 Federal Budget, there are many people and bodies arguing for some modifications, in particular to the proposed $500,000 lifetime non concessional contribution (NCC) cap backdated to 1 July 2007. Proponents of modification include some LNP members of Parliament as well as some non LNP senators. I expect there will be a significant time lag while potential changes are debated and negotiated and before legislation passes to implement the superannuation changes.
Firstly, the Government indicated that it would consult the industry on the changes. This can involve certain parties being able to see draft legislation and/or public consultation. Secondly, the legislation must proceed through the normal legislative process including:
- Introduction of Bill into the Parliament
- Passed by House of Representatives
- Passed by Senate, and
- Receiving Royal Assent.
There may also be regulations to support some of the legislation which is not tabled in Parliament until the legislation has passed. While everyone hopes this will be finalised in the Spring session of the new Parliament, it is possible that final legislation may not pass until the Autumn sitting in 2017. This would be consistent with the 2007 Simpler Super changes where many provisions were still being finalised in the first half of 2007 and some regulations were not passed until after 1 July 2007.
As previously mentioned, prior to any passage of legislation, the Budget superannuation proposals may be amended. The Government has already given some ground on the $500,000 lifetime non-concessional contribution cap. During the election campaign the treasurer, Scott Morrison, stated that exemptions will be available for self-managed superannuation funds:
- which entered into contracts to purchase property prior to the Budget announcement, and
- with a non-arm’s length LRBA which require changes to meet the guidelines issued by the ATO.
Further exemptions and possibly other changes seem quite likely given the Government can’t pass legislation through the Senate without the support of either Labor or a broad range of disparate cross benchers.
Brexit – for an Australian investor is this just noise or something important?
The unexpected vote for the UK to leave the European Union has understandably generated an enormous amount of news but from an Australian investor’s perspective the real issue is whether this is just “noise” and will soon be largely forgotten or is this a profound development with important implications. As yet we don’t know the answer to that.
There are many interpretations being put on Brexit but there seems to be broad agreement that it will take many years for this to play out and no-one really knows what the global impact will be. The fear is that it has negatively impacted sentiment worldwide and will lead to a further economic slowdown. For the UK & EU, freedom of movement of people will be a critical issue to be negotiated and surely the UK will not want to lose its current open access to one third of the global economy. Certainly the result has already had a major impact on UK politics with key leaders Cameron, Corbyn and Farage gone or likely to be gone shortly.
What does seem clear is that the Brexit vote was more than simply a protest vote but reflects a deep and rising feeling among many sectors of society that the political system is not working for them. Unemployment, underemployment, lack of wage growth and general economic uncertainty are leading to a mood of discontent. It has been described as a populist, anti-elite, anti-establishment uprising sweeping the globe. This is showing up in many countries with support for non establishment figures, such as Trump, and as support for far left and far right parties.
The major impacts in financial markets have been :
- The British Pound is at a 30 year low against the US Dollar so it is obviously a big deal for the UK but not for us.
- The market expects interest rates to fall even further and current bond yields reflect a very pessimistic view of global growth and very low inflation expectations.
- Share markets initially fell sharply but quickly recovered and the US share market has just reached an all time high. In a low interest rate world the search for yield remains a dominant theme.
- Longer term Australian bond yields have fallen continuing the trend of the past year. 10 year Australian Government bonds now yield close to 2.0% and 30 year maturities around 2.4%.
I won’t try to be too definitive on how significant Brexit will prove to be as we don’t know how it will play out over the next few years but it seems reasonable to say that, while this is very significant for the UK and to a lesser extent Europe, the global impact is currently modest and the world is likely to be focused on some other major “event” before too long. This view may prove wrong if the growing flow of people, in particular young men, from failing states in The Middle East & Africa leads to political crisis in Europe and Brexit proves to have been the warning bell of the developing problems.
Share Market Volatility
While many investors find it unnerving, share market volatility is normal and likely to continue. Professionals refer to periods of “risk on” when optimism prevails and the share market is rising and “risk off” when investors retreat and prices fall. Fund manager Roger Montgomery recently noted, “In the 66 years since 1950, there have been 57 market moves downward of 20% or more in either of the US S&P 500, the UK’s FTSE, Germany’s DAX, and Japan’s Nikkei. Think about that statistic – it means a ‘crash’ in a major market every 1.15 years ».
Similarly for Australia, sharp market movements are not unusual. Since 1984, the All Ordinaries Index has recorded 18 single-day market decreases greater than 5% and two of more than 10% being 10.8% on 28 October 1997 and 24.9% on October 20 1987. In the last 6 years we have seen a number of significant falls in the ASX 200 price index yet over that time frame the market is up somewhat and companies have continued to pay dividends :
- A fall of 15.6% in May/July 2010 due to international factors : the BP oil spill in the Gulf of Mexico and fears of a Eurozone crisis caused by a Greek debt default.
- A fall of 17% over several months ending in September 2011 due to what was referred to as the Eurozone crisis.
- A fall of 10.6% in mid 2013 due to what’s known as « the temper tantrum », basically a fear of rising interest rates.
- A fall of 12.2% in August 2015 due to fears of a global economic slowdown and uncertainties regarding China and the US Federal Reserve’s interest rate policies.
- A fall of 10.4% in January/February 2016 due to fears of recession in the US and slowing growth in China.
Markets are difficult to predict as has been shown last week with share indexes up all over the world despite the terrorist attack in Nice, the strong reaction by China to the international Permanent Court of Arbitration decision to reject it’s claim to most of the South China Sea and now the attempted coup in Turkey.
Five Financial Challenges that Women Face
Many women who’d like to grow their wealth and save for the future sometimes feel that it’s particularly difficult to get ahead If that sounds like you, these could be some of the reasons why :
- Women earn less on average
- Women live longer than men
- Many women take career breaks to raise children or care for elderly parents
- Women end up with less Super on average
- Women are typically underinsured.
If you would like a bit more detail on these challenges please click this link.
Andrew’s new Family Member
Several years ago, after a wonderful 15 years, the life of our beloved golden retriever, Lucy, ended. There has been a gap in our family ever since but several months ago we acquired a black labrador, Ruby, who has quickly won a place in our hearts. She is also getting Jane, myself and our daughters out walking daily which is great. We are biased, of course, but we think she’s a seriously good looking dog! And yes, she still needs a good deal more training. If you would like to see a picture, click here.
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.