Share markets are surging despite slow economic growth
The US market has been setting new records regularly and Australia is belatedly joining the party with the All Ords closing on Wednesday at 6862 points, a new all-time record, above the peak, reached in 2007 before the Global Financial Crisis. This may seem strange given the weak state of the European, Japanese, Chinese & Australian economies. Even the US economy is showing signs of weakness after a long period of strong growth. The primary reason seems to be falling interest rates.
The economic weakness in Australia has seen the Reserve Bank cut the official cash rate to 1.0%, and most economists are expecting further cuts in rates, helping the stock market to rise. Company earnings in Australia have been relatively weak so the near 20% rise in the share market since Christmas is almost entirely due to an increase in the price to earnings (PE) multiple, rather than companies increasing profits. With bank term deposits mostly below 2% and Government bonds trading at all-time lows, shares are increasingly in favour with investors as the dividend yield on the market is around 4%, plus franking credits. It is worth noting that roughly half of all dividends come from only six stocks – the big four banks, BHP & Telstra.
Much of the rise in the Australia share market has happened since the Federal election in May and can be attributed to four main factors. These are: the return of a coalition government which is seen as more business-friendly than Labor and means Labor’s proposed changes to franking credit refunds and capital gains tax are not proceeding, the Reserve Bank cutting interest rates, APRA loosening credit standards to encourage more bank lending and the Government’s recently legislated tax cuts.
The relative attractiveness of the share market in an environment where interest rates are extremely low is understandable, but some caution should be exercised as if the fear of economic slowdown that has prompted central banks to reduce interest rates is realised that’s not a healthy backdrop for company earnings and share prices.
The Self-Managed Superannuation Fund (SMSF) Sector is growing and performing well
The SMSF Association has just released its review of the Australian Taxation Office’s 2016-17 statistical overview of SMSFs. Industry funds and some others are regularly critical of the very popular SMSF sector, seemingly with little justification. The ATO overview shows several interesting things, such as:
- SMSFs accounted for 99.6% of the total number of superannuation funds in Australia and 28% of the $2.7 trillion in total superannuation assets at 30 June 2018. SMSFs therefore, are clearly an integral and significant part of the superannuation system.
- There are approximately 1.1 million Australians in 596,000 SMSFs with an average fund balance of $1.2 million or median fund balance of $690,000 (the median value is more reflective of the normal SMSF as a minority of very large SMSFs distort the average figure).
- The average new SMSF had an establishment size of $521,000; this is a sizeable increase on previous years.
- SMSFs earned an average return of 10.2% in 2016-17 compared with the 9.1% return for APRA-regulated funds.
- The total expense ratio for SMSFs, which includes administration and operating expenses and investment expenses, which are the two key outgoings for SMSF members, are modestly higher than for APRA-regulated super funds. SMSF expenses fell slightly, largely attributable to increased use of technology and software in fund administration.
- Total member contributions to SMSFs were $41.8 billion, a record amount and an increase of 32% over 2016.
- 2016-17 was the first financial year where SMSF member contributions were higher for females than males. This is likely due in part to spouse equalisation strategies given the 1 July 2017 introduction of the transfer balance – a $1.6 million cap on the amount of assets an individual could use to commence a tax-free pension.
- SMSF pension payments increased by 31% to $46 billion.
Superannuation Death Benefit Nominations
Superannuation balances are not directly ‘owned’ by members; hence, they won’t necessarily be distributed in line with a person’s Will. Instead, super balances, including death insurance proceeds if a policy is owned within super, are held by the super fund trustees on members’ behalf. When a member or an insured person dies, the trustees often have discretion in how that money is dealt with.
A ‘Nomination of Beneficiary’ is a direction that a member provides to the trustees in relation to the distribution of his or her death benefit. It’s a relatively simple document setting out the member’s preference or instruction (depending on the type) then appropriately signed and witnessed.
There are three types of nomination:
- A Binding Nomination – lapsing
The trustees must pay the death benefit as nominated. This type of nomination has a legally valid life of, typically, three years before it automatically expires. Most retail and industry funds have this option.
- A Binding Nomination – non-lapsing
The trustees must pay the death benefit as nominated. This type of nomination never expires. Not all retail and industry funds currently have this option.
- A Non-Binding Nomination
A binding nomination that has expired or become invalid, or one chosen as a non-binding nomination in the first place. The trustees have the discretion to either follow the stated wishes of the member or direct the entitlements to another person (or persons) or pay the entitlement directly to the estate. It is a guide-to-intent only.
Superannuation death benefits can be left directly to an “SIS dependent”, such as a spouse, or to a Member’s Estate in which case the money will be distributed as outlined in the deceased’s Will. As large sums are often involved it is important to make a nomination and to ensure it is still valid and reflects your wishes. Marriage and divorce are two events that should see nominations updated.
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.