It is all about Interest Rates!!

Ever since the US Federal Reserve changed its guidance from further interest rate rises to a more neutral stance in early 2019, and subsequently indicated a willingness to lower rates if economic conditions warranted that, as many are predicting, share markets in most countries have experienced a significant rally. This has happened despite the escalating trade war between the USA & China.

In Australia, our sharemarket has rallied around 15% over the last 6 months despite a weak economy. This has, in part, been due to the global trend but also due to the RBA cutting the official cash rate to 1.25% and expressing a willingness to take rates even lower. A 10-year Australian Government bond is now returning only 1.4% and Term Deposit and Cash rates are falling so getting above 2% may soon be difficult.

While inflation is low, defensive assets like Cash, Term Deposits, Bonds & Annuities are comparatively unattractive and likely to remain so for several years. All investors, other than the most defensive, have little option but to maintain well-diversified portfolios with significant weighting to growth assets, like shares and property, if they want returns meaningfully above inflation.

This is not an argument for taking excessive investment risk and there is a case for holding some Cash to take advantage of opportunities when they arise, as was the case in the December quarter 2018. However, holding substantial amounts in defensive assets almost guarantees low returns over the next few years given already very low-interest rates and the real possibility they will go even lower.

Superannuation contributions before the end of Financial Year: act now!

There are only a couple of weeks now until the end of the financial year and any contributions that you want to make this financial year must be received by your super fund no later than 30 June. As there are sometimes delays in contributions being credited to your account you should act well before 30 June.

If you are planning to make any contributions before financial year end you should do so now to ensure they are received and credited to your account before your fund’s cut-off date.

Will the higher HEM (Household Expenditure Measure) offset APRA loosening and again reduce borrowing capacity?

The latest UBS Australian Banking Sector Update provides the following comments on the housing market:

“Improved sentiment post-election, rate cuts and APRA changes. There has been much excitement amongst the housing industry post the election.

We estimate the RBA rate cuts and APRA’s removal of its interest rate serviceability floor may improve maximum borrowing capacity by around 14%. However, these changes need to be considered in the context of ongoing tightening, in particular, a new HEM methodology, the rollout of Comprehensive Credit Reporting and Open Banking.

New HEM methodology – Higher estimated expenses for higher incomes. A new estimate of the Household Expenditure Measure (HEM, a floor on estimated living expenses in mortgage calculations) is being rolled out by the banks over coming months.

Our channel checks indicate the revised HEM is skewed to higher income earners, especially above ~$120k. Although each bank now applies the HEM slightly differently, we estimate that for households with income above $150k (~33% of owner-occupied mortgagors by number and 50% by value), the increase in HEM may more than offset the impact of lower interest rates and removal of APRA’s serviceability floor.

Given ~50-60% of borrowers are still assessed using HEM assumptions, these changes may have a material impact on the housing market, especially in Sydney and Melbourne given higher median incomes and house prices.

Investment property buyers are also generally higher income earners and will also be impacted by these changes.

For lower income households, the impact of HEM changes is less material implying the benefit of rate cuts and removal of the serviceability floor may be more effective”.

Top Takeaways from Mary Meeker’s Internet Trends Report

Ex-Morgan Stanley analyst Mary Meeker’s internet trends report focused on the USA, has plenty of interesting insights. Here are some:

  1. For the first time, Americans spent more time on their mobile devices than they did watching TV.
  2. After more than a decade during which the share of total advertising dollars allocated to mobile devices, like phones, trailed their usage, the gap has closed. In the US each now approximates 33%.
  3. E-commerce continues to increase in the US, hitting 15% of retail sales in 2018.
  4. Podcasts are growing rapidly: in 2018, 70 million Americans listened to podcasts, more than triple from 22 million a decade ago.
  5. An increasing number of people are using images to communicate: more than 50 per cent of all tweets, for example, now include images. People are also taking more pictures than ever before and platforms such as Instagram are amplifying this relatively new style of digital communication.
  6. YouTube probably will eclipse Facebook in daily usage soon.
  7. Somewhat surprisingly, surveys indicate that people care less about privacy today than they did five years ago.
  8. The percentage of encrypted web traffic increased from 53% in 2016 to 87% in 2019. Messaging platforms offering automatic or optional end-to-end encryption are rapidly rising in popularity, with secured services like Telegram and WhatsApp outpacing the growth of non-encrypted messaging services like Twitter and China’s WeChat.
  9. The percentage of US workers working remotely remains small; it increased from 3% in 2000 to 5% in 2017.
  10. Last year, China’s mobile data consumption almost tripled, thanks to short video platforms like TikTok and Kuaishou.
  11. In 2018, roughly 10 million people participated in genomics tests, a phenomenal leap from nearly zero in 2012.


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.

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