Australian Consumers are positive

CommSec Research has reported that the outlook for family finances is at a 6 year high.  They note that ” The Aussie dollar is holding near US 75-76 cents; job security is strong; interest rates are stable; and petrol prices are low. So what’s not to like? Sure the share market has been volatile, but Aussie consumers seem resigned to the fact that is a “normal” situation. And they are looking through the volatility, realising that our economy, and more importantly their finances are in good shape”.

“The good news for retailers is that consumers are seemingly looking forward to the next year with a healthy level of optimism. The estimate of family finances over the next 12 months has lifted to the highest levels since January 2010 – essentially at the height of the commodity boom. In addition consumers continue to believe it is a good time to buy a car, fridge, washing machine or television. Certainly retailers don’t seem to be in a rush to lift prices, so affordability is good”.

Australian Banks – an Update

It is always difficult to identify who is doing what in the market but my personal view is that the significant sell off of Australian banks we saw in January – February came primarily from offshore, in particular hedge funds. US & European banks were being heavily sold during that period and the Australian banks were caught up in the global weakness in bank shares.  This coincided with another lot of stories about an Australian property bust which would hurt our banks. However, when the banks released benign trading updates and strong Australian economic numbers (unemployment & GDP growth) were released the selling stopped and prices have moderately rebounded.

I think the following summary from Aurora Funds Management is a good summary of how our banking sector looks today.

“The Australian banks have been very successful over the past few years in generating record profits from their domestic franchises which operate in a cozy banking oligopoly. Competition from non-bank lenders has decreased along with bad debts which are now at historically low levels. What caused the French banks, Japanese and US to blow up in the late 1980s, 1990s and 2000s was rapid lending expansion into new areas that in hindsight their management teams did not fully understand. The bulk of the lending growth being delivered by the Australian banks is being done domestically in areas where the banks generally have a strong history of profitable business. Whilst Australian housing can be viewed as expensive globally, we see a range of factors that strongly encourage Australian households to maintain mortgage payments. These include recourse lending, homes are exempt from no capital gains tax and strong cultural desire to own one’s own home.

Nevertheless Australian banks (whilst offering high dividend yields) are likely to face a pretty constrained environment and higher loan losses should the economy continue to slow. Nevertheless, on the results we have seen over the past t few weeks from CBA and trading updates from NAB, ANZ and Westpac, our domestic banks are still very profitable and are still recording very low levels of bad debts. Indeed …. NAB (recently) recorded their lowest bad debt charge since 1980!”.

Interest Rates – at unprecedented lows worldwide

In the 30+ years since the early 1980s we have seen interest rates decline globally to levels previously thought impossibly low. We currently live in a deflationary environment. Katana Asset Management noted last year that ‘an astounding 90%+ of the industrialised world boasts interest rates at or near zero percent.’ More recently they highlighted that 17 countries, which include Japan and Switzerland, now have official interest rates that are negative! There is no historical precedent for this. This linked table shows the prevalence of negative interest rates.

The unprecedented long term decline in interest rates has had a huge impact on asset prices globally, property prices in particular.

The big question is “where to from here?”Central Bank support through enormous asset purchases is likely to decline and possibly reverse over the next few years.  As we do not know how or when this period of exceptionally low interest rates will end, or at least transition back to something more “normal”, I think a degree of caution is warranted.  Higher interest rates would undoubtedly impact bond prices but also the price of assets like shares and property. I should add that this is not a forecast of any significant upward move in interest rates this year and it’s quite possible that very low interest rates will persist for years.

Perhaps the biggest concern is that if there is a significant economic downturn, say through things going awry in China, then central banks have very limited capacity to respond as interest rates are already so low. In that instance a global recession could be severe.

China – on-going challenges

Yes, China’s economic growth is slowing and the mix of growth is changing away from commodity intensive construction and manufacturing towards services. This is no great surprise and arguably a necessary thing, though it has been making financial markets nervous.

Chinese equity market volatility over the past year has been a wakeup call for global investors. As the Chinese economy slows and policymakers struggle to deal with rebalancing and stabilising growth, liberalising financial markets, reducing overcapacity, demographic challenges and eliminating corruption, economic frictions are mounting. The current policy mix may not be enough to stabilise growth and China will require further substantial reforms. Markets are now less confident that Chinese authorities have the ability to make these reforms in an orderly manner. Volatility and uncertainty are likely to continue so investors should remain selective in their exposure to China and other emerging markets.

CommInsure & Insurance Claims

No doubt you have heard the reports about some very poor handling of claims experienced by some CommInsure clients.  Like most people, we were very surprised by this and very disappointed as, amongst other things, this undermines confidence in the value of insurance and we know, from personal experience, it can make a huge difference to people to receive an insurance payout when adversity hits. While we would in no way condone what appears to have happened in the reported cases, it is worth noting that in 2015 CommInsure alone paid over $850 million in claims.

We are pleased to hear that CommInsure and a number of their major competitors are reviewing product definitions and their claims process. CommInsure has already announces some changes. It’s a great pity that it has taken a burst of bad publicity to make this happen but we do believe that CBA’s CEO, Ian Narev, is genuine in his assurances that they will promptly address these issues. As they should!

Rest assured, if any of our clients have a legitimate personal insurance claim we will do everything we can to assist you to have the claim accepted by CommInsure, or any of the other insurers we recommend, and the appropriate benefit paid. As an independently owned business we are here to look after the interest of our clients, no-one else.

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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