Why Cash is not a suitable investment

Everyone likes the security of Cash and we all should have some cash available to meet current and near-term expenses, but Cash is not a suitable investment for anyone seeking to grow their wealth.

Cash in Australia now has a negative real yield – meaning that inflation is very likely to be higher than the nominal interest you earn on cash balances, resulting in a decline in real purchasing power of cash holdings over time. Avoiding risk now has a real cost not just an opportunity cost.

The RBA official cash rate at 0.1% is around negative 1.5% in real terms and even a 10-year Australian government bond has until recently been negative in real terms and, with a yield of less than 2%, may still offer a negative return after allowing for inflation.

The case for owning Equities (Shares)

Longwave Capital’s David Wanis, who manages a fund focused on smaller capitalisation businesses, summed up the case for owning shares when he said:

“You cannot escape volatility or potential drawdown which makes equities the wrong asset for investors with short time horizons, however for longer-term investors drawdowns are only damaging if you change your mind about your risk appetite at the wrong time.

“Treat your portfolio like private equity and assume you cannot access it for many years, and the experience is very different. The ~ 7% pre-tax yield for the small-cap benchmark … can be thought of as the extra yield the portfolio earns to compensate for volatility and drawdown risk. Part of this is paid out every year (2.3% dividend yield for the market … almost fully franked), the rest is retained by the companies to invest in growth opportunities”.

A quality well-diversified portfolio should be able to increase earnings in nominal terms to keep pace with any unexpected inflation that emerges (unlike bond coupons)”.

The key messages here are the importance of having a suitable investment time horizon, tolerance for the inevitable ups and downs and adequate diversification so that any unsuccessful investments are outweighed by the winners.

China’s Latest (14th) Five Year Plan

Mason Stevens’ has provided a useful summary of the economic and social plan of our largest trading partner, China.

“In July this year, the Communist Party of China (CCP) will commemorate its 100th anniversary – and considering the global superpower is poised as one of world’s most robust economies after the pandemic, we can expect to see a party [pun intended] to fit the occasion.

In the lead-up to its centenary, the CCP announced its 14th ‘Five Year Plan’ … an event which affects investors across the globe as the world’s most economically aggressive nation lays its cards on the table.

“The Five Year Plan (FYP) is thousands of pages long touching on a wide range of topics from the status of previous goals to expanding on major and minor goals for the next five years.

Eight of the largest targets … in no particular order:

  1. GDP

For the first time in decades, no firm target was set for GDP. Rather, the commitment is to “a reasonable annual target range” – whilst this allows for greater fluctuations in headline GDP growth over the next five years. Market consensus is that the unofficial target is above 6% per annum.

  1. Urban Population

China’s ongoing ‘national rejuvenation’ goals heavily involve the urbanisation of its population to city-centres. The target has increased from 60% (achieved in 2020) to 65% of the population.

  1. Unemployment

A new inclusion to the FYP, the target is to keep the unemployment rate in urban areas below 5.5%.

  1. Share of Digital Economy

Another new addition to the FYP, China has long been touting its desire to be a leader in global technology innovation – from AI to the first Central Bank Digital Currency (CBDC). The official target in the FYP was to have over 10% share of the global digital economy by 2025, with specific attention to blockchain, AI, cloud computing and financial technology (“fintech”).

  1. Green Development

China has announced its desire for carbon emissions to peak by 2030 and decreasing carbon emission intensity (a measurement per unit of GDP).  This has resulted in an official target of reducing energy consumption per unit of GDP by 13.5 – 18% by 2025. Another target which the population would be glad to hear is the percentage of ‘good quality air days per year; increasing from levels of 84.8% in 2019, the target is now 87.5% of the year by the end of 2025.

  1. Life Expectancy and Retirement Age

As part of their desire to become a ‘fully modernised country’ by 2035, this FYP has announced China’s desire for people to live and work longer. One express intention is to raise the life expectancy of all citizens (currently 77) by one year by 2025. The other target has been to increase the retirement age across men and women and across all sectors – for decades the retirement age has been capped at 55 for women and 60 for men. To make the Chinese pension plan sustainable (95% of citizens will have access to basic pension), the latest FYP looks to increase this age, though the numbers are not firm as of yet.

  1. More Babies

In stark contrast to the ‘one child policy’ that only ended in 2015, Beijing is looking to increase the population fertility level – for now this has only been tabled as an ‘appropriate level’ until their latest population census data comes through.

  1. Political Development

Geopolitical risk is something any international investor needs to consider, and in particular, China’s political actions can have dramatic effects on global markets and relationships well beyond those of Asia-Pacific. Part of the latest FYP is an increase in political pressure and control over regions outside of Mainland China, with Hong Kong the most directly in sights and Taiwan as a close second”.

Impacts on Investment

“There are some key takeaways from what the CCP is indicating in their latest plan.

If you’re bullish Asian tech, then you’re a winner under the FYP.

The commitment to a share of the digital economy, the introduction of the digital RMB (currency) and a suite of government-endorsed technologies will drive innovation and demand in the future. This plays well into China’s desire to become a modernised country, since they will look to leverage their existing technological expertise and R&D funding into further commercializing their high-tech industries.

If you’re bullish Asian healthcare and education, then you’re a winner under the FYP.

Increasing urbanisation, fertility and life expectancy all play into the growth of modern healthcare capabilities in China. We can expect aged care to make an increasingly large impact on the balance sheets of Chinese families, as more children are born into city clusters then education systems will become more robust and better funded. We can expect to see urban infrastructure spending being dedicated to improving healthcare and education systems in future.

If you’re highly exposed to political risks, you may be wary.

Those invested into companies/industries in Hong Kong and Taiwan which deal with foreign parties such as the U.S, may be concerned based on renewed and officially publicized intent from China to exert more control over these regions. Politics and economics may clash where it is aligned with Party’s interests, in particular the maintenance of Hong Kong as a financial hub – but suffice to say it is certain that the regions as we know them today will look vastly different by the end of this period”.

 

Sergei Magnitsky Update

In December I recommended for holiday reading a book about corruption and murder in Putin’s Russia and a campaign to make the perpetrators pay. The book is:

Bill Browder: Red Notice: A True Story of High Finance, Murder, and One Man’s Fight for Justice

I am happy to say that the global campaign headed by Bill Browder to expose and punish Sergei Magnitsky’s killers and other corrupt and disreputable characters is having a real impact as laws are passed to harm the perpetrators.

The Global Magnitsky Human Rights Accountability Act authorizes the US President to impose economic sanctions and deny entry into the United States to any foreign person identified as engaging in human rights abuse or corruption. Canada passed a similar Act in 2017 and the UK announced a similar sanctions regime in July 2020. In December 2020, the European Union passed the European Magnitsky Act, which will allow it to “freeze assets and impose travel bans on individuals involved in serious human rights abuses”.

An Australian parliamentary committee has recommended that Australia join the U.S., Canada, the U.K., Europe and others with legislation targeting human rights abusers worldwide.

In December 2020 the Sydney Morning Herald reported that:

“The name of a Russian tax auditor can now strike fear into the hearts of murderers, kleptocrats and human rights abusers all over the world.

Sergei Magnitsky died in a Russian prison cell when he was just 37 after uncovering a $230 million tax fraud – perpetrated by officials in his own government. Some of those involved in his death were given awards and honours.

Today a growing list of nations are adopting laws in his name to make those guilty of human rights abuses and corruption overseas pay – even if they, as with Magnitsky’s persecutors, never face justice in their home countries.

Among those regularly featured on sanctions lists are the assassins who lured Saudi journalist Jamal Khashoggi to a consulate to kill him, the generals of Myanmar who ordered genocide and, of course, the people who locked up and tortured Magnitsky.

As Australia and the European Union move to follow countries such as the United States in adopting their own Magnitsky Act, the spotlight is falling on officials in China involved in everything from the crackdown on protesters in Hong Kong to the detention of more than 1 million Uighur Muslims in “re-education” camps.

The man behind the global Magnitsky push, US financier Bill Browder, says the beauty of the penalties is that they target individual wrongdoers rather than putting whole nations under punishing economic sanctions. But, with Australian and Chinese relations at a historic low point, he says “the diplomacy can still get messy”

For more detail see: https://www.smh.com.au/national/what-are-magnitsky-sanctions-and-why-does-russia-oppose-them-20200909-p55tqm.html

Another Book Recommendation: “The Frenchman” by Jack Beaumont

While not a true story like Red Notice, I have recently enjoyed a spy thriller written by a former French spy who is now a resident of Australia and retired from that lifestyle. The author, Jack Beaumont, is the pseudonym of a former French intelligence operative.  I found it a realistic and enthralling tale and well written so if that genre appeals to you, I recommend it.

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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