Covid-19 Vaccine News is very positive for health and financial markets

Recently Pfizer announced that trial data for their prospective Covid-19 vaccine shows it to be over 90% effective in protecting people from Covid-19 and, importantly, no major safety issues. This prompted a surge in financial markets worldwide despite the rapidly escalating number of coronavirus cases in the US, Europe, and some other countries. More encouraging news emerged subsequently as Moderna announced that preliminary data shows that their vaccine, which uses the same messenger RNA technology as Pfizer’s vaccine, is 94.5% effective. Astra Zeneca has also indicated its prospective vaccine should be effective and numerous other vaccines are in Phase 3 trials and results should be available over coming months.

While production limitations and distribution challenges mean the roll-out will take quite some time and it is likely going to be late 2021 or beyond before the various Covid-19 vaccines can be given to the billions of people worldwide necessary to produce global herd immunity, financial markets always look forward They are already focusing beyond today’s health and economic challenges and pricing in the likelihood of global economic recovery in 2021.

More than 55 million people have contracted Covid-19 worldwide so far and deaths exceed 1.2 million, thus highlighting the critical importance of developing successful vaccines if this disease is to be controlled and more normal economic activity resumed. While many individuals and businesses object to the restrictions imposed by various governments to control the spread of the disease, until vaccines can be rolled out there is no other effective health strategy available. Furthermore, those cities and countries that have adopted less restrictive measures have not benefitted economically as well as incurring higher infection and death rates. Hopefully, successful vaccines can mean this debate can be largely rendered moot before too long.

The market reaction to the US Election Results

The US election threw up some unanticipated results and controversy over unsubstantiated claims of voter fraud but it seems clear that Democrat Joe Biden will be formally confirmed on December 14 by the Electoral College as the 46th President. The Democrats did not do as well in the House of Representatives and the powerful US Senate and the likelihood that the Republicans will retain a small majority in the Senate has been welcomed by financial markets. The rationale for this is that the incoming Biden administration will stimulate the economy further but not excessively as their actions will be constrained by a Republican-controlled Senate. It is unlikely that Biden will be able to significantly raise taxes or take other actions disliked by corporate America. Star Australian fund manager, Hamish Douglass from Magellan, has described this as a “goldilocks” scenario for financial markets. The US sharemarket has reached record highs despite new restrictions being imposed to mitigate the rapidly escalating number of new coronavirus cases in the US and Europe.

Low interest rates – bad for term deposits,  good for residential property prices

Central banks around the world, including Australia’s Reserve Bank, have cut already low interest rates to new all-time record lows to try and stimulate economic growth and this has already hurt savers and benefitted borrowers.  Australian banks can borrow from the Reserve Bank at approximately 0.1% so it is hardly surprising that Term Deposit rates have fallen and further falls are likely. Unfortunately for savers, rates below 0.5% are already common and hence savers are receiving less than the inflation rate. This is expected to continue for at least several years and potentially longer.

Exceptionally low deposit rates benefit borrowers and the availability of residential mortgages at rates as low as 2.0% has stimulated demand from first home buyers and investors are likely to become more active. House prices did not decline nearly as much as forecast 6 months ago and are now firming in many markets. An oversupply of units in Melbourne, Sydney & Brisbane has seen rents falling and price weakness in that sector; this will likely continue until foreign student numbers and population growth resumes.

The extremely low return on “safe” investments like bank deposits is likely to continue for years and force investors to look at alternatives that can deliver a higher return. Even more conservative retirees are effectively being forced to take more investment risk to generate a return on their savings. These policy settings should provide a tailwind for assets like shares and residential property even though they are certainly not cheap versus typical valuation metrics.

Implications of Gifting for Social Security Recipients

While there are no legal restrictions on how much you can give away, if the gifts exceed certain limits, the extra amount will not be disregarded when entitlements for most social security benefits and concessions are calculated.

For example, this can impact a person receiving the Age Pension. In other words, the gift may still be assessed, even though you no longer have the money or asset. Also, gifts exceeding the allowable limit are assessed for five years from the date of the gift. So even if you are not receiving a social security benefit right now, gifts made before you become eligible could still impact your future entitlements.

When Centrelink and Department of Veteran’s Affairs (DVA) apply ‘means-testing’ to assess entitlements, they disregard (do not count) gifts of assets up to $10,000 per financial year, and a maximum of $30,000 in a rolling five-year period. These limits apply both to individuals and couples combined. So, if you are a couple, these limits apply to the combined value of any gifts you make. The thresholds apply to the total of all amounts gifted.

There is not a specific ‘penalty’ for gifting above the thresholds. However, assets gifted above the threshold are not immediately disregarded by Centrelink and DVA and will continue to be assessed as your assets for five years from the date of the gift. These amounts will be assessed as ‘financial assets’ when calculating your social security entitlements under the means-test. At the end of the five-year period, the amount you have gifted is disregarded and is no longer assessed for means testing to determine your entitlements in the future.

For social security purposes, arrangements that may be assessed as gifts include:

▪ giving cash or transferring ownership of another asset to another person ▪ selling property or another asset for less than market value (where the sale is not on the open market)

▪ being guarantor on a loan, where the borrower defaults and you repay their debt

▪ forgiving a debt owed to you by someone else or paying someone else’s debt for them

▪ paying someone else’s expenses, such as a grandchild’s school fees, wedding expenses or costs of living

▪ donating to a charity or other organisation

▪ forgoing your interest in a deceased estate or a superannuation death benefit.

Some arrangements are not assessed as gifts. These include:

▪ transferring cash or another asset to your spouse

▪ transferring or selling assets where you receive cash or other assets that are at least equal to the market value of the assets transferred)

▪ repaying a debt or loan that you owe, and

▪ arrangements referred to as ‘Granny Flat Rights’, which involve being granted the right to live in a property for life in return for cash or other assets.

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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