What has happened in Financial Markets since late February?
The financial markets only recognised the global and profound significance of Covid-19 from around late February and a great deal has happened since then. A huge initial sell-off in stock markets and border closures was soon accompanied by both massive Government stimulus programs and Central Banks reducing interest rates and pumping liquidity into the markets.
While economic activity slumped despite this, resulting in a global recession, stock markets have recovered significantly and technology stocks have reached new highs. Perceived “safe haven” assets, like gold, have also done well and demand for oil has fallen leading to lower prices.
There is plenty of information about coronavirus cases and deaths, but some of the interesting changes over the last 6-7 months from an investor perspective are as follows:
Australian Dollar: up @12% against the USD to 0.73 and up against the Yen , Euro & GBP.
Australian Government 3- and 10-Year Bonds the 3 year rate has halved from 0.5% to 0.25% due to RBA actions whereas the 10 year rate remains basically unchanged at around 0.8%
US Government 10 Year Bonds: down around 40% from 1.15% to 0.7%
Australian Sharemarket: down @ 17% from the February pre-coronavirus high but up @ 30% to 5,875 from the March low. Clearly a lot weaker performance than the US.
US S & P Share Index: up nearly 50% from mid-March and at 3,315 , now close to the February pre-coronavirus high.
US NASDAQ index: up around 60% from mid-March to nearly 11,000 now and even up 12% from the February pre-coronavirus high.
Gold Price: up around 20% in USD to @US$1,900 (but less in AUD due to the rise of the AUD).
WTI Oil: down @ 8% to US$41 (but down more in AUD due to the rise of the AUD).
Can Tech Stocks keep rising or is it a bubble?
Every day it seems the news is all about the on-going rise of the price of tech stocks like Tesla and Amazon in the US and Afterpay and Xero in Australia.
So, the big question is whether this will continue or is there a bubble in danger of bursting?
There is no doubt that coronavirus has benefited many technology companies, such as on-line retailers, but the valuations of many do look somewhat stretched, if not outright crazy.
The market does not seem to be distinguishing between those businesses like Google (Alphabet) and Apple that are very profitable and those with little if any profit but seemingly bright prospects.
This is dangerous and, as we saw with the bursting of the tech bubble in 2000, prices can fall very quickly when sentiment changes. In the Australian context, few of the tech darlings are profitable, so I would caution against buying at current levels as an investment; they are more suited to traders/speculators.
Morgan Housel on finding the sensible balance between optimism and pessimism
I am reproducing this quote as I think it has relevance for investors. There are always things that throw us off-kilter – wars, pandemics, terrorist attacks, recessions, etc – but in developed countries like Australia things eventually come good and patient investors are rewarded.
“Optimism is usually defined as a belief that things will go well. But that’s incomplete. Sensible optimism is a belief that the odds are in your favour, and over time things will balance out to a good outcome even if what happens in between is filled with misery. And in fact, you know it will be filled with misery. You can be optimistic that the long-term growth trajectory is up and to the right, but equally sure that the road between now and then is filled with landmines, and always will be. Those two things are not mutually exclusive.”
The role of Fixed Interest Investments (Bonds)
Ben Inker from fund manager, GMO, has provided a thoughtful update on the role of fixed interest investments in a world of very low-interest rates. My take on this is that while there is still a role for fixed interest investments, like bonds, returns will be low and they probably won’t provide as much portfolio protection (gains in value) as they historically have in periods when shares and property fall in price. This presents a big challenge for investors, particularly those in retirement living off their investment assets.
“The recent fall in cash and bond yields for those developed countries that still had positive yields has left government bonds in a position where they cannot provide two of the basic investment services they have traditionally provided in portfolios – meaningful income and a hedge against an economic disaster. This leaves almost all investment portfolios with both a lower expected return and more risk in the event of a depression-like event than they used to have. There is no obvious simple replacement for government bonds that provides those valuable investment services. As a result, investors would be well advised to think critically about not only what their fixed income portfolios can feasibly achieve going forward but also what the implications are for the amount of risk they can afford to take across the rest of their portfolios”.
Navigating the new assets test limit for the Age Pension
Millions of Australians receiving a full or part Age Pension had a welcome boost at the start of July in the form of further increases to assets test limits.
The assets test is a key part of the assessment process used by the Department of Human Services to determine who is eligible to receive government pension payments and how much is paid to singles and couples.
It sets the maximum value of assets (excluding the family home) that can be held to receive a full Age Pension.
Pension payments are then reduced by $3 per fortnight for every $1,000 of assets above those limits until they cut out entirely.
The other main test for Age Pension payments is the income test, which, assuming singles and couples qualify under the assets test, allows them to earn up to certain amounts per fortnight before their pension payments are reduced.
The latest assets test increases shown below, although not large, maybe enough to assist some people to capture higher fortnightly Age Pension payments. Furthermore, they may help others currently not eligible for any Age Pension payment to creep in under the higher test limits.
Assets limits for a full Age Pension
(1 July 2020 to
30 June 2021)
(1 July 2019 to
30 June 2020)
|Couple homeowner (combined)||$401,500||$394,500||$7,000|
|Couple non-homeowner (combined)||$616,000||$605,000||$11,000|
Source: Department of Human Resources
Assets limits for a part Age Pension
(1 July 2020 to
30 June 2021)
(1 July 2019 to
30 June 2020)
|Couple homeowner (combined)||$876,500||$869,500||$7,000|
|Couple non-homeowner (combined)||$1,091,000||$1,080,000||$11,000|
|Couple homeowner (combined, illness separated)||$1,031,500||$1,024,500||$7,000|
|Couple non-homeowner (combined, illness separated)||$1,246,000||$1,235,000||$11,000|
Source: Department of Human Resources
What assets are incorporated in the assets test?
The pension assets test does not apply to the family home (your principal place of residence), but it does to your home contents and to any other assets you own.
Assessable assets include your superannuation and other financial holdings, bullion, collectables, any investment properties including holiday homes, retirement village contributions, business assets, vehicles, caravans and boats.
However, all assets are assessed on their net value, meaning that if you hold an investment property with a mortgage the value is calculated after the deduction of the outstanding debt.
One of the biggest problems for many retirees at the moment is the mismatch between Age Pension rates and investment returns.
On current full Age Pension rates, a single person with a home can receive $24,551.80 a year including additional payment supplements if they hold assets valued below $268,000. A homeowner couple can receive $37,013.60 combined if their assets are below $401,500.
People with assets above these limits need to rely on their investment returns to make up the difference with the Age Pension as it reduces under the payment taper rate of $3 for every $1,000 in assets held.
Using asset reduction strategies
If your net assets are above the assets test thresholds, and depending on what makes the most sense for your longer-term retirement plans, there are strategies you may want to consider in order to qualify for either a full or part Age Pension or to increase your current government payments.
Below are some common asset reduction strategies:
Home improvements. With your family home being exempt from the assets test you’re able to reduce your assessable assets by spending any amount of money on improvements or repairs.
Debt payments. If you have a mortgage against your exempt principal place of residence, using other assessable assets to repay that debt will have the dual effect of reducing your debt and your assessable assets at the same time.
Gifting. Another legitimate way to reduce is assessable assets is via gifting to family or friends. A single person or couple can gift $10,000 in a financial year, or $30,000 over a rolling five-year period. Those more than five financial years away from being eligible for the Age Pension can gift any amount, which can also include the transfer of other assessable assets.
Super splitting. There also can be substantial Age Pension benefits when an older spouse splits their superannuation contributions with their younger spouse over time so the older partner can qualify for the Age Pension.
Funeral expenses. Lastly, another way to reduce assessable assets is through the purchase of funeral bonds. A single or couple can each spend up to $13,250 on an individual funeral bond, which are classed as exempt 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.