Welcome to the August 2011 news on Financial Planning
Hope this finds you well, with all the turmoil that is happening in the US one of our 3 articles is about the current situation that might shed some light on this complex problem for you.
In our business there is no such thing as a stupid question, especially when there is lots of media hype about uncertain times, so please call us with any questions.
We know that this information, along with our advice and support, can help get you on the path to creating the life you really want to live!
Your partners in wealth creation,
Larry and the InvestWise Team
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The global economy - Investment and market update
Madison Financial Group Pty Ltd | A member of PHAROS Financial Group
So far, however, the US Treasury bond market has shrugged off the prospect of a Federal Government
default with ten year bond yields falling towards 3% p.a. in line with those in Germany and Britain,
before a slight uptick back to 3.1% p.a. They have remained the safe haven of choice in a world where
many sovereign borrowers are looking less reliable and their bond yields are being pushed up accordingly.
The next few weeks will test the resolve of the recent buyers of US Treasury bonds with the yield.
The yield will be the canary in the coalmine signalling wider spread mayhem in financial markets.
Watch the ten year US Treasury yield more closely than the equity market indices.
– While the US economy has difficult times ahead, it is important to recognise that it is not equivalent to
the US stock market. Many of the major companies listed on the US stock market operate worldwide and
derive much of their revenue and profits from faster growing economies in Asia and elsewhere. They are
posting very good profit results due not only to foreign sourced revenue but also cost cutting and access
to very cheap finance in the current easy monetary conditions.
– Overall, in the absence of a US Government default, the outlook for the US equities market is likely to be
mildly positive rather than negative. There is clearly capacity for shocks to the system which can unsettle
the stock market but significant falls of 10% or more from the current level will provide medium to longer
term buying opportunities, as long as there is no actual Government Bond default.
AUSTRALIA
– Outside of resources, the prospects for listed companies are mixed. Occupying a protected island of
their own within the wider economy, the four major banks have pricing and distribution power although
their overall business volume is largely tied to the rate of credit growth in housing mortgages and credit
card balances within the economy at large. We expect that their profit growth will vary between 4% p.a.
in the bad years and over 12% p.a. in the best years. Overall their earnings per share growth and hence
their share price growth should be less volatile than that of the mining and energy companies but will be
significantly better than most industrial stocks.
– Given the high combined weight of the mining, energy and banking sectors in the overall stock market
index, investment via broadly based or passive funds should benefit from the positive outlooks noted
for those sectors.
– Investment in property securities, whether listed or unlisted, still needs to be done cautiously, in spite
of talk of recovery from commercial real estate agents and others in the property funds management
sector. Retail and residential property investments are still often problematic, offering insufficient
return for the risks involved. Selective investment in office property with long term leases to high quality
tenants can provide the level of prospective return needed to fairly compensate investors for their risks
(about 12% p.a. total return).The selectivity needs to be applied not only to the prospects of return but
also the credibility of the proponents of the investment.
– Fixed interest is still in the shadow of the recovery from the GFC. The course of long term interest rates
is driven mainly by inflation expectations here and internationally and the expected worldwide trend is
towards an increase rather than a decrease in inflation. Yields on long term sovereign debt issued by some
governments such as the USA, Germany, Canada, Britain and Australia have actually declined in recent
months as a result of a flight to safer issuers. Not all of them have the low debt to GDP ratio of Australia
and are not as safe in terms of default risk. We expect the yields on some issues such as US Treasuries to
rise as default risk becomes less remote. Paradoxically, any such increases are likely to drag Australian
bond yields up with them, not withstanding our better debt position. This is due more to the correlated
dynamics of global bond markets than any rational form of behaviour by bond investors. In general bank
term deposits offer better value for money than government or corporate bonds.
– Short term interest rates on cash are driven mostly by the official RBA cash rate. As this is the main
policy instrument that the RBA has to control inflation, we should expect it to rise rather than fall in the
next two years, but the extent of any rise will be tempered by the anti-inflationary effects of the higher
Australian dollar exchange rate.
THE UNITED STATES OF AMERICA
– The US economy remains in a slow motion recovery (some would say a slow motion train wreck but we are
not as pessimistic except for the risk of Congress forcing a default on US Treasury bonds- see below).
– Unemployment is coming down slowly and the housing market has fallen for much of the last six months,
although the most recent monthly report on the Case Shiller House Price index across twenty major cities
has shown a slight upturn.
– The Federal Reserve is unlikely to increase interest rates in any of the next several monthly meetings.
While they have announced that quantitative easing will end on schedule.
in June of this year, they have not ruled out a third round should one become necessary. More worrying
(for the financial markets) is the recent admission by Ben Bernanke, Chairman of the Federal Reserve
Board of Governors, in a press conference, that they do not fully understand why the slowdown is persisting
nor whether it will be temporary or longer term in nature.
– The impasse between the US Congress and the Obama Administration over the lifting of the US Federal
Debt ceiling is getting worse not better as the clock ticks down to the
2 August 2011 deadline. After that date, if the debt ceiling is not lifted, the US Treasury has indicated that
it will have to stop payments on some commitments. These may include interest on its debt, defence
spending including salaries or other public service costs or even social security pensions. This will provide a
major scare to the financial markets before it is resolved in late July or early August, and worse if it is not
resolved. Rating agencies have indicated that any default on interest payments would lead to a downgrade
of US Treasury bonds from AAA to D (the lowest rating).
BASE CASE (35% PROBABILITY – PREVIOUSLY 40%)
– The USA avoids a return to recession but has slower than normal economic growth (sub 4% p.a.) during
the recovery over the next five years. This means that unemployment will reduce slowly and stay higher
than in most previous recoveries.
– Japan achieves low real growth but with deflation continuing well into 2012.
– Europe achieves low growth with very low inflation. Inflation in developed countries picks up only slightly
into the 3% p.a. to 4% p.a. range from 2011 onwards and does not get out of control. This has the beneficial
effect of slightly reducing real interest rates and the real burden of debt.
– Australian cash and short term interest rates increase modestly with the RBA cash rate rising to above 5%
p.a. by the end of the first quarter of 2012.
– Bond yields have a capacity to rise by between +0.5% p.a. and +1.0% p.a. by the end of FY 2011/2012.
– Commercial property values remain fairly static in 2011/ 2012.
– Earnings per share for the ASX 200 grow moderately over the next 5 years with the exception of the
major resource companies which achieve more rapid growth in the next two years and beyond.
– The Australian share market is prone to falls of between 10% and 15% during the course of the next two
financial years but has a reasonable prospect of being some 10% to 15% above its current level by 30 June 2012.
– International share markets, led by the US, show some moderate weakness over the next six months
(10% to 15%) before resuming their recovering, underpinned by some earnings growth.
– The Australian dollar continues to swing in a wider than normal range of between USD 0.90 and USD 1.20,
adding more short term volatility to returns on international assets.
UPSIDE CASE (15% PROBABILITY)
– Worldwide growth stronger than expected due to consumers and businesses recovering in confidence.
US unemployment drops below 8% by late 2011, Europe grows real GDP by 2% p.a. or more, Japan recovers
more quickly and Chinese growth slows only minimally.
– Inflation in developed countries picks up into the 3% p.a. to 5% p.a. range from 2012 onwards but does
not get out of control, even though it is at the higher end of the range most of the time.
– Australian cash and short term interest rates increase more significantly over the course of 2011 -2012
to combat reemerging inflation risk.
– Bond yields up by between +1.0% p.a. and +2.5% p.a. by the end of FY 2011/2012.
– Commercial property values start to recover more quickly starting in 2012.
– The Australian share market is prone to falls of between 5% and 10% during the course of the next two
financial years but has a reasonable prospect of being some 15% to 20% above its current level by 30 June 2012.
– International share markets, led by the US, show some moderate weakness over the next six months
(10% to 15%) before resuming their recovery, underpinned by some earnings growth.
– The Australian dollar continues to swing in a wider than normal range, adding more short term volatility
to returns on international assets.
DOWNSIDE CASE (30% PROBABILITY – PREVIOUSLY 25%)
– Due to one or more of the following: A US debt default; an oil price shock: or increased conservatism in
Japan and Asia, recession re-emerges in the USA, Japan and Europe in late 2011 to early 2012 and proves
to be a worldwide double dip event and lasts till 2013 or later, threatening a recession in Australia.
– Inflation is contained by recession and slips into deflation worldwide for up to 5 years, ranging between
-2% p.a. and +1% p.a.
– Australian cash and short term interest rates down by 1.0% p.a. from current levels by the end of calendar
2011 and by further 1.0% p.a. in 2012 as the world moves into recession and the RBA cuts rates to stimulate
the economy.
– Bond yields down by 0.5% p.a. by the end of calendar 2011 and a further 1.0% p.a. in 2012.
– Commercial property values do not recover their 2007 level until 2016 or later.
– With the exception of major resource companies, earnings per share growth for the ASX 200 companies
are negative in 2010-2011 and slower by 1% p.a. for the next 5 years.
– Australian, European and US stock markets bottom some time in 2011-12 between 20% and 30% below
current levels and recover their current levels in 2013-2014.
– The Australian dollar continues to swing in a wider than normal range, adding more short term volatility
to returns on international assets.
– The other 20% of possibilities we simply do not know about. They include a range of unknown unknowns.
PORTFOLIOS SHOULD:
– Maintain their current positions with heightened levels of cash ;
– Be ready to increase their weighting to Australian and International equities over the next three to six months
during episodes of significant market weakness i.e. 10 % or more below the current levels as set out in
Table 1 above (see page 4);
– Continue their significant underweight in property subject to investing in exceptional opportunities which
offer returns in excess of 12% p.a.;
– Bias fixed interest to bank term deposits;
– Generally avoid investment products that are not clearly transparent in terms of how they work and
what they charge such as hedge funds and structured products.
How is this is relevant to me and my situation?
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40 - The year of living dangerously
By Suncorp
Suncorp Life's 'Year of Living Dangerously' report has found 40 years old to be the most dangerous year of Australians' lives, challenging the commonly held belief that risk-taking adolescents are the most accident prone age group.Suncorp's report, released in February 2011, found that those in the 'prime of their lives' are more likely to die by accident than any other generation.Suncorp Life CEO Geoff Summerhayes said the results were surprising."Unexpectedly it is not the young who are most at risk of accidental death,but those approaching middle age," says Mr Summerhayes. "The concern is, by the time you turn 40 it's likely you'll have a mortgage. You may also have a young family and in some cases elderly relatives who need caring for, too."The findings highlight the importance of having adequate insurance protection, yet many recent studies have found Australians to be significantly underinsured. That's a worrying sign, particularly when your ability to produce an income and provide for your family is the most important 'asset' you will ever own. How long would your savings last?If you couldn't work, how would you and your family manage financially? For how long would your savings cover your ongoing living expenses?
These figures are national averages.
How do you compare?
$15,600
Average yearly mortgage payments5
$10,965
Average yearly household expenditure on food and alcohol6
$8,666
Average yearly household expenditure on transport6
$1,468
Average yearly household expenditure on gas and electricity6
Do you still think your income isn't worth protecting?
$2,207,135
The gross amount a person on a current salary of $60,000 can expect to earn over a 20 year period.4
You could be worth more than you think.
33%
Percentage of Australians who'll be diagnosed with cancer before the age of 752. Reassuringly though, over 60% of cancer patients will survive more than five years after diagnosis.'
235,790
Number of working age parents who suffer a serious illness or injury each year.
How much insurance do you need - and how do you arrange it?
A financial planner can help by reviewing your needs across the full range of Life, Total & Permanent Disability (TPD), Trauma and Income Protection insurances. Together you can select an appropriate level of cover that will protect you and your family from unnecessary financial trauma.
1 The Lifewise NATSEM Underinsurance Report. February 20102 The Australian Institute of Health and Welfare, 20053 Cancer Council Australia, 2010.4 Based on annual CPI and salary increases of 3%.5 ABS. Cat. No 2001.0 - 2006 Census, Community Profile Series6 ABS. Cat. No 6530,0 - Household Expenditure Survey. Figure is inflation adjusted to September 2010.
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Take charge - Superannuation
By Dorothy Drane
New laws are allowing workers to access their super for property investment. MPP investigates this emerging area of super, which has property investors talking.
Most of us have mentally written off our superannuation as dollars that disappear from our pay packet and are locked away with only a vague hope that we might see them again one day before we die.
Even that grim thought was taken down a step when the GFC eroded the figures that have shown up on super statements since 2008. And those who think it might be a good idea to take control of their own destiny and establish a self-managed super fund face a jumble of jargon, formidable financial formulas and taxation traps for the unwary.
Property investment, on the other hand, is something that makes us comfortable. We can study our options, see it and feel a degree of confidence that we know what we are doing. Property and super were brought together about two years ago, when changes to the Superannuation Industry Supervision Act meant the nation’s self-managed superannuation funds could be used to help buy an investment property.
Until then, super funds, which attract tax concessions, could not be used when borrowing to buy an asset and it didn’t become really practical until further changes were made in July 2010.
“It is only in the past six months that we have started to see massive growth as people have realised they have the power to decide how their superannuation is invested,” says Mark Holzworth. He is a superannuation investment strategist with Retirewell Financial Planning, which has become a market leader in the relatively new field of facilitating the use of superannuation to purchase investment property.
“Super is not an asset class or an investment in itself but is a vehicle to access property,” Mark says. “You are not taking anything out of your superannuation fund to buy a property, but using your super to borrow to buy an investment property within the super structure. It is only in the past six months that we have started to see massive growth as people have realised they have the power to decide how their superannuation is invested
“A family or self-managed super fund allows families to pull super funds together in an asset base. For example, if a husband and wife each have $100,000 in super, they can pool it as the first $200,000 towards an investment property purchase and borrow the rest as they would normally.”
As a bonus, cash flows associated with the debt on the property are paid by the super fund so in many cases, no additional contributions are needed. Russell Dell of Belle Property Buderim, who has been actively working with Super investors, says that while superannuation funds have not been performing particularly well in recent years, property values continue to double on average every 7.5 years.
New laws are allowing workers to access their super for property investment. MPP investigates this emerging area of super, which has property investors talking.
“This way they can see growth in their fund,” Russell says. “Super funds incur substantial fees and managers don’t like releasing funds because they are making money out of it, but why not pull it over and manage it yourself? “The only real difficulty has been that most people don’t understand other markets, but they do understand the property market and can take control.”
It all sounds attractive, but how does the average worker use super to become a ‘super investor’. Basically, it’s just not something you can do yourself. The first step is to consult a financial planner to devise an investment strategy and make recommendations on how super funds can be transferred into a new self-managed fund.
An accountant can help with the administration and, once you find the property you want to buy, set up a bare trust, which is integral to the whole plan. A bare, or simple, trust gives a right to both income and capital and is simply the holder of the property. You have the ownership and control, but it must be handled through the trust, which is your nominee. The property will be the trust’s only asset and is essentially a way of protecting the superannuation capital. A safeguard for the loan, the bare trust is the government’s way of limiting liability in the event that you get into difficulty.
“It’s a new entity, similar to establishing a family trust,” Mark explains. “It is just another type of trust with its own tax concessions.” With the tricky and confusing financials sorted out, you are free to start thinking about the property you wish to purchase and find yourself well on the road to becoming a super investor.
“As compulsory superannuation contributions have now been around for almost 20 years, most Australians can use the strategy,” Mark says.
With the banks not lending as much as they were pre-GFC and demanding bigger deposits, mum and dad investors can use this hidden equity source they may not even realise they have, and that can be empowering.
Mark has found that most people don’t want to have to sit in the middle surrounded by all the different professionals – financial planner, mortgage broker, accountant, lawyer – which is why Retirewell has carved a niche in the super investor market.
With the banks not lending as much as they were pre-GFC and demanding bigger deposits, mum and dad investors can use this hidden equity source they may not even realise they have, and that can be empowering
“We firmly believe that this is the future of superannuation in this country,” Mark says. “People sometimes just don’t want other people in charge of their retirement investment so this is an opportunity to decide what property you buy and who manages it.
“It’s your money so take control.”
How it works:
• The superannuation accounts of up to four family members can be used to form one pool of
capital.
• There is a minimum of $150,000 made up on any combination of up to four investors, individuals or families, residents and non-residents.
• Investors can choose the property they wish to purchase and, with a few covenants, it can be bought and sold just like any other form of ownership.
• The property may be an established dwelling but buying off the plan is not a problem.
• It can be used for both National Rental Affordability Scheme (NRAS) and non-NRAS properties.
• The property cannot be occupied or rented by the owner or a family member.
• You can manage the investment property rental yourself.
• Retain the property until retirement and no capital gains tax is payable. Sell it sooner and an SMSF attracts a lower tax rate.
The process to get it happening:
1. Determine your capacity to use a self-managed superannuation fund (SMSF) for a property investment and prepare a strategy.
2. Source an investment property.
3. Find a lender and make a loan application.
4. Establish requisite entities, such as the SMSF, a bare trust and a corporate trustee.
5. Roll over funds from other super schemes – this can take about a month depending on the individual situation and how much is required.
6. Receive lending approval from a funding institution.
7. Get a solicitor to attend to settlement details.
8. Ensure ongoing compliance of the SMSF such as accounts, tax returns, member statements, audits and investment strategy reviews.
Super investors case study
Tony and Angela dreamed of owning an investment property.
After hearing that they could use their super to purchase an investment property, they spoke to us. We established a family super fund and rolled over their two existing super funds. Tony had $90,000 with an industry super fund and Angela had $70,000 with a corporate super fund.
We then sourced a loan of $300,000. They purchased an investment property worth $440,000.
With their investment property now worth $500,000 and long-term tenants in place, Tony and Angela are now making additional super contributions into a share portfolio and plan on using the gains in three years to buy another property.
– Mark Holzworth, Retirewell Financial Planning
Opportunity knocks
Buyers eager to enter the property investment market are increasingly taking up the opportunity to use their self-managed superannuation fund to do it.
Belle Property Buderim sales consultant Russell Dell, who is at the forefront of the concept on the Sunshine Coast, suggests that ‘super investors’ now account for about a third of mortgages being approved.
The majority are 40-plus and are buying with a 10-year strategy.
“As a general rule, to make it work you need to have around $150,000 available in your super fund to raise a mortgage and buy a property in the low $400,000s,” he says. “If they get into products that are National Rental Affordability Scheme (NRAS) approved, then they can buy it without having to top it up from their own earnings and have a positive cash flow property.
“If someone purchases a property that is negatively geared, it is going to impact on their ability to borrow, but the NRAS properties dovetail beautifully with this,” he says.
Russell says it is an excellent time for investors to enter the property market while rental returns are looking very positive in the medium to long term and purchase prices are under downward pressure.
“The investor chooses the property – and we have a large pool of investment properties that fit the bill – and then has an investment where they can sit back while it looks after itself,” he says. “This represents a really good opportunity for people to jump into the market and the fact they are buying at 2006 prices at the moment makes it even more advantageous.
“The property market will bounce back and now you can buy in the growth corridors where there is massive pressure on the rental market.”
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The information contained in this newsletter should be treated as general advice only. It has not taken anyone’s specific circumstances into account.
If you are considering a strategy such as those mentioned here, you are advised to consult your financial adviser at InvestWise Financial Planning info@investwisefp.com.au
‘There is nothing wrong in wanting to be rich. The desire for riches is really the desire for a richer, fuller, and more abundant life, and that desire is praise worthy.’
Wallace D.Wattles.
