We can’t be the only ones feeling like this year just flew by – yet here we are! With the silly season now upon us, the Ipswich office at Dobbrick Financial Services have been reflecting on the past 12 months and thinking ahead to what 2020 holds for us, our business, and our clients. It’s been a refreshing exercise – to take time out and take note of the wins we’ve achieved both as a business, and for our clients – and as the year comes to a close, we’d encourage you to do the same.
Dobbrick Financial Services were recognised with a string of accolades at the annual Fortnum Private Wealth Gala Awards night held at Sheraton Mirage last week with Director, Paul Dobbrick winning both Financial Advisor of the Year and the Guy Carrington Chairman’s Award.
“I am most proud of our team who were finalists in the Advice Practice of the Year category as they are a seriously committed and loyal bunch of people,” says Paul. “But of course, being recognised with these other awards is a huge honour and spurs us on to continue to get the best results we can for our clients.”
There was mixed performance for investment markets last week. European and Japanese equities performed well, whilst emerging markets, US and World equity indices performed poorly. Australia faired OK
Fixed rate sovereign bonds such as UK Gilts, German Bunds, US Treasuries and Australian Government securities all had a tough week, but floating rate instruments tracked sideways
The US Dollar fell as Gold rallied (extending the current negative correlation), whilst most other commodities were positive over the week
Whilst many commodities continue to do well, Oil in particular continues to power ahead with Brent crude being up over 45% for the year
Federal Budgets and Long-Term bonds
Last week we discussed the 100-year Argentinian bond and the disbelief that Argentina was able to not only find buyers for the bond but also that the offer was oversubscribed. We also took that as an opportunity to review how things can change surprisingly quickly in markets. We recently had the May Federal Budget issued here in Australia and these two topics evoked some previous thoughts and presentations we’ve given for clients in the past that we thought we’d share with you.
Over the years we have presented on various topics including previous Federal Budgets. Usually the Budget presentation is structured as thus:
5 minutes – Budget summary
10 minutes – why the budget has next to, or absolutely no influence on your investments, as well as why it is such an asinine practice having investment specialists on the TV giving budget run-downs and synopsis
30 minutes – on what you should actually be thinking about regarding your investments
Why does the budget have little to no effect on your investments? Budgets have the capacity to influence economies, however there is little empirical evidence to suggest a relationship between economic performance and subsequent investment market performance.
If positive economic performance preceded positive stock market performance and negative economic performance preceded poor market returns, there would be an upward sloping line of dots and an upward sloping ‘line-of-best-fit’ (and in fact vice versa if bad economic numbers meant good performance and good economic performance meant bad market performance). However, there is a flat line – meaning there is no relationship.
Back to our story
So, in May 2016 I was asked to present on the Budget for the second year, and if you recall this was around the time the Government were trying to release a budget that would convince the ratings houses to retain our AAA credit rating. For the months leading up to the budget, the ratings houses had been warning that persistent budget deficits meant that without a convincing budgetary plan they would downgrade Australia. This would have flow on effects by causing the banks to drop one level in their credit ratings, meaning their cost of borrowing would go up, and of course this would be passed on in the form of higher mortgage costs along with other negative effects.
So what did we propose at the time? The Government should borrow more… a lot more. We said that debt isn’t bad if the interest on the debt is serviceable, and this is achievable by owning productive assets – i.e. productive infrastructure assets.
The Government has actually announced an infrastructure spend which will hopefully lead to productivity gains here in Australia. In addition, they could fund some of the infrastructure through the issuance of Inflation Linked Bonds – an area of the market desperately needed by retirees but disgracefully underfunded here in Australia. Inflation Linked Bonds are bonds that pay an amount of interest that is linked to inflation – they are well suited to funding infrastructure assets where the pricing for the use of the asset is linked to inflation. Retirees need income products that can protect them against inflation erosion – this is another tool they could add to their tool kit.
Back to our 100 year bond
What we also said was that as tax payers, we wanted the Government to issue as many long-dated bonds (AUD denominated of course) as possible because the yields on offer were at multi-generational lows. If you want proof that these are indeed multi-generational lows in yields, here’s a chart of Australian 10 year Government Bond yields from June 1857 to June 2014:
Source: Global Financial Data *(1)
The Australian 10 year is currently yielding 2.86%, around as low as it’s ever been – it’s only been close to this in the 40’s and late 1890’s.
So, the Argentinian bond and the recent Government budget got us thinking –our original premise in 2016 was and is still valid, and in fact our Government has been following through on it. In fact, the ‘duration’ of the common index of Australian debt securities (if duration is a foreign term, think ‘time-to-maturity’ on a basket of debt issued in Australia) has slowly been getting longer – so the Government has been issuing longer and longer dated debt:
As a tax payer, this is a good thing if the debt is used wisely to fund productive assets that can service the interest. The interest would be pretty easily served if it was at a fixed rate issued at multi-generational lows, or via Inflation-Linked Bonds that are funded by assets that collect inflation linked revenues above the cost of the interest burden.
* (1)This is a composite of the following bonds: The New South Wales 5% Debenture is used from June 1857 to December 1858, the New South Wales 5% Bond Redeemable 1888-1892 is used from January 1858 to December 1874, the New South Wales 4% Bond of 1875 Redeemable 1903-1910 from January 1875 to February 1886, the South Australia 4% Inscribed Bonds of 1886 Redeemable 1917-1936 from March 1886 to June 1917, the Australia 5.50% Registered Bonds Redeemable 1922-1927 from July 1917 to June 1922, and the Australia 5% Registered Stock of 1925-29 from July 1922 to June 1932 quoted in London and quoted in Sydney from July 1932 to July 1933. From January 1933 until December 1936, 4% bonds are used, and starting in January 1937, a weighted average of bonds of 10 through 1940, 12 years from 1941 to May 1959, 20 years from June 1959 through 1980, 15 years from 1981 through 1990, and 10 years since 1991 to produce the theoretical yield on a perpetual ten-year bond.
General Advice Warning Past performance is not an indicator of future performance. The information provided in this article is general in nature and does not take into account your particular investment objectives, financial situation or insurance needs; we therefore recommend you seek advice tailored to your individual circumstances before making any specific decisions. Dobbrick Financial Services and its advisers are Authorised Representatives of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL 357306. Dobbrick Financial Services are a Corporate Authorised Representative of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL 357 306.
The focus of this year’s budget was on reining in spending, cutting taxes for middle Australia and small to medium sized enterprises, and giving older Australians a bit of love.
The Government revealed a seven-year personal income tax plan for “lower, fairer and simpler taxes” with relief for low and middle income earners, starting 1 July 2018. The measures will also tackle bracket creep.
From 1 July 2018, the Government will provide a tax offset of up to $530 for tax payers in the 2018-19, through 2021-22 financial years.
Those earning up to $37,000 who currently face a 19 per cent tax rate will have their tax bill reduced by up to $200. These savings will increase incrementally between $37,000 and $48,000 to a maximum saving of $530 for those earning between $48,000 and $90,000. The benefit will then gradually reduce to zero at an income of just over $125,000.
Bracket creep measures will see the upper threshold of the 32.5% tax bracket increase from $87,000 to $90,000 from 1 July 2018 and to $120,000 from 1 July 2022. The Low Income Tax offset will also increase from $445 to $645 from 1 July 2022. This will be followed by a flatter personal tax system by 2024-25 where the 37 per cent tax bracket will be abolished completely. Australians earning more than $41,000 will then pay only 32.5 cents in the dollar all the way to the top marginal tax rate threshold that will be adjusted to $200,000.
The top marginal tax rate of 45 per cent will apply to incomes above $200,000.
Small to medium sized enterprises
Attention to small to medium sized enterprises was targeted at keeping them competitive globally. The Government extended the $20,000 instant asset write off for a further 12 months to 30 June 2019 for businesses with a turnover of up to $10 million.
Tax cuts for small business began in 2016-17 when companies with a turnover of less than $10 million had their tax rate cut to 27.5%. This rate was extended to companies with annual turnover less than $25 million in this financial year and from 1 July 2018 will be expanded to include companies with annual turnover less than $50 million.
The Government also announced tough new anti-phoenixing measures to stop businesses who deliberately go bust to avoid paying their bills and potentially affecting other businesses through their demise.
The focus on superannuation was on lost super and allowing Australians to build their super balances by saving unnecessary fees and unwanted insurance.
The ATO will be given powers to send lost super to people’s active super accounts. Fees on accounts with balances of less than $6,000 will be capped at 3 per cent and superannuation fund exit fees will be abolished for those wanting to switch funds.
For superannuation fund members aged under 25, they will need to opt in should they wish to have insurance within their super policies.
For SMSFs, the maximum number of members will increase from 4 to 6 people from 1 July 2019. This will allow for greater flexibility for larger families. In addition, the audit requirements for SMSFs will move from annually to three year periods for funds with a history of good record keeping and compliance.
For older Australians
The Pension Loans Scheme will be open to all Australians, including full rate pensioners and self-funded retirees to enable them to boost their retirement income by up to $17,800 pa for a couple, without affecting their eligibility for the pension or other benefits. An expanded Pension Work Bonus will allow pensioners to
earn an extra $1,300 a year without reducing their pension payments. This will also be extended to self-employed individuals who can now earn up to $7,800. People aged 65-74 with a total superannuation balance below $300,000 will now be exempted from the work test for voluntary contributions for the first year they would otherwise fail to meet the work test.
Aged care, skills training, Medicare and the PBS
For older Australians who would like the choice to remain in their homes and avoid residential aged care facilities, there will be a total of 74,000 high level home care places funded by 2021-22. A new Skills Training Incentive will provide mature aged workers with the opportunity to update their skills. And, employers will be incentivised with $10,000 wage subsidies for employing mature workers. Extra funding into Medicare and the PBS will see new medications being funded including those to treat spinal muscular atrophy, breast cancer, refractory multiple myeloma and relapsing-remitting multiple sclerosis and an HIV preventive drug.
General Advice Warning The information provided in this article is general in nature and does not take into account your particular investment objectives, financial situation or insurance needs; we therefore recommend you seek advice tailored to your individual circumstances before making any specific decisions.
Dobbrick Financial Services (Gympie) Pty Ltd ABN 48 931 205 109 & DFS Oakland ABN 64 340 527 395 and their advisers are authorised representatives of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL 357306.
A debt crackdown similar to the recent robo-recovery Centrelink debacle which sent bills to thousands of Australians is now shocking Airbnb hosts and leaving them with fines worth thousands of dollars.
2016 started badly for investors with worries about global growth and deflation. But global growth turned out okay &, despite political events, rising bond yields & disappointing Australian growth, the end result has been a constrained but okay year for diversified investors.
2017 is likely to see another year of okay & maybe even slightly higher global growth, higher inflation, higher bond yields after a pause and divergent monetary conditions as the Fed tightens but other countries stay easy. The RBA is likely to cut rates to 1.25%.
Most growth assets, including shares are likely to trend higher, resulting in reasonable returns in 2017.
The main things to keep an eye on are US policy under Trump (stimulus v trade wars), the Fed and the $US, bond yields, various European elections, China and the impact of the rising supply of apartments in Australia.
With life being so busy it can be very easy to ignore your long-term financial plans, but we can’t stress enough, planning conversations today should be done early to create room for your future dreams.
So how can you make the most out of your personal or business situation?
‘Dare to dream’ and plan for the future – here are a few things to consider.
Small business owners are often so busy running their business and dealing with customers, suppliers and employees there’s often no time to sit back and asses how financially ‘healthy’ their business really is.