Market Update

Contribution Reminder

by DFS Ipswich on June 14, 2019 No comments

One subject that is often front of mind leading up to the end of the financial year, is making the most out of any opportunities to put money into superannuation. With June 30 only weeks away, it pays to think about these opportunities and the benefits that may exist. There are a number of advantages to contributing money into superannuation, one of the most attractive being the tax concessions.

Although often highlighted during your review meetings, and for many, you have already made contributions through existing strategies, we thought it was timely to reconnect as a reminder for the deadline.

Below we have highlighted some common contribution methods that may be of benefit to you and put some money back in your pocket come tax time.

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DFS IpswichContribution Reminder

Market Update JUNE

by DFS Ipswich on July 2, 2018 No comments
Summary
  • Last week’s US dollar strength subsided somewhat this week, but the USD has been quite strong over the last quarter. This has translated to poor performance across the board in Emerging markets over the same period – but in particular the non-Asian based emerging markets of the Americas and Europe. This is because much of Emerging Asia’s debt is no longer denominated in USD, so USD strength doesn’t really hurt them as much (in fact it makes their exports cheaper to Americans) – but regions such as Turkey and Egypt have large USD denominated debt burdens – so a strengthening dollar is disastrous for them
  • In the last week most equity markets performed poorly, with Australia being a notable exception. In fact, over the last quarter both Europe and Australia have done very well compared to the rest of the world
  • Friday of last week, was the official meeting of OPEC, prior to which both Saudi Arabia and Russia had indicated production increases were ‘inevitable’. The results of the meeting were that production increases will indeed occur. This is somewhat surprising since Iran is a member of OPEC, and any change in policy requires unanimous decisions – and Iran don’t want production increases. Increased production leads to lower prices, and due to sanctions enforced on them by the US they have limited partners to whom they can sell their oil, so they have less to sell at a potentially lower price
 Portfolio Construction 101 – correlation

Anyone who has spent time learning the fundamentals of portfolio construction would be familiar with the concept of correlation, and the idea that less than perfectly correlated assets provide diversification and either a better return for the same risk, or less risk for the same return. For those lucky enough to have not spent much time thinking about it, correlation is simply a measure of how one or more assets move compared to each other. If you can find assets that both provide a positive return over time, but have a negative correlation when one performs particularly badly and a largely zero correlation at other times – that’s an ideal asset combination.

The foundation of multi-asset investing over the past few decades has been the idea that bonds act as negatively correlated assets to equities when equities sell off – in other words they go up in price when equities go down in price. If we look at the rolling 3 year correlation of the S&P 500 with the US 10 year Treasury index we can see this negative correlation:

Source: Bloomberg

This is the asset-allocation basis behind the majority of large Superannuation funds in Australia, endowments overseas and has worked really well for the last 20 years.

However, are bonds always negatively correlated with equities? Students of history would know that this isn’t the case. Unfortunately Bonds and equities can be positively correlated, and worse still, when they’re both going DOWN. We tested the correlation of Australian Bonds and equities back to 1885 (with the help of Milliman) to see how sound the theory was, with more than just 20 years’ worth of data – you can see the results below:

Future Potential Inflation

We are mentioning this now because global Central Banks have begun the process of either raising rates (the US and Canada) or easing/ceasing their Bond purchasing programs (ECB). This is because wage price inflation appears to be finally feeding through to the real economy and could feed through to prices. Central Bankers don’t want a repeat of the late 60’s leading to the inflation of the 70’s and the reaction required in the early 80’s. We are confident they have learned their lessons, but believe it is worth noting that in a rising rate environment, the building blocks of portfolio construction which have been broadly assumed by market participants for the last 20 years are unlikely to be best ones for the next 20. This is why DFS take a contrarian and evidence based approach to investing. We don’t just take assumed dependencies and rely on them ‘simply because’. We are constantly testing our thesis and looking for new ways to increase the robustness in our portfolio construction.

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.

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DFS IpswichMarket Update JUNE

Market Update May

by DFS Ipswich on June 5, 2018 No comments

Summary

  • 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.

Since then…

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:

Source: Bloomberg

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.

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DFS IpswichMarket Update May

INDICATIVE INTEREST RATES – JUNE 2017

by Dobbrick Financial Services on August 4, 2017 No comments

Are you in the market for a Home Loan, Investment Loan, Equipment Finance, Commercial Loan or simply wanting to review or consolidate your existing loan? Whether it be first home investment or an experienced home owner wanting to add to your portfolio, we can assist with an investment option tailored to you.

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Dobbrick Financial ServicesINDICATIVE INTEREST RATES – JUNE 2017

FEDERAL BUDGET 2017 WRAP UP

by Dobbrick Financial Services on May 10, 2017 No comments

On Tuesday 9 May, the Federal Government handed down its Budget for the 2017–18 financial year.

According to Federal Treasurer Scott Morrison, this year’s Budget is founded on the principles of fairness, security and opportunity. Mr Morrison claims that the government’s proposed measures will raise almost $21 billion in revenue over the next four years, returning Australia’s budget to surplus by 2021.

Here are some of the key Budget announcements. Note that each of these proposals will only become law if it is passed by Parliament.

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Dobbrick Financial ServicesFEDERAL BUDGET 2017 WRAP UP