A vaccine has been announced, so the market is soaring. At this stage it looks good, but the devil is in the details… We’ll provide more information when we have more details. 

So what does this election result mean?

In a sentence:     A less unpredictable President and a return to Washington ‘gridlock’.

Biden is unlikely to seriously challenge Big Tech or unwind much of Trump’s corporate tax cuts, as the Republicans will most likely retain control of the Senate.

So, Scenario 2 from our previous Report is the most likely:

A divided government – a Biden White House and Republican-held senate

This means that fiscal (government) spending would almost certainly end up being more constrained under a divided government – with a Biden administration having limited scope for significant legislative action. This may mean less spending by the government – which means no big cash splash – but also is unlikely to restrict spending in a big way, as the Republicans will want to maintain some stimulus for US businesses.

Climate Change

Any change in climate policy would also likely need to be via regulation rather than legislation. This is likely to be a lower risk to industry, as no new laws are likely to be able to be introduced to upset the current economic trends. Major healthcare reform and tax changes would be difficult to achieve, so that is likely to mean ‘business as usual’ for the time being. As we said for the Australian Election back last year,  “nothing to see here, move on.”

On the other hand, policies with bipartisan support such as infrastructure spending would likely be easily implemented.

In a nutshell, the likely tight Senate numbers and the filibuster rule will limit the ability of Democrats to push through all that they want – such as raising corporate taxes and much tougher regulation of industry.

In our view, this is likely to mean that there is no government threat to industry and to the US economy in the short term. Markets are likely to continue to enjoy some certainty, which we hope will bode better for investment markets as a whole. There is likely to be more compassion for humanitarian causes (due to the support for Biden from black America), of which we are unable to determine the financial impact at this point in time.

The post What a difference a vaccine makes! <br>What about the US Election and my bottom line? appeared first on AustAsia Group.

This piece is not intended to endorse either candidate or contain editorial comment. It is merely an opinion piece on past market reactions and what many market commentators are expecting.

B) Summary

1. What will be the long-term effect on markets and my portfolio

None. Don’t believe us read on…

There is no scientific data that shows any long-term impact on investment markets, and there’s lots of data out there. John Rekenthaler’s Report on Presidential elections don’t matter (for investments). Is referred to often and contains most of the stats.

History’s lesson

Conflicting headlines are hurled at us at an unrelenting pace. Yet, the performance for the Dow Jones during the first three years in office for each of the past 10 Presidents (excluding John Kennedy and Gerald Ford, who didn’t serve 36 months) ranked from best to worst is:

1. Bill Clinton (D)
2. Dwight Eisenhower (R)
3. Barack Obama (D)
4. Donald Trump (R)
5. George Bush Snr (R)
6. Ronald Reagan (R)
7. Lyndon Johnson (D)
8. George W. Bush (R)
9. Richard Nixon (R)
10. Jimmy Carter (D)

The effect that dominates this list is not party affiliation but instead the President’s timing. Aside from George W. Bush, who was unlucky enough to catch both the technology-stock decline and the 2008 financial crisis, the bottom performances all happened during the 1960s, 1970s, and 1980s, which were afflicted by global inflation concerns.

Headlines will try to shock us, but the long-term value of stocks don’t change that much. While uncertainly still surrounds COVID and the election, Morningstar’s outlook for the continuing economic recovery, and forecasts for individual companies, haven’t changed.

There is no scientific data whatsoever that shows that there is a link between the performance of the Dow Jones and the president/party. Markets and economies will cycle as they do. It is the president’s timing of election in this cycle that matters, not vice-versa. The market is the dog, the actual President is the tail.

The same applies to bonds, the economy and employment too!

Presidential elections don’t much affect the general economy.

As Mr Rekenthaler wrote:

The effect on stock market returns three years after a presidential election has been due more to broader economic patterns than the party affiliation of the winners.

2. What are the short-term effects?

The US presidential election has contributed to recent market volatility, however this year it has been less so, due to COVID-19 trumping the election (pun intended).

Interestingly, Biden’s lead in the polls seems to track new COVID cases. As cases lessen, so does his lead in the polls. As the US is now facing record-breaking numbers, we’ll see how this translates:

Markets are not political, but they are sensitive to uncertainly. Although we are expecting investors to be jittery, we find ourselves in a situation where the worst of the volatility (from the election) may be behind us.

How will markets react to a Republican or Democratic win? Here’s a brief summary but we’ll unpack more in Section C.

Likely market reaction

Since 1927, the election year has been reasonable for shares with an average total return of 11.2% pa.

Of course, this year is complicated by coronavirus and this election comes with greater than normal uncertainty. There are several points to note:

If Biden wins, investors are likely to fret more in the short-term about the prospects of higher taxes and regulation, particularly if it looks like Democrats will win control of the Senate. After initial negative reaction, there is no reason to expect a weaker economy, and hence weaker share market, under a Biden presidency;

If it’s close and contested it may be a while before the winner is known and markets won’t like the uncertainty.

Delays in counting postal votes may mean it takes longer to get a result, Trump’s refusal to guarantee to go peacefully should be taken “seriously but not literally”. It’s  hard to see him starting a civil war and senior Republicans have not supported him on this with Senate majority leader McConnell saying, “there will be an orderly transition just as there has been every four years since 1792.”;

 

If ultimately Trump is the winner, US shares may initially celebrate and outperform global and Australian shares but would be vulnerable next year as the trade war with China ramps up again; and

 

Interestingly, the best average market returns (16.4% pa) has actually occurred when there has been a Democrat president and Republican control of the House and/or the Senate. But ultimately, it’s all about broader market conditions.

3.  So why aren’t markets fretting?

On the face of it, you’d expect markets might have been fretting more in the last few weeks with Biden being out in front and promising higher taxes and more regulation.

In addition to higher corporate and top marginal tax rates, an increase in regulation and a rise in the cost of carbon, which is expected to weigh on energy companies when they are already struggling, are negative for the growth outlook.

For example, the rise in the corporate tax rate would knock around 6% off earnings per share for S&P 500 companies. In particular, these measures may reverse some of the supply side boost provided by Trump.

However, it’s never that simple, especially with all the variables at play this year. From Dr Shane Oliver, chief economist at AMP Capital, here’s a few possible reasons why the market isn’t fretting:

• The negative impact of higher taxes and more regulation would be offset by more fiscal stimulus under Democrats. Increased infrastructure spending could also help here. Once in office, Biden may dampen down his planned tax hikes, particularly if the economy is still weak;
• A clear Democrat victory would avert a worse case contested election;
• Biden will likely mean more stable policymaking with less trade wars. Biden’s trade and foreign policy is focussed more on strengthening ties with Europe and a diplomatic approach to dealing with China. Remember that 2018 which saw trade wars escalate under Trump was not a good for shares; and
• Quite aside from the above – after 2016, where polling is generally seen to have got it wrong, many people may simply not be believing the current odds ie. they don’t believe Biden is a sure bet.

C) In-depth analysis

1. What will be the long-term effect on markets and my portfolio?

More lessons from history

We won’t repeat what we’ve already covered above but add:

Headlines have been screaming at us, but Presidential elections don’t much affect the general economy, bonds, employment nor markets overtime.

Many additional factors influence investment performances, including whether the markets had anticipated those economic developments, investor demand, and (for corporations) shareholder responsiveness.

Over the years, there have been countless economic predictions based on political beliefs, with claims made about the effects of tax-code amendments, changes to business regulations, trade policies, and so forth. None of those forecasts occurred.

Mr Rekenthaler suggests that the reason is that there’s no actual science behind such assertions.

He gives an example:

Consider US economic output from 2014 through 2019, which incorporates the final three years of President Obama’s administration and the first three of President Trump’s. It would be difficult to find two presidencies that were more adamantly opposed, with each candidate sharply criticising the other.

Their tax, regulatory, and trade policies were different, as were their foreign relations.

Yet, the annualised growth rate was 2.5% for the first three years and 2.4% for the second period.

Here is the nation’s gross domestic product during those six years, expressed in real terms:

Here are the US nonfarm employment figures, also from 2014 through 2019:

The job-growth rate under President Obama’s final three years was modestly higher than during the first three of the Trump administration at 1.8% annualised versus 1.5%. Although it may seem significant, in reality, it becomes more difficult to add jobs as the unemployment rate declines – which it continued to do, reaching a 50-year low in December 2019. Call it a draw.

A Trump Victory

A Trump victory will mean more of the same and would likely initially be more positive for the US than global and Australian shares. 

If President Trump were to be re-elected, we don’t foresee any significant policy changes and would expect the status quo.

History indicates incumbent presidents tend to lose when there is a recession in the two years before the election and unemployment levels rise:

But we all know that Trump has bucked trends before.

The US share market is sending a more positive signal for Trump and it has been one of the best guides to election outcomes:

If the S&P 500 is up over the 3 months prior to the election date the incumbent party tends to win and vice versa if it’s down. This has been 87% accurate since 1928 and 100% accurate since 1984. Right now, it’s up 1.2% since August 3rd!

A Biden Victory

If former Vice President Biden were elected, but the Senate remains in Republican hands, we think he would be able to implement some of the policies he has advocated, but the scope would be limited.

If there is a Democratic sweep across the presidency and Congress, then the Democrats would have wide latitude to implement the key Democratic priorities within their platform.

Economic impact of a Biden victory:

Higher tax rates and more regulation under Biden would be negative for the growth outlook on their own. However, as with all things economic, it’s never as simple as that.

• The negative impact of tax hikes and increased regulation in the short term could be more than offset by increased infrastructure spending;
• Once in office Biden will likely delay or dampen down his planned tax hikes, given the weak economy;
• Raising taxes on top earners, while a negative for incentive, may help reduce inequality; 
• Biden’s trade and foreign policy focused on strengthening ties with allies and a diplomatic approach to China will reduce a source of angst and uncertainty under Trump (which will likely intensify if he is re-elected); and
• More stable and predictable policymaking under Biden may provide a more certain environment for business and so result in increased business investment.

So, most economists see no reason to expect a weaker economic/investment outlook under Biden beyond near-term uncertainty.

It’s interesting to note that Biden’s poll lead over the last six months has been more stable and wider than Hillary Clinton’s was during the 2016 presidential race. However, as 2020 has taught us, don’t bank on the polls!

So… three possible scenarios:

Scenario 1: The ‘blue wave’ – a Democratic sweep of the White House and Congress 

Scenario 2: A divided government – a Biden White House and Republican-held senate

Scenario 3: Status quo – a Trump administration with control of the Senate

For more see Betashares take here. Although they are trying to sell you their ETFs, it’s a pretty good overview.

5. Psychological Need

Elections ARE significant, but not as far as market movements nor economies are concerned.

But could there be a psychological need?

The immediate response is that persuasion wins elections, rather than facts; and that not only do presidential candidates prefer to believe in the myth, but so do reporters and their audience. There isn’t much demand for articles that read “No story here, look elsewhere.”

However, there may be a deeper reason, which is that attributing power to presidents brings order to chaos.

If the harvest fails, one could investigate if the soil was adequate, the crops appropriate, and the cultivation suitable. Unfortunately, doing so requires much effort and might not yield a simple answer. Easier to blame the gods. Then all will quickly make sense. Which is fine. Blame the gods, if you wish. But exclude them from your investment and economic analysis.

Tip to reduce stress in your life

What if for one whole week… you did a media fast? Too long? Then scratch that, make it three days. THREE DAYS. That’s just a long weekend!

No screens, no devices, don’t even pick up a newspaper! No. Media. Period.

Give it a shot. And when you do, pay close attention to your emotional state. How does it make you feel? Better? Happier? Sad? Energised? Exhausted?

The post The US Election and your stock portfolio appeared first on AustAsia Group.

This is not a bad news story! Does that make it a good news story? Not quite, but all the Australian Government spending is designed to keep the current recession from being too sharp or going on too long.

But it has some people nervous, and the Media is trying to panic us, because that’s what they’re designed to do. So, are we spending too much?

The answer is no. We can afford this, and, if needed, we can even spend more.

Here’s the picture of debt as a percentage of GDP since 1900:

As you can see, we are not even close to historical levels. We’re not saying that we want to approach WWII levels, but you get the picture. Government Debt is generally a function of Government Spending.

Why is Government Spending important?

Government spending is important, especially now, as the impact of COVID-19 on the economy is unfolding.

Government can boost an economy by spending money in a variety of ways. How they finance the spending is one of two ways:

1. From operating revenue (taxes) and then any past surpluses; or
2. By borrowing it.

Why is Government Debt increasing?

During our research and discussions with clients, there has been an undertone of concern that Government Debt is getting out of control, and that the Australian Government should ‘pull its head in’.

There’s been talk about JobKeeper, the HomeBuilder Grant etc, that cost the Government a lot of money. So, we thought we would provide some background on the size of Government Debt, to help to ease any of our clients’ nerves in how to make our way back.

Is the level of Government Debt concerning?

Ex-Treasury official Steven Hamilton told the ABC, “The Government will have to increase its debt by about 40%, but issuing debt is not a problem, they could issue five times that and it still won’t be a problem”.

So how will it be paid back?

To answer this question, we need to rewind a bit:

Firstly, Australia is in a solid financial position in terms of budget discipline. As the chart below shows, Federal Government Debt, as a percentage of GDP (which is Gross Domestic Product, measuring the size of the economy), is well below that of the US and Japan – Australia has been frugal over recent decades.

Australia’s debt is less than 40% of the value of its GDP. If we compare this metric to a business, it is like having a debt level that is a proportion of your turnover. Government Debt will go close to doubling from just over 20% in 2019 to nearly 40% in 2021, as a result of the additional forecast spending.

Compare this to other countries who have debt levels of between 80% (Europe) to 160% (Japan) of their GDP. Those countries have not gone broke yet; Australia is well behind them.

This is the chart that the Media will sell to you.

But taken in perspective it’s just amplifying the green box taken from the first chart.

Note that we had no Government Debt in 2006 / 2007, just before the GFC.

The spending in the GFC was reasonably quick, and Australia came out better than most countries. We had started to pay down debt in the last couple of years.

Now the Government is going to need to continue to spend to stimulate the economy and to make up for lost GDP in a number of sectors and industries (such as airlines, tourism, international students – you get the picture).

Secondly, the past century has shown that Australia can progressively pay down debt over time, after a crisis has passed. Following previous times of extreme hardship, Australia proved resilient and government debts were eventually reduced. Perhaps Australia isn’t simply just a ‘lucky’ country, but a ‘plucky’ country.

Where does the money come from?

Officially, the money will be raised by selling Australian Government bonds.

We need to stress that the stimulus is absolutely necessary! It’s now more important to spend in order to stop the economy from going into a lengthy recession. It is the right response to support the economy during lockdown, otherwise economic growth could fall even further, which would be harder to recover from.

You didn’t answer the question… how is the debt paid back?

1. The COVID-19 debt does not have to be paid off all at once, but instead, just pay the interest. That might be a good choice, because at the moment, interest rates are extremely low.This will be one of the long-lasting impacts of COVID-19. Globally, interest rates look set to stay low for a very long time which will allow Governments to repay the debts that are being incurred. It is a cost-effective point in history to go into debt;
2. The main way the debt is repaid is through taxes. The Government taxes us more and spends less so it can have a surplus, and it uses that surplus to pay back the institutions they borrowed from. However, the Government would prefer option 1, as raising taxes in the near-term is counter-productive. Perhaps a temporary deficit levy would do the trick?;
3. Inflation helps debt disappear. While $200 billion might seem like a lot now, when we get some inflation over the next 30 years, it will shrink. Not filling you with confidence we hear you say, but;
4. The key point is the ratio of debt to GDP. A country can grow the GDP side of the ratio. The GDP can be made bigger using either economic growth or inflation. One reason Japan has such a high debt ratio is its GDP hasn’t grown much since 1990. It has had both low growth and low inflation. According to the IMF (International Monetary Fund), Australia is the poster child for a national response to COVID-19 and the best rated economy in a post-COVID world.

What do economists think?

Most agree with the Treasurer that the best approach to getting debt back down is to grow the economy.

The Government’s wage subsidy package will “undoubtedly” prevent the unemployment rate rising as much as it would have otherwise. The size and reach of the JobKeeper payments should reduce the peak in unemployment – the economic version of ‘flattening the curve’.

The severe COVID-19 induced market correction has been unprecedented (there’s that word again!) as economies temporarily go offline to address the pandemic challenges.

The stimulus package combined with historic low rates, at near zero, will cushion the severe correction. This will enable economies, and therefore earnings, to come back online.

Equity markets have always been driven by both fear and greed. There are significant uncertainties in the current market turmoil and the dislocation in markets is the result of these uncertainties.

Is there a way out?

The human and health impact of COVID-19 has sent our fears into overdrive. Our privileged lifestyles have been impacted, and the lack of resilience is notable.

However, there will eventually be an end to the crisis, there will be a sustainable health solution, and societies and economies will recover. Get comfortable being uncomfortable for now.

Every country, and every central bank, has had to react. Every share market has been smashed. Governments are pumping record amounts of money into the economy, just so it won’t flatline. BUT, as a percentage of GDP, we’re not at unprecedented levels – not even close.

The point of THIS piece is to compare debt levels in previous crises, to let you know that Austalia is NOT insanely exposed, and has a lot of ‘wriggle room’ left.

In conclusion

In a dramatic economic and social crisis, there are some key historical lessons for Governments:

1. Be generous;
2. Mistakes will happen but learn from them;
3. Don’t ‘sweat’ on debt as the economic recovery, and improved community well-being, will deliver better long-term returns than ‘counting the pennies’ now; and
4. Australia’s current debt-to-GDP levels are world class and relatively low.

Nothing good results from panic. History has reinforced this point time and time again. It is our response to the crisis that is critical.

The policy response from the central banks and Governments has been swift, coordinated, innovative and a significant magnitude. Whatever it takes. This will continue.

The post Government Debt – is it too high? appeared first on AustAsia Group.

• Repayment holidays on loans; and
• The lowest interest rates we have seen

We have assisted a number of clients to decide whether to go with a Fixed or Variable interest rate on their Home Loan or Investment Loans.

We have updated our Fact Sheet on Fixed or Variable interest rates with a lot of useful information to help our clients in making their decision.

If you are concerned about your home loan, your financial position in general, or you want help to review what interest rate and home loan offers are in the market, please contact us at consulting@ww2.austasiagroup.com for assistance in relation to your particular circumstances.

The post Interest Rate on Loans – To Fix or not to Fix? appeared first on AustAsia Group.

Welcome to Part II. The chaos from COVID has thrown up plenty of opportunities, none more so than the banking sector.

Let’s kick off from where we left off, starting with the four points:

Why do we like the Big Four banks…still?

Whilst it is difficult to know precisely where the banks’ share prices will move in the short term, we are confident that over the medium term and beyond, they will be substantially higher due to the:

1. Investor need for yield;
2. Long-term track record of profitability and dividends;
3. Core nature of banking; and the
4. Competitive advantages and oligopolistic industry structure.

Let’s elaborate:

Investor need for yield

When the dust settles, investors will wake to the reality that the RBA has an official rate of 0.25% (and not looking to move up). This means that deposit rates will be ~1%, so after inflation (at 2% to 3%) and tax, investors will receive a negative return of 1% (at best) – that is, 1% interest received less 2% inflation = -1%.

Many analysts concur that, under this scenario, there will be an inevitable migration out of cash back into equities, in particular those with an above-average and ‘sustainable’ dividend yield. Reluctant at first, inevitable in the end.

The Big Four’s long-term track record of profitability and dividends

Following from Part I’s Net Interest Margin* (NIM) comments:

It is clearly harder to hide bank margin in record low rates. With the official rate at 0.25% and mortgage rates now testing the 2% barrier, the NIM has never been tighter. This is clearly a significant headwind (which is the financial term for an impediment). And with deposit rates on many accounts already at 0% (or negative when account fees are included), there is no scope to reduce them any further to increase the profit margin (in banking terms called the spread).

Put simply, Net Interest Margin (NIM) is the difference between what a bank receives from credit products like loans and mortgages, and outgoing interest it pays for term deposits and other savings products. So if a bank is paying 1% for a term deposit and lends that out as a mortgage at 3%, then NMI is 3% less 1% = 2%. There’s a little more to it than this, but you get the idea.

To begin with, they have been reducing the impact on margin by withholding a component of some of the recent rate cuts.

Of course, the shorter-term impact is of more immediate concern to investors. And once again, we believe that record low interest rates should play a significant role in containing bad debts and provisioning.

To quote Mr Sala Tenna from Katana Asset Management again:

“Whilst some could intimate that bank yields are not sustainable, we would argue that it is in fact the lack of dividends that is unsustainable. Whilst the majority of the investing community appears to be fixated upon the current half-yearly dividend, a simple review over any other timeframe would provide a very different picture.”

For example, over the past 10 years, NAB has paid an average of $2.64 per annum including franking credits, Westpac $2.52 and ANZ $2.24. This has actually happened!

On the current share prices (not COVID lows), this equates to grossed up yields of 13.8%, 13.6% and 11.5% respectively. History clearly indicates that the present situation is the exception, not the norm.

Which leads us to the heart of this consistency…..

The core nature of banking

We agree with many market commentators that when the effects of COVID pass – as they inevitably will – the population will still need to borrow money. The whole spectrum of lending, from personal loans and mortgages, right through to large scale business financing, will still be required. Borrowing money is as essential to a capitalist economy as oxygen is to human existence. Banks provide a core function that is irreplaceable.

What about the new breed of disruptors, neo banks, impacting the banking system? If you take a look under the hood of the vast majority of these ‘innovators’, a significant percentage, if not all of their funding, originates with the major banks! This is not surprising, as the major banks can borrow money cheaper than anyone else in the country.

As a side note, many of the smaller non-bank lenders, and a range of other products get wholesale funds from the Big Four. For example, NAB gets some of its monies from superannuation funds, such as MLC, which are then invested in interest bearing investments.

Which leads us to the fourth reason for being positive on the medium-term outlook for the major banks:

Their competitive advantages and oligopolistic structure

In other words, their sustainable competitive advantages and barriers to entry.

It is very difficult for the smaller banks, such as Bendigo and Adelaide Bank, BOQ, and AMP to compete with the Big Four. And in case you were not aware, the Big Four actually own a number of the bigger brands that you know well:

– CBA owns Bankwest and Aussie Home Loans;
– Westpac owns St George, RAMS Home Loans and Capital Finance;
– NAB owns a number of mortgage broker warehouses (called Aggregators); and
– ANZ owns Esanda.

Their sheer size enables them to borrow money – either through customer deposits or wholesale credit markets – at the lowest average cost. But in addition, the Big Four banks also enjoy the largest economies of scale, deepest IT spend, trusted (perhaps not loved) brands and extensive distribution footprints.

These are sizeable and significant barriers to entry, and go towards explaining why the Big Four have remained the four same banks for such a long period of time. Investors often go to great lengths to find monopolistic or oligopolistic industries, but in the banking sector it is in plain sight – but often missed.

In Australia, there are just over 50 banks, but less than 10 have any scale and the Big Four control around 60% of the market. In the UK there are over 300 banks. As outlined above, the economies of scale and oligopolistic structure of the Australian industry enables Australian banks to maintain higher levels of profitability.

Back to the ASX200 and the banking index

The disconnect between the ASX 200 and the financials index is at record levels.

Source IRESS: The ASX200 is the blue line, while the Banking Index is the red line.

Where does this leave us?

With the fundamentals… “the short term is unknowable, but the long term is inevitable”.

This means that in the short term, sentiment rules the roost, but over the long-term fundamentals drive share prices.

In conclusion

We need to remind ourselves that in a post-COVID world, our country will have the lowest interest rates on record.

The hunt for yield will be on in earnest. So we see no reason why the banks cannot regain their early 2020 prices over the next 18-24 months. This offers decent capital growth from current levels.

Even if dividends recover at the most conservative of estimates, the average yield is around 5% fully franked in FY21, moving to 7% fully franked thereafter.

While the outlook for the banks may look uncertain, Australia’s banks have historically performed well coming out of crises.

You’re welcome!

The post Can you bank on the Big Four Banks? Part 2 appeared first on AustAsia Group.

The wave of pent-up buying in the banking sector indicates a change in sentiment, with most of the Big Four up 25% from their dismal COVID lows.

Although they are still 20% off their pre-COVID levels, in our view, the move up is underway. Why?

1. Banks have taken big provisions – governments have influenced this. Governments have proven to be very conservative in their economic assumptions around COVID which implies the banks have over-provisioned. They’re also holding a lot of capital at the behest of regulators – probably too much;
2. While it’s hard to know what bad debt levels will do in the next 6 months, looking out to 2021/22, they will get back to a normal, so too will bank profits and dividends;
3. If that happens, CBA will trade mid $80’s and ANZ, NAB and WBC share prices will recover back to mid-$20’s, which is a solid bounce across the board;
4. Share prices have started to move higher sooner, rather than later;
5. CBA is the most highly capitalised bank and is growing income at the highest rate – that’s why it trades at a premium to the other banks; and
6. We’re not keen on the regional banks, given they need to spend up big on technology and improving their internal operations – it would make more sense for them to join forces.

But there is always the risk of a second wave of infections.

What’s our medium to long-term outlook on Australian banks?

We still see the current risk-reward equation as compelling.

Romano Sala Tenna from Katana Asset Management notes:

“Whilst it is difficult to know precisely where the banks will move in the short term, we are confident that over the medium term and beyond, they will be substantially higher due to the:

1. Investor need for yield;

2. Long term track record of profitability and dividends;

3. Core nature of banking; and the

4. Competitive advantages and oligopolistic industry structure.“

There is an old industry saying: ‘The short term is unknowable, but the long term is inevitable’. This means that in the short term, sentiment rules the roost, but over the long-term fundamentals drive share prices.

These 4 points are really important and warrant further explanation, as they directly impact on future stock prices and dividends, so we will cover off on these in Part II.

Where did we position ourselves?

You can see from the chart below that the disconnect between the ASX200 and the banking sector since 2018, is at record levels.

Source: IRESS The ASX200 is the blue line, while the Banking Index is the red line.

The NAB, WBC and ANZ shares prices were at GFC lows. This is bizarre given that the GFC arose out of poor bank lending practices.

These share price declines seem excessive.

We have focussed on the ANZ, NAB & WBC banks as they have fallen relatively further than the CBA. Even though the CBA is a better business, it is not twice as good as the others.

What about record low rates and the economy?

Mr Sala Tenna goes on to explain:

“It is clearly harder to hide bank margin in record low rates. With the official rate at 0.25% and mortgage rates now testing the 2% barrier, the net interest margin (NIM) has never been tighter. This is clearly a significant headwind. And with deposit rates on many accounts already at 0% (or negative when account fees are included), there is no scope to reduce them any further to increase the spread.

Whilst not sufficient to completely offset the tight rates, the banks do have a few levers to pull.

To begin with they have been reducing the impact on margin by withholding a component of some of the recent rate cuts.

Of course, the shorter-term impact is of more immediate concern to investors. And once again we believe that the record low interest rate should play a significant role in mitigating the extent of bad debts and provisioning.

During the GFC, the RBA’s official rate was set at around 6%. This is a long way from the 0.25% we have today and provides a significant buffer.

This is likely to be the case especially for households/mortgages, where the lowest rates on record will mean that a much smaller percentage of loans will default. We anticipate that only a fraction of the estimated $200bn currently requesting loan deferrals will actually progress into default.”

What about APRA and the role of the regulators?

We need to remember that APRA has been regulating the banks’ lending standards more diligently than in prior cycles. Lender Mortgage Insurance is often compulsory for high Loan-to-Value-Ratio loans. And importantly, we have seen no crash in property prices yet, which in part was due to the cooling that occurred prior to COVID.

September will be the lie detector test (after the six month “holiday” period expires). So, we expect bad debts to peak in the second half of 2020.

Any other risks?

Household lending is seen as less of an issue than during the GFC, the sting in the tail is likely to be in the Small to Medium Enterprises side. Regardless of how low rates are, if revenue drops below expenses, you no longer have a business! This is the major risk factor we see.

The threat posed by Neo Banks in 2019 may well recede as the COVID inspired ‘flight to quality’ sees Neo Bank deposits switch back to the major banks, at a time when losses on the Neo Bank loan books are increasing.

What does this mean for my investments?

What to do with the Australian banks is one of the major questions facing both institutional and retail investors alike, as their share prices have fallen significantly in 2020 and they appear priced for the most pessimistic outcome – although they have rallied spectacularly in the past two weeks.

We don’t expect that the banks will have a smooth ride, but the big difference between the COVID crisis and previous crises has been the speed and size of the fiscal responses.

During the GFC, it took around 12 months for politicians to respond to the unfolding crisis, mainly due to the impression that those most affected were bankers and US sub-prime borrowers.

But, when we remember that our banks entered this crisis with the strongest balance sheets on record (thanks to years of APRA prodding), we have some confidence that they will see out this downturn in reasonable shape.

In conclusion

The current pricing suggests that their issues are more systemic or of longer duration. We believe that this is not the case; that COVID will have a transient effect on book quality.

While the outlook for the banks may look uncertain, Australia’s banks have historically performed well coming out of crises.

Please check in for Part II of this series, it’s important…..

The post Can you bank on the banks? Part 1 appeared first on AustAsia Group.

1. You could certainly use the money, but can probably get by without it, but why not? They’re offering and I’m taking – besides, it’s my money anyway; or
2. You have no other choice. You have exhausted every other source of income, and now need to consider cashing in some of your super, just to live.

If this is you, please get in contact with us, so we can make sure that you have maximised any government benefits, loan repayment holidays, rates and taxes deferrals or anything else on offer, to help you get through these really tough and sometimes heartbreaking times.

If you fall into category 1, the question is no longer Can I, but Should I lean on my super for some short-term cash? You can take out up to $20,000 in total by withdrawing $10,000 before June 30 this year, and another $10,000 in the three months after 1 July.

We strongly urge you not to – Why? 

• Because if you spend your super, you are not just spending money you saved, but you are spending money that was building, or compounding for you, inside a tax-protected environment.
• You can never get that compounding effect back again.
• If you take it now, you are selling into a massive market downturn, where share prices are a third lower than they were in early February.

Nobody knows which way the market will move in the days ahead, but when it comes to the years ahead, history says, market panics from any era, do not last. Markets always eventually recover.

If you had panicked and sold out of the sharemarket in March 2009 (which we now know was the bottom of the GFC), you would have paid dearly. If you had taken $10,000 out and put it in cash, it would still be worth about $10,000. If you had left it in the share market, it would have climbed to a value nearer $100,000.

Bottom line, you will have less of your own money in retirement than you would have if you opt for early release. Your super is for your future retirement and was never meant to be spent for any pre-retirement crisis.

• That said, don’t forget this is not a government handout. It is your money. You earned it. You also need to consider how it will impact your retirement, taxes and what effect it will have on any other COVID-19 government benefits you’re receiving or may likely receive.

If you have a small super balance, there are other consequences to cashing out your super and you also need to consider your insurance. If ongoing fees and insurance premiums together with the $10,000 lump sum reduce your account balance to less than $6,000, your Life, TPD and Income Protection insurance cover may be cancelled.

Remember, the government is splashing the cash around to help anyone in financial hardship and stop the economy from flat-lining.

Many people have never received any government help but may now be in a position where they must take it…just to survive. Let’s face it though, you’ve paid taxes for many years and will pay much more in the years to come – so while things are tough, you may as well recuperate some of the taxes you have already paid.

If you are in a position where you think that you have no other choice but to cash in some of your super, please get in contact with us. We can ensure that you firstly exhaust every other potential income source (including any government assistance).

What’s on offer? See:

How to gain financial help during the Coronavirus

Financial Crisis Assitance for Low-income Earners

Finally, we want to acknowledge the difficulties everyone is facing as a result of COVID-19. We hope you can take confidence in knowing that AAG has been helping clients with their financial needs since 1979 and we continue to be here to support you.

If you believe you have to cash-in some super, we can help you with the process and make it easier for you. Please contact us at investments@ww2.austasiagroup.com to tell us your personal situation and to find out how we can assist.

The post Reconsider before cashing in your super early. Even if you can, try not to. – Here’s why… appeared first on AustAsia Group.

Oil prices went into negative for the first time ever this month, which is a major concern for the world economy and sparks a major issue for US oil producers as Saudi Arabia and the OPEC nations, along with Russia, will eventually force the US producers out of the market, and then may control the oil supply and energy into future.

The main concern of many business owners, accountants and various advisers is, due to the changes made by the Governments around Australia in terms of social distancing, will businesses such as cafes, restaurants, gyms, and sporting and religious organizations be able to come back from the carnage that is being left in the wake of COVID19?

What we have seen

We have been assisting numerous clients with their businesses on both ends of the spectrum:

• Some who have closed the doors after more than 20 years in business, as the financial impact of closures and the effect on business income is so great, that the business won’t come back
• Other businesses who can’t keep up with the demand for their services, so are looking to expand the workforce.
• Some individual clients have been able to continue to work full time, be that in a roster of working in an office or site, to having their pay cut by over 40%, or being forced to take leave. These are all tough things to have to deal with.

We have also been assisting clients with home loan repayment deferrals, reviewing loans for better deals with interest rates being low, reviewing their superannuation funds and investing cash, to considering if it is worthwhile accessing their super to stay afloat?

What about the Market?

Regardless of which part of the economy or what your particular circumstances are, there are some things that will affect us all. So we thought it timely to help people to get an overall picture of what is happening in the market:

A shrinking economy is not good for anyone. With job and pay cuts there is going to be less income around to keep demand for things like coffee, and gyms, and those extra things that keep small businesses alive going. Likewise, a lower number of jobs mean that people may accept a job regardless of the rate of pay, just to get or keep a job.

As Dr Shane Oliver from AMP Capital said recently:

• There are a range of factors Australians will feel as we move through the recession period, and a big one will be how tough the jobs market is. There will be much higher unemployment, it will be harder to switch jobs, and it’s reasonable to expect more redundancies and terminations as the crisis continues.
• This leads to a loss in income and falling wages, which reduces the spending power of affected Australians. Compounding that, even for those who are holding on to their jobs, uncertainty will rise – people worry about the future, they worry about their income, they worry about their employment prospects. That will impact spending patterns, and how much people are willing to part with beyond the essentials.

The big question we are being asked often is “How Long will this last?”

The answer to that question is largely determined by governments’ responses and the health advice on how to deal with the pandemic.

But the economic picture and fallout is going to be something that is different than what we have seen in the past. We have seen a number of different economic downturns and the last major recession was in 1991. Over the last 30 years we have seen:

• 1987 – The Share Market Crash
• 1991 – Recession (Paul Keating’s recession we had to have)
• 1997 – The Asian Debt Crisis
• 1999 / 2000 – The Y2K Bug and the tech boom and tech wreck
• 11 September 2001 – Terrorist Attacks in the US
• 2008 & 2009 – Global Financial Crisis (GFC)
• 2012 – The mining boom coming to an end in WA, Queensland and the Northern Territory

In WA we’ve have had a fairly flat property and economic time since around 2014 / 2015.

So what is different this time?

The difference this time is that the recession that we are likely to experience will be health-related, and not due to an economic or financial crash. There has been no spike in demand or crash due to financial market intervention (such as the GFC).

Instead, this is a shutdown of business and parts of the economy to save Australia (and the world as well) from a wipeout of proportions not seen for some time. Some health experts are saying not since the Spanish Flu back in the early 1900s.

The final parting word from Dr Shane Oliver from AMP Capital is this:

Finally, the thing I think will be different about the recession before us and those Australia has seen before, is that the current crisis is not the result of a bust after a boom. This is an enforced shutdown and a significant disruption – it was not caused by anything fundamental in the Australian economy. Because of that, I am hopeful that once the virus is under control, we can recover and reach a more normal functioning in a quicker way than we have before. Adding confidence to this is that government and financial support programs – notably the wage subsidy and debt payment holidays – have been applied early and aggressively and should help offset and protect many businesses and individuals so that the economy can bounce back reasonably quickly once the virus is under control.

Fundamentally there was a demand for services, and things were starting to look up with property markets and property development coming into the fore. The only question will be if the crisis and the effect of the shutdowns and the economic impact are cuts too deep for a recovery any time soon?

What should you be doing?

As we have said for a while, and at least the last 10 years, the important thing is not to panic. We are advising clients to hold tight, and we will help to ride out the storm. There is a lot of financial assistance available, and we are helping clients to obtain as much of that as possible to keep the wolves from the door.

If you are unsure of your situation or want some advice in relation to your specific circumstance, we can help, please email us at consulting@ww2.austasiagroup.com

SimonChesson
Director

The post Where to Next for the Economy & us Minions in Australia appeared first on AustAsia Group.

The other 5 articles in this series are:

Low-Income Earners
Home Owners and Investors
Small and Medium Businesses
Larger Businesses
Landlords & Tenants

You can also refer to our other articles by clicking on the links above for your personal situation.

The additional measures to help self-funded retirees and superannuation pensioners are as follows:

1: Reduction in Deeming Rates:

A further reduction in deeming rates was announced today. The deeming rates will reduce as follows:

The deeming thresholds are unchanged at $51,800 (single) and $86,200 (couple) which are generally indexed on 1 July each year. The rates will take effect from 1 May 2020, and any additional entitlement will be paid from 1 May 2020.

2: Income Stream Drawdown Rates:

As with the GFC, there will be a temporary reduction in the minimum annual amount that you’re required to withdraw from your super income stream. The reduction in the minimum drawdown rates will apply for the duration of this financial year and for the 202/21 financial ye

We are here to support you by getting access to the information and any financial assistance as soon as it comes to hand. We will help you with your finances and your financial welfare, or any other concerns however small or large. Please email us at consulting@ww2.austasiagroup.com, or via phone on 08 9227 6300.

Best Regards,

Simon Chesson
Director

The post COVID-19 – Financial Crisis Assistance: Superannuation Pension and Centrelink Recipients appeared first on AustAsia Group.

We understand your concerns about the market sell-off due to the spread of Coronavirus and the oil spat between Saudi Arabia and Russia.

But our long-term strategy remains firmly in place:

Make the most of the power of compounding. We invest primarily for income. Higher income means that our cash pool grows, so we can invest more into high dividend paying shares.

Then, we get more income, so we can buy more stock to keep boosting income – we get dividends on dividends, compounding the return.

Although we buy stocks, we are actually buying companies and businesses, with sound cashflows and dividend streams. We will still receive dividends, even though prices have been battered.

Is this just a short-term aberration? History tells us “Yes”, but only time will tell.

In the words of Warren Buffett “Trouble is always coming, buy stocks anyway… My reaction is that I like to buy stocks, so I don’t wish ill on anybody else. But if they want to sell them to me cheaper, I prefer it.”

Don’t get thrown off by scary events or market cycles. Falls in asset markets can throw investors out of a well thought out strategy at the wrong time – as some were at the end of 2018, then they missed out on the gains throughout 2019. Don’t get panicked into selling.

Sometimes markets are not pretty. We are at an extreme and we don’t know how long it will go on for – it’s normal to want to run from the threat, but eventually it will pass. Here’s a refresher of our take on market downturns.

Respected commentator Peter Switzer is of the view that this is a panic sell for no reason. The facts are that more people die of normal influenza each day than coronavirus.

The falls we have seen are similar to those in the GFC. The advice back then in 2008 and 2009 was also to not sell, but instead to hold onto quality shares (which most of our clients hold), and then to build on those holdings if and when cashflow is available.

These are difficult times, but they are not the first that we have encountered, and they won’t be the last – it is part of investment life. Just don’t let your emotions run away with the media – they won’t live happily ever after.

Please contact us if you would like further information or clarification via email at investments@ww2.austasiagroup.com or call us on (08) 9227 6300 and ask for the Investments Team.

Best regards,

Denise Locantro
Associate Director
Wealth Management and Protection

The post Coronavirus & Your Investments appeared first on AustAsia Group.