MONTHLY MARKET UPDATE

April 2024

How the different asset classes have faired:

(As of 30 April 2024)

Asset Class

10 Yr

% p.a.

5 Yr

% p.a.

3 Yr

% p.a.

1 Yr

% p.a.

YTD

%

6 Mth

%

3 Mth

%

1 Mth

%

Cash1                                                                                                                             

1.83

1.55

2.19

4.24

1.44

2.17

1.07

0.35

Australian Bonds2

2.09

-0.48

-2.29

-0.88

-1.02

4.66

-1.23

-1.98

International Bonds3

-1.08

-3.95

-0.46

-2.57

4.10

-2.17

-1.95

Australian Shares4

8.06

8.38

7.15

9.94

2.61

15.97

1.52

-2.70

Int. Shares Unhedged5

13.03

12.41

12.06

20.80

10.35

17.38

5.64

-3.18

Int. Shares Hedged6

10.02

9.63

6.08

19.04

6.53

19.59

4.67

-3.17

Emerging Markets Unhedged7

6.15

2.91

-0.75

10.75

7.50

11.81

9.56

1.14

Listed Infrastructure Unhedged8

8.79

4.34

6.32

-1.50

3.30

7.90

3.11

-1.88

Australian Listed Property9

9.26

5.53

7.51

18.89

7.29

32.58

6.00

-7.64

Int. Listed Property Unhedged10

6.05

0.77

1.26

-0.26

-3.33

8.56

-2.39

-5.88

Gold Bullion Unhedged11

6.00

12.49

9.38

16.75

12.24

15.88

13.59

4.88

Oil Unhedged12

-10.19

-2.10

21.45

17.76

18.14

5.10

11.20

-0.13

1 S&P/ASX Bank Bill TR AUD, 2 Vanguard Australian Fixed Interest Index, 3 Vanguard Global Aggregate Bd Hdg ETF, 4 S&P/ASX All Ordinaries TR, 5 Vanguard International Shares Index, 6 Vanguard Intl Shares Index Hdg AUD TR, 7 Vanguard Emerging Markets Shares Index, 8 FTSE Developed Core Infrastructure 50/50 NR AUD, 9 S&P/ASX 300 AREIT TR, 10 FTSE EPRA/NAREIT Global REITs NR AUD, 11 LMBA Gold Price AM USD, 12 S&P GSCI Crude Oil TR

Source: Centrepoint Research Team, Morningstar Direct

Key Themes:

  • Equity Markets had their first monthly decline in 2024: Both international and Australian equity markets retreated over the month as rate cut expectations were further delayed.
  • Fixed Income falls: Both international and Australian bond prices fell, and yields rose following strong economic data and central bank comments.
  • Australian Dollar flat: The Australian dollar ended the month at almost the exact same level that is started at.
  • Commodities end mixed: Oil prices fell due to easing tensions in the Middle East, whilst gold continues to rise.

International Equities:

April was a rough month for international equities, ending a five month-long rally, with unhedged equities falling by 3.18% and hedged equities falling by 3.17%. The overall global market hit a low point in the month on the 19th of April at -4.8% but has slightly recovered in the last third of the month. This reduction was primarily fuelled by strong inflation and economic data coming out of the US convincing investors that the interest rate cuts that were previously expected to come around June will now most likely come much later in the year or maybe even in 2025.

The three worst performing sectors were Real Estate (-5.9%), Technology (-5.8%), and Consumer Discretionary (-4.3%), all three being highly interest rate sensitive sectors that have suffered from expectations of later rate cuts. The only global sector that ended the month with a positive return was Utilities which grew by 1.4%. This most likely being due to utility companies being able to raise their prices in line with inflation whilst maintaining their customer base, due to their products being mostly necessary for modern life. It may also partly be due to investors leaving their riskier growth investments and reinvesting in more defensive stocks in the Utilities sector.

Australian Equities

The Australian equity market suffered less so than the global market in April but still retreated by 2.7%. This also being due to strong economic data out of the US and Australia pushing back the expected date of initial central bank rate cuts. Much like global equities the two biggest losers in April were Real Estate and Consumer Discretionary, losing 7.7% and 5.4% respectively, due to their sensitivity to interest rates. Both sectors have been strong performers over the past few months when rate cuts were expected sooner in the year but much of those returns were wiped out this month.

In Australia, once again similarly to global markets, Utilities was the best performing sector but by a significant amount, returning 4.9% in April. This can be attributed to the same reasons as why the sector outperformed the rest of the market globally. The next best performing sector, and the only other that had positive returns, was Materials, growing by just 0.5%.

In general, the biggest influences this month on both the Australian and global equity markets were strong economic data, rate cut expectations, and the threat of a greater conflict between Israel and Iran in the Middle East. This last factor adding volatility during the month, but its effect has mostly subsided as tempers seem to have settled.

Domestic and International Fixed Income

Throughout April international bond prices fell by 1.95%. The continued release of strong economic data and persistent inflation in the US has finally broken the expectations of investors, with many pushing back their expectations for rate cuts to September, November or even early 2025. This has led to an increase in the yield on 10-year US bonds by 8.2% and two-year US bonds by 6.7% which in turn has lowered the prices of bonds.

The story is very similar in Australian bonds as their price has fallen by 1.98%. This has been caused by the previously mentioned rate cut expectations in the US as well as our own economic data in Australia and Reserve Bank of Australia comments leading investors to believe initial domestic rate cuts will not arrive until 2025. This has materialised in the yields on 10-year and two-year bonds rising by 11% and 11.6% respectively and in turn lowering their prices.

Australian Dollar

The Australian Dollar gained very little against the US Dollar in April, rising only 0.0154%, a negligible amount. This explains the small difference between the hedged and unhedged returns in international equities. While there was some volatility throughout the month generated by various data releases and central bank comments it ultimately ended with little change between the AUD and USD.

Most major currencies ended the month mostly equal with the start of the month with changes of less than 0.5%, the biggest mover being the Japanese Yen that has continued to depreciate, falling 3.9% against both the USD and AUD. 

Commodities – Gold and Oil

Oil retreated just slightly in April by 0.13%. There was volatility earlier in the month as tensions flared between Israel and Iran but as these tensions eased and potential for a ceasefire in the Middle East increased the price of oil fell. Contrary to oil, Gold had another strong month, returning 4.88% in April. The price of gold rose in the first half of the month due to ongoing central bank demand for gold and escalating geopolitical concerns but the easing of these tensions in the back half of the month led the price to slide back from its mid-month peaks.

Disclaimer

The information provided in this communication has been issued by Centrepoint Alliance Ltd and Ventura Investment Management Limited (AFSL 253045).

The information provided is general advice only and has not taken into account your financial circumstances, needs or objectives. This publication should be viewed as an additional resource, not as your sole source of information. Where you are considering the acquisition, or possible acquisition, of a particular financial product, you should obtain a Product Disclosure for the relevant product before you make any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. It is imperative that you seek advice from a registered professional financial adviser before making any investment decisions.

Whilst all care has been taken in the preparation of this material, no warranty is given in respect of the information provided and accordingly neither Centrepoint Alliance Ltd nor its related entities, guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution.

MARKET AND ECONOMIC UPDATE - March Quarter 2024

March Quarter 2024

Key points

  • Equity All-Time Highs: Global and Australian equities have continued to rise in Q1 2024, with many major equity markets reaching all-time highs.

  • Bond Split: Australian bonds gained, and global bonds fell as markets reacted to economic data and central bank comments.

  • US Dollar Regains Ground: The US Dollar gained over the quarter while the Australian Dollar fell as expectations for US rate cuts were pushed back.

  • Cautious 2024 Outlook: Expect market volatility with a focus on diversified equities and medium-duration bonds.

  • Sector Performance: Technology outshone the rest of the market globally and even in Australia despite a lack of strong domestic investment options in the sector.

1.      Markets in Review

Entering 2024, investors exhibited caution as they waited to see the effects of aggressive rate hikes on the wider economy. Thus far, investors have been encouraged by the resilience of the global economy and subsequently all major equity markets finished positive for the quarter with many reaching all-time highs. The best-performing region was the Eurozone which benefitted from investors de-concentrating their portfolios away from the US where valuations continue to be stretched, especially in comparison to Europe which is currently trading at a discount. Despite this, the US still performed well over the quarter returning 10.2%, even with inflation not slowing as expected.

1.png

Fixed Income had a mixed month as we start to see divergence in different economies and sectors. The 10-year U.S. Treasury yield concluded the quarter at 4.2%, up by 32 basis points since the start of the year. This was a result of stronger than expected growth and stickier inflation leading fixed income investors to re-think rate cut predictions.

2.      Returns

2.png

Throughout the first quarter of 2024 the S&P/ASX 200 returned around 4%, this pace being much slower than what we saw near the end of 2023 as strong economic data has pushed expectations for rate cuts back towards the end of the year. The strongest performing sector was Technology, returning 24.2%, as fervour surrounding the A.I. boom picked up speed. Despite this massive rate of return the sector’s performance had little effect on the overall S&P/ASX 200’s performance due to the Technology sector making up just 2.86% of the index. Real Estate also continued to perform well due to the expectation that we are at peak interest rates and approaching the first rate cuts.

The only sector that meaningfully retracted over the quarter was Materials (-7.8%) which can largely be attributed to a reduction in the price of iron ore. An interesting scenario has arisen around gold miners, whose share prices have failed to keep up with the rise in the price of gold itself. This divergence likely stems from an increase in production costs due to higher labour costs.

3.      Foreign Exchange Markets

In contrast to the last quarter of 2023 the USD dollar index (DXY) against a basket of currencies strengthened by 3.2% over the first quarter of 2024. This occurring due to strong economic data out of the US and comments from the Federal Reserve leading investors to push back their expectations of rate cuts in the first half of 2024. As rate cuts are expected later, bond yields remain elevated, attracting investors to the USD and increasing its relative value. This has led to a depreciation of the Australian dollar against the USD of 4.4% from 0.68 to 0.65.

3.png

The currency that depreciated the most against the USD was the Japanese Yen (JPY), depreciating by 6.9%. A prolonged period of negative interest rates in Japan has had the effect of reducing the currency’s desirability amongst traders in our current environment of high interest rates in most developed countries. In Q4 the Bank of Japan finally acted and increased interest rates for the first time in 17 years from -0.1% to 0-0.1% in an attempt to stimulate the economy.

4.      Fixed Income Markets

4.png

It was a volatile quarter for fixed income as strong economic data and central bank comments fought investor expectations for rate cuts, but in the end Australian bonds ended up by just 0.57% while global bonds ended down by 1.16%. Australian bonds gained over the quarter due to the belief that central bank rates have reached their peak, and that the RBA is simply waiting on the data to reflect inflation returning to the 2-3% target band before they begin to cut rates. The US reached the same position late last year, but the data has continued to suggest that inflation is not yet under control, meaning rates must remain elevated, leading to a decline in the price of bonds.

5.png

The US continues to have a yield curve inversion, the longest by far in the last 40 years. The inversion which was previously shrinking has slightly expanded again as the expected date of the first Federal Reserve rate cut continues to be delayed. A yield curve inversion is a common recession indicator in the US with every inversion in the past forty years being followed by a recession. With the latest inversion being longer than most that came before investors are waiting to see whether the indicator remains true.

6.png

The Australian yield curve has normalised for quite some time now, but we are still waiting to see whether Australia will enter a recession or narrowly avoid one as inflation slows.

5.      Outlook

Our outlook for the rest of 2024 remains much the same as it was at the start of the year. We initially predicted in January 2024 that most of the expectations for rate cuts around halfway through the year were far too optimistic, which has proved to be the case as many outlets have pushed their predictions back. We continue to predict that inflation will become stickier the closer we come to the RBA’s 2-3% target band, which has been clear to us in the strength of the labour market and the general economy during this first quarter of the year. Our belief is that given the RBA lagged the other central banks with lifting interest rates (in particular the US), they will also lag other central banks on the way down.

Regarding equities, we continue to expect volatility as rate cuts fail to arrive for most of the year. This does not mean that equities cannot perform well between data releases and central bank meetings, but we believe there will be greater volatility. In order to allocate your portfolio effectively in light of this prediction we continue to suggest a well-diversified equity portfolio, allowing access to any broad market rallies while limiting exposure to rate-sensitive sectors that may exhibit more of the aforementioned volatility.

It is a time for some slight caution in fixed income as central banks watch inflation data closely to determine their next course of action, so we suggest a medium-duration approach to fixed-income investing. While it seems unlikely at the moment that central banks will raise interest rates once more, if the data suggests that inflation is resurging then they will have little other choice. It is due to this slight chance that we suggest a slight overweight to duration. This approach should prove beneficial in a scenario of interest rate cuts while also providing a healthy income in the more likely scenario that rates remain at their current level for a longer period of time before they are eventually lowered.

Setting financial goals for 2024

The new year is a great time to reflect on your financial situation and plan for the future. Whether you want to save more, pay off debt, invest wisely, or simply live within your means, setting financial goals can help you achieve your desired outcomes. Here are some tips on how to set realistic and attainable financial goals for 2024.
 
Start with your “why”
Before you set any specific numbers or targets, think about why you want to improve your finances.
What are your values, dreams, and priorities?
How do you want to feel about your money?
Having a clear vision of your purpose can motivate you to stick to your goals and overcome challenges.
 
Assess your current situation
To set effective goals, you need to know where you stand right now.
Review your income, expenses, assets, liabilities, and net worth.
Track your spending habits and identify areas where you can save or cut costs.
Analyse your debt and interest rates and plan how to pay them off as soon as possible.
 
Set SMART goals
SMART stands for Specific, Measurable, Achievable, Relevant, and Time-bound. These criteria can help you create clear and actionable goals that are aligned with your vision and values.
For example, instead of saying "I want to save more money", a SMART goal would be "I want to save $10,000 by December 31, 2024 for a car". Be very specific, the more clarity you have over the goal the more achievable.
 
Break down your goals into smaller steps
Once you have your SMART goals, divide them into smaller and manageable tasks that you can do on a daily, weekly, or monthly basis.
For example, if your goal is to save $10,000 in a year, you can break it down into saving $833 per month or $192 per week. This way, you can track your progress and celebrate your achievements along the way.

 

Review and adjust your goals regularly
Setting financial goals is not a one-time event. You need to monitor your performance and evaluate your results periodically. If you are falling behind or facing unexpected challenges, don't give up. Instead, adjust your goals accordingly and find ways to overcome the obstacles.

On the other hand, if you are ahead of schedule or have achieved your goals early, don't stop there. You can either set new goals or increase the difficulty of your existing ones.
By Peter Kelly on 25 January 2024

Unlocking the Benefits of Appointing an Enduring Power of Attorney

By Peter Kelly

In today's world, it is crucial to plan for the future and make provisions for unforeseen circumstances.

One way to ensure our interests and well-being are protected is by appointing an enduring power of attorney (EPA).

An EPA grants someone we trust the legal authority to make decisions on our behalf when we are no longer capable. This powerful legal instrument offers numerous benefits that can provide peace of mind and safeguard our interests. Let's explore some of the key advantages of appointing an enduring power of attorney.

Protection During Incapacity

Life is unpredictable, and there may come a time when we are unable to make decisions for ourselves due to illness, disability, or mental incapacitation.

By appointing an EPA, we can ensure that a trusted individual, known as the attorney, will step in to make decisions in our best interests. This includes managing our financial affairs, paying bills, accessing bank accounts, and handling property matters.

The EPA acts as a safety net, guaranteeing that our interests are protected even when we are unable to voice our wishes.

Choice and Control

By appointing an EPA, we retain control over who will make decisions on our behalf if the need arises.

We have the freedom to choose a person we trust implicitly, someone who understands our values, preferences, and wishes. This ensures that our voice continues to be heard, and our best interests are upheld.

Without an EPA, decisions about our well-being may be made by someone appointed by a State-based civil and administrative tribunal, which may not align with our desires.

Seamless Financial Management

Appointing an EPA streamlines the financial management process during incapacitation.

Our attorney can handle financial transactions, pay bills, manage investments, and ensure our financial affairs remain in order.

This eliminates the need for lengthy processes, such as guardianship, which may otherwise be required to grant someone the legal authority to act on our behalf.

Reduction of Family Conflicts

In situations where there is no appointed EPA, family members may have differing opinions about who should make decisions on behalf of an incapacitated individual. This can lead to conflicts, causing emotional stress and strained relationships.

Appointing an EPA in advance minimises the potential for such conflicts by clearly designating the person who will make decisions, eliminating ambiguity and promoting family harmony during challenging times.

Preservation of Dignity and Autonomy


An EPA ensures that our dignity and autonomy are upheld even when we are unable to make decisions independently.

By appointing someone we trust as our attorney, we can rest assured that our values and preferences will guide the decision-making process.

This helps preserve our identity and ensures that our wishes are respected, even in situations where we cannot communicate them directly.

Conclusion

Appointing an enduring power of attorney is a prudent step to protect our interests, maintain control over our lives, and alleviate potential burdens on loved ones during times of incapacity.

It provides peace of mind, promotes family harmony, and safeguards our dignity and autonomy.

By choosing a trusted individual to act on our behalf, we ensure that our best interests are prioritised, and our wishes are respected.

Embracing the benefits of an EPA empowers us to navigate the future with confidence, knowing that our affairs are in capable hands.

Cost of Living Pressure

By Peter Kelly
Ever since inflation started its upward spiral in 2021, many, if not all Australians, have felt its impact to some degree or another. Just last weekend, I put fuel in my car - it had been running on empty for a few days. At $2.25 a litre, this was around 60% more than I was paying for the same litre back in 2021. But, of course, it is not fuel that is the culprit here.
Many of the basics, including food, mortgage interest, rent, housing prices and health care, have all been increasing significantly.
Sadly, wages have not kept pace with inflation, so it is becoming increasingly harder for many Australians to get by from one payday to the next. We also need to spare a thought for those living on a fixed income who don’t have the joy of any form of protection against inflationary pressures.
Hopefully, inflation will be back to the Reserve Bank’s target range of between 2 and 3% in the not-too-distant future. Let’s hope prices follow.

Having said that, I think there is still some pain to be endured, with the likelihood of another one or two interest rate rises in the coming months.

So, what are ten things we can do to help weather the storm of increasing prices:
  1. Budget wisely – track income and expenses and identify areas where we can cut back.
  1. Cut non-essential spending – cancel unused subscriptions and memberships, dine out less frequently, and avoid impulse buying.
  1. Shop smarter – look for discounted items, compare prices, and consider buying generic or store-branded items.
  1. Stock up on essentials – when items are on sale, particularly non-perishables, consider stocking up.
  1. Invest in skills and DIY – reduce the costs of home maintenance by spending time carrying out simple household repairs and maintenance rather than calling in contractors and tradies. YouTube is a great source of knowledge when it comes to learning to carry out simple jobs around the home.
  1. Explore alternative transportation – consider car-pooling, walking, riding a bike, or using public transport. Also, planning of time can help reduce unnecessary trips.
  1. Refinance high-interest debt – consider refinancing or consolidating loans to a loan with a lower interest rate.
  1. Build an emergency fund – having some money set aside for emergencies can provide a very welcome safety net and reduce the reliance on using debt to manage unexpected expenses.
  1. Invest wisely – reviewing current investments to ensure they are appropriate for the times. If money is being held in low or no-interest savings accounts, consider moving money not needed for everyday expenses to an account that offers a higher rate of interest. Always consider seeking the advice of a financial adviser to help select appropriate investments.
  1. Earn extra income – whether it is doing overtime, taking on a second part-time job, freelancing, selling unused items, or even renting out a spare room, there are lots of options to consider when it comes to generating additional income. Even for those who have retired and are receiving the age pension, part-time work can provide a significant boost to income without detrimentally affecting the rate of pension being received.
Managing finances in tough times can be difficult. Making some small changes to the way we live may result in some short-term hardship; however, it just might help in navigating the current challenges being faced by so many Australians.   

RBA Alters Inflation Expectations and Modifies Rate Messaging

Following its most recent interest rate hike, the Reserve Bank has adopted a more cautious stance, even though it acknowledges that inflation is persisting longer than anticipated
 
The Reserve Bank of Australia (RBA) has broken its pattern of keeping rates unchanged due to the persistent inflation pressure it faces. The central bank is now projecting a slower path toward achieving its target range of 2 to 3 percent for headline inflation. 
 
In its November meeting, the RBA implemented its 13th rate hike since the initiation of its tightening policy in May 2022. The official cash rate was increased by 25 basis points to 4.35%, marking the first rate hike after staying on hold in July, August, September, and October. 
 
RBA Governor Michele Bullock commented, "Inflation in Australia has peaked but remains too high and is proving more durable than it was a few months ago. The latest Consumer Price Index (CPI) reading shows that while goods price inflation has continued to decline, the prices of many services are still rising rapidly." 
 
The Australian Bureau of Statistics (ABS) reported a 1.2 percent increase in the Consumer Price Index (CPI) during the September quarter, resulting in a year-on-year increase of 5.4 percent. 
 
According to the RBA's revised forecasts, CPI inflation is now expected to decline to approximately 3.5 percent by the end of 2024 and return to the top of the target range by the end of 2025. Previously, the central bank had predicted a drop to 3.3 percent by the end of 2024 and 2.8 percent by the end of 2025. 
Ms. Bullock stated, "The decision to raise interest rates today was made to have more confidence that inflation would return to the target within a reasonable timeframe." She also warned that updated data received since the August meeting indicates an increased risk of inflation remaining elevated for a longer period. 
 
While the economy is currently experiencing below-trend growth, it has been stronger than anticipated during the first half of the year. Underlying inflation has been higher than expected in August's forecasts, especially in various service sectors. Labor market conditions have eased somewhat, but they still remain tight, and housing prices are on the rise nationwide. 
 
Since the October meeting, the RBA has included "the implications of international conflicts" as an additional uncertainty in its outlook, alongside longstanding concerns like service price inflation, monetary policy lags, and household consumption projections. 
 
The statement post-meeting no longer suggests that "some further tightening of monetary policy may be required." Instead, Ms. Bullock emphasized that "whether additional monetary policy tightening is needed to ensure inflation returns to the target in a reasonable timeframe will depend on the data and evolving risk assessments." 
 
Gareth Aird, Commonwealth Bank's head of Australian economics, noted that although the RBA maintains a tightening bias, it has softened it somewhat. He suggested that unexpected positive economic data, particularly regarding inflation, would be necessary for the RBA to raise the cash rate again. 
 
Mr. Aird's base case scenario foresees the RBA maintaining the current monetary policy stance, with a possible monetary easing cycle beginning in September 2024. However, he acknowledged the short-term risk of another interest rate increase, given the RBA's continued bias toward tightening. Consequently, markets will likely continue to factor in the possibility of a near-term rate hike. 
 
If the RBA does decide to raise rates again, Mr. Aird pointed to February 2024 as the most likely timing, as it would coincide with the release of Q4 2023 CPI data and updated economic forecasts.
 
Luci Ellis, Westpac's chief economist and former RBA assistant governor, observed that the RBA's November decision marks a departure from previous meetings where the central bank appeared content to maintain the status quo and monitor developments. She believes that while a December rate hike is unlikely, the February meeting could become more significant if the inflation outlook continues to improve. 
 
On the other hand, Sean Langcake, Head of Macroeconomic Forecasting at Oxford Economics, suggested that the RBA might need to make further moves to achieve its inflation target if it is genuinely concerned about the inflation outlook. A single 25-basis-point increase may not be enough to alleviate their concerns. The board may wait for the next set of inflation data and potentially raise rates in February, particularly if the Wholesale Price Index (WPI) shows significant strength.

What is …..the First Home Super Saver scheme?

The First Home Super Saver (FHSS) scheme was introduced in July 2017, with eligible people able to access certain superannuation contributions from 1 July 2018.

The scheme was designed to help Australian first home buyers enter the housing market by allowing access to certain superannuation contributions and their associated earnings.

Several enhancements have been made to the scheme since it was introduced.

In general terms, the scheme allows eligible first home buyers to withdraw voluntary contributions made to super since 1 July 2017, along with the associated earnings on those contributions.

Voluntary contributions generally include all personal contributions a person makes to super. This includes personal tax-deductible contributions, contributions made under a salary sacrifice arrangement (where salary is foregone in return for an employer making additional contributions), and non-concessional contributions. Non-concessional contributions are personal contributions made from “after-tax” income. Mandated employer contributions, including Superannuation Guarantee contributions, cannot be accessed under the FHSSs.

When applying for the release of super, up to $15,000 of annual contributions may be released. Up to 100% of non-concessional contributions and up to 85% of personal tax-deductible and salary sacrificed contributions can be released (i.e., a maximum of $12,750 per annum).

The maximum contributions that can be released under the FHSSs is $50,000.

In addition to accessing contributions, the associated earnings on the contributions can be released.

However, the associated earnings are not based on the actual investment earnings achieved on the contributions. When requesting a FHSS determination, the Australian Taxation Office (ATO) will calculate the associated earnings based on a formula set out in legislation.

When seeking to access superannuation under the FHSS scheme, the first step is to request a FHSS determination. This can be requested through an individual’s My.Gov account. The determination sets out the amount that can be released under the scheme. A person can apply for as many determinations as they wish.

When seeking to have superannuation released under the scheme, an application is made to the ATO to issue a release authority. Only one release authority can be lodged.

The released amount is paid to the ATO by the super fund, which will then deduct tax, if applicable, and will forward the balance to the individual.

While any non-concessional contributions withdrawn are not taxable, the associated earnings and any personal tax-deductible and salary sacrificed contributions are taxed at the individual’s marginal tax rate, less a 30% tax offset.

When planning to withdraw contributions from superannuation, the amount withdrawn must be applied to the purchase or construction of a home within 12 months. The individual must occupy the home as their main residence for at least six months in the first 12 months of ownership. Release of funds may also be requested within 14 days of having signed a contract to purchase or construct a first home. However, from September 2024, this will be extended to 90 days.

If a home is not purchased within 12 months, the funds released can be recontributed to super. If not recontributed, additional tax is payable.

To be eligible to withdraw money from super under the FHSS scheme, a person must:

  • Not have owned property in Australia previously,
  • Be aged 18 or older; and
  • Not previously had an amount released from super under the scheme.

Being able to access super to contribute towards the purchase of a first home is a strategy that may be attractive to many first home buyers. However, like most things, the devil is in the details. Whether this is an appropriate strategy will depend on personal circumstances.

Is the government eyeing off your super?

By Peter Kelly on 20 September 2023

At the end of March 2023, there was a massive $3.5 trillion held by everyday Australians in superannuation.

That is $3,500,000,000,000.

For any government with ambitious spending plans, this could be an attractive pool of money to target.

In a previous blog, “What is the purpose of superannuation?” I mentioned one idea being circulated that would see superannuation potentially being used to fund the cost of providing aged care.

The word being used in this context was “ring-fencing”.

The concept of ring-fencing could see a situation arise where a portion of one’s superannuation savings are set aside to cover potential (future) aged care costs. If this was ever introduced, it would mean a person would only have access to a portion of their superannuation savings to fund their general retirement living expenses. Part of their savings would need to be quarantined to fund future aged care needs.

But let’s not get too far ahead of ourselves. I think this is a long way off and is unlikely to be a politically palatable pill for any present or potential government to swallow.

The legislation to enshrine an objective in superannuation is currently open for consultation. It appears to be innocuous in its current form.

As mentioned in a previous post, the objective of superannuation is proposed to be:

“To preserve savings to deliver income for a dignified retirement, alongside government support, in an equitable and sustainable way.”

The explanatory materials accompanying the draft legislation include the following paragraph (paragraph 1.8):

“The superannuation system is an important source of capital in the economy which can support investment in capacity-building areas of the economy where there is alignment between the best financial interests of members and national economic priorities.”

While the statement addresses the “best financial interests of members” (of superannuation funds), this is balanced with “national economic priorities”.

Does this mean that superannuation could be targeted as a source of investment in specific areas, including housing, infrastructure, technology, community, and the like?

Put simply, could a government mandate our superannuation be invested in areas other than those we might voluntarily choose to participate in?

This raises an interesting academic question and one that I am sure will be pondered by experts for many months and years to come. Incidentally, for those who might suggest the government would never dictate how our superannuation should be invested, here is a quick history lesson.

In 1961, the “30/20 rule” was introduced. Superannuation funds were required to invest at least 30% of their assets in public securities, with 20% being invested in Commonwealth-issued securities (e.g. Government bonds), if the funds were to receive concessional tax treatment.

The 30/20 rule was eventually abolished in 1984.

While the 30/20 rule was a “soft compulsion” – that is, superannuation funds received tax concessions in return for compliance – it is an example of how governments may implement policy to achieve outcomes consistent with their policy objectives.  

With superannuation now comprising of such a large component of the economy, it will continue to remain the focus of all potential governments, irrespective of their political persuasion.

The “sanity-saving” benefit of an emergency fund

Recently I was confronted with a challenging situation at home.

I woke one morning to find that one of our power circuits had “blown”. Fortunately, the hot water was still flowing so my mandatory “wake up” shower was not jeopardised.

A local electrician was able to call by that day to diagnose the problem and provide a temporary fix.

As it transpired, the underground power cable from the street to our switchboard had shorted.

To remedy the problem and provide a future-proof fix, the electrician and his “mate with the digger” spend several days tracing the power supply to our house, excavating, cutting through the driveway, and as I write, hopefully reinstating the power to our house.

Some years ago, perhaps because of watching too many YouTube videos on living a financially secure life, we established an emergency fund. This has continued to grow to a point where we have a comfortable nest egg.

The cost of my electrical repairs will run into five figures. Knowing that this expense is covered has led to considerably less stress.

Had we not had the funds available, I am not quite sure what we would have done. The temporary fix was just that – temporary. The repairs needed to be carried out without delay.

Having access to a robust financial safety net, when it’s needed to cover an emergency, can deliver a comforting sense of security.

Some of the reasons supporting the establishment of an emergency fund include:

  1. Weathering the Storm of Uncertainty: 
    Life is unpredictable, and emergencies can occur at any time. 

    Whether it's a sudden medical expense, car repair, or unexpected job loss, having an emergency fund acts as a cushion to absorb the financial blow. 

    Instead of resorting to credit cards, loans, or borrowing from friends and family during times of crisis, an emergency fund enables us to address these situations confidently, avoiding the debt trap and protecting our financial well-being.
  2. Eliminating Financial Stress:
    Financial stress can take a severe toll on both mental and physical health. 

    Having an emergency fund can alleviate the anxiety and worry associated with money-related emergencies. 

    Knowing that you have a financial safety net to fall back on can reduce stress levels, enhance overall well-being, and improve decision-making during challenging times.
  3. Preventing Disruption of Financial Goals: 
    Without an emergency fund, people often end up diverting money allocated for long-term financial goals, such as retirement or buying a home, to handle unexpected expenses. 

    This diversion can significantly slow down or even derail progress toward these objectives. 

    An emergency fund, however, allows individuals to maintain their financial goals undisturbed, ensuring steady progress toward a secure financial future.
  4. Avoiding High-Interest Debt: 
    Relying on credit cards or personal loans to cover emergencies can lead to a vicious cycle of debt. 

    These options often come with high-interest rates, making it challenging to repay the borrowed amount promptly. 

    With an emergency fund, individuals can avoid accumulating such high-cost debts, which can save them substantial amounts of money in interest payments over time.
  5. Capitalising on Opportunities: 
    In times of economic downturn, opportunities for investment or purchasing assets at discounted prices can arise. 

    Having an emergency fund positions individuals to take advantage of these opportunities, as they will have readily available cash to invest when others may be strapped for funds. 

    This can lead to significant financial gains in the long run.
  6. Enhancing Financial Discipline: 
    Establishing an emergency fund requires discipline and regular contributions. This practice can instill good financial habits and discipline in managing money. 

    Consistently setting aside a portion of income builds financial responsibility, making individuals more resilient in handling both expected and unexpected expenses.
  7. Promoting Independence: 
    Relying on others for financial help during emergencies can lead to feelings of dependence and strain on relationships. 

    An emergency fund empowers individuals to tackle challenges independently and preserves their autonomy and dignity during tough times.

Starting an emergency fund may seem daunting, but even small, regular contributions can make a significant difference over time. 

It's never too late to begin building this essential safety net and experiencing the countless benefits it offers in safeguarding your financial well-being. 

Take the first step towards financial security today, and rest easy knowing you have a lifeline to face any challenge that comes your way.

Markets up on worsening economic data.

Local and global stock markets rose this week on the back of weaker economic data.

Australian employment unexpectedly fell in April with 4,300 fewer people employed versus March. The fall saw the unemployment rate tick up to 3.7% with an additional 18,400 unemployed.

The minutes of the RBA’s May meeting show that the decision to raise by 0.25% was a close one, but concerns surrounding strong services inflation pushed the call over the line.

Eurozone industrial production fell by 4.1% in March, coming in well below expectations and the biggest fall since April 2020. The largest contractions came from Ireland and Germany.

The European Union raised its inflation forecasts to 5.8% this year and members expect the European central bank to continue with rate hikes.

Japan’s economy emerged from recession and grew faster than expected in the first quarter as post-covid consumption rebounded strongly.

US President Biden cancelled his trip to Australia for the Quad meeting and shortened his G7 trip to Asia to focus on resolving the US debt ceiling debacle which remains ongoing. Estimates have the US government running out of money to meet expenses as early as 1 June.

Top of Mind: Debt Ceiling in Focus

The latest concern and risk that investors are having to contend with is the prospect of the United States defaulting on trillions of dollars’ worth of loans. That is unless the Republicans and Democrats strike a deal to legally allow the US Department of Treasury borrow more though debt to allow it to pay its bills.

The amount of debt that the US can incur is known as the debt ceiling and the “X date” is the date at which the US will hit that limit. While the exact date for the “X date” is hard to predict, Treasury Secretary Janet Yellen has indicated the government will fall short of funds by mid-June. 

Thankfully over the weekend, debt ceiling talks that had stalled were back on with Joe Biden and Kevin McCarthy agreeing to resume negotiations to avoid the US defaulting. This came a day after they broke off talks! 

If Democrats and Republicans do not agree to allow the US to raise the debt ceiling - the world's biggest economy will default on its $31.4 trillion (£25tn) debt. If the US does not lift its debt ceiling, it will not be able to borrow more money - and it will quickly run out of funds to pay for public benefits and other obligations.

The White House Council of Economic Advisers estimates that if the government cannot reach a debt ceiling agreement for a prolonged period, the economy could shrink by as much as 6.1% which would most likely tip the US into the recession that it is heading towards. That would have big knock-on effects for the rest of the world, many of which count the US as a key trading partner.

In addition, the US dollar is the reserve currency of the world. Should the US government default, the value of the dollar is expected to drop sharply with knock on effects for commodities and commodity orientated economies such as Australia.

It could also exacerbate the inflationary problems we have already been facing. With a weakening US dollar, everything would need to be repriced. That could lead to food and fuel becoming more expensive and would again raise the cost of living for millions of people.

The stock market is also likely to react badly to a US default as it erodes confidence in the world’s largest developed market economy. We don’t think that will be the case though. If history is a guide, you would expect a resolution to be met. Although, it wouldn’t be surprising to see it left to the last minute and create a lot of volatility across markets. That is what we saw in 2011 when the Democrats and Republicans remained at an impasse over the debt ceiling until hours before a potential default. US stock markets plunged but it was short-lived, and shares recovered from the sharp fall once details of the deal became known. We think we are likely to see the same again this time round.

US inflation continues in the right direction.

Local and global equity markets were mixed this week with contrasting signals across economic data including falling US inflation, a UK rate rise, and weakness out of China.

Westpac shares rose after the bank lifted its dividend by 15% and announced a first half net profit increase of 22% to $4 billion. Commonwealth Bank shares rose following its quarterly result with the bank reporting a net profit increase of 1% to $2.6 billion but said that net interest income was 2% lower in the quarter.

The Federal Budget surprised with a $4.2 billion surplus, a significant improvement from the last estimate of a $36.9 billion deficit, with stronger than expected revenue from mining, corporate and income taxes. The government showed some fiscal restraint, but no plans to fix likely budget deficits in the years to come.

Australian new house lending rose by 4.9% in March, the first increase since January 2022, with lending to owner occupiers rising by 5.5% and to investors by 3.7%. Lending to first home buyers rose by 12.3%. The rise for the month was a big shock and may put further pressure on the RBA to maintain tighter monetary conditions.

Australian building approvals in the first quarter were the weakest in 11 years whilst business conditions fell in April. Australian retail trade volumes fell by 0.6% in the March quarter. Outside of the covid period, this was the largest quarterly fall in volumes since the GFC. Cost of living pressures along with higher interest rates finally hitting home.

US consumer prices rose at a 4.9% annual pace in April, slowing slightly from March and coming in below expectations. The annual core figure, which excludes food and energy, rose 5.5% in April down from 5.6% in March

German industrial production fell more than expected in March which saw recession fears escalate in Europe’s largest economy. Production decreased by 3.4% on the previous month partly due to weak performance by the automotive sector.

The Bank of England hiked rates by 0.25% to 4.5% at its May meeting, bringing interest rates to their highest level since 2008. The lift was widely expected.

China’s consumer inflation slowed to the weakest pace in two years in April while producer prices fall deeper into deflation. Stimulus likely to be required but authorities playing the waiting game for now.

US Treasury Secretary Janet Yellen said there are no good options for solving the debt ceiling stalemate and cautioned that resorting to the 14th Amendment would cause a constitutional crisis. There is a deal to be had, but President Biden is holding Congress hostage by not being amenable to any future budgetary cuts. US deficits are out of control and getting larger.

RBA Decision – May 2023 

The Reserve Bank of Australia (RBA) Board has increased the cash rate by 0.25% to 3.85% at its May meeting. 

The move was a fairly big surprise for markets given the largely consensus call for another month of pause. Whilst the March quarter inflation print was pleasingly lower, confirming a lower trajectory ahead, the mix of underlying components showing some “stickiness” effectively forced the RBA’s hand to push monetary settings further into contractionary territory to ensure the inflation trajectory continues lower. 

There were some key changes to their May statement relative to the prior month. 

Key points of focus include: 

  • A tone of impatience creeping into the statement – ie. inflation is still too high; it will be some time yet before it is back in target range; importance of returning inflation to target within a “reasonable timeframe”. 
  • Reiterated their inflation forecasts of 4.5% for 2023 and 3% for mid-2025. • Happy with goods price inflation falling but unhappy with services price inflation, particularly the combination of rising labour costs without any productivity increases. 
  • Reiterated their economic growth forecasts of 1.25% for 2023 and around 2% over the year to mid-2025, with unemployment set to increase to 4.5% in mid-2025. 
  • Confirmed their commitment to return inflation to target but again emphasised “in a reasonable timeframe”. 

We still believe that the RBA is near the end of this hiking cycle given the lagged effect of the cumulative rate increases since May 2022, but they will need to see continued evidence of headline and particularly underlying inflation falling over the coming quarters, and/or a subsequent pick-up in productivity growth. 

Following their announcement, Australian equities moved lower, the AUD/USD rose, and bond prices fell (ie. yields higher).