Welcome to our May newsletter, and while the weather is cooling the economic and political landscape is heating up. All eyes are on interest rates as the federal election campaign shifts into top gear ahead of the May 21 polling day.
The economic event that overshadowed all others in April was the release of the March quarter Consumer Price Index (CPI), which showed inflation up 2.1% in the quarter and 5.1% on an annual basis. This was the biggest lift in prices since 2001 and well above the Reserve Bank’s target of 2-3%. The biggest increases were for fuel, housing construction, and food as the war in Ukraine pushes up global oil prices and the cost of transporting food and other goods. Most economists now agree that the Reserve will lift official interest rates on Tuesday from their current historic low of 0.1%. The question now is by how much. Any rate rise will be passed through to variable mortgage rates, putting more pressure on household budgets during an election campaign where cost of living is a major theme.
On a positive note, unemployment fell below 4% in March, its lowest since 1974 as the economy continues to recover from COVID-related disruptions. As a result, businesses are more confident, with the NAB business confidence index lifting to a five-month high of 15.8 points in March, well above its long-term average of 5.4 points. Consumers are less confident, with the Westpac-Melbourne Institute consumer sentiment rating down 0.9% in April to a 19-month low of 95.8 points.
The Aussie dollar fell from US75c to around US71c over the month, adding to cost pressures on imported goods. Oil prices eased slightly, with Brent crude down 6% in April but up 48% on the year.
The road ahead for shares
Trying to time investment markets is difficult if not impossible at the best of times, let alone now. The war in Ukraine, rising inflation and interest rates and an upcoming federal election have all added to market uncertainty and volatility.
At times like these investors may be tempted to retreat to the ‘’safety” of cash, but that can be costly. Not only is it difficult to time your exit, but you are also likely to miss out on any upswing that follows a dip.
Take Australian shares. Despite COVID and the recent wall of worries on global markets, Aussie shares soared 64 per cent in the two years from the pandemic low in March 2020 to the end of March 2022.i Who would have thought?
So what lies ahead for shares? The recent Federal Budget contained some clues.
The economic outlook
The Budget doesn’t only outline the government’s spending priorities, it provides a snapshot of where Treasury thinks the Australian economy is headed. While forecasts can be wide of the mark, they do influence market behaviour.
Australia’s economic growth is expected to peak at 4.25 per cent this financial year, underpinned by strong company profits, employment growth and surging commodity prices. Our economy is growing at a faster rate than the global average of 3.75 per cent, and ahead of the US and Europe, which helps explain why Australian shares have performed so strongly.ii
However, growth is expected to taper off to 2.5 per cent by 2023-24, as key commodity prices fall from their current giddy heights by the end of September this year.
Commodity prices have jumped on the back of supply chain disruptions during the pandemic and the war in Ukraine. While much depends on the situation in Ukraine, Treasury estimates that prices for iron ore, oil and coal will all drop sharply later this year.
Share market winners and losers
Rising commodity prices have been a boon for Australia’s resources sector and demand should continue while interest rates remain low and global economies recover from their pandemic lows.
Government spending commitments in the recent Budget will also put extra cash in the pockets of households and the market sectors that depend on them. This is good news for companies in the retail sector, from supermarkets to specialty stores selling discretionary items.
Elsewhere, building supplies, construction and property development companies should benefit from the pipeline of big infrastructure projects combined with support for first home buyers and a strong property market.
Increased Budget spending on defence, and a major investment to improve regional telecommunications, should also flow through to listed companies that supply those sectors as well as the big telcos and internet providers.
But there are other influences on the horizon for investors to be aware of.
Rising inflation and interest rates
With inflation on the rise in Australia and the rest of the world, central banks are beginning to lift interest rates from their historic lows. Australia’s Reserve Bank is now expected to start raising rates this year.iii
Global bond markets are already anticipating higher rates, with yields on Australian and US 10-year government bonds jumping to 2.98 per cent and 2.67 per cent respectively.iv
Rising inflation and interest rates can slow economic growth and put a dampener on shares. At the same time, higher interest rates are a cause for celebration for retirees and anyone who depends on income from fixed interest securities and bank deposits. But it’s not that black and white.
While rising interest rates and volatile markets generally constrain returns from shares, some sectors still tend to outperform the market. This includes the banks, because they can charge borrowers more, suppliers and retailers of staples such as food and drink, and healthcare among others.
Putting it all together
In uncertain times when markets are volatile, it’s natural for investors to be a little nervous. But history shows there are investment winners and losers at every point in the economic cycle. At times like these, the best strategy is to have a well-diversified portfolio with a focus on quality.
For share investors, this means quality businesses with stable demand for their goods or services and those able to pass on increased costs to customers.
If you would like to discuss your overall investment strategy don’t hesitate to get in touch.
ii https://budget.gov.au/2022-23/content/bp1/download/bp1_bs-2.pdf
iii https://www.finder.com.au/rba-survey-4-apr
iv https://tradingeconomics.com/united-states/government-bond-yield
Sowing the seeds of succession
Succession planning can be difficult at the best of times without dealing with the added pressures farmers have recently faced with droughts, fires and floods.
And that’s why it is even more important to plan early and get it right when you are on the land. You are not just dealing with a business, but invariably also with a home.
Some 99 per cent of the 134,000 farms in Australia are family owned with the average age of farmers being 52.i It is believed that farmers are five times more likely than other Australians to be working beyond the age of 65. There are a variety of reasons for this, from a reluctance to relinquish control, to a lack of family willing to take over the reins and financial necessity.
Given the physicality of farming, it would seem to make a lot more sense to start thinking about succession planning well before that stage.
Often such planning is put into the too hard basket because there are so many variables to consider. But this will not solve the problem, so it’s better to get good advice and get it early.
Start talking
The first thing you need to do is open the doors of communication. Arrange a time to talk with your family to discuss:
- Who wants to inherit and work on the farm and who wants to leave the property
- Whether they agree each child should be treated equally or accept that the one inheriting the farm should receive preferential treatment
- How everybody feels about splitting the property between siblings, or
- The way forward if none of your children wants to stay on the land.
These are all considerations that need to be addressed and revisited over time to ensure they meet with everybody’s wishes.
If just one of the children wants to remain on the property, will they need to find the finance to pay out the other siblings? If so, then the next decision is how that finance will be found.
Perhaps the answer is to transfer the property before you die. If that is the case, then where will you live in retirement and what will be your source of income once you retire? Again, you need to examine the options. Perhaps you may receive an ongoing income from the property, or maybe find income from other investments. Importantly, you also need to revisit these options over time to ensure they still work for you.
One danger of not having a succession plan and working well beyond your best years, is that you can run the farm into the ground and make it a far less attractive property to sell.
Structure your plans
There are so many questions to ask and what is right for one family, may not be right for another.
But once you determine how you want to move forward, you then need to examine the best structures to put in place to make the process as efficient as possible. Some of the key advice you may need is on tax, trusts and land ownership and the intersection of all three.
Tax is particularly important as you want to avoid or at least minimise capital gains tax (CGT).
If you are 55 years of age or more and retiring and have owned your property for at least 15 years, then you may qualify for the small business 15-year CGT exemption on your entire capital gains. Other concessions may apply if you don’t qualify the 15-year exemption.
For couples where the family farm is held in their own name, perhaps you might want to consider a joint tenancy agreement as it leads to automatic transfer of ownership if one dies.
Or you might consider putting the farm into a family trust or perhaps holding it as an asset in your self-managed super fund.
There are so many what-ifs to consider when it comes to rural properties. If you want to discuss how to move forward on your estate and succession planning and what will work best for you, then give us a call.
i https://www2.deloitte.com/au/en/pages/consumer-business/articles/succession-family-farm.html
Thriving on social connection
The phrase ‘no man is an island’ is from a poem written by John Donne and expresses the idea that humans need to be part of a community to thrive. That’s certainly true, by nature we are social creatures and connection is a core human need. So why do some many of us feel alone and what can we do to feel more connected?
The last few years have highlighted the importance of social connection on our mental health and physical well-being, as our movements were restricted to varying degrees. The need to connect socially is as basic as our need for food, water, and shelter, with studies showing that it reduces the incidence of heart disease and stroke.i
You’re not alone in feeling alone
While we all need social connection, so many of us are feeling that it’s lacking in our lives. Feeling isolated is pretty common and happens to us all at one time or another, although loneliness appears to be particularly prevalent at the moment. A 2018 survey revealed that one in four of us are lonely and this increased to around half of us during the pandemic.ii,iii
So, what measures can we take to feel more connected?
Think about what you need
Everyone has different social needs. If you’re used to spending a lot of time with colleagues, friends and loved ones, you might feel isolated or lonely with just a few interactions per week, while for someone who likes their own company that might be simply fine.
On that note, it’s important to be able to enjoy your own company and sometimes periods of being alone can provide inner peace and time for introspection, making those moments of connection all the more precious.
Your social needs also change over time and under different circumstances. A life change like becoming a parent or retiring from the workforce can prompt a shift in your need to connect with others.
Quality can be more important than quantity
It’s important to consider the significance of meaningful connections rather than just social interaction, for the sake of it. Often the intimacy of a deep and meaningful discussion with a close mate can be much more enjoyable than a dinner with people you barely know.
Foster good social skills
Social connection is a two-way street so there are things you can do to improve the quality of your social interactions. You can forge deeper connections by talking about things that matter to you and to the other person, developing good listening skills and demonstrating real interest in what they have to say.
Seek out new people and experiences
It can be hard to foster new social connections. One effective way is to join a group to be with people who have similar interests. This growing need has led to apps being built for this purpose, with one of the most popular being meetup.iv Meetup has groups for everything, whether you are interested in bike riding, cinema, salsa dancing or dining. If you can’t find a group that’s of interest you can always create your own.
When looking to meet new people, try to open yourself up to try new experiences. Not everything you try your hand at will open doors to friendship, but you can always learn from the experience and hopefully have some fun along the way.
Dust off old friendships
Friendships need nurturing and many of us have been guilty of neglecting old buddies – particularly of late. Have a think about the people in your life and the relationships that may have fallen by the wayside and reach out, even if it’s just to grab a coffee.
It can take a little time and effort, but it’s always possible to reach out and strengthen existing connections or forge new ones. The benefits of having those social connections in our lives are profound. Keep in mind that you’re not the only one out there in search of connection and your efforts are not just helping yourself but also benefitting those you are reaching out to.
i https://www.heartfoundation.org.au/media-releases/Loneliness-link-to-heart-disease-in-older-Australi
iv https://www.meetup.com/en-AU/
This Newsletter provides general information only. The content does not take into account your personal objectives, financial situation or needs. You should consider taking financial advice tailored to your personal circumstances. We have representatives that are authorised to provide personal financial advice. Please see our website https://superevo.net.au or call 02 9098 5055 for more information on our available services.