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Infocus

Federal Budget Summary 2021

In this special report, our Head of Professional Standards & Technical Services, Craig Meldrum, looks at the key takeouts from the federal budget and what it means for individuals and businesses for tax, superannuation and social security that may impact wealth creation and retirement funding strategies for Infocus’ advisers and clients.

The macro

On Tuesday, 11 May 2021, Treasurer Josh Frydenberg handed down the 2021-22 Federal Budget. It was his third Budget but more interestingly, this was the second “Covid” budget and unsurprisingly did not reprise any of the catch-cries of “debt and deficit” or “return to surplus” from the pre-Covid era (which seems a long time ago now). With a Federal election looming next year, and in what the ABC’s political correspondent, Andrew Probyn, referred to as the “hot chocolate budget”, this budget had all the hallmarks of a pre-election cash-splash with more spending to ensure a continued recovery out of the Covid-fueled economic black hole.

Given the massive challenges for both the federal and state governments in managing the health impacts of the pandemic, including various random state-based outbreaks (generally from hotel quarantine), the further economic impacts to tourism and education while the borders remain closed and the slow pace of the vaccine rollout, Australia has actually done much better than expected. Last year’s federal budget predicted a deficit of $213.7 billion which was forecast to fall to $66.9 billion by 2023-24, representing 36% of GDP. Treasury has recast those figures and forecast a better, but still eye-watering deficit of $161 billion, reducing to $57 billion by 2024-25.

Total net debt was expected to reach $703 billion this year and was forecast to peak at a record $966 billion by June 2024. Those figures have now reduced to $617 billion, representing 30% of GDP and expected to peak at $980.6 billion in 2025 (40.9% of GDP). Australia’s successful transition out of its debt-fueled recovery does rely on a few assumptions including having the entire population fully vaccinated, re-opening the borders and continuing to enjoy the tax receipts from China’s strong demand for our iron ore. The continued rollout of the vaccine and strong fiscal policy are expected to see real GDP grow by 5.25% during the 2021 year, (after it fell by 2.5 per cent in 2020).

Australia has also rebounded well with its unemployment figures. After initially forecasting a Covid-induced unemployment rate of up to 15%, Australia is currently sitting at 5.6% which Treasury has forecast will fall below 5% by late 2022 and should reach 4.75% in the June quarter of 2023. Like last year, this budget is all about continuing to build business confidence and create more jobs. Businesses can benefit from further tax incentives for investing in innovation and the instant asset-write off will continue. The Treasurer also made big spending commitments on infrastructure, housing and traineeships to further boost job creation.

The Government has also put more of a focus on women in this budget, following the establishment of a dedicated taskforce earlier this year, with measures targeted towards women’s safety, economic security, and health and wellbeing.

The government has committed $1.9 billion to a Women’s Economic Security Package, including $1.7 billion flowing towards an increased childcare subsidy over five years, for families with second and subsequent children aged five years and under.

Noting that women generally have a lot less in their superannuation than men by the time they retire, the Government has also scrapped the $450 per month minimum income threshold for eligibility for superannuation guarantee contributions from employers, benefiting low-income workers.

Besides further spending to implement the comprehensive Digital Economy Strategy and a range of measures in health, the Government has dedicated $17.7 billion to improving the aged care system following on from the recent royal commission into aged care, including adding 80,000 new HomeCare places (275,000 in total). Further big-ticket items include $13.2 billion for the National Disability Insurance Scheme (NDIS) and $2.3 billion towards a National Mental Health and Suicide Prevention Plan.

More detail on a few of the measures

Personal taxation

There were no changes announced to the Government’s already-legislated three-stage tax plan that was announced in 2018 and enhanced in 2019. As a reminder;

  • Stage 1 amended the 32.5% and 37% marginal tax brackets over 2018-19 to 2021-22 and introduced the Low- and Middle-Income Tax Offset (LMITO);
  • Stage 2 was designed to further reduce bracket creep over 2022-23 & 2023-24 by amending the 19%, 32.5% and 37% marginal tax brackets; and
  • Stage 3 was aimed at simplifying and flattening the progressive tax rates for 2024–25 and increasing the Low-Income Tax Offset (LITO). The Government estimated that around 95 per cent of taxpayers would be on a marginal tax rate of 30% or less (as shown in the tables below).

3 Stage Tax Plan

Tax rates (2017-18) Thresholds Tax rates (2018-19 to 2021-22) Thresholds
Nil $0 – $18,200 Nil $0 – $18,200
19% $18,201 – $37,000 19% $18,201 – $37,000
32.5% $37,001 – $87,000 32.5% $37,001 – $90,000
37% $87,001 – $180,000 37% $90,001 – $180,000
45% $180,000 + 45% $180,000 +
LITO Up to $445 LITO Up to $445
LMITO – LMITO Up to $1,080

 

Tax rates (2022-23 & 2023-24) Thresholds Tax rates (2024-25) onwards Thresholds
Nil $0 – $18,200 Nil $0 – $18,200
19% $18,201 – $45,000 19% $18,201 – $45,000
32.5% $45,001 – $120,000 30% $45,001 – $200,000
37% $120,001 – $180,000 – –
45% $180,000 + 45% $200,000 +
LITO Up to $700 LITO Up to $700
LMITO – LMITO –

The Stage 3 personal income tax cuts will proceed as originally planned, commencing on 1 July 2024. The tax rate above taxable income of $45,000 will drop from 32.5% to 30%, and the rate of 45% will apply above $200,000, eliminating the 37% tax bracket.

The LMITO will be extended to 2021–22. Originally legislated for 4 years, the LMITO was then reduced to 2 years and due to end on 30 June 2021. The 12-month extension means it will end 30 June 2022. The rates and thresholds remain unchanged.

The reduction in tax provided by LMITO will remain at $1,080 per annum ($2,160 for dual-income couples) with the base amount at $255 per annum for the 2020-21 income year.

Taxable Income (TI) LMITO
$0 – $37,000 $255
$37,001 – $48,000 $255 + ([TI – $37,000] × 7.5%)
$48,001 – $90,000 $1,080
$90,001 – $125,999 $1,080 – ([TI – $90,000] × 3%)
$126,000 + Nil

In another personal tax measure, the $250 threshold for self-education expenses is to be removed.

Superannuation

Superannuation, which was fairly well ignored in last year’s budget, got some needed tweaks but no wholesale changes. The following provides a short summary on each of the proposed measures.

The Work Test

Since 1 July 2020, the work test is required to be satisfied by those aged 67–74 (65–74 before 1 July 2020) to make voluntary contributions to superannuation. However, it was announced that the work test will be removed completely. This measure is expected to take effect from 1 July 2022.

Interestingly (or frustratingly), there is still no sign of the extension of the Non-Concessional Contribution (NCC) Cap bring forward measure (the bill that is still stuck in the Senate sought to align the bring forward contribution rules with the provision that removed the work test for 65 and 66 year olds where the Total Super Balance is below $300,000). With the work test scrapped, it is not known whether the bring forward rule will now be opened up for eligible contributions above 65.

$450 per month minimum income level for SG support

As mentioned above, the current minimum income threshold of $450 per month will be removed. The measure is expected to start from 1 July 2022. This means lower income earners, many of them women, will become entitled to superannuation guarantee support regardless of their level of income.

At the same time, the Budget did not contain any change to the legislated Super Guarantee rate increase from 9.5% to 10% for 2021-22.

Downsizer contributions

The age for making downsizer contributions (up to $300,000 of proceeds per member of a couple from selling the principal residence of at least 10 years) will be reduced from 65 to 60. This measure is expected to take effect from 1 July 2022. Downsizer contributions are not included in the NCC cap.

First Home Super Saver Scheme

As well as some technical amendments, the maximum amount of voluntary contributions that can be released under the First Home Super Saver Scheme will increase from $30,000 to $50,000. This measure is expected to take effect from 1 July 2022.

SMSF and SAF residency requirements

The residency requirements for SMSFs and small APRA funds will be relaxed by

  • extending the central management and control test safe harbour from 2 to 5 years for SMSFs; and
  • removing the active member test for both fund types.

This measure and is expected to take effect from 1 July 2022.

Early release of super to victims of family and domestic violence

The Government will not proceed with a measure to extend early release of superannuation to victims of family and domestic violence. The measure was previously announced on 21 November 2018.

Conversions of legacy income streams

Individuals will be permitted to exit certain legacy retirement income stream products (excluding flexi-pensions or lifetime products in APRA-funds or public sector schemes), together with any associated reserves, for a 2-year period. Any commuted reserves will not be counted towards an individual’s concessional contribution cap. Instead, they will be taxed as an assessable contribution for the fund.

Superannuation thresholds from 1 July 2021 to 30 June 2022

Threshold type Amount
Transfer Balance Cap $1.7 million
Concessional Contribution Cap $27,500
Non-concessional Contribution Cap $110,000 or $330,000 over 3 years
Low rate cap $225,000
Untaxed Plan cap $1,615,000
Account based pension payments 50% Covid reduction to minimum payment standards ended
Superannuation Guarantee 10%
Maximum Super Contribution Base $58,920 (per quarter)
Government Co-contribution ($500) Lower income threshold – $41,112 Upper income threshold – $56,112

Social Security and Aged Care

The budget did not contain any large social security measures.

Pension Loans Scheme (PLS)

The Government has announced that they will be increasing the flexibility of the Pension Loans Scheme (PLS) by allowing participants to access up to two lump sum advances in any 12-month period up to a total value of 50% of the maximum annual rate of the aged pension.

The total PLS is currently around $12,385 per year for singles and $18,670 couples (combined). The Government has also announced it will introduce a No Negative Equity Guarantee which means that when the house is sold, the Government will not claim back more than the sale price of the house used to guarantee the payment

Family Home Guarantee

The new Family Home Guarantee will allow single parents with dependants to purchase a home with as little as a 2% deposit.

Aged Care

The Government will invest a total of $17.7 billion on aged care reform over five years, including:

  • $6.5 billion for 80,000 additional Home Care Packages over the next two years;
    • $798.3 million for to provide greater access to respite care services and payments to support carers;
    • $7.8 billion for a new funding model for residential aged care, with a $10 per person per day supplement of the Basic Daily Fee;
    • $189.3 million over four years from 2020-21 to implement the new funding model, the Australian National Aged Care Classification (AN-ACC); and
    • $117.3 million to support structural reforms, including the implementation of a new Refundable Accommodation Deposit (RAD) Support Loan Program.

Business taxation

A welcome announcement was an extension to the measure announced in the 2020 Budget that was designed to improve cash flow and to encourage new investment to support the economic recovery whereby eligible assets (including new depreciable assets and the cost of improvements to existing eligible assets, and for small and medium-sized business, second-hand assets) acquired from 7:30pm (AEDT) on 6 October 2020 and first used or installed by 30 June 2022, could be fully expensed in year of first use. The Government will extend temporary full expensing for 12 months until 30 June 2023.

Further, eligible businesses with an aggregated turnover of less than $5 billion can deduct the cost of eligible depreciating assets of any value acquired from 7:30pm (AEDT) on 6 Oct 2020 and first used or installed ready for use by 30 June 2023. Normal rules will apply from 1 July 2023. The Government also announced that it will extend loss carry back for eligible companies by 12 months to allow them to carry back losses from 2022–23 to offset tax paid on profits as far back as 2018–19 when they lodge their 2022–23 tax return.

The Administrative Appeals Tribunal (AAT) will be given the power to pause or modify ATO debt recovery action in relation to disputed debts of small businesses. This is expected to improve efficiency by keeping these matters out of the courts.

Conclusion and where to from here?

Moving on from the 2020 budget, which was loaded with the largest injection of economic stimulus Australia has ever seen to “keep the ship afloat” during the economic calamity wrought by the pandemic, the 2021 budget has continued on with the theme of further economic stimulus and with all the trimmings of a pre-election cash splash ahead of next year’s election. It has enough sweeteners to woo a broad range of voters, but we’ve seen it does rely on continued economic activity, full vaccination and growing business and consumer confidence, which will be turned on its head if Australia doesn’t maintain its keen focus on managing the virus.

Similar to last year, the Government will continue to pull the fiscal levers to generate jobs and provide the tax incentives to foster business and individual confidence to invest and grow.

As with all budget announcements, the measures are proposals only and need to be enacted by Parliament.

If you have any specific questions, please contact your financial adviser.

General Advice Warning

The information in this presentation contains general advice only, that is, advice which does not take into account your needs, objectives or financial situation. You need to consider the appropriateness of that general advice in light of your personal circumstances before acting on the advice. You should obtain and consider the Product Disclosure Statement for any product discussed before making a decision to acquire that product. You should obtain financial advice that addresses your specific needs and situation before making investment decisions. While every care has been taken in the preparation of this information, Infocus Securities Australia Pty Ltd (Infocus) does not guarantee the accuracy or completeness of the information. Infocus does not guarantee any particular outcome or future performance. Infocus is a registered tax (financial) adviser. Any tax advice in this presentation is incidental to the financial advice in it.  Taxation information is based on our interpretation of the relevant laws as at 1 July 2020. You should seek specialist advice from a tax professional to confirm the impact of this advice on your overall tax position. Any case studies included are hypothetical, for illustration purposes only and are not based on actual returns.

Infocus Securities Australia Pty Ltd (ABN 47 097 797 049) AFSL No. 236 523.

Filed Under: News

Media Release: Infocus scoops double executive senior talent

Infocus Wealth Management has pulled off a stunning coup, snaring senior executives Jeff Mitchell and Craig Meldrum from a rival dealer group. Mitchell has been appointed to the newly created position of Chief Investment Officer, while Meldrum will be Head of Technical Services for the Group.

Infocus has been riding a wave of positive momentum since company founder, Darren Steinhardt returned to an operational role as Managing Director late last year. The appointment of Mitchell and Meldrum further strengthens Infocus’ determination to be an adviser-focused dealer group of choice.

Steinhardt is understandably thrilled with the dual recruitment stating “Infocus is proud of our foundations and proud to be an adviser-focused group. With the addition of outstanding professionals the calibre of Jeff and Craig to our leadership, we strengthen that position further. Both are experts in their respective fields, but just as importantly, they have each practiced as advisers so they understand and appreciate both the opportunities and challenges that face our industry. Like us, they agree Infocus is a great place to be in the current environment”.

Jeff Mitchell is highly regarded in Investment and Research circles, joining Infocus after more than 20 years in the industry with the last 6 years at Australian Unity and previously with Standard & Poor’s Wealth Management Services. Jeff will report directly to the Managing Director and join the Infocus executive leadership team. In his role as CIO, he will bring a wealth of experience across investment, research, asset management, governance and operational considerations.

Craig Meldrum as Head of Technical Services will lead a high calibre in-house function providing advice, strategy, tools, and quality technical leadership to the significant benefit of our 160-strong national adviser network. In addition, Craig will also lead the development and implementation of our end-to-end advice process. Craig also joins the Infocus executive leadership team.

Steinhardt added, “Infocus occupies a trusted position as the primary adviser for the entire financial lives of our customers. We are confident Jeff and Craig will make a material difference to our ability to do that at the highest possible standard and in the best interests of our clients”.

“The appointment of Jeff Mitchell and Craig Meldrum to our Infocus team signals our clear intention to resource ourselves for an exciting future”.

Filed Under: News

Federal Budget 2018

The 2018-19 Federal Budget that was handed down last night focused more on minor adjustments than sweeping reforms. In our view, it was a Budget designed to create short, sharp election headlines, but there were also measures that will provide financial planning opportunities for many Australians.

One of the more significant announcements was the Government’s determination to reduce personal income tax over stages starting with tax relief for low and middle-income earners from 1 July 2018 and culminating in the elimination of the 37 per cent tax bracket (and increasing the lower threshold of the top tax bracket) from 1 July 2024.

A summary of the key points from the Budget that may affect your financial situation is provided below. Please remember that before any of these announcements can be implemented they will require the passing of legislation and may be subject to change.

A summary of the key budget measures include:

1. Making the tax system easier over the coming years by reducing tax brackets

2. Tax reductions for low and middle-income earners

3. Reduction in fees and a ban on exit fees on all super funds

4. Opt-in insurance for young and low super balance Australians

5. Increasing SMSF members from 4 to 6

6. Super trustees will need to build new retirement income options for their members

7. Expanding the pension loan scheme to all older Australians.

Taxation

Changes to income tax bracket thresholds

From 1 July 2018, the Government will increase the top threshold of the 32.5 percent personal income tax bracket from $87,000 to $90,000.

The Government will increase the Medicare Levy low-income threshold for singles, families and single seniors and pensioners from 2017-18 income year.

Medicare Levy low-income threshold for families

  • The threshold for singles will be increased from $21,655 to $21,980.
  • The family threshold will be increased from $36,541 to $37,089.
  • For single seniors and pensioners, the threshold will be increased from $34,244 to $34,758.
  • The family threshold for seniors and pensioners will be increased from $47,670 to $48,385.
  • For each dependent child or student, the family income thresholds increase by a further $3,406, instead of the previous amount of $3,356.


2% Medicare Levy retained

The Medicare levy rate will no longer be increased from 2.0 to 2.5 per cent of taxable income from 1 July 2019.

Small business – extending the $20,000 instant asset write-off

The $20,000 instant asset write-off will be extended by a further 12 months to 30 June 2019 for businesses with aggregated annual turnover less than $10 million.

Small businesses will be able to immediately deduct purchases of eligible assets costing less than $20,000 first used or installed ready for use by 30 June 2019. Only a few assets are not eligible (such as horticultural plants and in-house software).

Personal Income Tax Plan

From 1 July 2018, the Government will introduce a seven year Personal Income Tax Plan over three stages that includes:

Step 1: Targeted tax relief to low and middle income earners

A Low and Middle-Income Tax Offset will be introduced. The offset is: a non-refundable tax offset

  • – of up to $530 per annum
  • – available to Australian resident low and middle income taxpayers
  • – available for the 2018-19, 2019-20, 2020-21 and 2021-22 income years
  • – received as a lump sum on assessment after you lodge your tax return.

The offset will provide a benefit of:

  • – up to $200 for taxpayers with taxable income of $37,000 or less
  • – the value of the offset will increase at a rate of three cents per dollar to the maximum benefit of $530, for taxpayers with taxable income between $37,000 and $48,000
  • – the maximum benefit of $530 for taxpayers with taxable incomes from $48,000 to $90,000
  • – the offset will phase out at a rate of 1.5 cents per dollar for taxpayers with taxable incomes from $90,001 to $125,333. The benefit of the offset is in addition to the existing Low Income Tax Offset (LITO).

 Step 2: Protecting middle income Australian from bracket creep

The top threshold of 32.5 per cent personal income tax bracket will be increased from $87,000 to $90,000. This measure takes effect from 1 July 2018. Other measures include:

  • LITO will be increased from $445 to $645 (and withdrawn at a rate of 6.5 cents per dollar between incomes of $37,000 and $41,000, and at a rate of 1.5 cents per dollar between incomes of $41,000 and $66,667)
  • 19 per cent personal income tax bracket will be extended from $37,000 to $41,000
  • top threshold of the 32.5 per cent personal income tax bracket will be increased from $90,000 to $120,000. These measures take effect from 1 July 2022.


Step 3: Ensuring Australians pay less tax by making the system simpler

The 37 per cent tax bracket will be removed entirely:

  • top threshold of 32.5 per cent personal income tax bracket will be increased from $120,000 to $200,000.
  • Taxpayers will pay the top marginal tax rate of 45 per cent from taxable incomes exceeding $200,000 and the 32.5 per cent tax bracket will apply to taxable incomes of $41,001 to $200,000.

These measures take effect from 1 July 2024.

Superannuation

Capping passive fees, banning exit fees and consolidating small and inactive super accounts

From 1 July 2019, there will be a three per cent annual cap on passive fees charged by superannuation funds on accounts with balances below $6,000 and exit fees will be banned on all superannuation accounts. In addition, all inactive superannuation accounts with balances below $6,000 will need to be transferred to the ATO.

Changes to insurance in superannuation

From 1 July 2019, insurance in superannuation will only be able to be offered on an opt-in basis for:

  • members with low balances of less than $6,000;
  • members under the age of 25 years; and
  • members whose accounts have not received a contribution in 13 months and are inactive.

Work test exemption for recent retirees

From 1 July 2019, the Government will introduce an exemption from the work test for voluntary contributions to superannuation, for people aged 65-74 with superannuation balances below $300,000, in the first year that they do not meet the work test requirements. This measure will allow contributions to be made for an additional 12 months.

Increasing the maximum number of allowable members in SMSFs and small APRA funds from four to six

From 1 July 2019, the maximum number of members permitted in new and existing self-managed superannuation funds and small APRA funds will be increased from four to six.

Three-year audit cycle for some SMSFs

From 1 July 2019, self-managed superannuation funds with a history of good record-keeping and compliance will be subject to a three-yearly audit requirement rather than an annual audit requirement.

Retirement Income

The Government announced it is developing a retirement income framework to increase flexibility and choice for retirees and help boost living standards.

Comprehensive Income Products for Retirement

The superannuation law will be amended to introduce a retirement covenant that will require superannuation trustees to formulate a retirement income strategy for superannuation fund members. The intention is to focus the industry on providing a higher standard of living for retirees.

The covenant will require trustees to offer Comprehensive Income Products for Retirement (CIPRs): products that provide individuals income for life, no matter how long they live. Offering a CIPR would be a core part of how trustees implement the retirement income strategy developed for their members.

Social Security

Pension Work Bonus

From 1 July 2019, the Pension Work Bonus will increase from $250 to $300 per fortnight with the maximum unused amount that can be accrued increasing to $7,800 (up from $6,500).

In addition, the Government will extend the Pension Work Bonus to those who are self-employed. However, a ‘personal exertion’ test will be introduced to ensure the Pension Work Bonus is only available to those who are engaged in gainful work and not to those receiving passive income such as income from real estate.

Expanding the Pension Loan Scheme

From 1 July 2019, the Government will expand eligibility to the Pension Loan Scheme to include all Australians of Age Pension age. The Government will also increase the loan amount so that an individual can receive a fortnightly amount up to 150 per cent of the maximum Age Pension rate.

 

 

 

Filed Under: Blog, Economic Update, News

Infocus Financial Advisers Dig Deep for Children’s Charity

Today, Infocus presented the Starlight Children’s Foundation with a cheque for $8340.50.

Speaking at their national head office on the Sunshine Coast, Infocus Managing Director Darren Steinhardt said “As Financial Advisers, we work hard to make a positive difference in the lives of our clients.  Today, with the Starlight Foundation, we have been given the opportunity to also make a positive difference in the lives of seriously ill children and their families”.

Steinhardt added, “The values of the Starlight Foundation and the amazing work they do really resonates with our team and with our financial adviser network.  We are incredibly proud to offer this donation today”.

Accepting the cheque, Tracey Tomlin, State Partnerships Manager of Starlight Foundation said “With this generous donation from the Infocus team, we will help brighten the lives of 213 seriously ill children and their families! Thank you Infocus.”

Tomlin continued “We rely on support such as this to help us deliver our in-hospital and community programs and we would not be able to do what we do without amazing organisations and individuals like you all”.

The Infocus team voted to select Starlight Foundation as their Charity of the Year and the cheque represents donations made in the past 12 months by Infocus staff through their fortnightly salary giving option, as well as money raised through fundraising initiatives with the nationwide network of financial advisers licensed through Infocus.

Filed Under: Blog

Top finance tips for Women of all ages

International Women’s Day (March 8) was this month, and it’s a special opportunity to celebrate the social, economic, cultural and political achievements of women past present and future.

Advancing gender equality is a key issue and critical to this is enhancing women’s economic empowerment.  Recent research* suggests that nearly half (47%) of Australian women don’t feel in control of their finances and a third (32%) have less than a month’s worth of savings to live off if they needed it.

For women of all ages, the following tips are a great starting point for making their future financial interests a priority:

1. Don’t delay uncomfortable conversations:

Divorce, illness, job loss and death all impact women’s wealth, so speak with your partner, family or a financial adviser to plan for adverse events.

2. Get to know your super:

How much do you have? How much will you need? How can you benefit from voluntary contributions? All this will have a huge impact when you retire.

3. Be independent and become an expert on your money:

Know your money inside out and – debt, savings, investments, insurance, and super – and how all of it works for you.

4. Prioritise your financial goals as well as your life and career goals:

The decisions you make in work and your personal life will all impact your finances.

5. Your salary matters:

Your pay cheque and super are vital to your financial security. Don’t undersell yourself, negotiate your pay, and be aware of your worth at work.

If you’d like our help with any of the above, or have any general questions – reach out to us.

*Research and tips provided by MLC Advice (Oct, 2017)

Filed Under: Blog

Response to current market volatility

 

Special Update

8th February 2018
Response to current market volatility

By Ron Bewley*. Brought to you by Infocus

Within this special update, we share with you an observation of the recent bout of market volatility.

We hope you find this update informative. If you have any feedback or would like to discuss any aspect of this report, please contact your Financial Adviser.

We can certainly understand why many investors are disturbed by the market volatility over the last few days. After about 18 months of great consistent returns on the S&P 500 with little volatility, January’s return was a massive 5.6%. That’s about an average year’s return in one month!

The reasons for the surge are fairly obvious. Trump got his tax cut through at the end of December – his first major victory. It was not at first entirely clear how much of a boost the tax package would give for the US and global economy so there was a fear of missing out in the investment community. There was a lot of cash on the sidelines needing a home.

The Australian story was quite different. The ASX 200 had an ordinary January because we had no new good news to process.

The S&P 500 corrected quite sharply in the first few days of February but only back to the trend that had been established in 2017. Intra-day volatility rose sharply after an unusually benign year or more.

So why did the ASX 200 also go down if it had not been overpriced? Typically investors sell first and ask questions later. Wall Street sneezed and we caught a cold as the saying goes.

We strongly believe that the rally on Wall Street will continue because analysts are still factoring in the impact of Trump’s tax cuts; a one and a half trillion dollar infrastructure programme is now on the table; and volatility is still at or below average levels – except for the blip over the last few days. Moreover, the IMF just upgraded its global growth forecasts for 2018 and 2019 from 3.7% to 3.9% pa. And the US Senate just voted for a two-year deal on their budget funding pushing those intermittent debt-ceiling debacles back to at least 2020.

With global growth booming and interest rates still low, the only ‘fly in the ointment’ is that the US Fed has only just sworn in a new chair (Jay Powell) and the latest wage inflation data was the strongest in a while. At 2.9% wage inflation is not a problem and there are good reasons why it might be an aberration.

So will rates rise faster in the US than previously expected? Markets were less optimistic than the Fed before Christmas but now the Fed and the market are in agreement that gradual rate hikes will follow.

To bring it all together, Wall Street just had a great ‘company reporting season’ – one of the best in recent history – so US companies are really strong. The global economy is really strong. The Europe economy is also strong and Brexit issues are being dealt with. The China economy growth for 2017 recently beat expectations at 6.9% for 2017.

The Australian economy is not as strong as we would like but it is nowhere near recession.

The recent sell-off was price-driven, not fundamentals-driven.

We firmly believe that this sell-off will be over soon and, by the end of the year we will have enjoyed another strong year of gains. Of course volatility does not usually vanish as quickly as it arrives. There have been some wild swings during the US sessions as investors try to work out a fair pricing for the market.

This recent market performance is a text-book version of an overpriced market correcting. Fundamentals will soon reappear as the main driver of the markets upwards. Long-term investors do not need to worry about when that will start.

 

*Ron Bewley (PhD,FASSA) – Director, Woodhall Investment Research

Important information

This information is the opinion of Infocus Securities Australia Pty Ltd ABN 47 097 797 049 AFSL and Australian Credit Licence No. 236523 trading as Infocus Financial Advice and Infocus Money Mangement and may contain general advice that does not take into account the investment objectives, financial situation or needs of any person. Before making an investment decision, readers need to consider whether this information is appropriate to their circumstances. Past performance is not a reliable indicator of future performance.

Filed Under: News

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