Economic Update

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.

 

 

 

Economic Update May 2018

Within this month’s update, we share with you a snapshot of economic occurrences both nationally and from around the globe.

– Australian share market recovers
– United State (US) economy seen as strengthening
– Royal Commission casualties
– Korean peninsula frictions easing

We hope you find this month’s Economic Update as informative as always. If you have any feedback or would like to discuss any aspect of this report, please contact your Financial Adviser.

The Big Picture

After two challenging months for equity markets, April turned out an impressive +3.9% for the ASX 200 but only +0.3% for the S&P 500 on Wall Street. Even better for Australia – that big gain was made up of four consecutive weeks of all positive gains. Low volatility returned.

The dominant negative influence on Wall Street was the ‘tech rout’. A number of mega tech companies like Apple suffered significant price corrections. That we do not have such a tech sector in Australia explains in part how we avoided much of the US volatility.

The US produced an impressive company reporting season with about 80% of companies beating analysts’ expectations with their Q1 earnings reports.

The US Federal Reserve (‘Fed’) produced minutes of its last meeting with a strong assessment of the US economy. It led the Fed to hold the line on there being three rate hikes in 2018 but possibly increasing the pace in the following two years.

The US reported slightly weaker economic growth for quarter one but a big beat on Retail Sales for the month. US jobs did come in well under expectations for the month but that followed an exceptionally strong report the previous month. The average of two months’ data was about on expectations.

China posted above-expectations, with economic growth at 6.8%. The April Purchasing Managers’ Index (PMI) for manufacturing came in at a solid 51.4. Talk of trade wars between the US and China appears to be taking on a more conciliatory tone.

At home, the Royal Commission into the Financial Services Industry produced some casualties. AMP’s chairman resigned as a result of certain findings. A high-profile financial planner (and principal) is reported to have lost all of his regular spots on TV and in the press for allegedly ‘bad’ advice. A UBS analyst put a ‘Sell’ recommendation on Westpac after assessment of evidence on its home loan book. Westpac’s stock price took an immediate tumble.

The Reserve Bank of Australia (RBA) kept rates on hold in April and again at the May meeting. With inflation coming in at 0.4% for the quarter and 1.9% for the year, this economic indicator is still below the RBA’s target range of 2% to 3%.

Our jobs report continues to see underlying growth in full-time jobs slipping month-by-month but it is still positive. The unemployment rate is stuck at around 5.5% which is well above most people’s estimates for full employment.

Japan emphasised the need to keep monetary policy loose until inflation gets above two per cent. The European Central Bank also reaffirmed that it will not start hiking rates anytime soon. UK economic growth, coming in at only 0.1% for the quarter, means that hikes anytime soon are unlikely. Policy makers around the world seem to be coordinated and in tune with keeping global growth on track for a strong 2018 and 2019.

While President Trump continues to be unpopular in the media and elsewhere, he scored two big wins in April. A joint US-UK-France missile mission attacked terrorist cells in Syria further reducing the likelihood of global unrest from terrorists. In addition, the North Korean president Kim Jong Un walked across the border to South Korea to meet his opposite number. Trump is also reportedly planning a meeting with Kim Jong Un. North and South now have a ‘hotline’ for immediate contact. This sentiment is a far cry from the fear of nuclear attacks from North Korea a few months or more ago. Trump stressing that he had a ‘bigger button’ seems to have worked even if reporters scoffed at the time!

Apart from the controlled unwinding of an overbought tech sector in the US, the world economy and markets seem back on track for stable growth prospects.

Asset Classes

Australian Equities

Our ASX 200 gained in April what largely it had lost in March. Resource stocks and the Healthcare sector were particularly strong performers. A more stable outlook for China and commodity prices helped resources.

Market volatility is back down to below long-term average levels and our index is once again ABOVE the 6,000 level. The total returns for the index – that is including reinvested dividends but not franking credits – for the financial year to date is a reasonable, but not stellar, 8.3%. But, with franking credits, that return rises to about 9.5%.

Foreign Equities

Major indexes such as Japan’s Nikkei, the London FTSE and the German DAX all had an even stronger April than Australia but the Wall Street S&P 500 index only produced a modest return of 0.3%.

Apple’s sales of iPhones are reportedly seen as underperforming; Amazon is being berated by Trump over his perception of its abuse of the US postal service; and Intel’s chip-making business is seen as losing demand as Apple plans to take manufacture of chips in-house by 2020. All-in-all the tech sector had a bad April.

Bonds and Interest Rates

The RBA did not change rates at the April nor May meetings. It is doubtful that they will raise rates in 2018 and they might even cut.

There are reports from the US Fed that rates might start to go up quicker than was thought at the beginning of the year. This is a sign of strength and markets took the statements within its stride. Ten year bonds broke through three per cent for the first time in a few years.

Japan’s chief central banker, Yutaka Harada, emphasised that monetary stimulus will continue until inflation exceeds two percent. The ECB also indicated that rate hikes are not front-of-mind.

Other Assets

The prices of oil, iron ore and copper all posted a strong April. Gold was flat. Our dollar was down a fraction.

Regional Analysis

Australia

While 4,900 new jobs were reported to have been created in April, 19,859 full-time jobs were lost. Part-time growth rescued the day. But, in trend terms, there was a small increase of 1,150 full-time jobs. The unemployment rate was flat at 5.5%.

Inflation came in at 0.4% for the quarter and 1.9% for the year – below the RBA target band. Retail sales grew by only 0.1% for the month.

The Budget will be handed down in May. With economic growth less than desired, we hope for some additional fiscal stimulus.

China

The dialogue between the US and China softened over April and the US announced various exceptions to its steel and aluminium tariffs.

China’s economic growth came in at 6.8% which was just above the expectations of 6.7%. China’s manufacturing PMI was 51.4 – just down from 51.5 in the previous month – but still above expectations.

US

After a major increase in jobs reported in March, the release in April was much lower. But the average jobs gain over the two months was above 200,000 per month. The unemployment rate stayed steady at 4.1%.

US economic growth came in at 2.3% which is down from 2.9% at the end of 2017. However, growth will be revised again (as always) in May and June. Because of weather conditions, this provisional read often gets revised upwards for the first quarter.

With retail sales at a very strong growth of 0.6% for the month, the consumer is back.

Europe

United Kingdom (UK) growth was barely positive at 0.1% for the first quarter which was much less than the expected 0.3%.
Greece is trying to renegotiate its debt repayments with the IMF and the EU. The idea is to tie repayments to economic growth but the two bodies cannot agree on their predictions!

Rest of the World

There is now a ‘hotline’ between North and South Korea. The two presidents shook hands on both sides of the border in an historic meeting. Trump is now saying he gets on well with Kim Jong Un and Trump plans to meet with him soon to discuss restrictions on nuclear capabilities. This is a big plus for world peace.

The US combined forces with France and the UK to launch a targeted missile attack on parts of Syria. It appears that ISIS is becoming much less of a global threat.

Economic Update – April 2018

Within this month’s update, we share with you a snapshot of economic occurrences both nationally and from around the globe.

Geopolitical Stability emerges

– National leaders re-elected

– Russia-OPEC deal

– Economic data strong

We hope you find this month’s Economic Update as informative as always. If you have any feedback or would like to discuss any aspect of this report, please contact your Financial Adviser.

The Big Picture

March was not a good month for global equity markets but there were many signs of an emerging global stability.The Big Picture

Russia’s Putin and Germany’s Merkel each got elected to a fourth term in office. China’s Xi also was re-elected after China allowed for more than two terms at the helm. Having stability at the top is more likely to lead to more of the same – and that’s good for expected global growth.

The US Federal Reserve increased its benchmark interest rate by 0.25% but did not change its expectations of three hikes this year, to the four expected by a big chunk of the market.

The Bank of England flagged a rate increase in May but the Reserve Bank of Australia (RBA) continues to remain on hold. The European Central Bank (ECB) removed its ‘easing bias’ from its communications. Again – more of what was expected.

Towards the end of March, Russia and OPEC announced negotiations for a new deal on controlling supply and, hence, price. They are moving toward replacing the current annual plan to one of lasting a decade or more. Of course the member states would have to adhere to the plan but these signs are also encouraging.

The fly in the ointment for March was Trump’s trade tariffs with possible repercussions in the form of a trade war. Trump started loud and strong but, as March progressed, he softened his stance with a view to negotiating a reasonable solution.

While the various incarnations of the tariff policy were bandied around, markets took sizeable hits. Wall Street had a few days of around 2% changes.

The net result was that the World share index was down ?2.5% for March and ?1.8% for the year-to-date. Our ASX 200 index was down ?4.3% in March but we did not benefit from the strong rally in the US after our market closed.

Facebook suffered major losses for unrelated reasons. It transpires that there have been major breaches of security for personal information. Since Facebook’s market capitalisation is so large, the broader indexes were materially affected by these share-price drops.

On the economic front, US inflation came in bang on expectations and just under the target rate. The wobbles caused by a stronger wage inflation number earlier in the year have dissipated. US GDP growth was revised upwards for the fourth quarter of 2017. The initial read released in January was 2.5% but March’s revision was up to 2.9% when only 2.7% was expected.

China’s Purchasing Manager Index (PMI) readings bounced back after the pollution-reduction measures ended for the year.

At home our retail sales figures disappointed at 0.1% for the month but these data are quite volatile. GDP growth came in at 2.4% for the year against an expectation of 2.5%.

The jobs data were quite strong with over 60,000 new full-time jobs reported. Unfortunately, there was a sharp fall in part-time jobs leaving a more modest number of total new jobs created.

The unemployment rate did kick up one notch to 5.6% but the trend unemployment rate remained static at 5.5%.

We interpret all of this new information reported over March as supporting equity markets having a strong year over 2018. We see the wobbles of February and March as being controlled variations as are normal in equity markets and not the start of something sinister.

In spite of the events largely occurring in the US, the VIX ‘fear’ index was quite well-behaved and is now back to a level that is only a little over the average.

Asset Classes

Australian Equities

Our ASX 200 lost ?4.3% over March but Financials and Telcos each lost more than ?6%. Materials, including the likes of BHP, lost ?5.6%. No sector produced a positive return but Property was flat for the month.

We believe that the market is quite cheap at this point (about 4% under-priced) and trend expectations for gains are quite strong (about 7% pa). As in many cases, February-March was a period for holding tight rather one of than trying to trade the market.

The forecast yield for the index is around 4.8% plus franking credits. Shorten’s call for clawing back some franking credits may have contributed to the exit from the traditional homes of fully franked dividends: Financials and Telcos.

Foreign Equities

The S&P 500 index had a very strong final day for the month so it only finished down by ?2.7%. The major markets performed similarly. Markets – including emerging markets – behaved in this fashion, suggests that this was a broad-based sell-off. There have been no strong indications of which industries would be most affected if, indeed, a trade was to build momentum.

Bonds and Interest Rates

The RBA did not change rates at the March meeting. It is doubtful that they will raise rates in 2018 and they might even cut.

The US Fed raised rates by 0.25% at its March meeting. They did not take the opportunity to increase the number of forecast hikes for 2018 but an extra one has now been pencilled in for 2019/2020. The new chair, Jay Powell, comes across as being a strong leader, who is prepared to speak more openly than past chairs. Powell seems confident that the US economic growth will stay at these levels or even improve in coming quarters.

At last the ECB has removed its ‘easing bias’ comment from its statements. It is still a long way from tightening monetary policy. Thankfully, it is also a long way away from the financial crises that faced the European Union shortly after the GFC.

Other Assets

After a strong February, the price of iron ore had a major correction of ?20% in March. The price of oil gained strongly in March with Brent oil (the international benchmark) touching $70 / barrel. Our dollar slipped to $US 0.7665. It was nearly 81 cents earlier in 2018.

Regional Analysis

Australia

In a trend sense, about 19,000 new jobs were created in February (and reported in March). The more volatile seasonally adjusted number was just a fraction lower but the full-time / part-time changes were stark.

There were approximately 65,000 new full-time jobs in February but a loss of ?46,000 part-time jobs. Closer examination reveals that this imbalance over new jobs by hours worked is simply a reversal of the previous month’s job creation pattern. In short, jobs are being created in a trend sense but not enough to bring down the unemployment rate from a trend level of 5.5%.

Economic growth for the final quarter of 2017 missed expectations at 0.4% which translated into 2.4% for the year. Growth is travelling at just short of trend.

China

Unsurprisingly, President Xi was elected to another term in office now that restrictions on re-election have been removed. There is a new governor for the People’s Bank of China (PBOC) in Yi Gang.

China is at last flexing its muscles over North Korea’s nuclear programme. It has used trade sanctions to bring North Korea to the negotiating table.

China’s manufacturing PMI bounced back to 51.5 from February’s 50.3 reading; the services PMI climbed to 54.6 from 54.0 and the combined manufacturing/services PMI came in at 54.0. Since it is a reading of 50 that separates contraction from growth, these are indeed strong readings. Analysts are interpreting the rises since February are at least in part attributable to the relaxation of pollution-reduction measures taken over the winter months.

US

The US started March with a particularly strong jobs report. 313,000 new jobs were created and the unemployment rate was steady at 4.1%.

Fourth quarter GDP growth was revised up to 2.9% from an initial 2.6% and a revised 2.5% in February.

The US CPI data produced a headline figure of 2.2% and a ‘core’ rate of 1.8%. It is the latter that the Fed focuses on. Its target rate is 2%.

It appears that Trump is entertaining the notion of meeting the North Korean president with a view to curbing its nuclear programme.

Europe

Germany’s Merkel at last formed a successful coalition to start her fourth term in office. On the other hand Italy voted in a populist styled government.

The European economy is healing to the extent that the ECB is no longer favouring an easing bias – but it is still a long way from tightening monetary policy.

Rest of the World

It was reported that South Korea is to reduce the normal working week from 68 hours to 52 hours!

India introduced a 60% tariff on the importation of chick peas which reportedly upset Canadian farmers. The US is not the only country using tariffs to balance trade.

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

Economic Update – March 2018

Within this month’s update, we share with you a snapshot of economic occurrences both nationally and from around the globe.

Inflation Jitters

– United States (US) jobs data starts a correction

– Market rally hard on no news!

– Australia jobs data are mixed

We hope you find this month’s Economic Update as informative as always. If you have any feedback or would like to discuss any aspect of this report, please contact your Financial Adviser.

The Big Picture

We ended January on a slight sell-off, arguably because markets ran a little bit too hard at the start of the year. But come February 3rd there was one little number in the US jobs report that caused a stir.The Big Picture

Wage inflation came in at 2.9% – not big in itself, but a little higher than expected. That caused market participants to reprice bond yields and equities dived a little more.

A week later, all was forgiven. When the noise was stripped out of the data, markets rallied hard again. But then they sold off in the last couple of days of the month.

The US got a second bite at the inflation cherry with the mid-February CPI read. Both versions of the index beat by a fraction so market volatility started to fluctuate in normal territory.

We had the local ASX 200 minimally overpriced in January, so it was no surprise that our market didn’t fall as far as Wall Street. And it rebounded sharply!

Our labour force data seemed strong on face value. But full-time jobs growth plummeted, while part-time more than took up the slack. Unemployment is stuck in the mid 5% range.

China produced some stunning trade data. The commodity boom is far from over.

China is also moving to ‘do a Putin’ by removing the restrictions on a president serving for an extended period. President Xi looks set to be around for at least another 5 – 10 years. Not bad for now but how will the next generation be introduced? Of course Australia and the UK have no limits on the tenure of a PM.

Stock market volatility certainly spiked in early February but it has already got back to close to the normal zone.

The fly-in-the-ointment for the next month is how the new US Fed Chairman, Jay Powell, handles himself. He faced his first grilling on Capitol Hill at the end of February. Commonsense dictates he will try to help the market slowly adjust to any new scenario he would like to preside over.

He was quite upbeat on the strength of the US economy. He emphasised that this strength has improved since the December Fed meeting.

The market and the Fed were both pricing in three rate hikes for 2018. But that Powell testimony has pushed up the probability of four rates to 34%.

As new data has come to hand – particularly on inflation – volatility may again spike. But it is our view that, at the end of the year, 2018 will be seen as having been good for equity markets.

Our Reserve Bank seems unlikely to do much for months – if not for the whole year and beyond.

It so happens that many high-profile analysts have called the latest US company reporting season (February) as “excellent” and the Australian season that is just ending as “quite good”.

With global growth converging to a stronger world economy, and US and Australian companies predicting a brighter future, 2018 looks likely to be quite a strong year for investors.

Asset Classes

Australian Equities

Our market was almost flat over the month but the Healthcare sector was particularly strong with CSL leading the way. The market finished February at 6,016 – which is well off the February low of 5,821.

We have the index priced fairly with above average capital gains expectations going forward.

Foreign Equities

The S&P 500 index sold off at the end of the month to finish down by ?3.9% which is about the same as for other major indexes. Australia was the standout!

Bonds and Interest Rates

The RBA did not change rates at the February meeting. It is doubtful that they will raise rates in 2018 and they might even cut.

The US Fed and the market seemed in lockstep at the beginning of February expecting three hikes in 2018. But Jay Powell’s first appearance on Capitol Hill was read as being quite bullish on the economy. The odds of four hikes rose to 34% on this testimony.

This change in sentiment nudged the 10 year US Treasury bond rate to almost 3% – the highest in 4 years.

Other Assets

The price of iron ore had a particularly strong month. Oil, gold and copper prices were all down a fraction in February.

Regional Analysis

Australia

16,000 new jobs were created in January – the latest published data point – but full-time jobs fell by ?49,800 and part-time increased by 65,900. The unemployment rate came in at 5.5%.

China

China had another spurt in trade volumes. Imports were up 36.8% and exports were up 10.5%. However the China manufacturing PMI missed expectations at 50.3 from 51.3 the month before. The non-manufacturing PMI was also weaker than expected at 54.4 from 55.3 but it was still very much higher than the value of 50 that divides contraction from expansion. Some experts said that the Lunar New Year celebrations may have adversely affected the data.

The authorities are moving to remove the current limits on the tenure of the President. As a result, President Xi looks set to steer the ship for at least another 5 – 10 years.

On the short-run, an extension for Xi is a positive but the danger is that a lack of new blood in his inner sanctum may make the eventual transition to a new President less smooth.

US

The US started February with a strong jobs report. 200,000 new jobs were created and unemployment was 4.1%. The wage rate grew by 2.9% which caused a change in expectations to a faster rise in interest rates.

Fourth quarter GDP growth was revised down to 2.5% from 2.6%.

Importantly, the wage data contained a significant change to the minimum wage that might only have given a temporary boost to wage inflation.

The US CPI data produced a headline figure of 2.1% and a ‘core’ rate of 1.8%. It is the latter that is favoured by the Fed and its target rate is 2%.

Bloomberg TV reported that Trump has already decided to run for re-election in 2021.

Europe

German inflation slipped in February but not by enough to cause concern.

Brexit negotiations continue to attract attention but again progress is being made but not rapidly enough for many members of parliament across party lines.

Rest of the World

The Winter Olympics concluded in South Korea with apparent harmony between north and south. But the star of the Olympics must be the woman – born and raised in the US – who represented Hungary by virtue of her grandparents. She came last in her event as she did not perform any tricks on her skis that characterise the sport. She qualified by coming in the top 30 in the required number of world cup events. She managed that feat by only entering competitions with less than 30 entrants and coming last in each!

It was reported on Bloomberg TV that the North Korean president, Kim Jong-un, and his father used false Brazilian passports to travel in the 1990’s.

Economic Update – February 2018

Within this month’s update, we share with you a snapshot of economic occurrences both nationally and from around the globe.

Davos endorses Trump economic tax policy

– World growth forecasts upgraded
– 2017 China growth exceeds forecasts
– Australia continues strong employment growth

We hope you find this month’s Economic Update as informative as always. If you have any feedback or would like to discuss any aspect of this report, please contact your Financial Adviser.

The Big Picture 

Each year, the powerful and wealthy descend on Davos for the World Economic Forum. Trump attended – against expectations by some – and some key figures backed his new tax policy.The Big Picture

The IMF announced its growth forecasts for 2018 and 2019 had both been upgraded from 3.7% to 3.9% and the IMF Director, Christine Lagarde, attributed this upgrade to Trump’s tax reforms.

Jamie Dimon, the influential leader of JP Morgan, stated that 4% growth for 2018 in the United States (US) was quite possible – again based on Trump’s tax break. Apple had already announced repatriating $US245 bn in cash that will attract a US tax take of $US38 bn.

Some scoffed at Trump’s talk of 4% growth in the US following his election. It seems their mirth was misplaced. Trump is not generally popular but he is effective.

And he’s just started work on his one and a half trillion dollar infrastructure policy.

The latest economic growth figure for quarter four 2017 just missed expectations at 2.6%, but that quarter finished before the tax cuts were enacted.

On top of tax, North and South Korea are not only marching together but fielding a joint hockey team in the upcoming Winter Olympics. Did Trump do that? It’s hard to say but his push for sanctions on North Korea seem to be having some impact – as did his missile barrage on ISIS earlier last year. And the US unemployment rate is at a 17-year low.

The world economies are interlinked. China just posted a growth figure for 2017 ahead of forecasts and even government expectations. As far as investors are concerned, the only take-away is that things are bubbling under quite nicely.

At home, we had yet another strong reading on employment growth but unemployment is still stuck a little on the high side and wages growth just isn’t doing any – let alone heavy – lifting.

Against all expectations, our retail sales came in particularly strongly at 1.2% for November which was well up on October’s read of 0.5% which itself was above previous outcomes.

The United Kingdom (UK) is working through Brexit issues and President Macron, of France, paid a visit to Britain. He expressed very comforting sentiments. UK quarter four growth exceeded expectations at 0.5%, but 2017 as a whole was the weakest since 2012. UK CPI inflation fell slightly to 3.0% from 3.1%. The unemployment rate is at a 42-year low of 4.3%.

Wall Street started 2018 with a bang hitting new high after new high before a pull-back at the end of the month. We had that market sufficiently overpriced before the pull back to cause concern – but not enough to predict a full correction.

New data flowing from the economy and earnings from company statements do bode well for market expectations to be revised upwards over 2018.

The booming world economy has ensured commodity prices have remained firm and, in many cases, they are higher than in the last 6 – 12 months.

Going forward we estimate that gains on the ASX 200 and the S&P 500 for 2018 will likely be more modest than in 2017. Given the rapid start to the year, the S&P 500 might have a small correction if company expectations are not revised upwards as quickly as we expect.

In Australia, the February company reporting season will shed light on the different signals being drawn from employment, growth and consumer confidence. It is unlikely that the banks will shine given the Royal Commission hanging over it. But resource companies might look stronger given global growth expectations. Even Bloomberg felt it worth reporting in a headline that, “China sets new records for gobbling up the world’s commodities.”

Asset Classes

Australian Equities

Our market fell a little in January. Resource stocks showed some strength and a rally on the last day of the month – during the US State of the Nation address – kept the ASX 200 comfortably above 6,000.

Foreign Equities

The S&P 500 index recorded a stellar month in January despite a material sell-off in the last few days.

We had the market over-priced by a sufficient amount at the start of the last week of January to argue that the market could correct – but a prolonged sideways movement was more likely given all of the upward pressures on expectations currently being formed

Bonds and Interest Rates

The RBA does not meet in January. It is unlikely to raise rates before the end of 2018 especially as inflation for the 2017 year was only 1.9%. Indeed, we think another cut is quite possible before the next hike.

The US Fed left rates unchanged at the end of January but the wording in the accompanying statement was slightly stronger about the prospects for hikes in 2018.

The new Fed chairman, Jay Powell, takes the reins on February 1 but most expect little change in the direction of monetary policy. Gradually rising rates over the next couple of years are being factored in. The question is how many.

Other Assets

Oil prices were firmly higher in January. The Australian dollar firmed from $US0.78 to nearly $US0.81 over January.

Regional Analysis

Australia

34,700 new jobs were created in December – the latest published data point – and nearly half of them were full-time positions. However, the unemployment rate rose one notch to 5.5%.

Retail sales stormed home at 1.2% for the month of November after 0.5% for the previous month.

CPI inflation missed expectations at +0.6% for the fourth quarter and 1.9% for the year. The RBA target range for inflation is 2% – 3%.

China

China had a spurt in trade volumes – notably in commodities. China imports were up 18%.

But the outstanding result was China’s fourth quarter GDP growth outcome of 6.9%. This reading not only exceeded market forecasts but also the government’s own prediction.

The PMI manufacturing number was a slight miss at 51.3 but well above the 50 that marks the difference between an accelerating economy and one that isn’t.

US

The US started January with a ‘miss’ on jobs growth. 148,000 jobs were created when 190,000 were expected. But the unemployment rate held at the lowest level in 17 years, and the average wage growth was 2.5%.

US inflation was 1.8% which is just below the 2% target level. The latest GDP growth rate was 2.6%.

President Trump gave a rousing State of the Nation Address to Congress where he highlighted the economic successes and other achievements during 2017. The Democrats didn’t seem to be enjoying the lengthy 80 minute speech but it was fine television.

Europe

CNBC called 2017 the best year for the EU economy in the last decade. The UK’s unemployment rate is stuck at 4.3%, but that is a 42-year low!

A lot depends upon how Brexit is negotiated, it is a long and complex process. As with the Scottish referendum on staying in the UK, and the last US presidential election, the losers in the elections are “sore losers” so much so that the negative side of the debate is perhaps getting too much exposure.

Economic Update January 2018

Within this month’s update, we share with you a snapshot of economic occurrences both nationally and from around the globe.

2018 shaping up as another good year for investors

– Global growth co-ordinated
– United States (US) tax reform
– Strong jobs growth in Australia

We hope you find this month’s Economic Update as informative as always. If you have any feedback or would like to discuss any aspect of this report, please contact your Financial Adviser.

The Big Picture

After almost a decade of economic woes around the world, all the major economies are starting to come good together.

China, as we expected, not only stayed strong, it also gathered a little pace towards the end of 2017. The US certainly gathered momentum finishing the year at a rate of 3.2% pa. Even Europe is looking strong but the big surprise is the way that the third largest economy, Japan, has at last put five strong quarters back to back.

When growth is co-ordinated like this it is much harder for any individual country to fall into recession anytime soon.

But the prospects for 2018 became even better after Trump got his tax reform through at the eleventh hour. It is doubtful if analysts have yet fully digested the consequences. It may well be that macro and market forecasts will be revised upwards in the next few months.

Citi produces a ‘surprise index’ for many major countries. It is based on how often analysts’ forecasts are beaten by the actual events. The US index stands at a reading of +73 which is a six year high. The Australian index stands at 10.9! We keep thinking things are better than they really are.

Global growth is likely to keep us well out of recession but we are likely to continue to underperform. Our jobs creation has been strong all year – largely because of immigration. Our unemployment rate stubbornly stands at a moderately high 5.4%

The Westpac consumer sentiment index stands at just above 100 but that is only for the second month this year. NAB’s business conditions and confidence indexes, however, remain consistently strong.

Major share markets did well around the world with Wall Street being the stand-out performer. But Australia didn’t do too badly after a bad reaction to various bank inquiries. The ASX 200 posted growth of over 13% over 2017 when dividends and franking credits are factored in.

There are a number of things to watch out for in 2018. The Brexit negotiations between Britain and Europe are progressing without any major problems so far. The new US Federal Reserve chairman looks set to make two or three rate hikes while our RBA is not expected to move in 2018.

Our Royal Commission into Financial Services might cause some angst, depending how press releases are handled.

The more difficult possibility to assess is Trump’s wish to commence a big infrastructure programme. In the election campaign he was talking about a trillion dollar deal, but that has since been scaled back to 200-300 billion dollars. With tax reform behind him, we should see some movement on this front in January.

The ASX 200 closed at the highest level since December 2007 on the penultimate trading day of 2017 and we see growth of about 5% in 2018 – but that means that the November 2007 peak is unlikely to be surpassed this coming year.

We see strong growth continuing on Wall Street in 2018. But, if analysts revise earnings forecasts upwards in January based on company tax cuts, we might see very strong growth in the first half of the year.

On the commodities front, copper, gold and oil prices did well in 2017. It would be sufficient for our resources sector to have a good 2018 if these prices just hold over 2018.

In conclusion, we see it unnecessary to take on extra risks in 2018 to chase returns. Volatility on share markets was unusually low in 2017, and that is expected to continue for the foreseeable future.

We wish you all a safe and prosperous New Year.

Asset Classes

Australian Equities

Our market was seemingly stuck in a tight range from mid-2017 but then it blasted through 6,000 at last – and it even finished 2017 above that psychological barrier.

The Resources sector led the charge in December to give the broader index a boost of 1.6% for the month.

The Financials sector was down slightly for the year, but there were outstanding double digit returns to be had in all other sectors except for Property, Telcos and Utilities.

The February reporting season is only just around the corner so this is the time for companies to ‘confess’ if they are likely to miss their guidance for earnings. We found analysts have started revising their forecasts in an upwards direction for the last month or two. Therefore, we are expecting a good “report card” in February.

Foreign Equities

The S&P 500 index recorded another positive month in December making it 12 in a row for 2017 and the first time on record! We do not, however, think the market is over-priced by more than two or three percent.

2017 market growth has been dominated by the big tech companies. Some are looking to Amazon to become ‘master of the universe’ by establishing a major presence across a broad array of industries.

The strong Japan economy has supported its Nikkei index to record near 20% growth in 2017

Bonds and Interest Rates

The RBA was on hold again and is unlikely to raise rates before the end of 2018. Indeed, another cut is quite possible before the next hike.

The Fed hiked rates in December making it three for the year. Their so-called ‘dot plots’ show that they collectively expect three more hikes in 2018, but the market has only priced in two. The Fed is unlikely to want to risk too much so two is much more likely than four. US inflation is still below target.

Other Assets

Oil and copper prices were firmly higher in 2017. Iron ore prices were down on the year but staged a very strong comeback returning 36% from the lows experienced throughout the year.

Regional Analysis

Australia

Over 60,000 new jobs were created in November – the latest published data point – and two-thirds of them were full-time. However, the unemployment rate was stuck at 5.4%.

Around 1,000 jobs were created on each day of the year (on average) but it seems, much of this was matched by immigration flows. Price and wage inflation are also stuck at below target rates.

However, we at last got a better than expected growth in retail sales (+0.5% against 0.3%).

The government presented its mid-year report card (“MYEFO”) in December which argues the deficit is better than that which had been previously expected.

China

China has reportedly been spotted exporting oil to North Korea which got Trump’s hackles up. But other than that, there is less reported bad news about China’s economy. Of course, any developing economy starts to slow gradually as it reaches economic maturity.

We do not see China’s economy being a problem for us in 2018.

US

After a bumpy ride, a tax reform bill passed through Congress giving Trump one victory for 2017.

The infrastructure programme could be even trickier to get through, as the size of it will require a public/private joint venture. That means the private sector will have a big say on which projects start first. That will put the Democrats off-side as they always want to lead with the public interest.

If the bill makes some progress in 2018, the US economy looks set for continued growth for a few years to come.

Europe

Greece finally came out of recession in December! While the European Union as a whole still has some problems to work through – notably Brexit – the general mood appears to be positive.

Rest of the World

Japan’s Q3 growth figure was revised upwards to 2.5% from 1.4%.

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