Federal Budget – Changes to Superannuation

Treasurer Scott Morrison has handed down his first Federal Budget – there are significant changes to superannuation.

Note: These changes are proposals only and may or may not be made law.

Summary

  • A lifetime cap on non-concessional (after-tax) superannuation contributions of $500,000 will apply from 7.30pm on 3 May 2016.
  • The income tax threshold at which the 37% tax applies will increase to $87,000 pa on 1 July 2016, from the current $80,000 pa.
  • The tax rate that applies to small business companies will reduce to 27.5% for businesses with a turnover up to $10 million in 2016/17. Further tax concessions will apply in future financial years.

A range of superannuation measures will also apply from 1 July 2017.

  • The annual cap on concessional (pre-tax) super contributions will reduce to $25,000, regardless of age.
  • Concessional super contributions may exceed the annual cap if certain conditions are met.
  • Those aged between 65 and 74 will be able to make super contributions regardless of whether they work or not.
  • Tax deductions will be able to be claimed for personal contributions regardless of employment status.
  • A lifetime limit of $1.6m will be placed on the amount of superannuation that can be transferred to start pensions.
  • Earnings on investments held in ‘transition to retirement’ pensions will be taxed at 15% (currently 0%).

 

Cap on concessional contributions

The annual cap on concessional super contributions will reduce to $25,000, regardless of age. This change will reduce the amount of concessional contributions that can be made each year without a tax penalty. There will, however, also be the opportunity for certain people to contribute more if they haven’t fully utilised the cap in previous financial years—see below.

 

Concessional contributions include:

  • salary sacrifice
  • superannuation guarantee
  • personal contributions claimed as a tax deduction, and
  • certain other

Currently the cap on concessional contributions depends on age—see table below.

 

Concessional cap Current Proposed
Under age 49 $30,000 pa  

$25,000 pa from 1 July 2017

Age 49 or over $35,000 pa

 

Concessional super contributions

  • Individuals with super balances under $500,000 will be able to bring forward previously unused concessional cap amounts from 1 July 2017.  The unused amounts can be carried forward on a rolling basis for a period of five (5) consecutive years, for example, if an individual contributes $20,000 in the 2016/17 financial year, they will be able to make an additional $5,000 CC on top of the $25,000 CC cap in 2017/18.
  • Individuals up to age 75 will be able to claim a tax deduction for their personal superannuation contributions up to the CC cap from 1 July 2017, regardless of their employment circumstances.

 

  • All clients will not be able to make personal deductible contributions regardless of whether they own a salary or not. Previously, if a client derived more than 10% of their income from employment they could not make deductable contributions.

Contributions between ages 65 and 74

Those aged between 65 and 74 will be able to make super contributions regardless of whether they work or not. Currently, you need to work 40 hours in 30 days in the relevant financial year to make super contributions in this age bracket.

 

Tax deduction for super contributions

Tax deductions will be able to be claimed for personal contributions regardless of employment status. Currently only self-employed people (eg sole traders) and those who earn less than 10% of total income from employment sources are eligible to claim a tax deduction.

 

Superannuation pension limits

A lifetime limit of $1.6m will be placed on the amount of superannuation that can be transferred to start pensions. This limit will be called the ‘transfer balance cap’.

 

Earnings on investments held in pensions (other than transition to retirement pensions—see below) will continue to be taxed at 0%. Earnings on any balance that needs to remain in superannuation will continue to be taxed at 15%.

 

People with existing pensions over $1.6 million will need to reduce the balance below this limit by 1 July 2017 to avoid penalties.

 

Transition to retirement pensions

Earnings on investments held in ‘transition to retirement’ pensions will be taxed at 15% (currently 0%). A transition to retirement pension is a pension that is started with superannuation money when you have reached your preservation age, which is between 55 and 60 depending on date of birth. Once permanently retired (or another condition of release is met), it is expected that the underlying earnings will then be taxed at 0%.

 

Change effective immediately

Changes to non-concessional contributions

A lifetime non-concessional contribution (NCC) cap of $500,000 will apply from 7.30 pm on 3 May 2016. All NCCs made on or after 1 July 2007 will count towards this lifetime cap.

 

NCCs include personal contributions made where no tax deduction is claimed, contributions made on behalf of a spouse and certain other amounts.

 

Any contributions made after commencement exceeding the lifetime limit (as well as assumed earnings on these amounts), will be subject to penalty tax if not withdrawn.

 

These measures will replace the current NCC cap of $180,000 pa, or $540,000 over a three year period if certain conditions are met.

 

Non-concessional cap    
Under age 65 at 1 July $180,000 pa or $540,000 over 3 years $500,000 lifetime cap from 7.30 pm on 3 May 2016
Age 65 or over at 1 July $180,000 pa

 

ABC’s of Personal Insurances

protecting_your_wealth

What is insurance?

Insurance is a form of protection – a way to protect yourself, your family and the things you own if something goes wrong. It enables you to replace or repair your assets, whether those assets are your belongings or your capacity to earn income.

Everybody’s circumstances are different, but insurance is important for everybody. Your need for insurance will change as you move through the different stages of your life.

There are many different types of insurance, and we can help you find the right level of protection for your needs.

What types of insurance are there?

There are many types of insurance. Car or home/contents insurance allows you to insure your belongings. Personal insurance policies enable you to insure yourself and your ongoing wellbeing.

Personal insurance provides protection against sickness, injury and death, and includes:

  • Life insurance
  • Total and Permanent Disability (TPD) insurance
  • Trauma insurance, and
  • Income protection.

The amount of insurance you need is affected by:

  • how much you earn
  • your cost of living
  • your assets
  • your liabilities
  • your relationship status (whether you are married, in a de facto relationship or single), and
  • how many dependants you have.

 

Life insurance

Life insurance protects your family by paying a lump sum if you die. Most people think that life insurance is only for the main income earner, but the person who takes care of the family is also a large contributor to the home and can be insured.

Life_insurance

Total and Permanent Disability insurance

TPD cover provides a lump sum payment if you suffer a disability before retirement and can’t work again, or can’t work in your usual occupation or chosen field of employment.

TPD_Insurance

Trauma insurance

Trauma (or critical illness) insurance provides a cash lump sum if you suffer a specified illness or injury. Advances in medical treatment have increased the need for trauma insurance. The improved chance of survival means that although you are more likely to survive, you are also more likely to have substantial medical bills to pay.

trauma_insurance

Income protection

Income protection insurance (also known as salary continuance or income replacement) provides a monthly payment to replace lost income if you are unable to work due to injury or sickness.

trauma_insurance

Insurance as part of your superannuation

Life, TPD and income protection insurances are all offered within superannuation. If your insurance is held within superannuation, the cost of the premiums is withdrawn from your superannuation balance.

It is important to work out the best way to structure your insurance, whether inside or outside superannuation, or a combination of the two.

Benefits to having insurance in your superannuation may include:

  • automatic acceptance – there’s generally no need to complete medical checks
  • cheaper cover – from the bulk discount typically available to superannuation funds, and
  • tax deductibility – some contributions to superannuation attract a tax deduction, so you may be able to pay your premiums by making tax deductible super contributions.

Disadvantages of having insurance in your superannuation include:

  • limitations on the level of cover
  • potential for access to insurance proceeds to be restricted in certain circumstances – for example where an own occupation TPD policy is in place
  • potential delays in the payment of benefits in the event of death, and
  • high tax rates – superannuation death benefits paid to a non-dependant may be taxed at up to 31.5 per cent.

 

Keep your insurance up to date

Insurance is not static, and your need for cover will change as you move through different stages in your life. As part of the financial advice process, we regularly review your insurances to make sure that you are adequately protected if your circumstances change.

Contact us for a no obligation meeting at no cost to you.

Robert Larrondo

0423 908 396

The Australian economy – more help will be needed

Introduction

The Australian economy remains in a difficult period as the mining boom unwinds. Non-mining activity has bounced back but is far from strong enough to offset the headwinds coming from the mining downturn. This note looks at the outlook for growth, interest rates, profits and what it means for investors.

Growth remains poor

June quarter growth was anaemic at just 0.2% quarter on quarter or 2% year on year.

Microsoft Word - SS_The Australian economy still soft.docx

Source: ABS, AMP Capital

Were it not for a strong surge in public spending and a (likely temporary) bounce in investment in WA, June quarter growth would likely have been negative as consumer spending was soft, housing investment fell, underlying business investment was soft and net exports and inventories cut 0.6% points and 0.2% points from growth respectively.

Growth outlook

The growth detraction from net exports and inventories seen in the June quarter is payback for positive March quarter contributions and unlikely to be repeated in the current quarter, allowing growth to bounce back a bit to around 0.5% quarter on quarter, which is the average of the last two quarters.

However, this will not alter the tough position Australian now finds itself in. Mining investment, having risen from around 2% of GDP to 6%, is now falling back rapidly as large projects complete. This is detracting around 1 percentage point from growth per annum. To offset this we need to see growth in other parts of the economy pick up. We have seen housing and consumer spending springing back to life and improvement in tourism and higher education. However, non-mining investment remains disappointing.

The latest business investment (capex) plans from the ABS point to more weakness ahead. Comparing the third estimate of investment for 2015-16 with that a year earlier for 2014-15 points to a 23% fall in business investment this financial year.

Microsoft Word - SS_The Australian economy still soft.docx

Source: ABS, AMP Capital

While slumping mining investment is no surprise what is concerning is that the outlook for non-mining investment remains weak pointing to a 7.5% decline this financial year. More broadly, several other factors seem to be playing a role in sub-par growth in the economy, including: steeper than expected falls in commodity prices that continue to cut into national income growth (nominal GDP growth was just 1.6% year on year through last year); the ongoing threat of more budget austerity; household reluctance to take on more debt; delays in the fall in the $A (just over a year ago it was still around $US0.95); and subdued levels of confidence.

But there are several reasons not to get too negative.

  • Borrowing rates are at generational lows. Australians owe the banks $1.2 trillion more than the banks owe them, so the household sector is a net beneficiary of low rates.
  • The fall in the $A is a big positive for manufacturing, tourism, higher education, services, farming and mining.
  • Petrol prices aren’t as low as they should be, but are down from their highs last year, delivering savings to households.
  • The household savings rate remains relatively high at 8.8% and has scope to drift down supporting spending.
  • Australia managed the boom a bit better than it has in the past when booms led to inflation or trade deficit blow-outs or both and all sectors of the economy boomed together and so went bust together. This time there was no major buildup of imbalances in the economy and sectors suppressed by the mining boom are bouncing back.
  • Reflecting this, real state final demand is up 3.3% year on year on NSW & 3% in Victoria, while it’s down 1.8% in WA.
  • Most Australians don’t get paid export prices so hand wringing over the “national income recession” is overdone.

This should mean the risk of a recession remains relatively low and there is no reason to get overly gloomy on Australia. Rather growth is likely to continue to remain sub-par at around 2% as the negatives and positives balance out.

More RBA rate cuts and the $A heading to $US0.60

However, with the mining downturn having at least another two years to run the prospect of another few years of growth running well below potential is not appealing. While potential growth in the Australian economy may have slowed to around 2.75% thanks to slowing productivity and population growth, actual growth is running well below this at around 2%. This means spare capacity in the economy will continue to build, with a rising trend in unemployment and downwards pressure on inflation. What’s more, housing construction which has helped the economy looks to be at or close to peaking. Against this backdrop the economy is likely to need more help.

First, the combination of an extended period of below potential growth, a rising trend in unemployment and weak inflation is likely to ultimately drive the RBA to cut interest rates again. A slowing in Sydney and Melbourne home price growth (as APRA measures bite) should make it easier for the RBA to do this. The November RBA meeting is the next one to watch, failing that then expect a move early next year. While in an ideal world it would be good to see more of focus on economic reforms to drive stronger growth, the political reality means that this will be hard to achieve any time soon.

Second, the $A looks headed to around $US0.60. The primary driver is the ongoing secular bear market in commodity prices but the likelihood of a further narrowing in the interest rate differential versus the US adds to the case. This will be a typical overshoot in the value of the $A, but it’s necessary to help drive increased demand in non-mining industries like tourism and manufacturing and in turn help drive up non-mining investment.

Profits disappointing, but good outside resources

The recently completed profit reporting season was a good reflection of the state of the economy. 2014-15 profits were weak overall with June half results being a little disappointing. 43% of companies beat expectations and 59% saw their profits rise from a year ago which is okay, but it’s well down on what we saw in the last few reporting seasons.

Overall profits fell around 2% over the last financial year and guidance for the current financial year was cautious.
However, several points are worth noting:

  • The fall in profits owes to a 35% slump in resources profits.
  • The rest of the market saw profits rise around 7.5% driven in particular by general industrials, building materials, retail and health care stocks.
  • Profits for industrials ex financials rose 11.5%, and are now up four years in a row. See the next chart.
  • Revenue growth remains subdued but is being helped by the lower $A with strength in companies connected to home building and NSW.
  • Dividend growth remains solid at 4% in 2014-15 with 57% of companies raising dividends.

Microsoft Word - SS_The Australian economy still soft.docx
Source: UBS, AMP Capital

Consensus earnings growth expectations for 2015-16 remain soft at around 4%, driven by industrials ex financials with profit growth of 8.5% more than offsetting another 6% expected decline in resources profits. Low interest rates and the falling $A should help industrial profits.

Are high dividend payouts to blame for weak capex?

A common view is that companies are not investing because shareholders are demanding high dividends. This may be playing a role but it’s likely to be minor. Contrary to popular perception the dividend payout ratio (ie dividends relative to earnings) is not significantly out of line with its historic norm. For industrials the payout ratio at around 70% is around where it was prior to the GFC. It’s mainly resources stocks that have boosted payouts to around 70% from around 30-40% prior to the GFC) and it’s hard to argue they should ramp up investment after having over invested!

Microsoft Word - SS_The Australian economy still soft.docx

Source: Bloomberg, Global Financial Data, RBA, AMP Capital

The real reasons for the lack of investment by non-mining companies is likely to be post GFC caution, wariness after getting smashed through the mining boom by the high $A, high interest rates and high labour costs (just four years ago now) and too high hurdle rates for a low inflation world.

Implications for investors

First, bank term deposit rates are likely remain low or fall even further. The search for decent income flows has further to run.

Second, the $A is likely to continue to fall. So continue to favour unhedged over hedged global shares.

Third, Australian economic growth is likely to disappoint relative to expectations for the US and Europe, suggesting a case to maintain a greater exposure to traditional global shares even though we expect Australian shares to end the year much higher than they are now.

Dr Shane Oliver
Head of Investment Strategy and Chief Economist
AMP Capital

Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.

China drives market volatility

financial-markets

Investors around the globe are catching their breath after one of the most turbulent day’s trading in many years.

The Chinese share market fell by more than 8.5%, as measured by the Shanghai Composite Index, marking its largest single-day descent since 2007. The US stock market also saw its biggest sell-off in four years with the S&P 500 and Nasdaq both in correction territory, down 10% on recent peaks.

Market falls around the world appear to reflect a combination of factors that are contributing to negative sentiment among investors. More notably for Chinese shares, despite the volatility experienced over the past few weeks, those who have been invested in the market for the past year have still generated positive returns of approximately +70%.

Are we heading into another major financial crisis?

Our current analysis suggests that the negative sentiment we have seen in the last few days is not out of the ordinary, with occasional sharp market sell offs during bull markets.

Following the share market fall in 1987, as well as the Global Financial Crisis, share markets took time to build firm bases and entered periods of protracted volatility before then commencing clear rising trends. It’s likely that this is what we are now experiencing with China.

While the recent market downturn has been sizeable, it’s not among the worst in market history. Financial markets in the west have been booming for the past six years at a time when global macro divergences have intensified. Recovery from the last recession has been patchy and weak by historical standards, but that has not prevented a bull market in equities.

For all the talk of ‘Black Monday’ in China, this was more of a correction in western markets, with 12-month market gains of around +70% even despite the sell-off this week.

What impact does this have on AMP Capital’s long term view?

Globally, while volatility is likely to remain high and a further correction is possible, we see little risk of a recession or bear market in global shares at this point in time.

What we have is a sharp adjustment of market sentiment and extreme fear without a real change in the underlying economic backdrop.

We also expect the Chinese government will support economic growth through strong monetary policy easing and other measures which, in turn, should help support growth in China and the broader emerging markets.

We will continue to watch and monitor the market, and will make necessary changes to our portfolios as the situation evolves.

Do you see any opportunities?

Going through August-September, we expect to see continued volatility. Historically, the September quarter is one of the weakest quarters of the year so we will not necessarily be putting all money to work at the moment but if we see further dips over the next few weeks, we will take advantage of these buying opportunities.

In terms of our views on asset allocation, we currently see the share market correction in China as a buying opportunity. While there has been a significant readjustment in valuations, the earnings backdrop for Chinese companies remains good.

We remain confident there will also be aggressive support from central banks to stem any negative impact to economic fundamentals.

About the Author
Nader Naeimi is Head of Dynamic Asset Allocation 
With over 18 years’ experience in Australia’s financial markets, including 15 years as part of AMP Capital’s Investment Strategy and Economics team, Nader’s responsibilities include analysis of key economic and market factors influencing global markets.

Important note:While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This document is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.
© Copyright 2015 AMP Capital Investors Limited. All rights reserved.

Shane Oliver – Australian dollar doing what it always does: Overshoot

Oliver's insight

Key points

    • The $A has more downside and is being driven lower by a combination of a stronger $US, a secular downtrend in commodity prices and a narrowing in the interest rate differential in favour of the $A.
    • It is likely to fall to around $US0.70 by year end and then into the $US0.60s as part of an overshoot on the downside to make up for the damage done by the strong $A years.
    • The downtrend in the $A will help the Australian economy and share market, but highlights the case for global investments denominated in foreign currencies.

Introduction

Since its 2011 high, the Australian dollar has fallen 34% in value against the US dollar. For some time our view has been that it will fall to $US0.70 by year end with probably an overshoot into the $US0.60s. However, as we all know forecasting precise currency levels is a mug’s game. The key is that the direction remains down and we are likely to see a classic overshoot. This note looks at why and what it means for investors.

Drivers of the lower $A

There are essentially three drivers of the falling $A.

First the US dollar is undergoing a longer term upswing. After falling through much of last decade, from 2008 it started tracing out a broad bottom and now looks to have commenced a rising trend. This is supported by relative strength in the US economy pointing to the Fed being closer to monetary tightening in contrast to Europe, Japan and China which are continuing to ease monetary conditions and at the same time that much of the emerging world is beset by various structural problems. While the rate of increase in the $US has slowed from the pace seen last year – particularly as the Fed will allow for the dampening impact on the US economy when considering interest rate hikes – the trend is likely to remain up.

Second, commodity prices are now in a long term, or secular downswing. Their secular upswing that ran through last decade is now in reverse thanks to a combination of:

• Surging supply and slower demand. Last decade demand for industrial commodities was surging led by industrialisation in China and strong demand growth in other emerging countries as supply (after years of commodity weakness) struggled to catch up. Now it’s the other way around as demand growth in China has slowed, many emerging markets are weak and supply is surging after record investment in resources for everything from coal and iron ore to gas. The surge in iron ore supply is well known. Over the last 12 months global oil production rose by 3.1 million barrels per day but consumption rose by just 1.4 mbd.

• The rising value of the $US. Since commodities are priced in US dollars they move inverse to it. They rose last decade when the $US was in decline and are now heading down as he $US is on the way up.

Gold is also caught up in this as its part of the commodity complex. But each commodity has its own specific factors. It seems like only yesterday that gold bugs dreamt of quantitative easing causing a crash in the $US and hyperinflation, central banks were reportedly piling into gold for their reserves and the gold price was supposedly on its way to infinity and beyond. Well as it turned out the $US didn’t crash, hyperinflation never arrived and when it comes to central banks and gold the best thing to do is the opposite to what they are doing (just as it was when they were dumping gold 15 years or so ago!). And so the gold price has plunged more than 40% from its 2011 high to a five year low. While there will be bounces with gold being part of the commodity complex which is in a secular downtrend I find it hard to be optimistic on gold for the next few years.

As can be seen in the next chart raw material prices trace out roughly 10 year long term upswings followed by 10 to 20 year long term bear markets. After an upswing last decade, they now look to have embarked on a secular downtrend.


Source: Global Financial Data, Bloomberg, AMP Capital

This is bad news for Australia as plunging prices for commodities have resulted in a collapse in export prices and hence our terms of trade. This is highlighted by the iron ore price which at the start of last decade was below $US20/tonne rising to over $US180/tonne in 2011 and is now running around $US51/tonne.


Source: Bloomberg, AMP Capital

Finally, the relative performance of the Australian economy has deteriorated and this is seeing the interest rate differential in favour of the $A decline, making it relatively less attractive to park money in Australia as part of the so-called “carry trade”. The Fed has ended quantitative easing and is getting closer to monetary tightening whereas there is a 50% chance the RBA will ease rates again – particularly with the business investment outlook remaining bleak, signs emerging that APRA’s efforts to cool property investment are biting and inflation remaining benign. More broadly, perceptions of global investors about the Australian economy are becoming less favourable. Over much of the last decade it was positive reflecting Australia’s favourable fundamentals tied to growth in the emerging world and through the Eurozone crisis as an AAA rated safe haven. Now there is a bit more wariness as emerging country growth has slowed, the commodity cycle has gone from a tailwind to a headwind for the Australian economy and Australia has struggled to get its budget deficit back under control.

Big picture for the $A not flash

Against this backdrop, the big picture outlook for the $A is poor. Perhaps one way to see this is via what is called purchasing power parity (PPP), according to which exchange rates should equilibrate the price of a basket of goods and services across countries. In other words, the exchange rate should be at the level that would make a country’s competitiveness neutral internationally. If the exchange rate is above this level then the country would be uncompetitive internationally and vice versa if it is below. A guide to this is in the next chart which shows the $A/$US rate against where it would be if the rate had moved to equilibrate relative consumer price levels between the US and Australia since 1900.


Source: RBA, ABS, AMP Capital

Right now the $A at around $US0.73 has just fallen below fair value on this measure of around $US0.75. But it can be seen from the chart that the $A rarely stays at the purchasing power parity level for long and long periods of overvaluation are followed by long periods of undervaluation. A driver of this in recent decades has been commodity prices and the relative performance of the Australian economy. These were positive last decade and so over the 2001 to 2011 period the $A went from well below PPP at $US0.48 to well above at $US1.10. Now the reverse is underway. Given the damage done to Australian industry through the boom years as Australia’s international competitiveness collapsed into early this decade as the $A surged, a period well below the purchasing power parity level now looks likely in order to reinvigorate Australian businesses again. In other words, this is necessary to make up for the damage done by the high $A. This is likely to take the $A into the $US0.60s but it could easily go lower.

In the very short term, the Australian dollar has fallen a bit too fast and it seems everyone is bearish about the Aussie again (with economists seemingly falling over themselves to revise their $A forecasts lower), so a short term bounce could well emerge. However, for the reasons noted above the broad trend in the $A is likely to remain down. I remain of the view that it will fall to around $US0.70 by year end and then move even lower.

Of course, it’s worth noting that the fall in the $A on a trade weighted basis won’t be as pronounced as against the $US, as the Yen and Euro are also likely to remain soft against the $US.

Implications for investors

There are a several implications for investors.

First, and most significantly, the ongoing decline in the value of the Australian dollar highlights the case for Australian based investors to maintain a relatively greater exposure to offshore assets that are not hedged back to Australian dollars (ie remain exposed to foreign currencies) than was the case say a decade ago when the $A was in a strong rising trend. Put simply, a declining $A boosts the value of an investment in offshore assets denominated in foreign currency one for one. For example, a 10% fall in the value of the $A will boost a foreign share portfolio by 10% in value in Australian dollar terms. This has been seen over the last few years – the fall in the value of the $A over the 12 months to June turned an 8.5% return from global shares measured in local currencies into a 25.2% return for Australian investors when measured in Australian dollars.

Second, having an exposure in foreign currency (notably the $US) provides a hedge for Australian based investors should the global economic outlook deteriorate. Recent global economic data – eg, slowing OECD leading economic indicators, stalling world trade growth and soft Chinese business surveys – have led to renewed concerns regarding the global growth outlook. In our view this is likely to be just another growth scare, of which we have seen a few over the last few years. But if we are wrong then being short the $A and more exposed to foreign currency provides a bit of protection as the $A invariably falls (and foreign currencies rise) in response to weaker global growth.

Finally, the fall in the value of the $A taking it down to levels that more than offset Australia’s relatively high cost levels is very positive for sectors that compete internationally including manufacturing, tourism, higher education, agriculture & miners. This in turn should help the economy weather the mining downturn and is in turn positive for the Australian share market. Roughly speaking each 10% fall in the value of the $A boosts company earnings by 3%. That said in the current environment, Australian shares are likely to remain a relative underperformer in terms of total returns compared to global shares.

About the Author – Dr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital is responsible for AMP Capital’s diversified investment funds. He also provides economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets.

Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.

 

Teaching your kids the value of money

Start young

Have your children learn the value of money when they are young, as it is one of the most important skills they will ever need.

Children learn a lot from their parents when it comes to money—arm yours for financial success.

When it comes to money, your own behaviour and attitudes can strongly influence your kids. Help your kids to be money smart by demonstrating positive money habits and teaching them valuable lessons as they grow older.

Teaching money smarts

Money management has always been important for children to learn about, especially as they grow into young adults and face the big wide world out there! It’s even more the case today, in an ever-growing digital world—kids are trained to become consumers from a young age.

What’s more, it can be hard for kids to understand what they can’t see. And shopping online—where there’s no exchange of physical cash—makes it easy for kids to miss learning about the real value of money.

The good news is the desire to buy things does provide an opportunity to encourage healthy financial habits though, like saving, budgeting and working to earn their money. The best principles to teach kids just vary at different ages.

Here are some tips for building money smarts no matter what age your kids are.

Young children

Making money tangible for young children can be helpful. Your child may benefit from seeing money visibly accumulate in a jar. You can convey the way money works by playing games that show your child how many coins are needed to buy particular items—and how spending reduces the quantity of money in the jar.

Primary school kids

When children reach school age, introduce more practical examples by connecting household jobs they do with money as the reward. It can be a good time to set up a savings account for your childi and to learn basic goal setting and budgeting.

Teens

As your child gets older, a weekend or holiday job can help them appreciate that working leads to earning money. It’s also a good stage to help your child start setting goals, say to buy a new mobile phone, while meeting short-term expenses like buying snacks, clothes and going out.

Young adults

Once children are earning money on a regular basis, if they’re still living at home, then it’s time to discuss living expenses, including board and chipping in for food and utilities. It’s also an idea to develop their interest in building wealth for the future. Be sure also to cultivate an understanding and interest in their superannuation and how starting early can make a big difference.

Talking digital

Money lessons need to be adapted for digital spending. To do this it’s a good idea to involve kids in the digital purchasing process when you’re doing it yourself. Walk them through how it works and tell them the actual price so you can take this out of their pocket money, for example. It’s also a good idea to take them to the ATM with you and explain that the money coming from the machine is reducing the amount the family has in savings.

It’s never too late (or early)…

Investing from an early age can help build substantial wealth over time. So share our budget planner and speak with your kids about planning for financial success. Integrating money into your children’s lives can be a positive experience—along the way they’ll benefit from your knowledge and may even want to celebrate their achievements.

Our practice can create a budget and savings plan that could help.

Call us today.

A parent/guardian can open an account in a child’s name who is under 13 years of age, as long as they are a signatory. If the child is over 13 years of age, the parent/guardian must still open the account, but the child can be a signatory as long as the standard account opening requirements are met. Visa Debit, PayTag & AMPwave technology is only available to customers over 18.

Important note: © AMP Life Limited. This provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Although the information is from sources considered reliable, AMP does not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, AMP does not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person.

5 Reasons why the RBA will probably cut interest rates again

Oliver's insight

Introduction

As widely expected the RBA left interest rates on hold at their August Board meeting. While it appears to retain an easing bias with its assessment that growth is “below longer-term averages” and that the economy is likely to have “a degree of spare capacity for some time yet”, it appeared to soften this bias by removing its previous reference to a further fall in the $A seeming “both likely and necessary”.

I am not in the gloomy camp on the Australian growth outlook. Low interest rates and the collapse in the value of the $A are helping the economy to rebalance which is seeing those sectors of the economy that were repressed through the mining boom return to strength. This is reflected in a reversal of the “two speed economy” which has seen Western Australia drop to the low end of a comparative ranking across the states and territories and Victoria and NSW push to the top.

Ranking the states, annual % change to latest

Source: ABS, CoreLogic RP Data, AMP Capital

However, it’s likely that the economy will still need more help. There are five main reasons why the RBA will likely move to cut interest rates again, probably before year end.

Reason #1 – The outlook for business investment remains poor

This was clear from the last ABS survey of investment intentions that was released after the RBA last cut rates back in May. Comparing the latest estimate of investment for 2015-16 with that made a year ago for 2014-15 points to a 25% fall in business investment in 2015-16 (see the next chart) and another approach points to a 23% fall.

Source: ABS, AMP Capital

Resource investment is now falling rapidly back to 2% of GDP as large projects complete. To offset this we need to see growth in other parts of the economy pick up and we have seen some success with housing and consumer spending. However, non-mining investment remains poor, with capex plans pointing to renewed weakness this financial year. There are several reasons why non-mining investment remains weak including non-mining corporate scepticism after the battering they took through the mining boom (thanks to the strong $A, high interest rates and competition for labour), post GFC caution and excessive project hurdle rates for a very low inflation world. High dividend payout ratios are not a factor because for industrial companies payout ratios are within their normal range – they are up for the whole share market but this is due to resources companies and it is hard to expect them to invest more! At its core, the weakness in non-mining investment partly reflects the degree to which the natural rate of interest has fallen and the RBA has yet to fully reflect this.

Reason #2 – Commodity prices are weaker than anticipated

The continuing decline in commodity prices that is rolling though iron ore and coal, metals and energy prices, largely on the back of increased supply, is taking Australian export prices and the terms of trade far lower than has been anticipated by both the Government and the RBA. Goods exports prices fell by another 4.4% alone in the June quarter. This is resulting in a greater than expected drag on national income.

Reason #3 – The $A remains too high

It’s typical during a commodity slump for the $A to fall way below the fair value level suggested by purchasing power parity, which is currently around $US0.75. This is necessary to help sectors that were harmed through the prior mining boom by the high $A including tourism, education, manufacturing and farming. This is now starting to happen, but at $US0.73 its early days. While the US Fed is on track to raise rates later this year, still moderate US economic growth and weak wages growth and inflation pressures indicate it could be delayed and/or it could do just one move and wait a while. To ensure the $A continues on its downwards trajectory the RBA needs to keep jawboning it lower and likely cut rates again. In this regard it was disappointing and risky to see the RBA drop its reference to a further depreciation in the $A being “likely and necessary” in its August post meeting statement.

Reason #4 – House price momentum is likely to slow in Sydney and Melbourne

Bank moves to tighten conditions for property investors via tougher income tests, lower loan to valuation ratios and higher mortgage rates in response to pressure from APRA are likely to weaken investor property demand and result in lower growth in home prices in Sydney and Melbourne. With property price growth comatose in the rest of Australia, at just 0.9% on average over the 12 months to July, this will help reduce a major barrier to further RBA easing.


Source: RP Data, AMP Capital

Reason #5 – Monetary policy has recently been tightened

Bank interest rate hikes for both new and existing property investors amount to a de facto monetary tightening. While it’s only modest after tax it could become serious if banks respond to the increase in their funding costs as they move to put more capital aside for property lending as directed by APRA and raise interest rates for owner occupiers. With economic growth still soft, higher mortgage rates across the board is certainly something that the RBA won’t want to see at this point in the cycle. The best way for the RBA to offset or neutralise this is to cut interest rates again.

Implications for investors

There are several implications for investors.


Source: RP Data, AMP Capital


Source: RBA, Bloomberg, AMP Capital

Source: RBA, Bloomberg, AMP Capital

About the AuthorDr Shane Oliver, Head of Investment Strategy and Economics and Chief Economist at AMP Capital is responsible for AMP Capital’s diversified investment funds. He also provides economic forecasts and analysis of key variables and issues affecting, or likely to affect, all asset markets.

Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.