Tag Archives: Finance

Geopolitical risks for the economy and investments

By visual /May 13,2020/

The world has always been challenged by the dynamics of geopolitics. The nature and magnitude of associated conflicts may transition and manifest across varying contexts but, broadly speaking, geopolitical risk is ever present.

The fierce competition between the powerhouses of the East and West has been watched closely by many. The trade war between the US and China, characterised by tit-for-tat tariffs, continues to disrupt major global supply chains with greater levels of exposure to the two while threatening to hinder global economic growth, albeit the extent to which is difficult to determine.

Numerous attempts to assess the impact and cost of the trade war between the US and China have been undertaken and recent research by the International Monetary Fund estimated the combined effect of the tariffs announced in 2018 and the recently announced tariffs this year could lower global GDP by 0.5% in 2020.

However, not all market participants are worse off as a result of the disputes between the US and China. While the impact of the trade war has affected the financial markets, primarily through its effect on investor sentiment, more broadly there could be opportunities for some nations to benefit from a potential diversion of trade, particularly for economies who have the competitive capacity to replace US and Chinese firms .

The open rivalry and strategic competition comes as China makes progress towards achieving its major long- term goal in becoming a “moderately prosperous country” by 2020. As part of this strategy, China aims to become a “global innovation power in science and technology” along with several other goals relating to sustainability of its growth.

Some of the actions China is alleged to have taken to achieve this, including allegations of inappropriate transfer of IP and technology, have raised concerns over national security for the US. This issue has been a driving force behind the protracted trade negotiations between the two countries with negotiations stalling on matters related to restrictions placed on some of China’s largest players in the tech industry. The tensions between the two nations are likely to remain while the possibility of a trade deal is still unknown.

Recently the People’s Bank of China (PBoC) let the yuan depreciate in its daily rate fixing, to be above the key USD/CNY 7 mark. Key reasons for the RMB depreciation is suggested to be in support of growth in light of the impact of US tariffs on China. Recent measures by China to combat US tariffs through a devalued yuan has soured the outlook for a trade deal.

While China is caught in a challenging set of negotiations with the US, it is facing unrest within its own country. In 1997, when the UK handed Hong Kong over to China, a One Country, Two Systems Framework was established which set out civic freedoms and a high level of autonomy, including judicial independence.

Recently proposed amendments to Hong Kong’s Fugitives Bill to allow extradition of fugitives not only to China, but to any jurisdiction in the world with which the territory has no existing formal agreement, has led to protests in the streets of Hong Kong over concerns and fears that the law could be abused by China for political or commercial reasons.

What began as a peaceful protest against an amendment to Hong Kong’s Fugitive Bill has now turned into the revival of a deeper-rooted issue reminiscent of the 2014 Umbrella Movement. While it is an example of China’s assertion of power within its own borders, it too is a demonstration of a clash of political ideology and symbolic of the gradual reclaim of power that has long been vested in the West.

Changing geopolitical relationships is also clear in the pending UK exit from the European Union (EU). The outcome remains more uncertain yet following the resignation of May only months before the Brexit deadline. Oxford Economics’ modelling of the economic implications assumes the base case as the UK continuing its EU membership.

In this model, all scenarios show a degree of trade destruction in which UK trade volumes decline as a share of GDP, reflecting the increased cost of trade between the regions, encouraging consumption of domestically produced goods instead. In the worst case scenario, compared to the base case, exports fall by as much as 8.8% and imports by up to 9.4%. The loss contributes to a 3.9% loss of GDP when factoring in events, such as a drop in labour productivity and foreign direct investment.

The rise of widespread geopolitical issues comes at a time when the world economy is slowing. The uncertain impact of potential US tariffs and the course of the UK’s pending divorce from the EU continues to introduce greater levels of volatility into the markets.

Source: BT

Economic Update

By visual /May 13,2020/

Market and Economic overview

Australia

The coronavirus ‘curve’ of known cases has flattened out, suggesting social distancing measures have been successful in slowing the spread of the disease.

The focus is now on a gradual easing of restrictions – people will gradually start returning to work as non-essential areas of the economy start to function again.

It will take time for conditions to normalise completely – borders remain closed to overseas visitors, for example, so tourism-related areas of the economy will continue to struggle.

It remains too early to say how significant the slowdown will be, but some observers have suggested the Australian economy could contract by approximately 5% in 2020. At the same time, consensus expectations suggest unemployment could double, from around 5% in February to perhaps 10% during the course of this year.

Job security is low and house prices appear likely to fall, which could further dampen sentiment. For now, credit card spending is running nearly -20% below the corresponding period a year ago, highlighting the current weakness in consumer confidence.

United States

By the end of April, more than 1 million people in the USA had been diagnosed with coronavirus.

Like other countries, the US had implemented various closures and restrictions. The ‘30 Days to Slow the Spread’ expired on 1 May 2020 and President Trump has suggested social distancing restrictions will not be extended.

Trump appears determined to reopen the economy as soon as possible, against the recommendations of some medical professionals. Ultimately, he wants the economy firing again in the run-up to the Presidential election in November.

The latest data showed the world’s largest economy shrank at an annual rate of -4.8% in the March quarter, even worse than consensus forecasts.

The downturn was due to economic disruptions in March. Data for the June quarter is expected to be worse still given more extensive closures during April, at least.

Europe

Much of Europe remains in lockdown, although numbers of cases vary quite markedly across the region. Germany – the largest economy in Europe – has much fewer cases than some other countries such as France, Italy, Spain and the UK. The economic impact might therefore differ between countries but will undoubtedly be significant overall.

Euro Area GDP growth declined at an annual rate of -3.3% in the March quarter and is expected to fall further in the June quarter.

Annual growth rates were lower still in some of the region’s major economies: France -5.4%; Italy -4.8%; and Spain -4.1%.

New Zealand

Restrictions have been eased in New Zealand; ‘Level 3’ measures are now in place – similar to those in Australia – after the more stringent ‘Level 4’ lockdown was no longer deemed necessary.

The Reserve Bank of New Zealand remains very active with its recently introduced asset purchase program. The Bank is buying large amounts of government and local authority bonds to ensure the smooth operation of the local fixed income market.

Asia

China’s economy shrank at an annual rate of -6.8% in the March quarter; a sharp slowdown from the 6.0% year-on-year growth seen in the December quarter of 2019.

The industrial sector was hardest hit by the near two-month shutdown of non-essential parts of the economy.

Whilst alarming, the short-term contraction will not impede China’s long-term growth trajectory, according to officials. That said, conditions could remain subdued in the foreseeable future.

Australian dollar

The Australian dollar clawed back all of its lost ground from March. The currency gained 7.0% against the US dollar, closing April at 65.5 US cents. Similar strength was seen against other currencies too.

Commodities

Most commodity prices finished the month of April stronger as demand uncertainty eased. Following sharp falls in March, copper (8.0%), nickel (8.0%) and zinc (3.4%) posted solid gains, although not enough to recover previous losses.

Iron ore (1.4%) reversed its downward trend on signs of a turnaround in Chinese manufacturing activity and reflecting China’s economic stimulus plans.

Oil prices (WTI Crude -26.6%) continued to fall, although stemmed losses towards month end on evidence of falling production.

The gold price (7.6%) again proved resilient against a backdrop of ongoing market uncertainty, while platinum (9.8%) and silver (10.1%) bounced back after March’s sharp falls.

Australian equities

The equity market recovery in the last week of March continued throughout April. The S&P/ASX 100 Accumulation Index rose 8.4%, registering its strongest monthly return since 1988.

Confidence was initially supported by the huge monetary and fiscal responses to the pandemic and later by encouragement that social distancing restrictions were proving effective.

The full impact of the virus remains unknown, however, and the shock to company earnings and balance sheets has placed additional pressure on dividend policies. At the same time, most companies have withdrawn earnings guidance.

Australia’s banks continued to underperform, as delays to mortgage payments and decreased property activity threaten earnings. The growing prospect of dividend cuts and the view that the banks will play a key role in supporting the economy has further dragged on investor sentiment.

Listed property

After plunging dramatically in March, global listed property markets rebounded in April. The COVID-19 situation continues to be the dominant driver of property securities. Due to virus containment measures globally, including widespread lockdowns, there are rising expectations for sweeping rent abatements across the sector, particularly in the most heavily hit sub-sectors such as discretionary retail. Many listed property securities globally have now withdrawn their earnings and dividend guidance due to the uncertainty.

 Global equities

Unprecedented levels of monetary and fiscal support helped global markets stage a remarkable recovery. The MSCI World Index bounced 10.6% in local currency returns in April – its strongest month since 1975. The appreciation of the Australian currency tempered global equity returns for domestic investors, with the MSCI World Index rising ‘only’ 3.7% in Australian dollar terms.

UK equities were the weakest performers in April, with oil giant Shell announcing a cut in its dividend. Financial stocks also weakened after Lloyds revealed a large drop in profits. Disappointing returns from energy and financials stocks have contributed to the underperformance of the MSCI World Value Index in recent months.

Global and Australian Fixed Income

Bond markets were substantially calmer in April compared to March as central bank support programs appeared to be having their desired effect.

The Reserve Bank of Australia, for example, has bought around $50 billion of government and state government bonds in the past few weeks. This has materially improved liquidity and helped steady the local bond market.

Benchmark 10-year US Treasury yields closed April just 0.03 percentage points lower, at 0.64%. Yields also declined in the UK, Germany and Japan, by 13 bps, 12 bps and 5 bps, respectively.

Australian yields moved in the opposite direction, though not significantly. The yield on 10-year Commonwealth Government bonds closed the month 13 bps higher, at 0.89%. This resulted in a modest negative return from the domestic bond market.

 Global credit

Like shares, corporate bonds were buoyed by an improvement in risk appetite globally. Credit spreads – the difference in yield between corporate bonds and comparable high-quality government bonds – narrowed substantially.

Companies looked to take advantage of improving risk appetite and strong inflows into the asset class by offering a substantial amount of new bonds. In some cases, this was to bolster their balance sheets to help cushion the impact of a more prolonged period of lower profitability.

 

Source: Colonial First State

How to reduce spending after a job loss

By Robert Wright /May 08,2020/

How to reduce expenses after a job loss and get back in the driver’s seat of your finances.

With many thousands of Australians experiencing job losses and reduced hours as a result of the COVID-19 (coronavirus) pandemic, many will need to take a look at their expenses to continue living within their means.

The average Australian household spends almost $75,000 each year on living expenses, excluding major expenses such as rent or insurance. That adds up to between $1,100 and $1,700 per household each week that’s spent on personal care, pampering our pets, transport, alcohol, fashion and more.

The good news is that there are some simple ways to cut back on these expenses. Whether you need to slash your costs significantly or simply tighten up your spending after a job loss, here’s where to start.

1. Know where you’re spending money

The first step is to evaluate where your finances stand today. If you already have a working budget, use it as a starting point, but expect that you may need to make some adjustments if your financial circumstances have changed. Itemise your monthly expenses as much as possible and separate out essential needs like housing, food and utilities, versus “wants” like entertainment, takeaway meals or online shopping. This will help you to see where you can realistically cut back, find cheaper alternatives and help save extra money.

2. Cut back housing expenses

When you need to make immediate changes to your budget, starting with the largest targets can have a big impact. For many of us, this means housing costs – either a mortgage or rental payments, as approximately 20% of Australians’ gross household income is spent on housing. If you’re paying off your home, many banks are offering “mortgage holidays” to clients experiencing financial challenges.

If you’re ahead on your repayments, there may be other options, including reducing repayments or using your offset or redraw facilities to get access to additional money. You might also consider temporarily switching from a principal-and-interest mortgage, to one that’s interest-only.

Paying off only the interest will instantly reduce your repayment amount. However, it may also take you longer to pay off the mortgage as a whole. Speak to your financial adviser or lender to discuss which options are right for your circumstances.

If you rent and have been impacted financially you may seek a rental reduction. The Australian government has agreed to a six-month moratorium on at least some evictions. The Tenants’ Union is posting up-to-date information about landlord obligations during this crisis, as well as pointers for how to negotiate with your landlord.

3. Save money on your phone and internet

Next, cast a ruthless eye over regular utilities like phone and internet bills. Many telco companies make it easy to bundle all your devices into a single plan, which can work out cheaper in the long run. If you and your family have separate mobile and data plans with different providers, look at whether consolidating them can help you save.

On the other hand, you might find you’re still paying for old devices that are attached to a bundled plan. Take a close look at all your plan inclusions and get rid of any phones or tablets that are sitting unused in a drawer.

You may also discover that you can get by with less data on certain devices, because you’re using them through your home network rather than being out and about. If you’re out of contract, talk to your telco about how much you can save by cutting back on your wireless data.

4. Trim the costs on food

Until recently, Australians were spending around $11.7 billion a year at restaurants and $10.6 billion on takeaways. While you’re probably not eating out right now, takeaway food can still make a hole in your budget, so use the extra time at home as an opportunity to get into the kitchen.

Take a savvy approach to home cooking by adding more vegetables and legumes to your diet, and staying away from expensive cuts of meat. Avoid shopping at the grocery store when you’re hungry, buy home-brand products where possible and always take a shopping list. Try cooking bigger batches of food so you have enough for a couple of meals, without doubling the cost (and always eat the leftovers). Be mindful of waste at home, the average Australian household throws away almost 300kg of food per person each year.

5. Find value in your lifestyle

Now is an opportunity to consider what you value most. By looking closely at your current spending, you’ll probably find ongoing monthly payments for expenses that are really not important to your household: music lessons for a child who hates the instrument; subscriptions to publications no one’s regularly reading; apps and software that are on auto-renew payment.

More than 14.5 million Australians – that’s over half of us – have at least one pay TV subscription in their home. If you still keep returning to free-to-air, it’s time to reassess. Cutting out things you don’t use or value is painless and gives you extra money that you can better use elsewhere.

There will also be areas where you can get the same value for less money. You hold a gym membership to be healthy, but while they’re no-go zones, freeze your membership payments and look for inexpensive or free at-home workouts instead. The same applies to beauty treatments like hair colouring and manicures, which can be done at home.

6. Forego any guilty pleasures

In tough times, it can be tempting to find solace in an occasional treat or guilty pleasure. But when you look at the expense, those seemingly cheap thrills could be costing you a lot of money. For example, Australians spend $14.9 billion each year on alcohol and $21.5 billion on clothing and shoes.

Be honest about where you’re most likely to splurge and remove any triggers like email newsletters (hit unsubscribe) or social media (unfollow those too-tempting accounts).

 

 

Source: AMP

The value of sound financial advice in these challenging times

By Robert Wright /April 29,2020/

In addition to the terrible health consequences, the coronavirus is having a massive impact on global economies and the way we live, work, and interact with each other.

Loss of income and uncertainty about the future can place a great strain on households, relationships and finances. For those affected, it can be overwhelming.

For those approaching or already in retirement, sharp falls in share markets can lead to sleepless nights about their retirement plans and whether they will have enough income to live comfortably.

In times like these, seeking professional financial advice is essential. We can help you to:

• Assess your current financial situation, review your income and expenses, and develop strategies to manage your cash flow more effectively.
• Make the most of any severance pay or redundancy payment.
• Identify any government support payments you may be entitled to receive and assist you with the application process.
• Assist you with practical strategies to consolidate and eliminate debt.
• Review your circumstances and assess whether early access to your superannuation savings or early retirement may be a suitable option for you.
• Review your retirement strategy to determine whether it continues to meet your near and longer term needs and objectives.
• Develop and implement a detailed financial strategy for your future personal and financial wellbeing.

Avoid making emotional or impulse decisions

It’s natural to feel anxious in turbulent times, however it’s important to make carefully considered decisions when it comes to your finances and investments. An emotional or impulse decision in the short term will rarely benefit your financial wellbeing over the longer term.

Sound financial advice can be life changing

Sound financial advice really can make all the difference. As qualified professionals, we understand the complexities of financial planning, the world of investments and the various support packages available from the government.

We are available to help you, or someone you care for to make the most of a difficult situation and to navigate a path forward.

Now isn’t the time to go it alone.