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Sunday, 24 November 2013 10:15

Bank Shares - Safe as Houses?

Mark Draper (GEM Capital) talks with Daniel Moore (Investors Mutual) about the impact of a potential property bubble in Australia on Australian Banks.

The average punter on the street considers Bank Shares to be a safe haven , but just correct is that assumption.

 

http://www.youtube.com/watch?v=50r8DW85cNI

 

DISCLAIMER: The above information is commentary only (i.e. our general thoughts).  It is not intended to be, nor should it be construed as, investment advice.  To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information.  Before making any investment decision you need to consider (with your financial adviser) your particular investment needs, objectives and circumstances.

 

 

Tuesday, 19 November 2013 16:17

RBA Board minutes for November 2013

BillEvans_small_headshot_WIBIQBill Evans, Westpac Chief Economist

As expected, the Minutes to the November RBA Board Meeting retained the key statement that  “The Board’s judgement was that, given the substantial degree of policy stimulus that had been imparted, it was prudent to hold the cash rate steady while continuing to gauge the effects [of the earlier rate cuts], but not to close off the possibility of reducing it further should that be appropriate to support sustainable growth in economic activity”. The Minutes did, however, not contain the comment “nor signal an imminent intention to reduce them” as did the October Minutes. While technically this may open the door for a December move, we doubt the RBA has any imminent intention to reduce the cash rate. Rather, the Board clearly has an easing bias and they would like to highlight the fact.

The Board is “continuing to gauge the effects, including in the housing market, of the substantial degree of monetary policy stimulus that had been put in place over the past two years. There was mounting evidence that monetary policy was supporting activity in interest-sensitive sectors and asset values”. They argue that it is “too early to tell whether this improvement would signal a willingness of businesses to take on new risks and thereby add to employment and investment”.

The Board also gave some insight into why they are in a watch and see, rather than primed to go, mode. “Nationally, dwelling prices were above their late 2010 peak, with prices over the three months to October increasing significantly in Sydney. Housing turnover and loan approvals had picked up noticeably. Improved conditions in the established housing market were providing an impetus to dwelling investment, with residential building approvals increasing over the year". This an expected development from the low level of interest rates and something the Board is hoping will spur on wider domestic activity.

So why does the Board still have an easing bias? They appear to have acknowledged concerns in regards to non-residential investment outlook noting rising office vacancy rates at the same there’s a clear decline in government employment. Downward revisions to the growth outlook have also been noted due to a stronger currency and a larger than expected fall in mining investment.

In addition, employment is forecast to continue to grow below the rate of population growth and hence the unemployment rate is expected to continue to rise gradually for the next year or two. Inflation forecasts are little changed and underlying inflation is forecast to remain consistent with the inflation target for the forecast period.

The other key reason for the rate cut bias is the Australian dollar. It was noted that “the Australian dollar, while below its level earlier in the year, remained uncomfortably high” and that a lower level of the exchange rate would likely be needed to achieve balanced growth in the economy". No doubt the strategy of maintaining an easing bias is partly motivated by the need to "talk down" the AUD.

Nevertheless, the Board is holding to the view that “in time, non-resources business investment was also expected to increase given the low level of interest rates and recent substantial increases in measures of business confidence and conditions”.

The Bank’s forecast for growth appears to be predicated on the current housing story flowing through to consumer spending which as the Board notes “household spending looked to have remained below average in the September quarter, consistent with softness in the labour market weighing on income growth". This is unlikely to materialise until consumers become much more comfortable with their job security.

Note also that the Bank lowered its growth forecast for 2014 from 3% (trend) to 2.5% (below trend) citing a lower trajectory for both mining and non mining investment.

Discussions on the international scene focused on the fact that Australia’s main trading partners growth remained around average. Chinese growth had lifted a little and was consistent with the Government target of 7½% while the Japanese economy continues to grow, albeit at a slower rate than the relatively strong pace seen in the first half of the year. In the rest of Asia, growth has continued around trend.

The US outlook is critical for the RBA as the tapering by the US Federal Reserve will be key factor in their desire to see a stronger US dollar and thus, a weaker AUD. The partial government shutdown in the US is expected to reduce growth only slightly in the December quarter although it is too early to tell as several data releases have been delayed. While house prices have risen further, it was noted that US housing starts and mortgage applications for purchases had declined since earlier in the year. Overall, the US economy was described as growing at a moderate pace.

Conclusion

The Bank has noted the recent strength in consumer and business confidence as well as the upswing in house prices and dwelling approvals. However, there are clear question marks on the sustainability of this upswing and if it can be maintained into 2014 given the downbeat outlook for non-residential construction; an expectation for a rising unemployment rate; the slowdown in mining; weak government spending; and the drag on our external sector from an "uncomfortably high AUD".

There are many dimensions of uncertainty in the outlook. The Bank is looking for the wealth/employment/confidence boost from the housing upswing to feed into the weak area of the economy mainly explained by business decisions on employment and investment.

It is our view that the pass through will be slow and uneven requiring further monetary stimulus in 2014. The minutes confirm that the decision to cut is not imminent and will depend on how those dynamics interact.

We continue to expect the Bank will become increasingly aware of the need for lower rates in 2014.

It is our view, that two further cuts in the cash rate will be required in 2014.

 

 

Wednesday, 13 November 2013 16:22

"Nein" to Nine

Channel-Nine-LogoChannel Nine is being floated on the share market shortly, and for many investors the thought of investing in a household name might be appealing.

Here we outline some of the reasons that investors should be wary of this listing:

1. TV advertising spending has gone nowhere over the last 5 years - here is a chart sourced from the Channel 9 prospectus

 

 

 

 

 

 

 

 

2. Traditional TV is facing a significant threat from the internet such as YouTube, Apple and Google TV just to name a few.

3. Channel Nine's price to earnings ratio is 14-15 - which doesn't strike us as cheap for a business that is being structurally challenged.

4. Current owners are selling 40% of their shares in this offer, and only have to hold their other shares for 12 months.

 

Before subscribing to shares in Channel Nine, investors should seek professional advice.

 

DISCLAIMER: The above information is commentary only (i.e. our general thoughts).  It is not intended to be, nor should it be construed as, investment advice.  To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information.  Before making any investment decision you need to consider (with your financial adviser) your particular investment needs, objectives and circumstances.

 

 

 

Friday, 01 November 2013 13:11

Deeming rates lowered by Centrelink

Interest Rate ImageHere is the press release from the Commonwealth Government announcing a lowering of the Deeming Rate for the Income Test to determine Centrelink allowances and pensions.

More than 740,000 Australian pensioners will benefit from the lowering of the social security deeming rates from 4 November 2013.

The Minister for Social Services, Kevin Andrews, said the deeming rate will decrease to 2 per cent from 2.5 per cent for financial investments up to $46,600 for single pensioners and allowees, $77,400 for pensioner couples and $38,700 for each member of an allowee couple.

The upper deeming rate will decrease to 3.5 per cent from 4 per cent for balances over these amounts.

“The deeming rules are a central part of the social security income test,” Mr Andrews said.

“They are used to assess income from financial investments for social security and Veterans’ Affairs pension/allowance purposes.

“This announcement means that part-rate pensioners and allowees will have less income assessed from their investments and receive a boost in Government income support.

“Returns available to pensioners and other allowees have decreased since deeming rates were last changed, in March 2013.

“This announcement brings the deeming rates in line with available financial returns,” Mr Andrews said.

Deeming rates reflect the rates of return that people receiving income support payments can earn from their financial investments. If income support recipients earn more than these rates, the extra income is not assessed.

Payments affected by the deeming rates include means tested payments such as the Age Pension, Disability Support Pension and Carer Payment, income support allowances and supplements such as the Parenting Payment and Newstart, paid by the Department of Human Services and the Department of Veterans' Affairs.

GEM Capital Comment:

For the want of spoiling a good press release, we hasten to add, that this change is likely to only benefit those people who are currently paid under the income test, rather than the assets test.  For those who are currently paid under the assets test, this change is likely to have no effect on their entitlements. (remembering that Centrelink apply an assets test and an income test and pay the recipient a benefit based on which test delivers the lowest outcome)

Nevertheless this is a welcome move considering the downward movement we have seen in interest rates.

 

A Solicitor parked his brand new Porsche in front of the office to show it off to his colleagues.

 

 

 

As he was getting out of the car, a truck came speeding along too close to the kerb and took off the door before zooming off.

More than a little distraught, the Solicitor grabbed his mobile and called the police.

Five minutes later, the police arrive. Before the policeman had a chance to ask any questions, the man started screaming hysterically: "My Porsche, my beautiful silver Porsche is ruined. No matter how long it's at the panel beaters, it'll simply never be the same again!"
After the man finally finished his rant, the policeman shook his head in disgust.

"I can't believe how materialistic you bloody Solicitors are." he said. "You lot are so focused on your possessions that you don't notice anything else in your life."

"How can you say such a thing at a time like this?" sobbed the Porsche owner.

The policeman replied: "Didn't you realise that your arm was torn off when the truck hit you?"

The Solicitor looked down in horror.
"F***ing hell!" he screamed. "Where's my Rolex?"

Wednesday, 30 October 2013 15:21

Australian Share Market Outlook - October 2013

John Grace (Deputy CEO, Ausbil Funds Management) and one of Australia's most respect Australian Share investors talks about the most recent company reporting season.

John also talks about his outlook for the share market, and his optimism despite a solid rally over the past 12 months.

More importantly he discusses how he has positioned his fund to take advantage of what has been very much a two tier market.

 

http://www.youtube.com/watch?v=iFfHhtpUPOg

 

 

DISCLAIMER: The above information is commentary only (i.e. our general thoughts).  It is not intended to be, nor should it be construed as, investment advice.  To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information.  Before making any investment decision you need to consider (with your financial adviser) your particular investment needs, objectives and circumstances.

Friday, 18 October 2013 09:30

Global Investment Update - October 2013

Hamish Douglass (CEO Magellan Financial Group) talks with Mark Draper (Adviser, GEM Capital) about his views on the current state of global financial markets.

In particular Hamish discusses:

1. How he does not believe that the US will default on their debt

2. Withdrawal of US stimulus in the form of Quant Easing and what investors should be watching in this process

3. How the Magellan Global Fund is positioned to generate returns for investors over the next 3 years

 

http://www.youtube.com/watch?v=MTI0JH-OmaQ&feature=c4-overview&list=UUF9H8uLExyIl1s4llFYleow

 

For more information on our views http://www.gemcapital.com.au

Wednesday, 16 October 2013 02:07

US Debt Ceiling - still a stalemate

imagesTwo days out from the 17 October deadline, negotiations in Washington have (yet again) come to a halt. Key Senate figures had been working towards a compromise proposal, but those discussions stopped once news got out that House Republicans had rejected the plan without seeing any details, instead choosing to focus on their own initiative. If that wasn’t bad enough, it subsequently came to light that the House Republicans may not even have enough support to get their bill through the House, let alone the Senate. That this is the case has since been confirmed, with the Republican leadership cancelling a planned vote on the bill. There have since been some reports that the Senate has recommenced negotiations, but the House and Senate clearly remain miles apart.

We continue to see very little chance that a resolution will be found this week. 17 October is not the true deadline for non payment by the US government. Rather, it is 1 November and beyond where the real risk lies. Markets have, broadly speaking, remained sanguine on the fiscal situation to date, but recent market developments provide evidence that the market psyche may be shifting.

Here is what high profile investor and author of investment report "Boom, Gloom and Doom", Marc Faber:

"It's basically a dysfunctional government that we have that is far too large that is essentially wasting money left, right and center. The Republicans are wasting money on the military complex and the Democrats are basically buying votes with transfer payments, with entitlement programs, it goes on. It is a huge waste. The problem is that I don’t see a solution."

We remain of the view that the US is highly unlikely to default on its debt obligations and that an '11th hour' solution will be found.

DISCLAIMER: The above information is commentary only (i.e. our general thoughts).  It is not intended to be, nor should it be construed as, investment advice.  To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information.  Before making any investment decision you need to consider (with your financial adviser) your particular investment needs, objectives and circumstances.

DohInsideThe Tax Office has published a list of the top 10 compliance mistakes that SMSF trustees make when running their funds. The list is based on the type of contraventions reported by approved SMSF auditors between 2005 (when contravention reporting started) and up to June 30, 2012.

The top 10 contravention types (although admittedly one of them is “other”) in percentage terms are as follows:

SMSF Contraventions

An interesting observation is that of the top 10, three types of contravention represent more than two-thirds of the proportion of asset values (67.8%) involved in the most frequent contraventions. These are:

  • in-house assets
  • separation of assets
  • loans to members/financial assistance.

When looking at the number of contraventions, a little under two-thirds (64%) involve four of the top 10. These are:

  • loans to members/financial assistance
  • in-house assets
  • administrative-type contraventions
  • separation of assets.

The Tax Office has the following options when dealing with an SMSF contravention issue:

  • making an SMSF non-complying for taxation purposes
  • applying to a court for civil penalties to be imposed — a person may also face criminal penalties for more serious breaches of the law
  • accepting an enforceable undertaking in relation to a contravention, and
  • disqualifying a trustee of an SMSF.

As well, the Tax Office can issue the following:

  • rectification and education directions for contraventions, and
  • an administrative penalty regime for SMSF trustees for certain contraventions.

A rectification direction will require a person to undertake specified action to rectify the contravention within a specified time and provide the Tax Office with evidence of the person’s compliance with the direction.

An education direction will require a person to undertake a specified course of education within a specified time frame and also provide the Tax Office with evidence of completion of the course.

Where an administrative penalty is imposed it must be paid personally by the trustee or the director of the trustee company and cannot be paid or reimbursed by the SMSF. A table of some of the provisions that will attract the administrative penalty follows:

SMSF Penalties

Tuesday, 24 September 2013 23:06

Self Managed Super Fund - Essential Checklist

Draper_05For those who are considering whether to establish a Self Managed Super Fund we have devised a checklist of aspects to think about before proceeding.

  1. Ask yourself one more time if this is the right decision for you. It might be time to take a deep breath and just check that you are sure. Don't do it just because SMSF is a buzzword and everyone else you know is doing it. It has to work for you and your family. So maybe sit down and do the age old thing, draw up two columns, one pro and one con, and go through it all again
  2. Part of the shift is being confident, not only that the SMSF structure will work for you, but that it will perform better than what you have already. So go through your existing statements on your retail or industry fund or whatever it is you have, and check its performance over time. Do you have a consistent and coherent investment strategy to fulfil your goals for retirement savings
  3. Make sure you have a good idea of how you will deploy your money when you set up your fund, either acting by yourself or with the help of an investment adviser you trust. Part of this is to understand how you can roll over existing super accounts, but also how you might put other assets currently outside your super into your new fund. Think about what assets you want to put into your fund and understand how much tax you might have to pay on getting them into your SMSF.
  4. You're going to become a trustee of your fund, so you need to make sure you understand your responsibilities and legal obligations. Work out if you want to get some professional help, or if you want to be completely DIY. You should understand how much work is required to administer the fund and work out if you have the time and expertise to do it yourself. If not, you should know what sort of skills you need to access, have some particular advisers in mind and have an understanding of their fees.
  5. Decide on your structure - individual trustees or a corporate trustee. The corporate route has gained in popularity in recent times but there are advantages and disadvantages for each. Professional advice will be useful here.
  6. Make sure all your tax affairs are in order. The ATO is the regulator of the SMSF sector and will approve the creation of your fund. It will definitely have issues with your application if you've been convicted of dishonesty offences, but they will also be cautious if you have a large outstanding tax bill, a history of not lodging your returns, if you have a private company with a poor reporting record or taxes outstanding.  If there are other trustees in your fund, they also need to be eligible, so check that they are.
  7. Apply the residency test. If you live outside of Australia for long periods, an SMSF might not work for you because that will impact on the tax situation. The fund needs to meet the ATO's definition of an "Australian superannuation fund” to be eligible for tax concessions.
  8. Get your trust deed together with the help of a legal practitioner. Sign and date it and make sure that is properly executed. Make sure all trustees sign it. At the same time, or within 21 days of becoming a trustee or director, all trustees need to sign a declaration saying they understand their duties and responsibilities. Keep this safe because you could be asked to produce it later.
  9. Access the tax file numbers of everyone in the fund, because these will be quoted when the fund is registered with the AT0.
  10. Set up your fund's bank account. You'll quote this account if and when you close down your existing super funds to kick off your SMSF.
  11. You need your trust deeds and bank account number when you register your fund with the AT0. If you've gone with a company structure, you'll also need an Australian Business Number (ABN).
  12. Write out your fund's investment strategy. This is not only a good exercise to go through, but you'll need it to show that your investment decisions comply with the strategy you have already outlined, and even more importantly, comply with super laws.
  13. Finally, refer to the ATO’s website for its SMSF series of booklets and information at http://www.ato.gov.au/Super/Self-managed-super-funds/.   And don't be shy about reaching out to the professionals for advice - that's what we're here for.

 

Note: Advice contained in this flyer is general in nature and does not consider your particular situation or needs. If information contained is not appropriate to you at this stage please pass on to family and friends who may benefit. Please do not act on this advice until its appropriateness has been determined by a qualified adviser.

For more information on SMSF’s or to arrange a no-cost, no-obligation first consultation, please contact us at GEM Capital on Ph (08) 8273 3222