Friday, 29 May 2015 14:35

Australian Housing in One Chart

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We sourced this chart from our friends at the Montgomery Fund - it is self explanatory in our view.


We are recommending caution with investments that are leveraged to the housing market in Australia which would appear at extreme levels.

Friday, 29 May 2015 10:21

10 tips for SMSF trustees before 30th June

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Investment research glassesAs 30th of June approaches there are many things SMSF trustees should consider to make the most of their SMSF. Better not to leave the following until the last minute:

  1. Valuation. The assets in your SMSF must be valued each financial year based on objective and supportive data. Refer to ATO publication, ‘Valuation guidelines for SMSFs’.
  2. Contributions. Ensure contributions are received on or before 30 June, especially if made by electronic funds transfer. A day too late could cause problems.
  3. Employer contributions. Check whether Superannuation Guarantee contributions for the June 2014 quarter have been received by your SMSF in July 2014. If so, include the contribution in your concessional contribution cap for the 2014/2015 financial year.
  4. Salary sacrifice contributions. Salary sacrifice contributions are concessional contributions. Check your records before contributing more to avoid exceeding your concessional contributions cap.
  5. Tax deduction on your contributions. If you are eligible to claim a tax deduction then you will need to lodge a ‘Notice of intention to claim a tax deduction’ with your SMSF trustee before you lodge your personal income tax return. Your SMSF trustee must also provide you with an acknowledgement of your intention to claim the deduction.
  6. Spouse contributions. Spouse contributions must be received on or before 30 June in order for you to claim a tax offset on your contributions. The maximum tax offset claimable is 18% of non-concessional contributions of up to $3,000. Your spouse’s income must be $10,800 or less in a financial year. The tax offset decreases as your spouse’s income exceeds $10,800 and cuts off when their income is $13,800 or more.
  7. Contribution splitting. The maximum amount that can be split for a financial year is 85% of concessional contributions up to the concessional contributions cap. You must make the split in the financial year immediately after the one in which your contributions were made. This means you can split concessional contributions made during the 2013/2014 financial year in the 2014/2015 financial year. You can only split contributions you have made in the current financial year if your entire benefit is being withdrawn from your SMSF before 30 June 2015 as a rollover, transfer, lump sum benefit or a combination of these.
  8. Superannuation co-contribution. To be eligible for the co-contribution, you must earn at least 10% of your income from business and/or employment, be a permanent resident of Australia, and under 71 years of age at the end of the financial year. The government will contribute 50 cents for each $1 of your non-concessional contribution to a maximum of $1,000 made by 30 June 2015. To receive the maximum co-contribution of $500, your total income must be less than $34,488. The co-contribution progressively reduces for income over $34,488 and cuts out altogether once your income is $49,488 or more.
  9. Low income superannuation contribution. If your income is under $37,000 and you and/or your employer have made concessional contributions by 30 June 2015, then you will be entitled to a refund of the 15% contribution tax up to $500 paid by your SMSF on your concessional contributions. To be eligible, at least 10% of your income must be from business and/or employment and you must not hold a temporary residence visa.
  10. Minimum pension payment. Ensure that the minimum pension amount is paid by your SMSF by 30 June 2015 in order to receive the tax exemption. If you are accessing a pension under the ‘Transition to Retirement’, then ensure you do not exceed the maximum limit also
Thursday, 28 May 2015 09:33

The future is Mobile

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Sourced from an interesting article in "The Economist" recently, here is a chart showing global growth rates of varying technology over the past 15 years including internet as well as smart phones.





















Clearly the highest growth, and the largest coverage of users within the world is in the mobile/smart phone sector.

The following chart shows the growth of mobile phone sales in China for the 5 year period until 2013.  It is estimated that over 500 million smart phones were sold in China and India in 2014.


The message is clear in the charts that mobile phones and mobile internet is here to stay and is changing the way in which consumers behave around the world.


What does this mean for business and investors though? 


We briefly pose some questions that are worth considering.


1. For businesses that you run or invest in ..... is the business a beneficiary or threatened with the move to mobile internet?  For example, any business owner with a website should ensure that their website is mobile friendly as Google have recently announced a change to their Google search that will favour those with mobile friendly websites.

For investors, are the companies you invest in embracing mobile technology and offering services to their customers through it, or are they likely to be canabilised by it?

2. Who are likely to be beneficiaries from this change (other than the obvious handset makers such as Apple)?  For example social media companies in China and India etc

3. Is your current investment strategy capturing this amazing growth?


Clients of GEM Capital have enjoyed good returns in the last few years, partly due to their exposure to global technology companies who are benefitting from the technological change that is underway.

Friday, 22 May 2015 06:32

Kerr Neilson - it's all about the price

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Kerr Neilson, Managing Director of Platinum Asset Management, was interviewed by Vincent O’Neill, Director of Private Wealth at Stanford Brown, on 24 April 2015 at the Stanford Brown Quarterly Investor Insight luncheon.

VO: What makes a good investment manager?

KN: You need to have some idea about what you bring to the game. You wouldn’t enter the Olympics without some ‘edge’, and it’s the same in the investing business. You have to define your ‘edge’ to yourself. One ‘edge’ you could bring is that which others find difficult, such as thinking in a contrarian manner. There’s a big problem with investments. Believe it or not, there’s no specific price for any asset. Some good companies are now worth 10 times the amount they got down to in the GFC. They haven’t become 10 times better companies. When you buy and sell in the stockmarket, you need to have a reference point against what other people think. Value can shift around massively. You need to be a contrarian to start looking for gaps. You need a way to distill out the confusion and noise.

VO: And what have you changed or learned over the years?

KN: Like all investors, you initially start looking for a bargain. But now we have the internet, it’s completely transformational. It’s as important as the railways and the automobile. On the one hand, you know what you’d pay for traditional companies, but then you’ve got this ginormous event which opens up the world to everyone. A company can be so much more valuable even though it started in a garage in Sydney. The value proposition is difficult to understand. With these changes, you need to change your own approach, at least at the margin.

VO: And you need a recognition that some are speculative.

KN: You need a high upside to justify the uncertainty and you need peripheral vision. A problem analysts have is that they spend a lot of time on a company, and they feel they need to be rewarded for that time. They still want to buy it, but you can’t do that if you’re running money.

VO: In what conditions does Platinum underperform?

KN: The times we are least effective are the times like the last six years, where there is little dispersion of valuations, and huge trending. The herd is going in one direction. The one market you had to be in was the US, and we have been progressively moving out of it.

VO: Does that make it difficult for you, as people question your stance?

KN: You need to build a team slowly over a long period of time because you have to think differently. To keep people of that nature is not easy, it’s a certain type of mentality.

VO: You’re a keen student of history. Can you share some of the key lessons from the past, including any insights for the current conditions of extreme monetary policy.

KN: You don’t need to be an historian, just start with the human condition. We are all slaves to our frailties, and we have little ability to suppress those animal instincts: fear, greed, jealousy, all these weaknesses we have. When you read the literature of the 1930’s, we had all this discussion about when to tighten monetary policy, and then you had some very volatile markets. So you can find precedents in history, but you must always look for the differences. We have a big change which is globalisation, and it is more powerful now. We have a transfer of capital and technology, and a massive pool of labour in China and India that is priced at $100 a week rather than $100 an hour. You need to be careful because we’ll have a lot of labour substitution which implies that growth in the West will be lower. The gap is so huge and the biggest problem we face is this arbitrage of labour costs. Through technology, you can quickly teach people how to do things, you can automate so much of this.

VO: Older people spend less on goods and services, they don’t have babies or buy houses, while they have higher health costs. What do you think about the drag on global growth from changing demographics over coming decades?

KN: In my view, technology is more disruptive than the ageing of the population. And India and Indonesia have the opposite problem of millions of young people entering the labour force, what do they do? The challenge is expectations. We’ve had 24 years of growth in this country. We’re not prepared to make these adjustments and it will come through the exchange rate. I don’t think the exchange rate will drop right now, but our labour costs are making us uncompetitive, so there must be more reduction in the currency. Our expectations have to be reined in.

VO: Can you talk us through your views on China.

KN: China will grow slower and in our view, India will outpace it by a factor of two. China might go down to 4½% to 5%. It was spending $4 out of $10 on building for the future, capital works like bridges and roads. In China, the locals are switching from property to shares, at the same time superannuation and insurance is growing, so there is more of a market economy going into financial assets. We can still buy companies at reasonable prices but they’ve moved very quickly.

Here’s a point I can never repeat often enough. This business is not about creativity and great dreaming. It’s all about price. When the price of something has collapsed by two-thirds, as the Chinese stockmarket did until a year ago, that’s not when you get worried. It’s when it’s gone up three-fold you should be worried. When it goes down you should be delighting in the prospect. Let me labour this point. If I offered you the car of your dreams, you’d be hounding me to tell you the price. I used to be in stockbroking, and as prices went up, our clients really lusted after shares as they became more expensive. But that’s not what they’d do with their Mercedes Benz S- Class.

VO: You’ve had a lot of exposure to Japan, can we expect Japanese companies to be managed to deliver shareholder value better?

KN: This is a remarkably introverted country, but we are seeing clear evidence of the leading companies changing in the way they select directors and the focus on profit. They don’t have bad returns on sales but they always over invest. They have such social cohesion that they’ll all fall into line. The market’s around 20,000 and it’s likely to get to 25,000 and then get into trouble at 30,000 – I think it’s got 50% to go over the next couple of years. When you have a currency that falls from 75 to 120, your cost competitiveness is spectacular.

VO: What are your views on the economic outlook for Europe.

KN: The central problem is the productivity gap between the north and the south. The south can’t close the gap. There’s no central exchequer, there’s no backing of a central bank. I suspect somewhere down the line we will get into trouble again.

VO: Are you still happy to be overweight in shares and not too much in cash at the moment?

KN: It depends on your time frame. In 1939 if you owned shares in Deutschland and your cities were flattened and industrial base destroyed, it took until 1954 to get your money back. The same is true in Japan. The only places that you did not retrieve your wealth was in China and Russia because there was a regime change. So you’re talking to a junkie here, we always see the benefit of shares because of the rewards over the long history. The trouble is, most of us go to water because we do not fully comprehend that it’s the very essence of our living, our whole structure, to own these companies. To lose faith in equities, you have to believe there’s a change in the entire structure. A fundamental change in the economic management of the system. So that’s why we say it is volatile but it is the underpinnings of our living standards. Even in the worst of times, capital will migrate to the best business opportunities. It’s a constant in our system, and to lose that, you must think we’re going back to some form of central control and ownership.

Please take away from this one critical message. Price is critical. What does the price say? It’s not about the headlines, it’s what is in the price.

This transcript was sourced from Cuffelinks.

This information is commentary only (i.e. 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.

Budget brief: will I lose my age pension?

Rafal Chomik, UNSW Australia Business School

The Conversation’s Budget briefs series aims to answer reader questions about the 2015 federal budget.

The 2015 budget confirms pre-budget announcements that the government is committed to reducing the cost of the age pension, but will now do so more fairly than it had intended in last year’s budget.

Indexation plans dumped

The government had previously wanted to link the annual increase of the age pension to CPI instead of wages. Since prices grow more slowly than wages, this would have affected negatively anyone expecting to receive the pension in future.

Crucially, that policy would have lowered the safety net for those with the lowest incomes, halving its value relative to wages in the next forty years. Of the different options to reduce pension costs, this was the most inequitable. Thanks to Senate opposition it has now been abandoned. The freeze on eligibility thresholds relating to the pension will also be abandoned.

Changes to means-testing

The new proposal, to start in 2017, is to make the pension more targeted by tightening the asset test, particularly for home-owners.

As with any means-tested benefit, there are three parts: maximum benefit (i.e. the full pension), the amount of assets you can have before the pension is reduced (i.e. the asset “free area”), and the rate at which the pension is reduced as you have more assets (i.e. the taper). Income is tested separately.

The previous policy would have cut the maximum. The new proposal is to extend the free area, but to make the taper on extra assets more aggressive (see illustration) – a measure originally proposed by the Australian Council of Social Service (ACOSS).

The family home is still not counted as an asset. But as this graphic shows, people who own their own home will be affected differently to those who do not because the free area increases much more for non-home-owners than for home-owners.

Asset test changes for pensioners Data from DSS, Author provided

Who will be affected by the new means test?

You will be affected if your (non-home) assets are within the green or red asset ranges, which differ depending on relationship status and housing tenure. One consolation: the Treasurer has promised that “anyone who currently has a Pensioner Concession Card will continue to receive a concession card that provides the same benefits.”

The vast majority of older people will see no change. Those gaining and losing are part-pensioners. The Government estimates that 170,000 with modest savings are expected to gain some age pension and about 330,000 part-pensioners with more assets will lose at least some of their entitlement.

For example, older couples who own their home and have other assets between about A$800,000 and A$1.2 million are expected to lose their part-pension altogether.

Of the $2.4 billion savings to the budget created by these changes, almost the entirety is borne by changes affecting better-off home owners.

So the measure takes a step toward redressing the inequality of excluding the family home from the asset test, where someone who used their savings to buy a house is favoured over someone who uses theirs to pay rent.

The ideal policy would include the family home beyond a certain level and make better use of the Pension Loans Scheme, under which pensioners can get the age pension and eventually pay it back from the equity of their home.

While not saving as much as the previous indexation policy, the effect of a tougher asset test will build over time as Australians accumulate more superannuation savings. In future, more Australians will have assets that will reduce their age pension.

Either way, Australia would be expected to continue to spend very little on public pensions compared to most OECD countries.

Fragility of retirement incomes

The proposed policy is a fairer alternative to the indexation changes proposed in last year’s budget. That such indexation changes had any currency at all points to the fragility of the retirement income system when policy-makers focus only on sustainability. Issues remain, but at last both sustainability and adequacy are being considered.

Read more of The Conversation’s Federal Budget 2015 coverage.

Rafal Chomik is Senior Research Fellow, ARC Centre of Excellence in Population Ageing Research, UNSW at UNSW Australia Business School.

This article was originally published on The Conversation. Read the original article.

INFOGRAPHIC: The budget winners and losers

Charis Palmer, The Conversation and Emil Jeyaratnam, The Conversation

Charis Palmer is Deputy Business Editor at The Conversation.
Emil Jeyaratnam is Multimedia Editor at The Conversation.

This article was originally published on The Conversation. Read the original article.

Article from Fidelity Worldwide Investment


Greek DebtThe Greek government in April issued an emergency decree ordering local and regional governments and public agencies to hand cash to the central Bank of Greece so it could pay wage and pension obligations and make an imminent repayment to the IMF.

Such a desperate ploy only highlighted what has been obvious since Greece’s 100 billion euro (A$139 billion) default to private creditors in 2012; that bankrupt Athens, now owning debt worth 177% of a broken economy, must soon miss payments to its official creditors.

Greece and its lenders, which are mostly other EU governments, the European Central Bank and the IMF, are at loggerheads over giving the Balkan country the money it needs to meet upcoming bills. Creditors won’t agree to release some of the 7.2 billion euros still tied to the second, 2012 bailout because the new Syriza-led leftist government wants to renege on the austerity and other stringent conditions agreed to by its centre-right predecessor. The core issue is that Athens – more pointedly, the Greek population – no longer accepts the austerity that has backfired by destroying a quarter of Greece’s economy, boosted the jobless rate towards 30% and strained society, for little of the bail-out money helps Greece; it just rebounds out as debt payments. Thus the first default by a eurozone country could occur within weeks or months, almost certainly by next year. The biggest unknown is almost how controlled any default is.

The consequences of an uncontrolled Greek default to official bodies are unknowable, for Greece, Europe, the euro and the world. It’s more likely than not to lead to a Greek exit from the euro. A Greek departure from the common currency could happen slowly in various piecemeal ways or abruptly over, say, a week-long bank closure. What is more certain is that the failure of Europe’s political elite in 2010 to agree to the Lazard-designed debt write-off to private creditors that would have helped Greece bounce back has led to the ultimate dysfunction. Almost all the players in Greece’s misfortune are being forced into decisions that will ensure outcomes they want to avoid.

To be fair, it would have been hard for European authorities in 2010 to wear a Greek default that could have shaken Europe’s banking system and put taxpayers at risk to revive a country whose former government had lied about its finances. It’s more likely than not that German-led creditors will agree to give Greece enough money linked to the second bailout to stave off an immediate default. A dénouement of the Greek crisis may herald the political, economic and fiscal integration that is needed to revive Europe and ensure the euro’s future. While a comprehensive deal can almost certainly be ruled out, surely creditor nations can agree to an amicable default by Greece that their voters will back. The reality, though, is that five years of fudges (stretching maturities on Greek debt), half-steps (slashing interest rates on Greek debt) and mistakes (imposing austerity) have run their course of usefulness. The crisis has led to political shifts within Greece and across the eurozone that will make it difficult to negotiate a third bailout, when the extended second bailout expires in June, that includes a Greek default that somehow would get a country with few competitive advantages flourishing again. Investors must prepare for the probability that the Greek crisis will detonate soon enough.

Blasé investors

The Greek default in 2012 was to private creditors who agreed to write-downs so as not to trigger credit-default swaps that could have caused mayhem. Any upcoming default on the 320 billion-plus euros that Greece owes would be to public authorities that financed the first, 2010 bailout and thus assumed the risk. Greece faces about 15 separate payments before August and if any are missed taxpayers in neighbouring countries will be walloped. For years, Europe’s political elite have told eurozone taxpayers that their prosperity is not at risk from a Greek default, even though it was.

The jump in yields on Greek government debt, higher premiums on Greek credit-default swaps and the plunge in Greek stocks show that investors are pricing in a Greek default. Yields on Greek two-year bonds, for instance, were at 20.9% on April 30 compared with 7.1% six months earlier, before the snap election in January was a possibility. (Greeks went to the polls after parliament in December failed to agree on a president.)

The yields on other debt-laden eurozone sovereigns, however, are close to zero, implying no risk of “contagion” from a Greek default, even if much of that is slow acting. (Bond yields should still reflect these risks.) Investors seem assured that so-called firewalls such as the ECB’s untested and qualified lender-of-last-resort power, Europe’s rescue fund and steps towards a banking union will shield debt-heavy countries such as Italy (public debt at 132% of GDP), Portugal (130% debt to output) and Spain (98% debt to GDP). On April 30, Italian, Portuguese and Spanish two-year sovereign bonds were trading at 0.17%, 0.18% and 0.01% respectively.

This smacks of complacency even if Greece’s economy is small and few private creditors hold Greek debt. Lehman Brothers was tiny in comparison to the US economy but the company was pivotal enough to rock the global financial system, which was only steadied by radical steps by authorities. Any Greek default that is followed not long after by a euro exit could rend similar global shocks, at a time when central banks (having already cut rates to close to zero) and debt-laden governments have less ability to steady the world’s banking system.    

Bad or worse

So why are the players in the Greek calamity sticking with positions that threaten their self-interest on many levels? Mainly because politics gives them little choice.

Take the EU. The aim of ensuring peace and prosperity in Europe drove the enlargement of a united Europe, the (largely) free trade between members and the creation of the euro, often against the wishes of voters. Greece’s entry into the EU and the eurozone was a political decision by Europe’s elite whereby the conditions of entry were waived to cement the EU’s reach into the Balkans. The EU’s western spread is now under threat because Russia has reacted to Nato’s encroachment on its traditional buffer states. The EU can’t afford to lose its Balkan base and no EU official or politician would want to wear history’s blame for forcing out Greece. Yet the EU must risk a rupture with Greece to stem the rise of nationalistic political parties in Europe spawned by the debt crisis, even though it knows a Greek default will fan these anti-EU forces.

The ECB quandary is that, as one of Greece’s biggest creditors, it must for political reasons take a brutal line against Greece that boosts the risk of a default and a euro exit. Once any country leaves the euro, the irreversibility of this political project is busted forever. The monetary union just becomes a fixed-exchange-rate system and such systems rarely endure for long. The ECB, at one level, is thus threatening its own existence for it only lasts as long as the euro does. The other dilemma is that an institution that needs to set itself above politics to survive could end up being blamed for political decisions that will reverberate in Europe for decades.

The IMF is another Greek creditor that must play tough with Athens and yet that only heightens the risk of the mayhem that it is designed to control. While Greece is a humanitarian disaster in European terms, it’s a rich country on a global comparison. The IMF can’t allow Greece to default while demanding payments from the world’s poorest countries that are its wards. (The IMF won’t mind, though, if EU taxpayers wear a default.) 

The creditor nations, embodied in Germany, must press Greece for three reasons. Firstly, their populations are feeling uncharitable for they are battling economic stagnation at home. Secondly, governments are confronting populist parties that would benefit from a Greek default hitting taxpayers and damaging the credibility of the elite. Angela Merkel’s party, for instance, is losing votes on the right to the Alternative for Germany party whose first policy was for Germany to leave the euro. Finland, which is one of Europe’s worst-performing economies, has just elected a coalition that is propped up by the anti-bailout, euro-sceptic and right-wing Finns party. Languishing France confronts the rise of the anti-euro, anti-EU right-wing National Front. It typically only takes one country to torpedo agreements in Europe. The third and biggest political problem for creditor governments is that they have assured their populations that their wealth will not be squandered on Greece.

Creditor nations, however, face the dilemma that if they break Greece they could trigger two booby traps that will cost their taxpayers much more than the amount defaulted. The first stems from the eurozone’s interbank system, known as Target-2.[1] The issues with Target-2 arise because a country’s balance of payments must balance. In the absence of private investment, it has unwittingly fallen on national central banks within the eurozone to balance balances of payments via pseudo euro transfers. These transfers create liabilities for current-account debtors and claims for those running current-account surpluses – namely Germany. In case of default, the ECB would have to write off a defaulting country’s Target-2 liabilities and the cost would be shared among the eurozone’s central banks in proportion to their ownership of capital in the ECB. That’s a big hit for German and other taxpayers. While a Greek default would be bad enough (for its Target-2 liabilities are at an estimated 80 billion euros), a collapse of the euro would wipe out Germany’s wealth claims because there are no laws determining how they would be paid should the eurozone splinter.

The second trap is the threat to free trade from a Greek default. A deep concern for Germany, whose exports reach a high 50% of GDP, is that a busted Greece could resort to tariffs to protect its shrunken economy. Berlin worries that other governments under the influence of populists could adopt similar measures that would destroy Europe as a free-trade area.

Other debtor nations are pressing Athens because governments in countries such as Italy, Spain and Portugal have imposed austerity on their populations and face populist forces that would benefit if Greece were to gain debt relief. Perhaps Syriza’s biggest miscalculation since it won power in January is that it assumed the support of austerity-gripped neighbours.    

Vote threat

The Greek government is obviously the hub of the debt talks. The chief constraint on Syriza, which is a coalition that includes some radical leftist parties, is the loyalty of the Greek electorate that backed its promise to unwind austerity and implement measures such as higher minimum wages but which still favours keeping the euro. Athens can’t back down on austerity for the coalition would split and Greek voters may turn to more revolutionary parties. If talks fail to ease austerity, Athens is threatening to hold a referendum to see if Greeks would accept such an outcome. This would only add to the uncertainty surrounding Athens’ brinkmanship with the EU that is roiling Greece’s economy, turning a primary fiscal surplus into deficit by slashing government revenue and intensifying a bank run.

The bankrupt government is thus left with pursuing a strategy of risking mayhem via default or referendum to force the EU to ease austerity and abandon asset sales. But it must ensure that any default or vote does not trigger a euro exit. All the while, it is running short of cash, time and possibly public support due to the fact that its confrontational style is failing to win concessions. In theory, Athens can default to the ECB or IMF without the country leaving the euro (just as it defaulted to private creditors three years ago) but in practice it’s hard to see how it could achieve this. A missed payment to the ECB or IMF and Greece would destroy investor confidence, upset the only bodies that can backstop the Greek banking system and call into question loans from Europe’s bailout fund. Such an outcome could test the population’s capacity for hardship, a limit, which crossed, could undermine Greece’s democracy.

The numbers say that something must give in the Greek crisis. Political forces are juggling against each other to see how that comes about and how soon.

Government debt-toGDP ratios are based on gross government debt and come from Eurostat, “Provision of deficit and debt data for 2014 – first notification”, 21 April. 2015, Other financial information comes from Bloomberg unless stated otherwise.

Thursday, 07 May 2015 00:55

Australian House Prices - at the extreme

Written by

ResearchKey  points

> A  housing recovery has been a necessary aspect of rebalancing the economy through  the mining bust.

> While  Australian property prices are overvalued, this should not be a constraint on the  RBA. Expect another rate cut in May with the possibility of more to follow.

>The  medium term return outlook for residential property is likely to be  constrained.


The case for the RBA resuming interest  rate cuts this year has been fairly clear: commodity prices have fallen more than  expected; the $A has remained relatively high; while residential construction  and consumer spending are okay the outlook for business investment has deteriorated pointing to overall growth remaining sub-par; and inflation is  low. This has seen the cash rate fall to 2.25%. While the RBA left rates on  hold at its April meeting, it retains an easing bias pointing to further cuts  ahead.

However, the main argument against further  rate cuts has been that the housing market is too hot and further rate cuts risk pushing home prices to more unsustainable levels resulting in a more damaging  eventual collapse. But how real is this concern? 

Housing construction doing its part…

Economic upswings in Australia rarely start without a housing upswing. Lower  interest rates drive housing demand resulting in higher house prices which  boosts consumer spending via wealth effects and drives home building. The  latter is happening with approvals to build new homes at record levels.


  Source:  Bloomberg, AMP Capital 

…but what about overheated property  prices?

But the big debate has been whether low rates are  just fuelling an overheated property market. Its long been known that Australian housing is expensive and overvalued. 

      Real house prices have been running well above trend  since the early 1990s and are now 14% above it.  

  Source:  ABS, AMP Capital 

      According to the 2015  Demographia Housing Affordability Survey the median multiple of house prices to  household income in Australia is 6.4 times versus 3.6 in the US and 4.7 in the  UK. In Sydney its 9.8 and 8.7 in Melbourne.
      The ratios of house  prices to incomes and to rents are at the high end of comparable countries in  the OECD. 

While it's generally agreed Australian property  prices are high, the reasons for it are subject to much debate with many looking for scapegoats in the form of negative gearing and buying by foreigners  and SMSF funds. However, these don't really stack up: negative gearing has been around for a long time and while foreign and SMSF buying has played a role it  looks to be small and foreign buying is concentrated in certain areas. 

The shift to low interest rates since the early  1990s has clearly played a role. Consistent with this, the rise in price levels  from below to above trend has gone hand in hand with increased household debt.  The trouble is that other countries have lower levels of interest rates and  most have lower household debt to income ratios and house price to income  ratios. A more fundamental factor is constrained supply. Vacancy rates remain low and there has been a cumulative supply shortfall since 2001 of more than 200,000  dwellings. The main reason behind the slow supply response appears to be tough  land use regulations in Australia compared to other countries.

High house prices compared to rents and incomes  combined with relatively high household debt to income ratios suggest Australia  is vulnerable on this front should something threaten the ability of households  to service their mortgages. While this vulnerability has been around since the  house price boom that ran into 2003 – with numerous failed predictions of  property crashes! – the RBA is right to be concerned not to further inflate the property market. The renewed strength in auction clearance rates this year to record  levels in Sydney is a concern. 


  Source: Australian Property Monitors, AMP Capital 

However,  there are some offsetting factors. First, home price gains are now narrowly  focussed on Sydney. According to CoreLogic RP Data Sydney home prices rose  13.9% over the year to March. But growth across the other capital cities ranged  from 5.6% in Melbourne to -0.8% in Darwin with an average of just 1.5%. So, the  rest of the Australia is hardly strong. 


  Source: CoreLogic RP Data, AMP Capital

Second, growth  in housing debt is running well below the pace seen last decade, and there are some signs of a loss of momentum in the last few months.Investor debt is up  10.1% year on year but reached around 30% through 2003 and in the last few months has slowed to an annualised pace of 9.3%. 


  Source: RBA, AMP Capital

Finally, the RBA and APRA have pushed down the macro prudential path to contain risks around housing.Tougher APRA expectations of  banks were announced in December with the threat of sanctions if these expectations are not met.

So while the RBA is right to be mindful of the  impact of low interest rates on the property market, the concentration of the  property market strength in just Sydney, the signs of a possible topping in investor property loan growth and the heightened role of APRA indicates that  the property market should not be a constraint on further RBA interest rate  cuts. As the RBA has pointed out in the past it needs to set interest rates for  the "average" of the economy. And the "average"still points to the need  for lower interest rates as the slump in mining investment intensifies, non-mining investment remains weak, iron ore prices are down another 23% since  the February RBA cut, the outlook remains for sub trend growth and ongoing spare  capacity in the economy and inflation remains benign. This points to the need  for further rate cuts to provide a direct boost to spending and an indirect  boost via the inducement to a lower Australian dollar. Expect the cash rate to  fall to 2% in May with a strong possibility rates will fall below that later  this year.  

Housing as an investment

Over the very long term residential property adjusted for costs has provided a similar return for investors as Australian shares. Since the 1920s housing has returned 11.1%  pa compared to 11.5% pa from shares. See the next chart. 


  Source: ABS, REIA, Global Financial Data, AMP Capital  Investors

They also  offer complimentary characteristics: shares are highly liquid and easy to diversify but more volatile whereas property is illiquid but less volatile. And share and property returns tend to have low correlations with each other so  including both offers diversification benefits. As a result there is a case for  investors to have both in their portfolios over the long term. 

In the short  term, low interest rates point to further gains in home prices. However, this is likely to be constrained by the economic environment and the impact of  tougher prudential scrutiny of bank lending by APRA. Over the next 12 months  home price gains are likely to average around 5%, maybe a bit stronger in  Sydney and Melbourne (key beneficiaries of the post mining boom rebalancing) but staying negative in Perth and Darwin (as the mining bust continues). 

The residential property outlook for the next 5-10 years though is messy. Housing is expensive on all metrics and offers very low rental yields compared to all other assets except bank deposits and Government bonds. The gross rental yield on housing is around 2.9% (after costs this is around 1%), compared to yields of 6% on commercial property and 5.7% for Australian shares  (with franking credits). See the next chart. 


  Source: Bloomberg, REIA, AMP Capital

This means that the income flow an investment in housing generates is very low compared to shares and commercial property so a housing investor is more dependent on capital growth to generate a decent return. So for an investor, these other  assets continue to represent better value.

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

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Thursday, 30 April 2015 12:43

Sonic Healthcare - the investment case

Written by

We discuss the investment case for Sonic Healthcare, a global pathology provider with Dan Moore (analyst Investors Mutual).  With the ageing of the population, thematically healthcare seems like a good investment.





Transcript of Podcast


Mark Draper: Here with Dan Moore, Investors Mutual analyst and we are talking about Sonic Healthcare which is a pathology operator that most people would know as Clinpath. That is an Adelaide name and is different interstate. Dan can you give us a flyover view of Sonic Healthcare and what they do and where they are located, I think is most interesting.

Dan Moore: Sure. Thanks Mark. Sonic Healthcare is really a global pathology planner and that they operate in a number of countries around the world. They have substantial earnings in Australia but they also, and they are the biggest pathology planner in Australia but they are also the largest player in Germany which they have a very significant operation. They are the largest player in the U.K. They are the largest player in Switzerland and close to the largest in Belgium and they are number three in the U.S. so they are quite a big global player. They also own a small radiology business in Australia and a medical centre business in Australia which I think is also the largest as well so globally diversified, diagnostics company but mainly pathology and they like to be and their strategy is to be the largest player in whatever geography they operate in.

Mark Draper: And in terms of management team, I think one of the features of Sonic, you have had a very stable management team Colin Goldschmidt has been there forever and the strategies have been in place forever. Can you talk through just a little bit of what their strategy has been in the last ten to fifteen years?

Dan Moore: Sure. Their strategy, as I said before, is to be the largest player in any market they operate in and they have achieved that through consolidating a number of markets over twenty years and they started doing that in Australia where pathology was a cottage industry and the benefits of consolidation and why this is the strategy that they tried to achieve is pathology is a fixed cost business. If you are the largest player, you will have the lowest cost base per test and it is quite synergistic if you own your own lab and then you can buy another lab and bring the pathology volume from that lab into yours and then effectively shut down the other lab. It is very synergistic to earnings and it delivers a lot of cost savings and they have done that very successfully in Australia. They have done it very successfully in Germany. They are starting to be quite successful in the U.K. and in the U.S they are number three so in the U.S they are getting there but that has been the strategy and when you are the largest player, it also allows you to deal with any government funding cuts that happen from time to time. If you are a small player, you know, those funding cuts can put you out of business but if you are the largest player who can survive any cuts, it allows you the opportunity to buy out the smaller players at cheap prices when they are really struggling. So that has been the general strategy for over twenty years executed by Colin and Chris, the CEO and the CFO, they have been there well over twenty years. It has been quite a big success story in Australia.

Mark Draper: So consolidation is part of cost cutting story, the other side of it and most people will relate to the aging of the population and a health care player like this, can you give us any feel for the growth in pathology tests and revenues and the flip side of the cost-cutting story?

Dan Moore: Sure. Yeah, no it is definitely one of the other benefits of pathology is being a diagnostics service. It can save you money through the health care system. If you diagnose diseases earlier on, it can save you a lot of money so if it is something that has been new tests are always, there is a lot of result done to develop new tests to diagnose diseases earlier and Sonic is a beneficiary of that so you can see new tests are always being develop, that’s one, and then with an aging population, obviously you have a higher prevalence of disease as you age so they are also a beneficiary of that so volume growth of pathology tests, you know, through a long period of time has grown at five to seven percent compound for a very long period of time and Sonic’s revenue should have approximated that before any acquisitions with some year to year volatility if there are funding cuts.

Mark Draper: So it is a nice space to be, you just have to be careful of government funding risks that we mentioned before. Dan thanks for that. Thanks for the helicopter view of Sonic and I appreciate your time.

Dan Moore: Thank you.


This information is of a general nature only and neither represents nor is intended to be personal advice on any particular matter. We strongly suggest that no person should act specifically on the basis of the information contained herein, but should obtain appropriate professional advice based upon their own personal circumstances including personal financial advice from a licensed financial adviser and legal advice. Fortnum Private Wealth Pty Ltd ABN 54 139 889 535 AFSL 357306

Thursday, 30 April 2015 12:39

Why do we like Origin Energy

Written by

We recently met with Dan Moore - analyst from Investors Mutual to discuss Origin Energy.

In this podcast we discuss the reasons why Origin Energy is attractive to investors.




Transcript of Podcast


Why do we like Origin Energy?

Mark Draper: Here with Dan Moore, analyst at Investors Mutual. Thanks for joining us.

Dan Moore: Thanks Mark.

Mark Draper: And today we are talking about Origin Energy which is an energy retailer in Australia and what people don’t know is that they are building a LNG plant in Queensland, so Dan what is the attraction of this business to you guys when you look at it from an investment perspective?

Dan Moore: Sure thanks Mark, what we like about Origin is it sort of has two parts to the business. The first part, as you said, is sort of utilities business which evolves power generation and its electricity retailing business. That business is quite a stable business, it is a business that has been stable for a long period of time. That business makes about sixty five cents per share of earnings which funds their dividends so they pay about fifty cents dividends every year and have for a number of years and we can see that going forward for quite a long period of time. At the current share price, it is close to a five percent yield so when you are buying it today, you are getting a company which can pay a five percent yield sustainably. Then the sort of I guess the upside is the LNG business. And APLNG is what it is called and it is a massive LNG project in Gladstone. Origin spent eight billion dollars and they earned thirty-seven and a half percent of the project so that is a big project and that is not delivering any earnings at all today. In two years the business will earn about sixty five cents based on our assumptions for oil price and currency which is about seventy five cents Aussie dollar and about sixty five dollars for oil. The current oil price is high fifties so we sort of see at the moment we get a company which is almost paying a five percent yield based on the existing based business but in two years, you know that yield, maybe not double, but go up over fifty percent, you know, based on relatively conservative oil price assumptions and currency assumptions so we see we get a bit of both. We have got some stability and then some upside from this new project.

Mark Draper: And in terms of the oil price, if the oil price was to go above sixty five dollars because there are some in the marketplace who believe the medium term oil price will go to closer to one hundred, what are the upsides you are talking about then if the oil price goes above sixty five?

Dan Moore: Yes, it is a very good question and because the project has a lot of fixed costs, the leverage is quite significant. It almost, I have got some assumptions and some sensitivities here between sixty dollars a barrel of oil and eighty five, the earnings is double so for every twenty five dollar increase in oil the earnings from APLNG will actually double so the upside is significant. Leverage can work both ways but we sort of feel, with our assumptions of around sixty five to sixty dollars a barrel, we think that is a conservative assumption where they can make good money. The upside is free and it will be great if it happens but using conservative assumptions we still think it is really cheap.

Mark Draper: And finally what do you think are the major risks of that stock at the moment as things stand at the moment but with respect to balance sheet and any other things that you can see.

Dan Moore: I guess that short term oil price volatility, you know, could see the stock bounce around a little and probably the other risk is the ramp up of the LNG plant. Sometimes in the commissioning phase there are some risks but with this sort of plant, our analysis shows it is relatively low risk. The operator Conoco Phillips has done this many times before, they are an experienced operator and while it is a risk, we are relatively comfortable with where the company is.

Mark Draper: Dan, thank you for that, for the fine review of Origin Energy. Thanks for your time.

Dan Moore: Thank you.



This information is of a general nature only and neither represents nor is intended to be personal advice on any particular matter. We strongly suggest that no person should act specifically on the basis of the information contained herein, but should obtain appropriate professional advice based upon their own personal circumstances including personal financial advice from a licensed financial adviser and legal advice. Fortnum Private Wealth Pty Ltd ABN 54 139 889 535 AFSL 357306