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Friday, 20 May 2011 15:20

Investing is a rising inflationary environment

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The Reserve Bank has a formal inflation target in place and most investment commentators regularly talk and discuss the threat inflation may have on investors.  This article explains why inflation should be considered by investors and some tips on protecting an investment portfolio in a rising inflationary environment.

For many years there have been deflationary pressures, particularly from 1. an increasing Australian dollar which lowers the cost of imports, and 2. cheap Chinese labour (translating to cheap imports).

In the past 12 months, Chinese wages have increased 30% for average workers, while Chinese construction workers have received about 100% wage increases (source Platinum Asset Management).  Food and energy shortages around the world are also putting upward pressure on prices of basic essentials for daily living.  We believe that the days of deflationary pressures are over for now.

Why is this important?

Consider a business that sells widgets.  It sells 1,000 widgets for $100 each, while the cost to produce the widgets is $50 per widget.  The gross profit for this business is therefore $50,000.

If however the cost to produce widgets due to rising energy prices, increased wages etc goes up to $60, the gross profit falls 20% to $40,000.  Of course the business could raise the sale price of widgets to protect their profits, or sell more widgets if the market will bear, but this is easier said than done. So inflation hurts business profits (read share prices) as well as making the cost of living higher.

What typically happens to interest rates when inflation rises?

History suggests that when inflation rises, interest rates rise.  Below is a chart sourced from the Reserve Bank of Australia that shows the movements of inflation (top part of the chart) and interest rates (referred to as cash rate in green line) over the past 25 years.  You can see how they move closely together.

With these points in mind here are some simple techniques to help you inflation proof your portfolio:

Share Market Investments

Seek to invest in companies that have the ability to pass on price increases to their customers.  These companies typically have the following attributes:

  • Well recognised brand and a dominant market position  (meaning they can pass on increased costs)
  • Management with experience from previous inflationary cycles

If using managed funds, ensure that the fund manager responsible for investment selection is on top of the threat of global inflation.  Evidence of this could come in the form of commentary from the fund manager in recent communications.  Your adviser could also have direct contact with the fund managers’ investment personnel and can confirm this for you as well.

Fixed Interest Investments

Exercise extreme care when investing in long dated fixed interest investments.  Consider an investor who invested $100,000 into a 10 year bond paying 5% interest.  Interest received is $5,000pa.  If interest rates rose to 10%, in order to receive $5,000 of interest the investor would only require $50,000 of capital.  The point here is that if this investor wished to sell their 10 year bond, before the 10 year period was due, it would be unlikely that they would receive anywhere near $100,000.  It is possible to lose capital in fixed interest investments in a rising interest rate environment.

Instead, look at fixed interest investments that are linked to interest rates.  So as interests rates go up, the payment received goes up as well.  Your financial adviser can help you with investments that have these characteristics.

Other suggestions

Property (particularly commercial property) can provide protection in an inflationary environment as lease agreements normally contain an inflation adjustment each year.

Infrastructure investments such as toll roads also contain clauses in the legal agreement, where the toll paid by consumers is increased by inflation each year.

Talk to your adviser to ensure that your portfolio is prepared for the threat of a global inflationary environment.

Thursday, 19 May 2011 21:20

Safe As Houses???

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How would Australians feel if the house that they bought in 1979 was worth almost 10% less today?  It’s fair to say they wouldn’t be too happy.  But this is the scenario that homeowners in the United States, who are experiencing the effects of plummeting wealth, are putting up with.  From 1991 to 2005, US house prices rose at a rapid rate but, adjusted for inflation, prices are now almost 40% off their peak, or roughly US$100,000.  Those who stumped up to buy a house in 1979 are now down about 8.5% - and that’s more than three decades later.

Jeremy Grantham, who is a well respected Investment Analyst from GMO suggests that the Australian property market is well and truly overvalued, when compared with rental income yields, long term historic averages and relative to incomes in Australia.

 

 

Saturday, 07 May 2011 11:52

Superannuation and the Co‑contribution Scheme

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One government incentive to increase our retirement savings is the super co-contribution scheme – the government will contribute $1 for every $1 you personally contribute, up to $1,000. The information below will help you find out if you can use the co‑contribution scheme to boost your retirement savings.

What is the co-contribution scheme?

If your income is less than $31,920, the government will contribute $1 for every dollar you personally contribute, up to a maximum of $1,000. If you earn between $31,920, and $61,920, the government will contribute an adjusted amount.

Who is eligible?

To qualify for the co-contribution you have to meet the following criteria in the financial year:

• receive an assessable income of less than $61,920;

• make a personal contribution to your superannuation account out of your after-tax income;

• receive 10 per cent or more of your total income from employment or carrying on a business or attributable to activities that result in the person being treated as an "employee" for superannuation guarantee purposes, or a combination of both;

• lodge an income tax return; and

•be less than 71 years of age at the end of the financial year.

Only personal contributions from your after-tax income qualify for a co-contribution. Superannuation payments from your employer and contributions for which a tax deduction has already been claimed (for example under a salary sacrifice arrangement or if you are self-employed) are not eligible.

What are the current levels of co-contribution payable?

The maximum co-contribution that will be made by the government is $1,000, and is available if you have an assessable income of less than $31,920 a year. The maximum co‑contribution is reduced at a rate of 3.33 cents in the dollar if you have an income of between $31,920 and $61,920.

The following table highlights the level of co-contribution the government will make to superannuation, if you make a personal contribution of $1,000.

Income                         Co-contribution

$31,920 or less         $1,000

$35,000                       $897

$40,000                       $731

$45,000                        $564

$50,000                        $397

55,000                            $231

$61,920                          $0

How to apply for the co‑contribution If you qualify for the co-contribution payment, you don’t need to apply. The only actions required from you are to make the extra contribution to your super fund before 30 June and lodge an income tax return. The Australian Taxation Office (ATO) will work out if you are entitled to a co-contribution using information from your tax return and your super fund. If you are eligible, the ATO will then pay the co-contribution directly into your super account where it must remain until you retire. You need to supply your super fund with your tax file number so it will be easier for the ATO to link your personal contribution to your taxable income.

If you feel that you qualify and no payment has been made, you should contact the ATO to find out what has happened.

When will the co-contribution payment be made?

The ATO anticipates that the co-contribution will be paid late in the year. The ATO firstly has to collect information from your super fund about contributions (due 31 October). The ATO also has to wait until you lodge your tax return before they can determine if you are eligible.

Remember you must make your personal super contributions before 30 June to be eligible for a co‑contribution within the current financial year.

The government’s co-contribution scheme is a great incentive to grow your super savings. If your own salary is above the threshold, consider boosting the super of someone in the family who works part time such as your spouse or child. Take full advantage of this scheme if you can.

The co-contribution scheme at a glance

What is it?

The government will make super contributions (up to a maximum of $1,000) for low-income earners who make personal super contributions.

To be eligible you must:

  • receive income of less than $60,342;
  • contribute to super (from post-tax income);
  • receive 10 per cent or more of your total income from employment or carrying on a business;
  • be under 71 years of age; and
  • complete an income tax return.

How much will be paid?

An amount up to $1,000 (if income less than $31,920). An adjusted amount, if income less than $61,920.

When will I receive the money?

Late in the year.

How do I apply?

You don’t need to apply. Make a contribution and the ATO will deposit the co-contribution automatically.

Note: Advice contained in this flyer is general in nature and does not consider your particular situation or needs. Please do not act on this advice until its appropriateness has been determined by a qualified adviser.

For more information about the co-contribution scheme or to arrange a no-cost, no-obligation first consultation, please contact the office on 08 8273 3222.

Website:  www.gemcapital.com.au

Blog Website:  www.investmentadviceadelaide.com

Saturday, 07 May 2011 11:29

Save Tax With Dividend Imputation

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Saturday, 07 May 2011 11:22

The Investment Opportunity in Soft Commodities

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Soft Commodities are commodities that are grown not mined, and they include:
• Coarse grains, such as corn, wheat and barley
• Specialty products such as coffee, cocoa, sugar and palm oil
• Proteins such as beef, pork, chicken and fish
• Forestry products

The global soft commodity sector is experiencing a structural change predominately driven by growing demand from the developing world and constrained supply. The important question from an investor’s perspective is: how can I benefit from this trend? The answer we believe, is that superior investment returns can be made from investing in companies that are able to grow volume to meet this demand.

The rising long term demand for soft commodities is being driven by 3 factors:
1. Population Growth – United Nations is forecasting 40% population growth by 2050
2. Rising Living Standards – increasing wealth per capita in emerging economies is resulting in shifting patterns of food consumption and a rise in demand for grain and other soft commodities

At the same time, supply of soft commodities is being constrained by:
1. Falling arable land per person
2. Slowing productivity gains
3. Water – is currently being consumed above its replacement rate
4. Climate Change

Any time where there are large imbalances between supply and demand of commodities, an interesting investment opportunity exists. This is a very difficult theme to play within Australia as the companies exposed to this sector are relatively small by world standards.

There is a comprehensive 8 page paper available from GEM Capital that further explores one way of investing in this sector. If you would like a copy of this report please contact us by either phoning (08) 8273 3222 or via email on This email address is being protected from spambots. You need JavaScript enabled to view it.

Thursday, 14 April 2011 17:10

Maximsing Age Pension

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Wednesday, 13 April 2011 22:44

Advice On Income Protection

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Monday, 11 April 2011 22:15

Political Risks of Investing in Australia are Rising

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July 2011 is shaping up as a pivotal moment for the Frankenstein Government (unrelated parts cobbled together) that has been installed in Australia.  This is when the balance of power in the Senate will shift and the balance of power held by the Greens.

We have seen the Greens attempt at banking reform policy already which must have been taken from a text book from around the same era as their industrial relations policy.

On top of this we have witnessed the debacle surrounding the resources tax, the introduction of the notion of a carbon tax and of course the NBN which is becoming more and more intriguing with every resignation from senior NBN management.

Banking Reforms and the Telstra Bill are other examples of Government intervention over business.  Robert Gottliebson recently wrote an article on how Australian business is being attacked by the Gillard Government which can be found at http://www.businessspectator.com.au/bs.nsf/Article/Gillard-government-business-reform-politics-pd20110404-FKT6M?OpenDocument&emcontent_Gottliebsen

 

Our point here is that the political landscape has changed materially in Australia and 2011 could well see the political risks of investing in Australia rising further.  Business investment thrives on certainty.  With the high Australian Dollar and the uncertainty of the political scene in Australia there are some signs that International investors are putting their money elsewhere rather than investing in Australia.

There are good reasons to have investments spread geographically outside of Australia given the current political environment, not to mention the high Australian Dollar which leads us to our view to invest part of an investment portfolio internationally.  There are some excellent fund managers who are investing in leading global companies that are taking advantage of buoyant economies in emerging companies.  On our website there is an excellent presentation from Magellan Financial Group outlining this in more detail – check it out at www.gemcapital.com.au

 

Regards

Mark Draper  CFP, Dip FP

Authorised Representative

GEM Capital Financial Advice

Last weekend, Bill Shorten (Assistant to the Treasurer) stated that he does not support the creation of a Sovereign health Fund for Australia.

Firstly I searched on Wikipedia to come up with a definition of a Sovereign Wealth Fund and here is the result:

“A sovereign wealth fund (SWF) is a state-owned investment fund composed of financial assets such as stocks, bonds, property, precious metals or other financial instruments. There are two types of funds: saving funds and stabilization funds. Stabilization
SWFs are created to reduce the volatility of government revenues, to counter the boom-bust cycles' adverse effect on government spending and the national economy. Savings SWFs build up savings for future generations.”
Australia is currently enjoying is highest level of national income for decades courtesy of the mining boom. Some in the Reserve Bank and many leading business people are calling for Australia to establish a Sovereign Wealth Fund to save some of the money that the country is making from its resources boom while commodity prices are high and put it aside for the time when the commodity boom subsides.
Put simply the idea of a Sovereign Wealth Fund is putting money aside for a rainy day as the old cliché goes. Instead it seems that the current Government wants to spend additional revenue earned during the boom times and assume that the commodities boom and current income will last forever. I fear that when the resources boom subsides, that Australia will have little to show for it.
What is even more disturbing is that Bill Shorten was quoted as saying that he didn’t think Australia needed a Sovereign Wealth Fund as we already have one in the form of Superannuation. With all due respect, Bill’s statement here is rubbish. Last time I looked at my superannuation statement I didn’t see any reference to my savings being used to reduce the volatility of government revenue.
While clearly criticising the ALP’s view on a Sovereign Wealth Fund here, it must be remembered that I also publicly criticised the Coalition’s stance on Banking policy last year. The purpose of this article is to encourage Australian’s to support a sensible and
informed debate on important issues such as the establishment of a Sovereign Wealth Fund rather than tolerate the daily rhetoric of trash that is currently coming from Canberra.
The views in this article are my own personal opinions, produced for the interests of the future well being of Australia and do not reflect the views of the dealer group.
Mark Draper