Key points

- The past financial year saw solid to strong returns from most asset classes drive good returns from balanced and growth oriented investment strategies, including from super funds. 

- Investors should expect returns to slow over the year ahead, but they are likely to remain solid as share valuations are still reasonable, the global economy continues to grow, the Australian growth outlook improves and monetary conditions remain easy.


The past financial year saw another 12 months of strong returns. Returns of around 20% from shares, solid returns from property assets and good returns from bonds saw balanced growth superannuation funds return around 13% on average. This was the second year in a row of double digit gains. By contrast the return from cash was poor and average 12 month bank term deposits returned less than 4%.

Source: Thomson Reuters, AMP Capital

As always there has been plenty to fret about, including:

  • The mid 2013 "taper tantrum" in the US, with investors fearing the Fed's decision to start winding down its quantitative easing program would threaten the US economy and shares;
  • The US Government shutdown and debt default worries in October and the March quarter economic contraction;
  • The slow recovery and deflation worries in Europe;
  • Fears of a sales tax hike driven recession in Japan;
  • Another bout of hard landing worries regarding China centred on the property and shadow banking sectors;
  • Worries about the impact on emerging countries of Fed tapering;
  • Geopolitical worries regarding Syria, Ukraine and Iraq;
  • Ongoing worries as to how Australia will fare as the mining boom fades and whether the May Budget will worsen the economic outlook; and
  • The last six months has seen intensifying concerns that share markets are set for a fall.

But these concerns were offset by a range of factors:

  • A continuing improvement in the global economy;
  • The Fed's tapering has clearly been contingent on improving growth with a rate hike still a fair way off;
  • Further easing measures by the European Central Bank;
  • Little global economic damage from geopolitical risks;
  • Continuing record monetary stimulus in Japan;
  • A stabilisation in Chinese economic growth helped by various mini-stimulus measures;
  • No sign of capital flight from emerging countries and election optimism regarding India and Indonesia; and
  • Okay growth in Australia helped by low interest rates.

This has all seen growth assets boosted by a reasonable growth and profit outlook and bonds helped by continued easy monetary conditions. The latter has also seen an ongoing search for yield by investors. With shares no longer dirt cheap its likely returns will slow – indeed they have over the last six months. However, the cyclical bull market in shares likely has further to go. This along with reasonable returns from property assets should underpin further gains in diversified investment portfolios over the year ahead.

Equity valuations – ok

After strong gains through 2012 and 2013 shares are no longer dirt cheap. However, as can be seen in the next chart valuation measures (which are based on a range of measures including a comparison of the yield on shares with that on bonds) show shares are not expensive.

Source: Bloomberg, AMP Capital

Cyclical bull markets in shares invariably see three phases. First an unwinding of cheap valuations helped by low interest rates. The second is driven by stronger profits. And the third phase is a blow off as investor confidence becomes excessive pushing shares into expensive territory. Our assessment is that we are still in the second phase and as such the cyclical/profit backdrop remains critically important.

The economic cycle – slow improvement

We are still in the sweet spot of the global economic cycle. Growth is on the mend but only gradually such that spare capacity and excess savings remains immense so inflation remains tame, monetary conditions easy and bond yields low. In fact the March quarter growth soft patch seen in the US, Europe and China was more positive than negative because it wasn't threatening but further pushed out the timing of any monetary tightening. By region:

  • After a contraction in the March quarter driven by mostly temporary factors, the US economy is continuing to improve and looks on track for circa 3% growth. The jobs market and business investment are improving and shale oil boom is providing a long term boost both directly and indirectly via cheap electricity costs for business.
  • Growth has returned to Europe. Ireland and Portugal have emerged from their bailout programs and structural reform seems to be on track. But growth is far from robust, inflation too low and uncertainty around the banks is likely to linger till later this year after the completion of the ECB's bank asset quality review. All of which means continuing recovery but ongoing need for ECB support.
  • Japan appears to be weathering its sales tax hike well, with ultra easy money and economic reforms providing confidence growth will continue.
  • Chinese growth looks to be on track for around 7.5% helped by various mini-stimulus measures.
  • Emerging world growth generally isn't as strong as it used to be but it looks to be stabilising around 5%.

Reflecting this, the global manufacturing conditions PMI is at levels consistent with good, but not booming global growth.

Source: Bloomberg, AMP Capital

This suggests global growth is likely to pick up a notch which should underpin a modest improvement in profit growth.

In Australia, while the mining investment slowdown, the impact on confidence from the May Budget and the too high $A pose a short term threat, underlying growth is likely to have picked up to a 3% pace by year end and continue through next year helped by a housing construction boom, a Senate induced softening in some of the harsher aspects of the Budget and strength in resource export volumes.

Monetary conditions to remain easy

When the Fed will start to raise interest rates and reverse its QE program has been a constant source of speculation. While such speculation may intensify over the next six months – resulting in bouts of volatility for investment markets – global monetary conditions are set to remain easy:

  • The tightening US jobs market indicates the first rate hike in the US is coming on to the horizon. But continuing high levels of excess capacity indicate it may still be 9-12 months away and will be a gradual process when it starts. In other words it will take a long time before US monetary policy is tight – with above "normal" interest rates and short term rates being above long term rates.
  • The ECB has only just eased monetary policy and has signalled it stands ready to do more, including via a quantitative easing program, if deflation risks don't recede. Rate hikes are well over the horizon.
  • Unprecedented quantitative easing in Japan will continue until underlying inflation is firmly ensconced around 2% and there is still a way to go. Rate hikes are not in sight.
  • In Australia, the RBA is not expected to start raising rates till sometime next year. And as the Fed is likely to go first, the Australian dollar is likely to resume its downtrend.

While there will be a few bumps regarding the Fed (just like last year's taper tantrum) the monetary backdrop is set to remain supportive for investment markets.

Investor sentiment a long way from excessive

We remain a long way from the sort of investor exuberance seen at major share market tops. It seems everyone is talking about share market corrections and crashes and tail risk hedging seems all the rage. In the US the mountain of money built up in bond funds during the post GFC "irrational exuberance for safety" has yet to really reverse.

Source: ICI, AMP Capital

And in Australia, the amount of cash sitting in the superannuation system is still double average levels seen prior to the GFC and Australians continue to prefer bank deposits and paying down debt to shares and superannuation. There is still a lot of money that can come into equity markets as confidence improves.

Source: Westpac/Melb Institute, AMP Capital

Concluding comments

After a bout of relatively smooth sailing there will inevitably be a correction at some point. There are plenty of possible triggers: geopolitical risks, the risk of an inflation/Fed rate hike scare, deflation in Europe, the property slowdown in China and in Australia the transition to more broad based growth. However, while investment returns are likely to slow, still reasonable share valuations, gradually improving economic conditions, easy monetary conditions and a lack of excessive optimism suggest further decent investment returns ahead.

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

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

- See more at:

Wednesday, 16 July 2014 11:10

Rotation out of Term Deposits - still yet to occur

Written by

Following the GFC - the value of term deposits held by Australian investors reached record highs as investors redeemed money from more volatile investments to move into safe havens.

Some commentators have suggested that the recent rise in the Australian share market is as a result of money being withdrawn from term deposit and invested into the share market.  We did not sense that this commentary was true - but can now confirm this with statistics.

Below is a graph showing the value of term deposits in Australia on the left hand graph.  It is clear that the record value of term deposits has stabilised, but not materially decreased over the past 12-18 months, despite low interest rates and good returns from share and property markets.

The graph on the right hand side shows whether term deposits are increasing or decreasing (increasing if above 0 and decreasing if line is below 0)

Further downward pressure on term deposit rates seems likely given the lower refinancing costs in International funding markets, which means banks are again able to fund their loan books at a lower cost through Wholesale funding, rather than relying on term deposits.  Now that Term Deposit rates generally have a "3" in front of them it will be interesting to see how investors react.  Anecdotally, we believe we are at the beginning now of investors starting to rotate out of term deposits to obtain a higher rate of return.

Term Deposits - June 2014 




Tuesday, 17 June 2014 09:07

China Growth Slowdown underway

Written by

(an update from Sam Churchill - economist Magellan Financial Group)


Great Wall of ChinaChina’s extraordinary economic growth of recent decades has been driven by the mass mobilisation of rural labour, huge capital investment, low-cost manufacturing exports and the acquisition of foreign technology. However, in recent years, a number of imbalances have been developing that pose risks to the country’s stability. Since the GFC, China has experienced an unprecedented expansion of credit, from around 140% of GDP in 2008 to over 200% of GDP in 2014. Meanwhile, it has experienced a property construction boom that has shifted its housing market from structural undersupply to oversupply, with millions of properties now lying vacant.

Credit growth

The Chinese financial system comprises a traditional banking system of state-controlled banks and a shadow banking system made up of investors, borrowers and unregulated financial intermediaries. The traditional system is highly regulated and credit creation within it is tightly controlled by the government. However, rapid credit creation in the loosely-regulated shadow banking system is of particular concern. Shadow lending has grown to approximately 70% of GDP and now accounts for most of China’s new credit, which is expanding at a rate of around 15% of GDP per year.

Credit expansion has been concentrated in 3 main areas:

  1. Corporate borrowing makes up the majority of new credit creation, particularly by state-owned enterprises. China’s corporate sector is among the most heavily indebted in the world, with corporate credit having risen from around 90% of GDP in 2008 to around 125% of GDP in 2013.
  2. Household borrowing remains low compared to other countries, but the pace of recent growth has been quite strong. Household debt, most of which is mortgage-related, has risen from around 11% of GDP in 2008 to around 20% in 2013. The ratio of household debt to disposable income has doubled between 2008 and 2013.
  3. Provincial government borrowing makes up a large proportion of new government borrowing which has been undertaken to fund construction of infrastructure, property and local enterprises. Provincial government debt has risen from around 27% of GDP in 2010 to around 33% in 2013, according to a recent audit.

China’s shadow banking system is comprised of opaque financial instruments, such as trusts and Wealth Management Products (WMPs), sold as deposit-like products to investors hoping for higher rates of return than are available in a Chinese bank account. These products provide equity and debt capital to Chinese corporates, local government financing vehicles (LGFVs) or other financial instruments on unknown terms. Investors are generally unaware of the underlying exposures. Most WMPs have short-term maturities, which could lead to a systemic liquidity problem in the event of defaults and an investor run.

The extent of moral hazard in China’s financial system adds to such concerns, with many investors relying on an implicit guarantee from the central government in the event of counterparty default.

A recent run on a small rural Chinese bank demonstrates the vulnerability of the financial system to changing investor sentiment, as well as the likely response of the government. In this case the PBOC (People’s Bank of China) quickly came to the rescue to restore order to the local financial system.

Not all credit booms end in economic crisis. According to a 2012 IMF paper around 23% of credit booms are followed by a financial crisis and economic underperformance. China is no stranger to banking crises but these have been typically well managed. In the late 1990s, non-performing loans (NPLs) at Chinese financial institutions rose to well over 20% before government-backed Asset Management Companies took over the debt to recapitalise the banking system. Reported NPLs of Chinese banks are currently low, but are likely understated.

China’s domestic debt levels significantly exceed those of its emerging markets peers, but generally remain below the levels of advanced economies. However, the pace of recent credit growth is of greater concern as it may reflect the misallocation of capital towards unproductive investments, low credit standards, and generally unsustainable spending growth. A material portion of recent credit growth may be related to the rollover of existing debts rather than real economic activity.

Property market

Following the privatisation of the housing market in the late 1990s, China has rapidly become a nation of property owners, with approximately 80-90% of households owning at least one property. At the same time property development has become a major industry. In 2007, the country was constructing around 1.5 billion square metres of gross residential floor space per year (or 15 million housing units) to support urbanisation, replace demolished old housing stock and to meet the upgrading and investment needs of Chinese households. During the GFC property market restrictions were loosened considerably, driving up prices and increasing speculative investment. Growth in land sales by local governments and construction by developers followed suit, and the annual residential construction rate reached 2 billion square metres in 2013. This rate of construction equates to at least several million more units of housing than new households being formed, a story analogous to recent construction booms in the United States, Spain and Ireland.

Most of China’s excess housing supply is thought to be vacant stock held by private investors, with the remainder sitting on the books of real estate developers, many of whom are highly indebted. There is also a serious geographic mismatch between housing supply and demand. Tier 1 cities such as Beijing and Shanghai generally suffer from housing shortages, while Tier 3 and 4 cities hold most of the excess supply. Another problem is the lack of affordable housing available for migrant workers who account for most of new urban household formation.

The risk is that the build-up of unoccupied properties held by developers will result in a major contraction of construction activity. Developers that have borrowed from shadow banks may default if their properties remain unoccupied or unsold. A fire sale could lead to large falls in prices and result in huge capital losses, rendering developers insolvent. Furthermore, investors may choose to dump some or all of their property holdings to mitigate losses, exacerbating any downturn. Interest rate liberalisation, the opening up of capital markets and availability of alternative investments (e.g. WMPs) could also undermine faith in the property market. Real estate accounts for around half of household wealth in China so there could be meaningful wealth effects on consumption; however the threat of negative equity for households appears low given limited mortgage debt.

What does this mean for markets?

Although there are a number of reasons to be optimistic about China’s long-term economic future, the short-to-medium term challenges are considerable.

To run down current excess residential property supply it is possible that China’s residential property construction activity could fall by as much as 50%. With housing construction representing around 9% of GDP this would cause a major slowdown in the economy and perhaps even a recession. There are signs that the rate of urbanisation may be slowing, and the Chinese leadership will be hoping that the housing adjustment can be managed gradually, alongside offsetting economic stimulus measures and orderly defaults. A ramp up in social housing initiatives is likely to form part of the solution, while helping to maintain positive sentiment.

China’s ongoing push to reign in excessive credit growth and liberalise financial markets risks creating a credit event somewhere in the shadow banking system. This could be linked to the property market or LGFVs. Although a major growth slowdown was avoided during China’s financial crisis of the late 1990s, the shadow banking system may prove a lot more difficult to control, especially since products such as WMPs are complex and involve millions of retail investors. Recent defaults by trust products and corporate bonds, as well as changes to lending regulations, are prime examples of such moves.

The Chinese government has a number of tools it can use to deal with any crisis, with combined central and provincial government debt relatively low at 56% of GDP. It can stimulate the economy or nationalise a large share of the debt if systemic problems arise, as the debt is domestically held, RMB denominated and issuance is fully controlled by the government itself. Notwithstanding recent moves to internationalise the RMB and open the country’s capital account, China’s economy remains relatively closed and the financial system remains fully funded by domestic deposit holders. A large domestic debt problem is more manageable than a large external debt problem, as the economy is less vulnerable to capital flight. Furthermore, the country’s huge foreign exchange reserves and current account surplus make it highly resilient to external financial shocks.

It is possible that we could see a larger-than-expected slowdown in China’s economy in the years ahead. This would have major effects on countries to which it has trade and financial links. Commodity exporters such as Australia and Brazil would be particularly vulnerable, as would emerging economies in Asia, Japan and Germany. Financial links between Chinese and Hong Kong or Singaporean banks could be channels for the international transmission of a Chinese financial shock. Furthermore, capital repatriation by Chinese investors could hit property markets in Canada, Australia, the UK and Hong Kong, while any move by China to sell its foreign currency reserve holdings could also lead to global asset price volatility, including a spike in US Treasury yields.

China is entering a period of heightened risk and uncertainty as it attempts to address some key systemic risks. As a major driver of global growth, China’s stability and growth performance will bear very close watching in the years ahead.

Sam Churchill is an Economist at Magellan Asset Management

Monday, 02 June 2014 14:52

Platinum Asset Management CEO looks at India

Written by

The founder of Platinum Asset Management, Kerr Neilson, shares some of his tips to creating wealth, including the need to look more closely at the world's second most-populous country, India.


This interview was given to Australian Financial Review Sunday and Kerr also talks about:


- China

- Interesting investment opportunities that exist today

- Do we face another tech wreck?

- Where Kerr Neilson is preferring to invest




Freezing thresholds for Australian Government payments for three years

The Government will freeze indexation of the income free area and asset test limits for a range of pensions as well as working age allowance payments, student payments and parenting payments as detailed in the following table.


Non-pension payments

Pension Payments

Three year period commences

1 July 2014

1 July 2017

Affected payments include

Family Tax Benefit, Child Care Benefit, Newstart Allowance, Widow Allowance, Sickness Allowance, Partner Allowance, Parenting Payment, Youth Allowance and Austudy/ABSTUDY

Age Pension, Carer Payment, Disability Support Pension Bereavement Payment and Veterans’ Service Pension

Disability Support Pension Changes
- Reduced portability 1 January 2015

Disability Support Pension (DSP) recipients will only be able to receive DSP for a maximum of four weeks in a 12 month period when travelling overseas before their payment is cancelled. This proposal will apply to all DSP recipients who leave Australia from 1 January 2015.

Under current legislation, DSP recipients can receive payments for up to 6 weeks for each overseas trip.

- Increased reviews and participation requirements for DSP recipients under 35 1 July 2014

DSP recipients under age 35 who were granted DSP between 1 January 2008 and 31 December 2011 will be reviewed against current impairment tables and have their work capacity assessed.

Compulsory activities may include:

  •   Work for the Dole

  •   job search

  •   work experience

  •   education or training

  •   connecting with a Disability Employment Service or Job Services Australia. 

Family Tax Benefit Reform


The Treasurer has announced a number of measures which tighten the eligibility for Family Tax Benefit and put a freeze on indexation of payments. These measures and their impact are outlined below. It’s important to note that for Family Tax Benefit purposes; eligibility is based on Adjusted Taxable Income (ATI).



From 1 July 2014

Family Tax Benefit A & B freezing of indexation



Indexation will freeze on the following rates and thresholds:
base rate and maximum rate will be fixed for two years for FTB part A

  •   income free area will be fixed for three years for FTB part A

  •   maintenance income free area will be fixed for three years for FTB part A

  •   secondary earner income free area will be fixed for three years for FTB part B

From 1 July 2015

- Family Tax Benefit A removal of the per child add on

Under this measure, a per child add-on amount will no longer be used to calculate a family’s higher income-free area. The higher income-free area of $94,316 will remain, without the add-on amount of $3,796 for the second FTB child and subsequent FTB children.

  • -  Limit the Large Family Supplement

    The Large Family Supplement will only be paid to families with four or more children. This change applies automatically for new and existing recipients of the supplement and will no longer be paid to families with three children from 1 July 2015.

  • -  Family Tax Benefit B reduction of primary earner income limit to $100,000

    The primary earner income limit for FTB part B will reduce to $100,000 from $150,000. Families with primary earner income of more than $100,000 will no longer be eligible to receive FTB part B.

    This change applies automatically for new and existing recipients.
    As part of this measure the Dependant (Invalid and Carer) Tax Offset income threshold will also reduce to $100,000.

  • -  Family Tax Benefit B limited to families with children under 6 years

    Eligibility for FTB B will be limited to families whose youngest child is younger than 6 years of age from 1 July 2015. During the period between 1 July 2015 and 30 June 2017, existing recipients with a youngest child aged six years and over will not be affected until 1 July 2017.

  • -  Family Tax Benefit A & B change to end of year supplements

    The end of year supplements will be brought back to their original amounts, which were $600 per annum per FTB part A child and $300 per annum to each FTB part B family. There will be no indexation of these amounts from 1 July 2015.

GEM Capital Comment

The impact of this measure is that the maximum income thresholds where FTB part A is no longer payable will decrease where you have more than one child.


- New Family Tax Benefit Allowance


A new allowance will be paid over 4 years to single parents on the maximum rate of FTB part A whose youngest child is aged between 6 and 12 years old from the point when they become ineligible for FTB Part B. This allowance will provide $750 for each child aged between 6 and 12 years in each eligible family. 

Indexing pensions and pension equivalent payments by CPI

1 September 2017

The Government will index a number of pensions (and equivalent payments) by the Consumer Price Index (CPI). This measure will standardise the indexation arrangement for these payments which are currently indexed in line with the higher of the increase in the CPI, Male Total Average Weekly Earnings or the Pension and Beneficiary Living Cost Index.

This measure will commence on 1 July 2014 for Parenting Payment Single recipients and from 1 September 2017 for pension payments including Age Pension, Disability Support Pension, Carer Payment, Bereavement Allowance and Veterans’ Affairs pensions.

Removing certain concessions for Pensioners and Seniors Card Holders

1 July 2014

The Government will terminate the National Partnership Agreement on Certain Concessions for Pensioner Concession Card and Seniors Card Holders.

Holders of a Pensioner Concession Card and Seniors Card currently receive a range of concessions from state and local governments such as discounts on council rates, utilities charges and public transport fares. State and local governments generally make decisions on the type and level of concessions they offer. The Australian Government, under this Agreement, has contributed funding towards selected state-based concessions.

GEM Capital Comment

It is unclear at this stage what types of concessions will be removed upon the termination of this Agreement. 

Resetting the asset test deeming rate thresholds

20 September 2017

The deeming thresholds will be reset to $30,000 for singles and $50,000 for couples from 20 September 2017 (for both pensioners and allowees). Current thresholds are $46,600 for singles, $77,400 for couples and $38,700 for members of allowee couples.


GEM Capital Comment

This measure effectively increases the amount of assessable income from deemed financial investments.

The proposal will impact the social security entitlements of income test affected pensioners and allowees. Additionally, older people subject to income tested residential aged care or home care fees may also be affected.

This measure will also impact holders of account based pensions which are impacted by the recent legislative change to deem account based pensions from 1 January 2015. 

Changes to the Commonwealth Seniors Health Card (CSHC)

The Government has announced a number of changes to the Commonwealth Seniors Health Card (CSHC). The CSHC allows self-funded retirees to gain access to medicines listed on the Pharmaceuticals Benefits Scheme at a concessional rate as well as other concessions.


To be eligible, a person must have an adjusted taxable income (ATI) of:

  •   $50,000 (singles)

  •   $80,000 (couples, combined), or

  •   $100,000 (couples, combined, for couples separated by illness or respite care)

    The proposed changes include:

  •   Annual indexation of the income thresholds to Consumer Price Index from September 2014.

  •   Account based pensions (ABP) that are subject to deeming will be included in the CSHC income test from 1 January 2015. Grandfathering applies to holders of a CSHC on 1 January 2015 with an ABP commenced prior to that date.

  •   Holders of the CSHC will cease to receive the Seniors Supplement beyond the June 2014 quarter. The Seniors Supplement is currently $876.20 p.a. (singles or couples separated due to illness) or $660.40 (couples, each). CSHC holders will still receive the Clean Energy Supplement.



GEM Capital Comment

The inclusion of deemed income on account based pensions in the assessment of income to determine eligibility to the CSHC will have a significant impact on a number of self- funded retirees.

Under the proposed change, based on the current deeming rates and thresholds and assuming no other income, a new applicant will not qualify for a CSHC if their ABP exceeds $1,448,543 (singles) or $2,318,886 (couple, combined).

However, these changes will not only impact self-funded retirees with large ABP balances, but also those with lower ABP balances who have other Adjusted Taxable Income such as income from untaxed Government schemes or foreign pensions.

The proposed change has a number of implications for holders of account based pensions. The grandfathering provision essentially “locks” clients into their existing ABP provider as any change after 1 January 2015 will see the new ABP deemed for CSHC purposes.