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Wednesday, 15 January 2014 00:57

Govt's Super and Tax Plans confirmed

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Draper_05The Coalition Government has reiterated its position on a range of previously announced superannuation and tax issues, as part of the Mid-Year Economic and Fiscal Outlook.

The key take-outs of interest include:

  • The next increase in the superannuation guarantee rate to 9.5% will be deferred for two years.
  • A range of measures relating to the Mineral Resource Rent Tax that were legislated during the previous Government's tenure will be repealed.  This includes the low income super contribution, income support bonus and school kids bonus.
  • The 2015 personal tax cuts will not proceed.
  • Benefits from the Government's Paid Parental Leave scheme will generally be paid by the Department of Human Services, not the person's employer.  Efective 1 March 2014.
  • Deeming will be extended to include allocated pensions from 1st January 2015 (for new pensions only)
  • The tax of 15% on earnings exceeding $100,000pa from assets held by a member in a superannuation pension will not proceed.


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

Tuesday, 14 January 2014 02:39

Book Review - Dog Days - Australia after the boom

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Dog-Days-cover-(print)Ross Garnaut - Economic Adviser to the Hawke/Keating Governments and well respected economist has recently published a book that labels Australia as complacent and at the 'cross-road' to its future.

"Here is a brilliant guide to the future of the Australian economy that our prime minister, his cabinet and indeed all members of parliament should study.  We cannot be sure that big problems are ahead for Australia owing to the end of the China boom, but it is highly likely, and our government must be prepared."  Max Corden on the book.

Here is an article extracted from the media recently that outlines some of the aspects of the book that we believe is worth a read.  It's price is $19.99 from bookshops or can be downloaded in electronic version for $9.99.

Australia is enjoying its 22nd year of economic growth without recession – an experience that is unprecedented in any other developed country.

For the first decade of expansion, growth was based on extraordinary increases in productivity, attributable to productivity-raising reforms from 1983. In the early years of this century, reform and productivity growth slowed sharply and then stopped. For a few years, increases in incomes and expansion of output came from a housing and consumption boom, funded by wholesale borrowing overseas by the commercial banks.

Unlike other English-speaking countries and Spain, Australia avoided recession with the end of the housing and consumption boom (earlier in Australia than elsewhere). This was largely the result of a China resources boom. The boom emerged when the exceptional metals and energy intensity of Chinese growth in response to Keynesian expansion through the Asian financial crisis, and again in response to the global financial crisis, took markets by surprise, and lifted prices of iron ore and coal continuously and immensely from 2003 until the Great Crash late in the September quarter of 2008.

China’s fiscal and monetary expansion put iron ore and coal prices back on a strongly rising trajectory in the second half of 2009, and new heights were reached in 2010 and 2011. The high prices for coal and iron ore flowed quickly into state and especially Commonwealth government revenue and was mostly spent as it was received – raising the Australian real exchange rate to unusual, and by 2013, unprecedented levels. The high commodity prices induced unheard-of high levels of resources investment after the recovery of the Chinese economy from the Great Crash of 2008, adding to the expansionary and cost-increasing impacts.

The China resources boom created salad days of economic policy, in which incomes could grow even more rapidly than community expectations. The expansionary effect of the resources boom – taking expenditure induced by high terms of trade, resource investment and resource production together – reached its peak in the September quarter of 2011, when the terms of trade began a decline that continues today. The terms of trade fell partly because Chinese growth fell by about one-quarter within a new model of economic growth.

A bigger influence was the new model of growth, which caused energy and metals and especially thermal coal to be used less intensively. Huge increases in coal and iron ore supplies are also putting downward pressure on prices and will be increasingly important in future.

The dog days of economic policy


The declining impact of the China resources boom ushered in the dog days of economic policy from late 2011, when government revenue and private incomes growth sagged well below expectations and employment grew less rapidly than adult population. The maintenance of high employment and reasonable output growth without external payments problems requires the restoration of investment and output in trade-exposed industries beyond resources. And yet the real exchange rate by early 2013 was at levels that rendered uncompetitive virtually all internationally traded economic activity outside the great mines. A substantial reduction in Australian cost levels relative to other countries is required – a large depreciation of the real exchange rate – to maintain employment and economic growth.

The more that productivity growth can be increased the better. Helpful policy measures include the removal of artificial sources of economic distance between Australia and its rapidly growing Asian neighbours to allow larger gains from trade – removal of remaining protection and industry assistance at the border as the real exchange rate falls, and investment in transport and communications infrastructure.

While China’s new model of economic growth ends the extraordinary growth of export opportunities for iron ore and coal that characterised the first 11 years of this century, new patterns of growth in China and elsewhere in Asia are rapidly expanding opportunities in other industries in which Australia has comparative advantage – education, tourism and other services, high-quality foodstuffs, specialised manufactures based on innovation.

But in contrast to iron ore, coal and natural gas, Australia does not have overwhelming natural advantages over other suppliers of these products. It must compete with the rest of world on price and quality, especially with developed country suppliers with hugely depreciated real exchange rates following the Great Crash.

Even with the return of productivity growth to the world-beating levels of the 1990s, maintenance of output and employment growth would require a large reduction in the nominal value of the dollar, accompanied by income restraint to convert this into a real currency depreciation.

A new economic reform era is required. That requires social cohesion around acceptance that all elements in society must share in restraint as well as commitment to productivity-raising structural change. Achievement of this outcome is blocked by changes in the political culture of Australia since the reform era. Now, uninhibited pursuit of private interests has become much more important in policy discussion and influence.

The new Australian government will succeed in building the political culture that is necessary to deal with the problem only if it is effective in persuading the community of the importance of reform, and in confronting the Australian complacency of the early 21st Century.

This will be hard, as the government will have to change the 21st-century tendency for private interests to outweigh the public interest in policy discussion and choice. Harder still, it will have to disappoint its strongest supporters along the way to leading Australia into a new reform era.

Ross Garnaut is vice-chancellor’s fellow and professorial fellow in economics at the University of Melbourne. This article is based on his book, Dog Days: Australia After the Boom, and is part of a series from East Asia Forum ( in the Crawford School of Public Policy at the Australian National University.


Monday, 06 January 2014 19:13

Fed Tapering - what it means for investors

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Wall St ImageKey points

- After much talk since May, the US Federal Reserve is finally reducing (or tapering) its asset purchase program - by $US10bn a month.

- However, the Fed has enhanced its very dovish forward guidance, highlighting that interest rate hikes are still a long way off and dependent on the economy.

- Fed policy remains market friendly & generally supportive of further gains in shares.

- While, Fed tapering and speculation around it has and will contribute to bouts of market uncertainty, it should be seen as good news as it indicates the US recovery is becoming more sustainable.


In what was perhaps the most anticipated event this year the US Federal Reserve has announced it will reduce the pace of its third quantitative easing (QE3) program by $US10bn a month. The Fed has been foreshadowing a “tapering” since May 22nd so it’s a surprise to no one. This note looks at what it means for US monetary policy and investment markets.

The Fed tapers

The key aspects of the Fed’s decision to taper are:

  • A cutback in QE from $US85bn a month to $US75bn.
  • This to be focussed on both reduced Treasury bond purchases (which drop from $US45bn a month to $US40bn) and reduced purchases of mortgage backed securities (which drop from $40bn a month to $35bn).
  • Tapering is not a “not on a preset course” but dependent on further economic improvement & higher inflation with Chairman Bernanke implying the wind down will be such that QE will likely continue into late next year, implying an ongoing reduction of about $US10bn in bond purchases each meeting, which is slower than many expected,
  • More dovish guidance on the outlook for interest rates with the Fed indicating rates will remain near zero well beyond the time when unemployment falls below 6.5% and 12 of the 17 Fed committee officials not seeing a rate hike until 2015. In other words the clear message is that tapering is not monetary tightening and does not mean that the first rate hike is any closer.

The Fed’s dovish guidance is significant as Fed research suggests it has greater effects on the economy than signals about asset purchases.* Specifically, it’s aimed at pushing back against rising bond yields as it has led to higher mortgage rates.

Our assessment

The first thing to note is that the Fed’s move is positive as it indicates the US economy is getting stronger and the recovery more self-sustaining and so the US can start to be gradually taken off life support. However, the emphasis is on gradual. It’s quite clear the Fed is still committed to easy monetary policy until more spare capacity is used up. While the economy is on the right path, it’s still got a way to go, particularly with inflation running well below the Fed’s 2% target.

In this regard, tapering is not the same as monetary tightening. Pumping cash into the US economy is continuing but at a slightly lower rate. It’s very different to the premature and arbitrary ending of QE1 in March 2010 and QE2 in June 2011 that went from $US95bn & $US75bn respectively in monthly bond purchases to zero overnight at a time when US and global economic data was poor and contributed to 15-20% share market slumps at the time. This time around QE is only being reduced gradually and only because the economic data shows the US economy improving.

More fundamentally, tapering does not signal earlier interest rate hikes. Quite clearly the Fed has gone out of its way to stress this message by indicating that near zero interest rates will likely remain well beyond the time when unemployment falls below its previous target of 6.5%. Our own view of the US economy is very similar to the Fed’s in seeing growth of around 3% next year driven by housing, business investment and consumer spending. However, barring a much faster acceleration in growth, interest rate hikes are still probably 18 months or more away:

  • Growth is still far from booming.
  • Spare capacity is immense as evident by 7% official unemployment, double digit labour market underutilisation and a very wide output gap (ie the difference between actual and potential GDP).

Image 1
Source: Bloomberg, AMP Capital

  • A fall in labour force participation has exaggerated the fall in the unemployment rate. While much of this is structural some is cyclical and at some point will start to bounce back slowing the fall in unemployment.
  • Inflation is low at just 1.2%.

Comments during her nomination hearings quite clearly indicate that Janet Yellen, the likely next Fed Chairman after Bernanke’s term ends at the end of January, will not be rushing to raise interest rates.

Put simply the Fed may be easing up on the accelerator, but they are a long way from applying the brakes.

Finally, while the US is slowing its monetary stimulus this is not so in other key developed regions with both the ECB and Bank of Japan likely to ease further if anything.

Implications for investors

While the days of expanding US monetary stimulus are probably over, the message from the Fed remains market friendly. The pace of quantitative easing is slowing only gradually, this is contingent on the US economy continuing to strengthen and rate hikes are unlikely until 2015, at least.

For sovereign bonds our medium term view remains one of poor returns. Despite the back up in yields, they remain low relative to long term sustainable levels suggesting the risk of rising yields and capital losses over time as the global economy mends. Even if bond yields stay flat at current levels they offer poor returns, eg just 2.9% for US 10 year bonds and just 4.3% for Australian ten year bonds. However, a 1994 style bond crash which saw extreme long bond positions unwound triggered by a sharp 300 basis point rise in the US Fed Funds rate looks unlikely.

For shares, the period of dirt cheap share markets and support from ever expanding monetary stimulus seems over. More significantly, taper talk since late May has clearly made some nervous given the positive relationship between rounds of quantitative easing in the US and share markets, with many fearing that a move to end it will be followed by slumps as occurred after QE1 and QE2 ended. See the next chart.

Image 2

Source: Bloomberg, AMP Capital

Slowing QE suggests share market returns are likely to slow from the 20% or so pace of the last 18 months. Bouts of uncertainty regarding the Fed’s intentions are also likely, as we saw in May-June and more recently. However, the overall picture remains favourable for shares:

First, the tapering of QE3 is very different to the abrupt and arbitrary ending of QE1 and QE2. This time around US data is stronger and the wind down in QE3 is dependent on further improvement in US economy.

Second, although the Fed isn’t undertaking monetary tightening many tend to see it as such so past monetary tightening moves, which have been via rate hikes, are instructive. The next table shows US shares around the first rate hikes in the past 8 Fed tightening cycles. The initial reaction after 3 months is mixed with shares up half the time and down half the time. But after 12 and 24 months a positive response tends to dominate. So even if this were the start of a monetary tightening cycle it’s not necessarily bad for shares.

The reason for this lies in the improvement in growth and profits that normally accompanies an initial monetary tightening. It’s only later in the cycle when rates are going up to onerous levels to quell inflation that it’s a worry. Right now we are seeing improving growth and profits, but with the start of rate hikes (let alone rises to onerous levels) looking a long way off given very low inflation.

US shares after first Fed monetary tightening moves

First rate hike -3 mths +3 mths +6 mths +12 mths + 24 mths
Oct 80 4.8 1.6 4.2 -4.4 2.4
Mar 84 -3.5 -3.8 4.3 13.5 22.5
Nov 86 -1.5 14.0 16.4 -7.6 4.8
Mar 88 4.8 5.6 5.0 13.9 14.6
Feb 94 2.9 -6.4 -4.9 -2.3 14.9
Mar 97 2.2 16.9 25.1 45.5 30.3
Jun 99 6.7 -6.6 7.0 6.0 -5.6
Jun 04 1.3 -2.3 6.2 4.4 5.5
Average 2.2 2.4 7.9 8.6 11.2

Source: Thomson Reuters, AMP Capital

Thirdly, the rally in US shares recently has been underpinned by record profit levels. It’s not just due to easy money.

Finally, shares are likely to benefit from long term cash flows as the mountain of money that has gone into bond funds since 2008 is gradually reversed with some going to shares.

Image 3

Source: ICI, AMP Capital

While next year will no doubt see a few corrections in shares along the way, the key point is that the broader picture – of reasonable share market valuations, improving global growth and still very easy monetary conditions - suggests the bull market in shares has further to run.

The Australian share market is also likely to benefit from the rising trend in global shares, but is likely to remain a relative underperformer reflecting better valuations globally and a bit more uncertainty over the Australian economy. Sector wise, mining stocks look cheap and best placed to benefit from the global recovery.

In terms of the Australian dollar, Fed tapering may make life a bit easier for the RBA in getting the $A down. While I wouldn’t get too excited as near zero interest rates in the US look like remaining in place for some time, the broad trend in the $A is likely to remain down.

Finally, in the very short term getting the Fed’s taper decision out of the way likely clears the way for the seasonal Santa rally in shares that normally gets underway around this week and runs into early January.

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.


Saturday, 15 February 2014 05:59

CSL - Company Update - January 2014

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CSL has long been a company we have liked.

Mark Draper (GEM Capital) talks with Daniel Moore (Investors Mutual) about some recent developments with the company as well as an important accounting measure that investors should be aware of when valuing CSL.


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



Sunday, 24 November 2013 20:45

Bank Shares - Safe as Houses?

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

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


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



Thursday, 14 November 2013 02:52

"Nein" to Nine

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

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

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









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

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

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


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


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




Friday, 01 November 2013 23:41

Deeming rates lowered by Centrelink

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

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

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

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

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

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

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

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

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

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

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

GEM Capital Comment:

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

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

Thursday, 31 October 2013 01:51

Australian Share Market Outlook - October 2013

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

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

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



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

Friday, 18 October 2013 20:00

Global Investment Update - October 2013

Written by

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

In particular Hamish discusses:

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

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

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


For more information on our views

Wednesday, 16 October 2013 12:37

US Debt Ceiling - still a stalemate

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

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

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

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

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

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