Error
  • JUser: :_load: Unable to load user with ID: 565
  • JUser: :_load: Unable to load user with ID: 564
Wednesday, 17 October 2012 10:57

Share market rallies usually follow pessimism - October 2012

Written by
Is the glass half empty or half full? The pessimist would pick half empty, while the optimist  would choose half full.

Investors would be excused for failing to realise that share markets over the past 12 months have returned over 10%.  Investor sentiment is still negative as can be seen in the equity risk premium chart below.

Equity risk premium is defined as "The excess return that an individual stock or the overall stock market provides over a risk-free rate. This excess return compensates investors for taking on the relatively higher risk of the equity market. The size of the premium will vary as the risk in a particular stock, or in the stock market as a whole, changes; high-risk investments are compensated with a higher premium" (definition sourced from Investopedia)

Currently investors require a higher return from the share market due to risks, or perceived  risks, before they will commit money - which explains a high equity risk premium.  You will notice that the equity risk premium is at a level not seen since early 2009 during the peak of the GFC.  Once global policy makers took assertive action at that time, the share market rallied strongly.

What catches our eye is that share markets have performed strongly over the past 12 months despite enormous pessimism.  The ASX 200 for example at the time of writing is trading at 12 month highs and yet investor sentiment toward the share market is trading at multi decade lows as can be seen from the chart below which was sourced from Westpac Economics.

Historically, strong share market rallies have followed periods of extreme pessimism.

One of Warren Buffett's famous quotes is "be greedy when others are fearful". (and be fearful when others are greedy)

Those sitting on the sidelines must ask themselves "Is it different this time?"

This material has been provided for general information purposes and must not be construed as investment advice. This material has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Investors should consider obtaining professional investment advice tailored to their specific circumstances prior to making any investment decisions and should read the relevant Product Disclosure Statement.


Monday, 08 October 2012 18:47

Where to for the Australian Dollar?

Written by

The strength of the Australian dollar has been positive for those wishing to travel overseas or to purchase goods online from overseas, but inbound tourist operators, exporters and bricks and mortar retailers are not likely to share the enthusiasm.

The Australian currency is often referred to as a commodity currency which means that it generally behaves in keeping with commodity prices.

Below is a chart showing the long term trends of Commodity Prices (green line) and the $AUD/$USD (blue line).

$AUD vs Commodity Prices

Source:  IRESS, RBA and Macquarie September 2012

In the past 20 years the Australian dollar has followed the Commodity Price Index, and yet right now there lies a massive gap between the currency and commodity price index.

Picking currency trends is a dangerous occupation, however it seems to be accepted within the finance profession that the Australian dollar is over valued and is only a matter of time before is corrects itself.

Should the Australian dollar devalue, which investments would benefit?

  • Unhedged International Equity Funds
  • Australian companies with earnings from overseas (providing not hedged), ie CSL
  • Companies providing in bound tourism services
  • Australian companies exporting goods (providing no hedging)

This material has been provided for general information purposes and must not be construed as investment advice. This material has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Investors should consider obtaining professional investment advice tailored to their specific circumstances prior to making any investment decisions and should read the relevant Product Disclosure Statement.

 

Wednesday, 10 October 2012 13:16

US Housing Market - the recovery has begun

Written by

Warren Buffett (one of the world's best investors) previously stated that he believes the recovery in the US Housing market will be a defining moment for the US economy.

It is considered that the annual underlying demand for houses in the US is 1.5 million houses per year due to immigration and family formation.  For example, since the Global Financial Crisis the US population has increased by over 10 million.  The chart below shows the number of new houses being currently built as around 600,000 per year which is well below annual demand.  At the moment this does not represent a problem as there is as oversupply of housing due to the housing boom leading up to 2007.  During that time many more houses were built than the underlying demand, which lead to surplus housing stock (and let's face it you can only live in one house at a time).

The key message here is that in time the surplus housing stock will be soaked up by demand that is not being met with new home building currently.  This explains Macquaries research which shows (in blue bars) the likely trend for US Home Building over coming years as ultimately the US will have to build houses to keep up with demand.

The question for Australian investors is how can you take advantage of this?

 

This material has been provided for general information purposes and must not be construed as investment advice. This material has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Investors should consider obtaining professional investment advice tailored to their specific circumstances prior to making any investment decisions and should read the relevant Product Disclosure Statement.

 

 

 

 

 

Wednesday, 03 October 2012 11:52

To My Dear Dead Husband Tom........

Written by

To My Dead Husband Tom,

Why were you so against insurance? You always chuckled and laughed that you would never die and I would just remarry. Well guess what? You died one year later! It’s now two years later, all our money is gone and I have some real physical and mental challenges.

I am left with our daughter Susan, NO HOME, working two jobs, and bills coming from everywhere.  The doctor bills for your heart attack alone were in excess of $90,000.

The fun and laughter is now gone and we are really hurting! When I really think about it, I believe I am as much to blame as you are. I should have opened my mind and imagined the alternative picture that my Financial Planner was painting. Instead I chose to laugh about it and assumed it would never happen to us.

The joke is on me! I am not remarried and most likely will not get married ever again. When someone dies it is amazing the sorrow and pain that comes to the surface.

I want to let you know that I now have a policy on myself, and I make sure it is the first bill paid. If something ever happens to me, I want Susan to be protected. You know what kills me the most? For approximately  $650 a year, we could have been protected.

Tina

Wednesday, 19 September 2012 12:31

Positive Developments In The Euro Debt Crisis

Written by

There have been some very positive developments with respect to the Euro Debt Crisis over the past few months that many would argue is potentially the turning point of the crisis.

View 3 1/2 minute video by Mark Draper explaining some positive developments in Europe

Brandenburg Gate Berlin

In summary these developments are:

  1. The European Stability Mechanism, which has funds of EUR 500bn, will be available for operation in the second half of 2012.  This fund was the subject of a legal challenge to the German High court on constitutional grounds and this challenge was dismissed yesterday.  The purpose of this fund is for recapitalising European Banks as well as funds to purchase Government Bonds in countries such as Italy and Spain in order to keep borrowing rates affordable for those countries.
  1. The European Central Bank (ECB) has announced a program that will allow the ECB to purchase an unlimited amount of Government Bonds in the market for countries that seek assistance and accept strict conditions about aspects of their budgets.  The purpose of this is to guarantee access to funding for European Governments at affordable rates.  We have long argued that Spain and Italy are solvent countries, providing their borrowing costs do not become excessive.  This announcement is critical in keeping interest rates low and has seen borrowing costs for Italy and Spain come down significantly as can be seen below:
Spanish 3 Year Govt Bond Rate Spanish 10 Year Govt Bond Rate Italian 5 year Govt Bond Rate Italian 10 year Govt Bond Rate
Borrowing rate as at November 2011

6.25%

7.6%

(as of July 2012)

7.5%

7.2%

Borrowing rate now

4.4%

5.6%

3.7%

4.95%

  1. We continue to believe that there is very little risk of a financial meltdown resulting from the Euro Debt Crisis or Financial Armageddon.

The Head of the European Central Bank recently went on record as saying “We will do whatever it takes to keep the Euro together, and believe me this will be enough”.  He has backed up this rhetoric with the announcement to purchase an unlimited amount of European Government bonds for countries that request assistance.

Does this mean that this is the end of the crisis?  Unfortunately not, however, we see these developments as very important building blocks that should stabilise the Eurozone and allow the Governments to carry out the necessary reforms to put their economies on a sustainable path.  These reforms include tax, welfare, spending and labour market reforms.

In addition to these the other steps that the leadership of the European Union will need to take is to formulate plans for a Banking Union, and a closer Political union, which would result in individual countries surrendering some degree of control over their budgets in exchange for access to funding at cheaper rates and other economic benefits.

Currently the European Union is a currency union, arguably put together for political reasons, now they must bring together other aspects of their economies.  This is not something that can be done quickly given the political pressures.  The ECB however appear to have provided the necessary time for the politicians to get on with the job as the ECB alone can not resolve this crisis.  This is where we see the main risk – with politicians and potential for the balance of power to shift over time.

The other main source of risk would seem to be with the very high levels of unemployment in countries such as Spain where overall unemployment is around 25% and youth unemployment is around 50%.  This has potential to create social unrest which is difficult to predict.

Overall, we believe that the most recent steps are very positive moves forward that can provide the building blocks for the Euro Debt Crisis to be brought under control and financial markets have welcomed these moves in the form of lower borrowing costs for Italy and Spain.

There is an excellent video we produced earlier this year called “Fire Wall for the European Debt Crisis” that discusses the firewalls that have been created to ensure European Governments continue to have access to funding at affordable rates.  This can be found by clicking the YouTube icon on our website at http://www.gemcapital.com.au and is well worth viewing.  It runs for 6 minutes.

We trust you find this update useful and helps you put into context some of the information you are hearing in the media.

 

This material has been provided for general information purposes and must not be construed as investment advice. This material has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Investors should consider obtaining professional investment advice tailored to their specific circumstances prior to making any investment decisions and should read the relevant Product Disclosure Statement.

Monday, 03 September 2012 12:16

New Warning - Serious Investment Fraud

Written by

Fraud

The Minister for Home Affairs and Minister of Justice Jason Clare today urged Australians to protect themselves against the growing threat of serious and organised investment fraud.

Minister Clare released a new report from the Australian Crime Commission (ACC) and Australian Institute of Criminology (AIC) which provides a national picture of the nature and threat of serious and organised investment fraud in Australia.

“This is the first unclassified report of its kind. It indicates that more than 2600 Australians may have lost more than $113 million to serious and organised investment fraud in the last five years. That number could be even higher because people tend not to report this kind of crime,” Mr Clare said.

“The targets of this type of crime are primarily Australian men, aged over fifty. They are usually highly educated – and have high levels of financial literacy. They are likely to manage their own super.

“This is what happens. The criminal syndicate cold calls the investor, refers them to a flash website and sends them a brochure promising strong investment returns. After taking their money they string them along for months or even years and then the money disappears.

“People’s entire life savings are stolen by criminals with the click of a mouse. This type of crime destroys wealth and destroys lives. It’s also very difficult to stop.

“These criminal syndicates usually operate from outside Australia. They use front companies and false names. Once they’ve stolen the money the website disappears and the trail goes dead.”

In the next two months every household in Australia will receive a letter warning them about this criminal activity and providing information on how to avoid becoming a victim.

This is the first time Australian law enforcement agencies have undertaken a mail out of this scale regarding serious and organised crime.

“This problem is not going away. Australia’s retirement savings are growing – making us a bigger target every year,” Mr Clare said.

ACC Chief Executive Officer Mr John Lawler said the level of superannuation and retirement savings in Australia made it an attractive target for organised crime groups.

“To combat this growing threat, last year the ACC Board established multi-agency Task Force Galilee to disrupt and prevent serious and organised investment fraud and harden Australians against this type of organised crime,” Mr Lawler said.

“These scams are typically unsolicited ‘cold calls’ used alongside sophisticated hoax websites to try and legitimise the fraud. This type of crime targets the life savings of hard working Australians. Australian and international law enforcement partners stand committed to protecting Australians from these crimes.”

Australian Securities and Investments Commission Chairman, Greg Medcraft said fraudulent investments are incredibly sophisticated and very difficult for even experienced investors to identify.

“Perpetrators of this type of fraud are skilled at using high-pressure sales tactics, over the phone and using email, to persuade their victims to part with their money,” Mr Medcraft said.

“I urge investors to be immediately wary if they are called at random by someone offering an investment opportunity overseas.”

Australians should take the following actions to prevent becoming victims of investment fraud:

  • Visit www.moneysmart.gov.au or call 1300 300 630 for further information or advice.
  • Alert your family and friends to this fraud, especially anyone who may have savings to invest.
  • Report suspected fraud to the Australian Securities and Investments Commission, on www.moneysmart.gov.au or 1300 300 630, or your local police. Remembering information such as company name, location and contact details will assist with subsequent investigations and enquiries.
  • Hang up on unsolicited telephone calls offering overseas investments.
  • Check any company you are discussing investments with has a valid Australian Financial Services Licence at www.moneysmart.gov.au
  • Always seek independent financial advice before making an investment.

To access the report on Serious and Organised Investment Fraud in Australia see the ACC website www.crimecommission.gov.auor visit www.moneysmart.gov.au or call 1300 300 630 for further information and to report suspected investment fraud.

Warning letter that was sent to all Australian households

Media contact:  Annie Williams - 02 6277 7290

Monday, 27 August 2012 10:44

Financial Planning and Family Risk

Written by

There is an important aspect to Financial Planning we would like to highlight which is the potential risk associated with an illness, injury, or major trauma event occurring to a member in your family ie a son, daughter, their spouse or a grandchild.

If the unthinkable happened and one of your family members was to suffer from any of these events, would they survive financially, or would you need to step in and offer financial support?
We think it is important that you be honest and ask yourself two questions.
  1. Would you step in and help out your family in the event that one of your children, their spouses or your grandchildren were to suffer a serious illness or injury.  We know the importance of family and think in most cases the answer would be yes.
  2. How would you feel if when you found out they had no or insufficient insurance cover to provide for their family.......how would the rest of your family feel?

The financial consequences for you could be a burden too great to bear and drastically affect your future plans and other family members.

Many parents know little or nothing of their extended family’s real financial position, this extends to not knowing how much debt they hold and ongoing financial commitments they have.  In addition, most parents rarely know what insurance cover they have in place and if this is sufficient to meet the circumstance.

This is not unusual as they are adults now and responsible for their own life BUT, if something did happen and only then did you find out, you would potential have to suffer the financial consequences.  This is what we call Family Risk as it affects all members of the family.

We provide a financial planning service to the adult children of our clients.  We would be happy to have a discussion with you about your family and how we could provide this service to them.

Wednesday, 22 August 2012 11:14

Spain & Italy Are (Probably) Fine

Written by

...right round, baby, right round. Let's get it together and have a roundtable...Just as Brussels is finally enjoying a spell of summer sun, there’s more good news for debt-crisis watchers who stayed behind in the European Union’s headquarters: The Peterson Institute for International Economics says the debt loads of Italy and Spain are (most likely) sustainable.

In a new working paper, William R. Cline—a sovereign-debt crisis veteran going back all the way to Latin America’s troubles in the 1980s–calculates different trajectories for the debt loads of the two countries whose financial fate is seen as central to the survival of the euro. The interesting thing about the paper is that it not only examines three typical scenarios (good, baseline, bad) and applies them to five variables (the level of growth, primary surplus, interest rates, bank recapitalizations, and privatization receipts), but also assesses the probability of several of these variables going bad (or good) at the same time. In other words, Mr. Cline calibrated the effect of, say, low privatization receipts on a government’s primary surplus or the interest rates it’s likely to pay on its bonds.

His conclusion–which should delight policymakers in Rome, Madrid, and Brussels alike–is that the most likely outcome by the end of the decade is that “both Spain and Italy remain solvent” and that they won’t need a debt restructuring á la Greece or, even worse, leave the euro zone.

The “probability weighted average,” i.e. the best bet, for Spain is that its debt will be no higher than 92% of gross domestic product by 2020. That’s up quite a bit from the 81% it is expected to hit by the end of the year and slightly worse than the 89% under Mr. Cline’s baseline scenario, but still at a level that is generally seen as manageable for a large, developed economy. On top of that, there’s a 75% chance that the debt load will be below 99% of GDP by 2020. For Italy, the best bet is a debt that declines to at least 109% of GDP by 2020 from 123% this year, with a 75% probability that it will go down to at least 116%.

Now, forecasting debt levels eight years into the future is in itself a tricky exercise. The goal of Greece’s debt restructuring earlier this year was to bring the country’s debt load to a “sustainable” 120% of GDP by 2020. Even back in March some EU officials warned privately that that kind of calculation was more of a political spiel designed to convince parliaments in countries like Germany or the Netherlands to once again open their wallets for Greece than a sound basis for economic policy making. Less than six months on they were proven right–international debt inspectors are currently trying to determine how much the political uncertainty of two national elections have set the country behind in hitting the 120% target, while the International Monetary Fund is arguing that for Greece, really, a level of 100% of GDP is much more suitable.

The biggest challenge with these calculations is of course determining how to fill in the variables, i.e. what’s the good, baseline or bad scenario for growth or interest rates. And it is perhaps here were Mr. Cline’s analysis is most vulnerable. For Spain, for instance, the “good” scenario for bank recapitalizations is that Madrid will have to pick up exactly €0 of the cost of recapitalizing its banks—that would only happen if either the stakes the government acquires in struggling lenders turn out to be unexpectedly valuable or the country succeeds in moving the entire recapitalization costs off its own books and onto those of the euro-zone bailout fund. We explained why either of these two scenarios are unlikely here and here.

The baseline scenario expects bank recapitalizations to add only some €5 billion to government debt (mostly thanks to the European Stability Mechanism taking direct stakes in the saved lenders rather than routing the money through the government, as Mr. Cline explained in an interview). Even under the bad scenario the bank bailouts add “only” €50 billion to the debt load (that’s assuming that the cost cannot be transferred to the ESM). Considering that the euro zone has promised Spain as much as €100 billion and some analysts fear that low growth could push the bailout bill even beyond that, it’s easy to imagine a worse scenario. (Sidenote: the bank recapitalization section in the Spain scenario table on p.15 of the paper also includes €36 billion in debts that the Spanish government may have to take on from crisis-hit regions—a footnote that Mr. Cline says was accidentally dropped in the final version.)

But there are conclusions in the paper that go beyond the exact variables used for the different scenarios. For instance, Mr. Cline’s calculations show that for both Spain and Italy higher interest rates—and even lower growth–have a smaller effect on debt levels than missing budget targets. For Spain, more-expensive bank bailouts set off a similar dynamic: the “bad”(€50 billion) recapitalization scenario drives the baseline debt load from 89% of GDP to 94% by 2020; the full €100 billion, meanwhile, would take it up to 99%, even if all other variables stay in the baseline.

The good news from that if of course that governments may have more influence on their primary deficits—and even the cost of bank bailouts for national governments amid “direct” bank recapitalizations from the ESM–than on interest rates and growth. Or as Mr. Cline summed it up in an email: “The good outcome depends on Spain doing its part on the primary surplus and the euro zone doing its part on the banking union.”

If that thesis holds up, Mr. Cline’s analysis may herald more good news than Brussels weather, where the probability of sustainable summer sunshine is close to zero.

By Gabriele Steinhauser

The Wall Street Journal

Thursday, 23 August 2012 10:06

Don't trip up when Chasing Income Yield

Written by

With official interest rates hovering at 3.5% and residential property income yields typically running at between 4-5%, investors are clamouring for investments that pay a higher rate of income.

Is it as simple as running a ruler over the dividend yield column in the Financial Review to select your investments?

The table below highlights the top 20 dividend payers from the Australian share markets based on forecast dividend payments for the current financial year.

What are some of the questions investors should ask themselves when considering high income investments?

What is the likely profit growth trend that can support future dividends?

What proportion of company profits are being paid out as dividends?  A high proportion doesn't leave the company much room to maintain dividends if profit drops.

Is the dividend being artificially inflated by asset sales, debt or financial engineering?

What is the outlook for the sector in which the company operates within?

These points are best illustrated comparing the highest ranking dividend payer in the chart above, Metcash with its larger rival Woolworths.  Woolworths dividend is not as high as Metcash but the share price chart below shows that Woolworths has been a better performing investment despite paying a slightly lower dividend.  (Woolworths is the blue line and Metcash the red line)

Woolworths vs Metcash Share Price Performance

There is no doubt there are some juicy dividends to be enjoyed by investors in the current market, but care must be taken to avoid what is referred to as a value trap.  (where an investment appears good value - but performs as a dog)  We encourage investors to look beyond the headline dividend yield when considering an investment.

This material has been provided for general information purposes and must not be construed as investment advice. This material has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Investors should consider obtaining professional investment advice tailored to their specific circumstances prior to making any investment decisions and should read the relevant Product Disclosure Statement.

Wednesday, 11 July 2012 16:34

8 Common mistakes made by investors

Written by

 

Elinor at computer

Mistake 1: Excessive Buying and Selling

A study of more than 66,000 households found that investors who traded most frequently underperformed those who traded the least. For the study, investors were split into five groups based on their trading activity. The returns achieved by the 20 percent of investors who traded the most lagged the least active group of investors by 5.5% annually. Another study showed that men trade 45 percent more than women, and consequently, women outperformed men.

Mistake 2: Information Overload

Those who monitor the market too closely have a tendency to undermine their portfolios with self-destructive behavior. Richard Thaler, a professor at the University of Chicago, conducted a 25-year study where he divided investors into three groups: one group who checked their investment performance every month, one that checked performance once per year, and one that checked performance every five years. The study concluded that individuals who check performance the most obtain the lowest investment return and are most likely to sell an investment immediately after a loss. Of course, selling low is not a good strategy for making money.

Mistake 3: Market Timing

History has shown that the market rises about 70 percent of the time.

Market timers tend to find themselves out of the market during the 70 percent of the time that it is going up because they are trying to avoid the 30 percent of the time the market is falling.

Market timing is typically driven by emotion. Investors tend to buy stocks when they feel good and sell when they feel bad. Unfortunately, investors tend to feel good once the market has run up 20 percent and feel bad when their portfolio is down 20 percent. With the feel good/bad strategy, investors will always buy after the market has already gone up and sell when the market has already fallen.

Mistake 4: Chasing Returns

Guess which managed funds attract the most new money each year? Money flows into managed funds that have just enjoyed the greatest performance in the previous year. Unfortunately, investors are often late to the party with this strategy. It shouldn't be surprising that chasing returns is a very common mistake. The entire financial media industry is built around a common theme: Don't Miss Out on the Ten Hottest Stocks. When the fine print says past investment performance is no guarantee of future returns, believe it!

Mistake 5: Poor Diversification

You may have seen this mistake coming. Investors tend to be concentrated in one or two companies or sectors of the market.

Over-concentration can hurt a portfolio, whether the market is performing well or poorly. Poor diversification leads to excessive volatility and excessive volatility causes investors to make hasty, poor decisions.

Mistake 6: Lack of Patience

Most managed fund investors hold their funds for only two or three years before impatience gets the best of them. Individual stock investors are even less patient, turning over about 70 percent of their portfolios each year. It's difficult to realize good returns from the stock market if you invest for only weeks, months, or even a couple of years. When investing in stocks or funds, investors must learn to set their investment sights on five and ten-year periods.

Mistake 7: Not Understanding the Downside

When you buy an investment, you should plan on worst-case scenarios occurring when you invest. It is true that past performance isn't guaranteed to repeat, but it does give us an indication of what to expect on the downside. Know how your investments performed during recessions, wars, terrorist attacks, and elections. If you don't understand the risks at the outset, you are more likely to react poorly during periodic market setbacks and get scared out of the market.

Mistake 8: Focusing on Individual Investment Performance Rather than Your Portfolio as a Whole

One way to know you are diversified is that you will always dislike a portion of your portfolio. If you are properly diversified, I can guarantee you that each year some of your investments will lag behind others in your portfolio. If you look at investments in isolation rather in context of your overall portfolio, you will be tempted to make poor decisions. You can get yourself into trouble by getting rid of investments when theyr'e low in value and replacing them with those that just experienced a nice run.

Conclusion

Most of these mistakes can be avoided by having a clearly defined, long term investment strategy. Before investing, develop a proper diversification strategy, a system for evaluating the performance of investments, and solidify your long term investment goals. Then, turn off the TV and refer back to the systems and principles of your strategy when it is time to make investment decisions.

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. RI Advice Group Pty Limited ABN 23 001 774 125  AFSL 238 429.