Error
  • JUser: :_load: Unable to load user with ID: 564
  • JUser: :_load: Unable to load user with ID: 563
Thursday, 14 June 2012 10:56

Global Investment Update May/June 2012

Written by

Please click on the link below to view an informative video presentation from Hamish Douglass (Magellan Financial Group CEO) that discusses the uncertainties facing the global economy including Greece, Spain, Portugal, United States and China.

Spain Bailout

 Click here for Global Investment Update with Hamish Douglass

The key points from this update are as follows:

  • A spectacular Greek exit from the Euro is very unlikely irrespective of which party wins the June 17th 2012 election.  Greece deciding to leave the Euro now is best described as “suicide”.  If polls can be believed, 80% of Greeks wish to remain in the Euro.
  • Financial issues within Europe are well understood by the authorities including the European Central Bank (ECB) which has made substantial moves already to deal with liquidity in the European Banking system.  This sends a signal that the ECB will not idly sit and let the European financial system fail.
  • Spanish Banks require additional capital to restore their balance sheets following a property market bubble, possibly as high as EUR 100 billion.  The European Stability Mechanism (ESM) is to commence operating in July 2012 and has EUR 500 billion at its disposal and in Hamish’s view, if required could be used to recapitalise Spanish Banks.  The French are suggesting methods to increase the ESM financial firepower.
  • Low probability that the Spanish Banking system will cause a financial meltdown.
  • ECB is in a position to provide assistance to keep borrowing rates affordable for Spain to ensure that Spain does not become insolvent.
  • A gradual United States recovery is underway, and on a 3 year view, US housing will lead a sharp recovery in the US economy.
  • Chinese economy on track for a “soft landing” (meaning that Chinese economy unlikely to fall off a cliff) and is likely to slowdown gradually.
  • Volatility in financial markets is likely to be a feature of the landscape for months to come.
Wednesday, 13 June 2012 13:09

"What I Wish I Knew About Wealth Creation When I Was 18"

Written by

If you could go back and give your younger self some advice about money, what would it be?

This is a superb new edition of the What I Wish I Knew series by best selling author, Marty Wilson, produced in collaboration with GEM Capital, that gets a broad range of financial experts and an inspirational collection of successful people to pass on the wisdom of their financial experience.

The book has a healthy attitude towards money and more particularly the role it can play in achieving one’s life goals.  You will find the book pleasurable, informative reading that you don’t have to read from cover to cover if you don’t want to.

For your copy of this extraordinary new book that shares tips, strategies and stories to help fast track your financial independence, please contact us at:

GEM Capital

154 Goodwood Road, Goodwood, SA 5034

Ph (08) 8273 3222

Email: This email address is being protected from spambots. You need JavaScript enabled to view it.

This email address is being protected from spambots. You need JavaScript enabled to view it.">This email address is being protected from spambots. You need JavaScript enabled to view it." width="246" height="74" />

18 April 2012 – Off-market transfers of certain assets, such as shares, between related parties and self managed superannuation funds (SMSFs) will cease to be allowed under Tax Office rules.

Frequently referred to as in-specie contributions, the government announced in 2011 that from July 1, 2012, non-market transactions that result in a contribution being made to an SMSF in the form of an asset will no longer be permitted.

The government's move came as a response to the growing trend of SMSF members making in-specie contributions of property into their SMSF, as on a practical level many people may not have had spare cash but may have had valuable assets they could contribute.

However there are restrictions imposed on the assets that can be acquired by funds from related parties (such as fund members or family members). The asset must be:

  • business real property (property used exclusively in one or more businesses)
  • listed securities (shares)
  • certain in-house assets acquired at market value (where the value of those in-house assets do not exceed 5% of the value of the fund's total assets).

Off-market transfers that make in-specie contributions to an SMSF are, however, generally made without actually selling and re-purchasing the securities on the open market. Hence the government believed that such non-market transactions were not transparent, and were open to abuse — through transaction date and/or asset value manipulation to achieve more favourable results with regard to both contribution caps and capital gains tax outcomes.

Keeping such asset transfers at arm's length was also seen to more closely meet the sole-purpose test for SMSF activities.

Part of the Stronger Super package, the legislation was formed to ensure that related party transactions be conducted through a market, or accompanied by a valuation if no market exists. In the latter case, transactions must be supported by a valuation from a suitably qualified independent valuer.

For equities, for example, the underlying formal market is the Australian Securities Exchange. So if SMSF trustees want to contribute listed shares to their fund, these will be required to be sold onto the market and then subsequently repurchased.

For business real property, there is no underlying formal market, so transferring these assets will therefore require validation by a valuation from a qualified valuer. Under the existing rules, a real estate appraisal of the value is sufficient.

Speaking at the SMSF Professionals Association of Australia's 2012 conference in February, Tax Office assistant commissioner Stuart Forsyth said the Tax Office will provide guidelines, probably before the end of the financial year, to help trustees and their advisers with the valuation problems they may encounter.

'They'll promote a consistent approach to valuations across the sector and support the proposed new requirement for SMSFs to value their assets at net market value,' Forsyth said. 'We'll also talk directly to auditors and other stakeholders as we develop this product which will build on existing guidelines focused on taxation compliance.'

Source: Taxpayers Australia INC latest news

 

Monday, 02 April 2012 11:16

Equity Market Pessimism is at Extreme Levels

Written by

The old saying of buy in gloom and sell in boom is much easier in theory than in practice, firstly because of the emotional aspect of investing and secondly the difficulty investors have in measuring the gloom.

One reliable measure of measure of gloom (and boom) is the equity risk premium.

The definition of equity risk premium is "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."

Below is an updated chart of equity market risk premiums for the Australian share market.  This chart highlights that equity market risk premiums are at levels not seen since the depth of despair from the GFC in March 2009 and in fact higher than they were during 1974 and 1980.  The way of interpreting this chart is the higher the risk premium, shares are cheaper, and the lower the risk premium, the more expensive they are.



You will also see that historically, following peaks in the equity risk premium there have been significant share market rallies such as that experienced during 2009 which saw the market rise by around 25%.

Much of the cause for pessimism relates to Europe and we remain of the view that a workable medium term plan for Europe can be found.  If this risk was reduced, one would expect equity risk premiums to drop which would result in an increase in share prices.  Arguably most if not all tail risk if already priced into the sharemarket.

Clearly we are not in boom times, which is why we have a bias to buy (selectively) not sell at this point.

Note: Advice contained in this articler is general in nature and does not consider your personal situation or needs. Please do not act on this advice until its appropriateness has been determined by a qualified adviser.  While the taxation implications of this strategy have been considered, we are not, nor do we purport to be registered tax agents. We strongly recommend you seek detailed tax advice from an appropriately qualified tax agent before proceeding.  The information provided is current as at March 2012.

 

 

 

 

 

 

 

Thursday, 12 April 2012 16:55

Important to scratch the surface when investing

Written by

All too often we hear the generalist who says "buy healthcare because of the ageing of the population" or "can't lose in bricks and mortar".

When investing it is critical to scratch below the surface and avoid being tempted by the generalist.

Europe is currently an excellent study for this as the generalist would probably be saying that Europe is a basket case and investors should avoid it at all costs.  Upon digging below the surface however it can be seen firstly that not all of Europe is a basket case.  This is represented by the graph below whcih shows the GDP (commonly used to measure strength in an economy) of various European countries over the past 5 years.

While it is clear that the Greek economy is in poor health, the German economy is enjoying the cheap Euro that assists their exporters such as BMW.  While talking of BMW, we read from the Wall Street Journal that the waiting list in China to buy a BMW is 6 months and that BMW is making considerable money exporting cars to China.  Fund managers including Platinum Asset Management have made a significant amount of money from investing in BMW while the generalist would have missed the opportunity.

We encourage investors to "scratch below the surface when considering investments".

Note: Advice contained in this article is general in nature and does not consider your personal situation or needs. Please do not act on this advice until its appropriateness has been determined by a qualified adviser.  The information provided is current as at March 2012.

Saturday, 17 December 2011 10:44

Show leadership and stop “Bank Bashing”

Written by

It is truly disturbing to read daily political statements from our leaders on all sides of politics bashing banks for the sake of political gain.  Even the unions have joined this lunacy recently, but then again, none of these players are necessarily known for their intellectual athleticism.

Michael Chaney, one of Australia’s most respected businessmen has said that our leaders should educate people about the banking system, rather than use it for political mileage.  We agree.

Our political leaders would have you believe that banks are gouging borrowers by not passing on interest rate cuts.  The easiest way to determine if this was the case is to examine the banks net interest margins.  The net interest margin is simply the difference between what the banks pay to obtain funding and the rate charged to customers.

Below is a chart showing the net interest margin of the major and regional banks over the past decade.

This chart shows that margins now are significantly lower than they were 10 years ago and that the major bank margins have only been restored to levels seen before the Global Financial Crisis.  There is no evidence to be seen here of bank gouging.

Yes, bank profits in absolute terms are larger than they were before, but so are their businesses.  Just imagine how absurd it would be to criticise a builder for making more money because he built 10 houses a year, rather than 6.

Let’s also consider some of the benefits of a strong banking system to the community which include:

Finally, the table below, sourced prior to the GFC shows the profitability of Australia’s banks compared to other Western countries.

 

Australia has not experienced a bank failure in the modern era (banking collapse defined as an event where ordinary depositors lose their money).  Therefore we need to look overseas at how things can go terribly wrong when banking systems become stressed.

We find it interesting that many of the countries in the table above that harboured banks with low profit margins before the GFC find themselves at the centre of the Euro Debt Crisis today, which is likely to result in the lowering of living standards for the general population in those countries for years to come.

Canberra and the union movement should celebrate our strong banking system and the benefits that it brings to our community.  The media should expose those attempting smear the banking system for political gain as “lightweights”.

Note: Advice contained in this article is general in nature and does not consider your personal situation or needs. Please do not act on this advice until its appropriateness has been determined by a qualified adviser. While the taxation implications of this strategy have been considered, we are not, nor do we purport to be registered tax agents. We strongly recommend you seek detailed tax advice from an appropriately qualified tax agent before proceeding. The information provided is current as at December 2011.  The views expressed in this article are personal views of Mark Draper and are not necessarily the views of the dealer group.

 

 

 

Thursday, 06 October 2011 13:44

Share Markets Look Cheap – Trading On Fear Not Fundamentals

Written by

It is clear that over the longer term what drives share prices is company profits. It is logical that the more profit a company makes, the more valuable it is and therefore the value of the shares increase.

The graph below shows company profits represented by the red line for the last 30 years. The green line is the value of the Australian share market measured by the All Ordinaries index. For the majority of the past 30 years the pricing of the share market has reflected company profits, until the Global Financial Crisis.

You can clearly see a disconnect between the red line and the green line which means that there is a clear disconnect between company profitability and the current share prices.

Ultimately we would argue that the lines will converge, and the most plausible result would be a significant rise in share prices.

Obviously the short term is dominated by the issues in Europe and the US, but arguably once these issues are resolved it is likely that the All Ordinaries index will once again be reflective of company profits.

We have provided another chart that demonstrates the point that the market is currently trading on fear rather than fundamentals.

This chart shows the Equity Risk Premium of the Australian Share market. 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.”

Generally speaking higher risk premiums result in lower valuations of assets.

What the chart below outlines is what additional premium investors require to invest in the Australian share market. This tells us that there is a very large amount of risk already priced into current share prices. The chart shows that the Australian share market is currently trading a 3 times the average Equity Risk Premium, which implies that the share market appears very cheap. The last time this chart showed such an extreme was in early 2009 – which was followed by a very strong share market rally.

Note: Advice contained in this article is general in nature and does not consider your personal situation or needs. Please do not act on this advice until its appropriateness has been determined by a qualified adviser. While the taxation implications of this strategy have been considered, we are not, nor do we purport to be registered tax agents. We strongly recommend you seek detailed tax advice from an appropriately qualified tax agent before proceeding. The information provided is current as at September 2011.

In a financial world that is currently light on for good news, largely courtesy of Europe and the US, it may surprise you to know that almost 50% of the top 200 Australian companies increased their dividend last financial year.

There are clearly two parts to determining the return from investing in shares.  The first is movement in the share price and the second is the dividend paid each year by the company.  Dividends are often overlooked as an important reason to invest in shares, but Platinum Asset Management recently reminded that from 1900 – 2008 the average return from shares was over 6% above the inflation rate and that  dividends contributed 4% of this figure.  (Platinum were quoting figures from the US share market, where dividends are generally lower than Australia)

Total dividends from the Australian market rose by over 9% last year and here is a selection of companies to show the increase in dividends.  This information has been sourced from IRESS.

 

Company 2010 Dividend 2011 Dividend % Increase 2011 Dividend Yield ** Dividend Yield adjusted to include tax credit
Wesfarmers $1.25 $1.50 16.6% 5% 7.1%
CBA $2.90 $3.20 10.3% 7% 10%
Woolworths $1.15 $1.22 6.1% 5% 7.1%
Platinum Asset Mgment $0.22 $.0.25 13.6% 6.75% 9.6%
NAB $1.47 $1.62 10% 7.2% 10.3%
Telstra $0.28 $0.28 No Increase 9.4% 13.4%
QBE $1.28 $1.28 No Increase 10.1% 10.5%

 

** Based on closing price of company as of 12th September 2011.

Not only are the dividends being paid by these companies significantly higher than the current cash rate of 4.75%, but dividends are bankable and can be spent or saved by investors.  Companies that pay fully franked dividends means that the tax has already been paid at a rate of 30% on that dividend.  The right column titled  “Dividend Yield adjusted to include tax credit” includes the value of tax paid by the company on a fully franked dividend.

While share values fluctuate daily, it is the dividend stream that investors can rely on over time paid from rising profits.

 

 

Note: Advice contained in this article is general in nature and does not consider your personal situation or needs. Please do not act on this advice until its appropriateness has been determined by a qualified adviser.  While the taxation implications of this strategy have been considered, we are not, nor do we purport to be registered tax agents. We strongly recommend you seek detailed tax advice from an appropriately qualified tax agent before proceeding.  The information provided is current as at September 2011.