News from the Finance and Accounting Sector

Finding opportunities in a volatile market

The past 3 months have been big both locally and overseas.

Which makes now a good time to update you on the current outlook and explain what this means for your investments.

Global politics and the sharemarket
In Europe the current debt problems aren’t going to just go away. You’ll continue to hear reports of potential debt defaults, and of potential problems in the European banking system.

While we all hope that the political leadership of countries such as Spain, Greece, Ireland, Germany and France will soon take the kind of steps needed to prevent further Europe-wide economic and financial issues, there are political hurdles in the way.

Some of the current governments are facing upcoming elections; Spain in November this year, followed by presidential elections in France next year. Many of the steps that need to be taken are going to be politically unpopular, and it is hard to see many of Europe’s politicians wanting to face the polls after taking those steps.

In the US, despite Standard and Poor’s announcing the first ever downgrade of the US Treasury’s debt, Treasury bonds are still very much in demand. In times of equity market turmoil, it is clear US Treasuries are still a key safe haven for investors.

What this means for your investments
In times like this active management of your investments is crucial to delivering good strong medium to long-term returns.

Such market volatility and individual share volatility, provides a great backdrop for investment managers with strong investment processes and discipline. They can pick up shares at very attractive prices relative to their medium-term growth opportunities.

While the level of economic activity has slowed down particularly in western economies, is perhaps not as dire as media reports have suggested.

Ironically, in these times, high quality equities may actually prove to be more of a safe haven in a world dominated by government debt concerns. Many companies around the world are in a very strong financial position, with historically very low levels of debt, and able to invest in and grow their businesses.

Any questions?
As always, we’d be very happy to meet or talk with you over the phone.







Why you need a return above inflation

Rises in the price of goods and services, is known as inflation. Inflation erodes the value of your money. For example, $100 in the future may not buy the same amount of goods as $100 today. To prevent the value of your money being eroded, your investments need to earn a return equal to or above the rate of inflation in the long-run.
For your investments to more than keep pace with inflation, you need to invest in assets which are expected to deliver higher returns in the long-run (like property or shares).
The following graph shows how an investment of $100 in the Australian share market in 1900 would have grown in "real" or after inflation terms. By the end of 2008, this $100 would have grown to $208,059 in real terms. Cash on the other hand would only have grown to $207 - a significantly lower return in real dollars.



There were many periods in history where cash did not keep up with inflation. Eg during World War I and II, post World War II and the 1970s. Of course there were also times when the share market did not keep up with inflation, however the returns in the long-run have significantly compensated.

*Source www.mlc.com.au

Prepare for a rise

As Australia recovers from the global financial crisis (GFC) there’s mostly good news but some bad. On the positive side, more people are employed, investors are gaining from a healthier sharemarket and the strong dollar makes travelling overseas and importing goods much more affordable.

On the flipside, with the risk of inflation, official nterest rates are rising. The Reserve Bank of Australia (RBA) has lifted the official cash rate by 1% since late last year, and if the economy continues to bounce back, NAB’s research team expects the RBA will increase the cash rate by a further 0.75% over 2010 to 4.75% per annum. If you’ve already got a loan, you need to understand the impact that rising interest rates could have on your finances. There are also some things you could do to ease the burden of higher loan repayments.

Know where you stand
“The all-important first step to managing interest rate rises is to complete a household budget”, says Paul Sarkis from MLC. When doing this, you need to work out your total household income and deduct what you currently spend on loan repayments, other essentials items (such as food and utilities) and discretionary expenses. You then need to work out the impact that higher loan repayments will have on your budget. “It’s also a good idea to stress test your finances to see how you’d cope if interest rates increase by a range of increments”, says Paul. “This will give you a clear picture of where you’ll stand in different scenarios and help you decide whether any action is necessary”. If you think your budget will struggle, you should take a close look at your discretionary expenses and see where you could make some cut backs.

Maximise your repayments
If you find you have some room in your budget, you should consider increasing your repayments as soon as possible. This is a smart thing to do, regardless of where we’re at in the interest rate cycle. “Making higher repayments can also enable you to see how your budget would cope if interest rates rise”, says Paul. “Furthermore, by getting ahead on your loan, you may have the option to redraw some of your additional repayments should you need to”.

Offset your loan
Rather than making additional repayments into your home loan, you could ask your employer to pay your salary directly into a 100% offset account linked to your loan. “By doing this, your salary will effectively reduce your loan balance, and the amount of interest you’re charged, from day one in your pay cycle”, says Paul. “This is because the balance of the offset account is deducted from your outstanding loan amount before interest is calculated”. You’ll also have the same access to your money as a regular bank or other transaction account. For example, most offset accounts enable you to access your funds via an ATM, cheque book or the internet. To keep more of your salary in the offset account, you could even pay the majority of your living expenses with a credit card. But you’ll need to make sure you pay off your credit card (in full) before the end of the interest-free period. Otherwise the interest you pay on your credit card could negate the home loan interest savings.

No easy fix
Locking in a fixed interest rate on some or all of your loan will give you more payment certainty.
“For some people this provides peace of mind and may be worth considering if your budget simply won’t cope if rates go higher than the fixed rates available,” says Paul. But when doing this, be aware that if interest rates fall before the end of the fixed term, you could end up locked in at the higher rate. Also high exit penalties could apply if interest rates fall and you want to break the fixed term.

Another problem with fixed rate loans is they lack the flexibility of variable loans. For example, you can’t use an offset account. Also, while some fixed rate loans allow you to make limited additional repayments, they may not allow you to redraw the money. Additionally, when setting the fixed rates, most lenders anticipate future interest rate movements and build this into the rate. ”As a result fixed rate loans are often higher than variable rate loans”, says Paul.

Planning is paramount
As we enter a cycle of rising rates, remember that the better prepared you are, the easier it will be to manage the impact. The more carefully you budget and plan now, the better positioned you’ll be to cope with any interest rate rises that will affect you in the year ahead.

For more advice on coping with rising interest rates speak to your financial adviser.

Put more into super now

If you arrange with your employer to sacrifice some of your pre-tax salary into super you will pay a maximum tax rate of 15%, instead of your marginal rate which could be up to
46.5%*.

This strategy could enable you to pay less tax on your salary and make a larger investment for your retirement.

If you are self-employed**, similar benefits are also available if you invest some of your business income in super and claim a tax deduction for it.
To find out whether this strategy may be suitable for you, seek financial advice.

* Includes a Medicare levy of 1.5%.
** To qualify as self-employed, you need to earn less than 10% of your assessable income plus reportable fringe benefits from eligible employment.

Retirement in Transition

For investors approaching retirement, recent changes to superannuation rules may be causing some confusion and doubt.
We look at how the new Concessional contribution caps can affect a Transition to Retirement (TTR) strategy, and whether it’s still a good way of maximising retirement savings.

Please see further details below;

Financial Focus Newsletter - Spring 2009