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Cuffelinks Firstlinks Edition 298

  •   22 March 2019

The Reserve Bank has not moved the cash rate since 3 August 2016, which suggests its website might be struggling for a bit of action. But the cash rate is not the only policy tool in its kit bag, as it can opine on almost anything. In recent weeks, two issues have caught widespread attention. 

In the first, a Reserve Bank paper on Australian housing fessed up that:

"We find that low interest rates (partly reflecting lower world rates) explain much of the rapid growth in housing prices and construction over the past few years. Another demand factor, high immigration, helps explain the tight housing market and rapid growth in rents in the late 2000s."

It's almost an admission that the reductions in the cash rate, twice in 2015 and twice in 2016, were steps too far. The FOMO pushed up residential property prices until the mid-2017 peak, which is now inflicting pain as recent buyers fall into negative equity or struggle to settle amid falling prices. There's also less cash rate firepower to stimulate the economy as it slows.

The timing on the second paper, this one on climate change, appears spot on, catching a mood perfectly. It feels like a tipping point when politicians such as Tony Abbott (who reversed his call for Australia to leave the Paris Accord) and Peter Dutton (who refused to support the government building a coal-fired power station) change their tune just before an election, realising that most voters have accepted the dominant science. One of the Reserve Bank charts shows wind and solar are finally competitive sources of electricity, promising a strong future for solar when combined with storage capacity. It's a good story in this land of sunshine.    


The latest Essential Vision poll shows the majority of Coalition voters and those over 55 believe climate change is caused by human activity, with young people leading the way in their views.  

For investors, including those who reject the climate change science, it's time to recognise the impact on portfolios. On the weekend, the AFR reported the first chair in 2008 of the UK Climate Change Committee, Lord Adair Turner, now saying:

"It's so embarrassing. I mean, we knew the price of wind and solar was coming down but we thought it might come down at, you know, 20% a decade or something like that. Solar has come down by 90% or so, wind has come down by 70%."  

Two articles this week look at ESG investing. Use the Have Your Say section for comments.

Moving on from the franking credit debate, we look at Labor policies on negative gearing and capital gains. Noel Whittaker reports on a housing policy roundtable he attended, and he is especially concerned about the price impact when a 'new' property becomes 'established'. However, Richard Holden argues negative gearing creates intergenerational inequality and financial instability. The debate highlights how investors should watch the interlink between policies, as switching to assets without franking might generate more capital gains which might be taxed at a higher rate than in the past.

On investing, Oscar Oberg sees better growth prospects in offshore markets as Australia slows, and Ilan Israelstan reports on ETF research showing changes in investor and asset composition. Pablo Berrutti and Mark Nieuwoudt explain new moves in ESG principles

The big news in asset management this week was Brookfield taking a majority stake in Howard Marks' Oakfield Capital, so it's instructive that Jonathan Rochford reviews the latest Marks book on market cycles. Did Marks pick the top of the value cycle for his firm?

I met with Nobel Laureate, Robert Merton, a few years ago, and he espoused the merits of reverse mortgages as part of the retirement income solution. Most Australian banks have exited the product, and Joshua Funder makes the case for a revival of home equity access

We recently ran a 'face off' on the use of government bonds in all portfolios, and Warren Bird has a short reply as a referee after judging both cases.

This week's White Paper from Vanguard examines How Australia Saves. It includes great insights into super defaults among millions of Australians. Plus we have the monthly report from BetaShares on ETF trends after a record month for growth. Also, many new LICs are coming this year, especially with an income focus, although the Bell Potter report below suggests their total returns have lagged the broad market in 2019 due to discounts to NTA widening. 

Graham Hand, Managing Editor


For a PDF version of this week’s newsletter articles, click here.




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