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Welcome to Firstlinks Edition 378

  •   8 October 2020
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Weekend market update

US shares continued their strong week on Friday with the S&P500 up another 0.9% to give a five-day gain of 3.8% on hopes of new fiscal injections. Other global markets also did well with the S&P/ASX200 rising 5.4%, the best weekly increase since April, on the back of a stimulatory Budget. The Australian index is just over 6,100 but it has struggled to push through 6,200 recently. To date, the markets are looking past the strong rise in new cases as deaths are flat, but the northern winter may cause a refocus.

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Budgets are forecasts, and more than most, Josh Frydenberg and Treasury waved a wet finger in the air in compiling the 2020 version. How many companies will now employ a new apprentice for $100 a week subsidy? Which back-of-the-envelope showed 3.5 million businesses would use the instant asset write off and the 1 million loss carry-back? At a time when, to use the Treasurer's words, "Our cherished way of life has been put on hold”, these estimates are understandable. But the $17.9 billion for superannuation savings based on the new YourSuper proposal is wishful thinking.

Exploring YourSuper is our main Budget focus this week. For a broader analysis, see Shane Oliver's summary in the White Paper section. Given the adverse changes in recent years, we should be grateful there were no meaningful announcements on superannuation and SMSFs, including nothing on the next stage of the Superannuation Guarantee.

We noted last week the strong fund flow into global investments, but the biggest surprise package is the support for fixed interest products with rates at all-time lows. The first two tables below from BetaShares show flows in August 2020, and the third table from the ASX is total balances as at August 2020. It shows $12.2 billion invested in fixed interest in Exchange Traded Products, up from $9.1 billion a year ago, and the trend is the same overseas.

On to tips to guide your asset allocation ...

Damien Klassen examines the cherished 60/40 portfolio, the 60% equities/40% bonds exposure used by millions of Australians. When investing, the past is irrelevant, as all earnings are in the future. Does 60/40 still work?

My interview with Vivek Bommi of Neuberger Bermann shows how fixed interest and stock markets bailed out companies facing the pandemic, and how high yield bonds are attracting flows in the current market.

Damon Shinnick and Jonathan Baird explain how an active bond fund is able to achieve returns not directly available for retail investors. Unlike the stock market where anyone can buy anything, the vast majority of opportunities in fixed interest are not available to the public other than via funds.

There is a crucial problem for active equity managers when they become too big for their market. Andrew Mitchell explores why this temptation to grow causes underperformance.

Some industries have benefitted greatly from COVID-19, and Josh Gilbert asks whether the boost to food delivery and related services will be sustained in the long run, or is the happy meal over?

And back to basics on managing an SMSF, Julie Steed warns that claiming a tax deduction for contributions needs to follow a process to ensure a favourable tax treatment.

Now, off to check the YourSuper comparison tool and get my share of the $17.9 billion.

Graham Hand, Managing Editor

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Weekly Editorial

Welcome to Firstlinks Edition 379

It is trite and obvious to say the future is uncertain, and while COVID-19 brings extra risks, markets are always unpredictable. However, investing conditions are now more difficult than ever, mainly because the defensive options for portfolios produce little income. We explore whether investing rules have changed with new input from Howard Marks.

  • 15 October 2020
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Retirement

Have the rules of retirement investing changed?

In retirement, we still want to reduce stock volatility while generating cash flows. The two needs have not changed, but the reward expected in the old days from interest payments has gone. What should we do?

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Tech continues to run on rising prices not profits

The global tech run paused in September but the boom is driven by rising prices rather than actual profits. It will end when global confidence in the prospect of endless monetary and fiscal stimulus runs out.

Investment strategies

When defensive assets become indefensible, turn to tech

During COVID-19 and the economic recession, we are seeing a surprising new entrant to the defensive sector grouping. Technology shares have been behaving a lot like defensive shares such as food and utilities.

Interest rates

10 reasons low interest rates may limit growth

Ultra low interest rates could be counterproductive for economic growth. Policymakers need to rely less on monetary stimulus and be mindful of the side effects they are creating, especially for retirees and savers.

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What the RC, Budget and Keating mean for aged care

Although the Aged Care Royal Commission (with Paul Keating) and Budget announcements gave the aged care sector high profile, the welcome 'granny flat' changes came with inadequate extra Home Care Packages.

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Is currency exposure an unwanted risk or source of returns?

As more Australians invest overseas, currency exposure represents a new risk. 50% hedged, 50% unhedged was once a popular ‘least regret’ approach, but there's a move to currency as a return source.

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High growth and low rates incompatible with current share prices

The unrealistic value creation through lowering discount rates while assuming high growth shows a sensible link is critical. Interest rate assumptions need as much valuation focus as the cash flows of the business.

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