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Welcome to Firstlinks Edition 463 with weekend update

  •   23 June 2022
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The Weekend Edition includes a market update plus Morningstar adds links to two highlights from the week.

Weekend market update

On Friday, US markets confirmed their best week for a month as the S&P500 rose 3.1% while NASDAQ was even stronger, up 3.3%.

From AAP Netdesk: The local share market ended the week with a flourish, with strong gains by tech stocks and lithium players helping offset weakness in the energy sector. The benchmark S&P/ASX200 index gained 28 in the final hour of trade to finish Friday up 50 points, or 0.8%, at 6,578.7. The ASX200 finished up 1.6% for the week, its best performance since the week ending March 18.

The index is down 8.8% in June to date, putting it on track for its worst monthly performance since March 2020, with four trading days still to go. Tech stocks were the biggest gainers on Friday, collectively rising 6% cent for their best performance since 13 May. Xero rose 7.5%, Nearmap soared 18% and Afterpay owner Block rose 10.9%.

The sector has been boosted by a drop in bond yields, which makes the risky high-growth sector seem more attractive. Australian 10-year bond yields hit an eight-year high of 4.1% after Reserve Bank Governor Philip Lowe gave a hawkish interview to the ABC, but tumbled to 3.7% this week amid fears the pace of rate hikes will trigger a recession.

In the mining sector, the iron ore giants were mixed. BHP and Rio Tinto both dropped 1.2% while Fortescue added 0.2%. The energy sector was down 1.5% as oil prices continued to move lower on concerns about global growth. Woodside fell 1.7% to $30.61 and Santos declined 1.8% to $7.22. Three of the four big banks were down, except CBA which rose 0.5% to $90.16. Consumer discretionary stocks rose 2.2% with Wesfarmers climbing 1.8% and property trusts gained 2.5%.

From Shane Oliver, AMP: Share markets saw a decent rebound from oversold levels over the last week as there were no new hawkish surprises from central banks and weak economic data saw bond yields fall taking pressure of share market valuations, despite increasing worries about recession. For the week US shares gained 6.4%, Eurozone shares rose 1.8% and Japanese and Chinese shares rose 2%. The $A remained around $US0.69 as the $US fell slightly.

The macro story remains the same with more higher inflation readings in the past week (in the UK where it rose to 9.1% yoy and in Canada where it rose to 7.7%), more hawkish comments from central banks (the Fed, ECB and RBA and a 0.5% rate hike in Norway) and ongoing fears of recession. We remain of the view that a global recession can be avoided but with central banks hiking rates aggressively the risks have increased to the point that it's now a close call. 

While money market expectations for the RBA cash rate have fallen sharply over the last week (from 3.86% for year end to 3.19%) in response to Lowe’s comments and recession fears, at 4% in a year’s time they still look too high.  Very weak consumer confidence and slowing credit and debit card transactions as reported by various banks so far this month suggest that consumer spending is starting to slow significantly already. Which all means that the scale of interest rate hikes expected by the money market is unlikely to happen.

***

Next week is the 30th anniversary of the Superannuation Guarantee (SG) system which has enhanced the retirement savings of millions of Australians. Initially set at 3%, the SG requirement for employers to make contributions into a super fund for their employees rises to 10.5% on 1 July 2022 on its way to 12% by 2025. For all its complexity and shortcomings, it's an exceptional policy achievement which forces most people to save for their later years and boosts the capital and savings of the country.

On 1 July 1992 when SG started, total super balances from other schemes totalled $148 billion. The 23 million accounts are now worth about $3.4 trillion. The architects of the scheme would be amazed to see industry funds ($1.1 trillion) and SMSFs ($894 billion) so far ahead of retail funds ($688 billion) in managing super assets. More on this milestone next week.

There is another major superannuation event next week when superannuation funds (but not SMSFs) must deliver retirement income strategies tailored to the needs of their members. The Covenant is the next phase in the development of Australia’s retirement system, and super funds are required to help members:

  • Maximise their expected retirement income
  • Manage expected risks to the sustainability and stability of their expected retirement income and
  • Have flexible access to funds during their retirement.

There are obvious difficulties. Every person is unique, especially in their retirement plans. Many pre-retirees don't know when they will give up paid work. Some retirees will aim to spend their money before dying, while others want to leave a substantial bequest. The Bank of Mum and Dad may be open in certain families but not others. Some retirees are happy taking market risk while many are terrified. The age pension is anathema to some but a sacred right to others. Most people will reach a stage where health becomes as important as wealth. How does a policy on a website cater for such infinite variation?

A key point often overlooked is that at best, the super fund may know how much the member holds in superannuation, but retired members usually own substantial assets outside super, including the family home. A recent Investment Trends/Vanguard SMSF survey gives some insights into this inside super/outside super balance.  

How will all these cohorts be recognised in a broad policy issued by a large fund with millions of members? Anyone rushing to the website of their fund on 1 July is likely to be disappointed. It's the first step on a multi-year journey, and next week is more likely to include a statement of principles and a plan to do something more in future than offer bespoke solutions to individuals.

APRA's implementation pathway looks like a stretch given 1 July 2022 is only one week away:

Within superannuation funds, there is doubt about what can be achieved with such a scatter gun approach, and it's not clear how super funds meet the legislation obligations without running foul of personal advice regulations.

This point was emphasised to me recently in a discussion with the Chief Investment Officer of a major superannuation fund. He was complaining about a C-suite meeting where the Chief Marketing Officer (supported by the other Cs) had presented a new marketing campaign about engagement with members. The CIO's view was that most of their members would benefit from less information about fund options and balances. He said people should leave their super alone to build over time while they concentrated on other things in their lives. He was frustrated that the same communication imploring members to take a long-term view and 'stay the course' also explained difficult market conditions and switching options.

Should members reading their letters for 30 June 2022 be worried that their super balances have dropped for the first time in a dozen years (yes, both bonds AND equities are down) with more falls to come? Will they switch to cash or is the lesson that it's not a time to sell despite the threat of significantly higher interest rates and a recession? Most professionals don't know what to do so what chance a member who reads a glossy communication a couple of times a year? As John Lennon wrote:

"Life is what happens to you while you're busy making other plans."

***

As markets correct from the excesses of 2021, a lot of people who jumped on the get-rich-quick bandwagons are paying the price. Among the more egregious practices, we previously warned against following the advice of actors and influencers paid to promote crypto. What does anyone really know about the value of a cryptocurrency, never mind a Hollywood star. We highlighted Matt Damon declaring "Fortune Favors the Brave" in a lavish Crypto.com ad in October 2021, and Bitcoin's price is since down 70%. Still feeling brave? The broad crypto economy has wiped out trillions of dollars since its November 2021 high, with a lot of scammers making money at the expense of punters.

And now this, for those desperate to own a Cristiano Ronaldo digital image:

The losses in many hyped-up companies in the US are extreme, with 10% of all companies in the Russell 3000 down over 80% from their highs, losing over US$1 trillion in value. Many of these companies, such as DocuSign, Block, Roku, Rivian, Coinbase, Beyond Meat, Virgin Galactic and Robinhood are well known to Australians and were supposed to become global disruptors. Some companies are now wondering whether their next capital injection will cover ongoing trading losses.

The Australian market often follows broad US trends, and the impact of inflation on US consumers is dramatic, where many typical household costs in the May CPI statistics were up a remarkable 26% in a year, near the all-time peak year-on-year inflation in 1980.

Our own central bank Governor, Philip Lowe, spoke to the American Chamber of Commerce this week. He pushed up his forecast for inflation to 7% by the December 2022 quarter, but more optimistically, gave three reasons why inflation will moderate in 2023:

  1. Pandemic-related supply-side problems in the global economy are gradually being resolved.
  2. Inflation is the rate of change of prices, not a measure of the level of prices. For inflation to stay high, prices must continue to increase at an elevated rate.
  3. The tightening of monetary policy around the world, including in Australia.

He made a commitment to push inflation back to the 2% to 3% range as "it is important that the higher rate of inflation this year does not feed through into ongoing inflation expectations."

During question time, he conceded that the market had been better forecasters of inflation and interest rates than the Reserve Bank, but he was highly doubtful that the 4% built into forward rates towards the end of 2022 is likely. It would require “the sharpest and quickest tightening of monetary policy that we’ve ever experienced in the inflation targeting regime” and the Board "would have to increase interest rates by 50 basis points at the remaining six meetings of this year, and have a 75 basis point increase in there as well”.

Although Lowe has been incorrect on rates for the last six months, it is difficult to disagree with him on these statements.

Graham Hand

***

In this week's articles ... 

We mark 30 years of compulsory super with a deep dive into how SMSFs have blossomed and are now attracting a younger cohort confident in their own decision-making. Check how investment allocations inside and outside SMSFs differ for the same people. 

Anton Tagliaferro was honoured in last week's Queen's Birthday awards, and we look back to an article he wrote in 2006 for remarkable similarities to the current day. Plus opportunities he is seeing in 2022.

Trent Koch writes that investments in assets such as toll roads, airports, railroads, utilities and renewables, energy midstream, wireless towers and data centres show their worth in turbulent market conditions.

Banks have been whipsawed as investors digest the positive impact of higher rates against the potential for bad debts to increase in a slowing economy. Hugh Dive believes bank shareholders will be rewarded for their patience by ignoring the current market noise.

Anna Hacker writes that whether you are seeking to appoint an attorney in the future, or have been appointed by a loved one as their attorney, it is critical to understand the full extent of this important legal framework.

The Australian housing market is seen as increasingly unaffordable, potentially putting home ownership beyond the reach of ordinary Australians. Kirsten Wymer and Edwin Lung provide an analysis of buying versus renting for Australians on the aged pension.

Tax time may be challenging this year given the number of changes. Mardi Heinrich outlines the key considerations for PAYG employees to be across given the COVID concessions that have been implemented by the Australian Tax Office.

In the additional articles from Morningstar for weekend reading, Lauren Solberg identifies eight electric vehicle opportunities which do not include Tesla, while Lewis Jackson shows there are far more highly-rated stocks in the Morningstar universe than lowly-rated.

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7 Comments
Peter
June 26, 2022

Just a quick question: How can Philip Lowe and his band be so wrong for so long and still hold their jobs?
Love to hear what others think.

Rick
June 24, 2022

I read your editorial an hour after finding out that I was not able to roll over my NAB Capital Notes 2 (that are maturing in July) to the new issue, NAB Capital Notes 6 because the government has made a ruling that I have to do this via a syndicated broker. Needless to say, all these brokers have allocated the new notes so I must buy them on the open market when they list. It is ironic that the largest investor group, SMSFs, are frozen out of this cozy arrangement when they are probably the largest investor in hybrid securities.

Graham Hand
June 24, 2022

Yes, Rick, the impact of the DDO rules achieves nothing for retail investors except locking them out of primary issuance, even when rolling over existing investments. Forcing to buy on-market without the new issue gain is simply reducing retail investor yields.

Kevin
June 24, 2022

Graham the sheer frustration of modern life is amazing,the complete lack of thinking and common sense.
I gave up trying to get Commsec to take over a margin loan from a different bank.
Statement from the other bank confirming value of shares.Check.The loan is approx 19% of the gross value of the shares at statement date.
Bank statements to prove income which is,dividends,super and a small pension from the UK govt.A very good net 6 figure income,far higher than what is needed.Cash in bank,enough to pay the interest for 3 to 4 years if there are no rises in rates.
Two years of assessments from the ATO,easy.Explain that for the last 4 years or so that ATO has got it wrong,slight errors on my part,and glaring errors on their part,these things happen.
You would think it would be easy.What is this UK pension,a very small part of my income.The age pension,the same as the age pension in Australia.Every 4 weeks on Thursday it is paid into my bank account with variations due to fluctuating exchange rates,or public holidays.A fixed amount of £s every 4 weeks for the rest of my life.That is what I have marked on those bank statements.
The usual rubbish from all of these institutions,we are here to help etc.
We need a letter from the UK pension provider stating how much the pension is and what the arrangements are.
You are not getting a letter from the UK govt because you want one you can forget about that,they will not supply it.I have told you what it is,it is on the statements as Citibank international transfer,every Thursday ( or Friday depending) for the rest of my life.That is the only proof you are ever going to get.The UK govt is not going to default on that payment.
We want a letter from your UK pension provider,by law they have to supply it .
No they don't!!.They told me what the pension was in £s based of the number of years of contributions into the NI fund.As Attlee said,the fund that doesn't exist A pay as you go system.The bank statements tell you,it is paid every 4 weeks.
We want a letter from your UK pension provider
You just give up and think these people are clueless They just read from a script and there can be no variations from that script no matter how obvious they are.

Kevin
June 26, 2022

While I'm on a roll the bank I want to get away from is Westpac.Somebody probably got sacked last year for getting it right and making it simple. An E mail from them.Your loan is due to rollover on ( date).You owe us say $200K.The interest rate is 5%.Pay $10K for interest in advance,tick the box for that.Should we debit the same account as last year,tick the box and return this E mail to us .I was amazed how they managed to get it right.That was last year,the only time they have got it right. This year a letter arrived on around 12 June.You must fill these forms in and return them to us by 6 June.If you don't your loan will revert to a variable loan.This obviously causes huge problems with the ATO, losing the deduction, and further problems with the ATO pay as you go system.The old provisional tax.The letter also states you can fill this in on line by going to,then the web address. Go to the web address,this page no longer exists.I take it that the page expires on 6 June also. I call them and I am amazed,they have made it simple.They say take a photo of the forms and E mail them to us at the address on the forms.Wonderful ,I am impressed.I explain that I will also go into my local Westpac branch and get them to scan and email the forms over,or fax or whatever they do. Nobody at the branch knows what a margin loan is of course .I tell them it isn't a problem,scan and E mail to the address on the forms,or fax it to the number on the forms,it is easy.Much discussion takes place,who is this old bloke dressed in Lycra and cut off Levi jeans ( shorts).A bike helmet on,giving us forms and instructions.Nobody knows what these forms are,is he from Mars,there is a lot of green in that flourescent Lycra bike top. I will just confer with the manager,and she walks off.The manager looks over at me as furtive whispers take place,the look is a kind of "the note says put all the money in the bag and nobody gets hurt".The manager nods his head and all is well.She disappears for 2 minutes,comes back and says,all done.My relief is great. No notification from Westpac.The forms say they will send a text to confirm.I call Westpac,go through the usual identification process.Did you receive the forms? I will check,yes they are here. I haven't received confirmation from you,I have no confidence that you can complete this transaction,I want that confirmation. Sometimes it can take 2 days says he.I have waited 2 days say I.Everything is good he says. Two days later call them back,where is the confirmation.I will check she says .We have not received any instructions she says You have I say,he told me you had . I will check she says ,reading the notes it seems he was looking at the forms from last year.WHAT. Hang on she says,get a pen and paper and take down my E mail address,take a photo of the forms and send them to me,I will try and get this done.Call them back 15 minutes later I need to speak to X about my margin loan and the problems with it .I'll check,she's gone home,end of her shift,can I help.Have you received the forms,this has to go through.I'll check,no we have not received anything from you where did you send them to.To the E mail address she gave me,I take it that is her E mail at Westpac.She's gone home there is nothing we can do. Hundreds of millions of $$ spent on computer systems,probably over a billion $ spent Wages for I T people.They cannot organise something as simple as roll the loan over and take the money out of the nominated account on the due date .They cannot organise how to accept instructions to do something so simple. This goes to the banking ombudsman most years.The incompetence is beyond belief. I cannot go to a different bank,a bank that is probably just as incompetent.We need a letter from the UK govt to prove that you get a pension from them The pension that is on the bank statements you have provided . On a different note I had 5 minutes to spare so checked the UK pension forecast .The major 5 year review.The system falls off a cliff in 2032.Not enough young people contributing to pay for the old people.The present employer/ employee contributions of approx 22% of wages will need to rise to approx 33% to cover pensions.The future date is 2086.The expected pension is £ 2,800 a week in nominal terms,or approx £220 a week in real money.A small rise from the £180 a week now.The numbers are just rough as it was just a quick look and my memory for numbers is not what it was. I'm coming back as a pom in the next life.

Joe
June 23, 2022

Very true Steve. Industry funds were also quick to realise that the employers were their customer and not the members. They communicate with members via billboards and TV ads, while wining and dining employers at the tennis and AFL. Once the corporate super sector collapsed under the weight of regulation, the industry funds scooped up all that FUM and why wouldn't they. The employers were getting the 5 start treatment at the MCG.
I wonder how industry funds will navigate this high inflation environment. Falling rates and inflation allowed them to revalue their unlisted assets higher and claim 'outperformance.' Will they now devalue those assets as the value of future cashflows has been slashed with CPI rising 3-5x the previous rate. I'm guessing they won't and their ponzi scheme will keep on rolling.

Steve
June 23, 2022

OF COURSE the Industry Funds are "ahead" of their retail competition, as the Govt legislation has been so distorted, their retail competition has been emasculated at every possible level. However with 1.1 million people in SMSFs, they continue to grow, proving not all is so fantastic about Industry Funds.

 

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