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Cuffelinks Firstlinks Edition 301

  •   12 April 2019

The election is on for 18 May, and there's a lot in play for investing and superannuation. It shows how difficult it is to plan for the future with certainty, when a new set of rules may come into affect only six weeks later, on 1 July 2019, if Labor is elected. As Parliament is now dissolved, all laws in the pipeline lapse. Anyone who was planning, for example, to take advantage of the increase in SMSF membership from four to six to counter Labor's franking proposal can rule that out for the moment. 
The economy, surpluses and 'taxes' will feature heavily in the campaign, and we previously published a summary of six Labor policy proposals. They have implications for all portfolios. Shane Oliver provides an election and investing update in the White Paper section below.

The impact of liquidity on asset prices

Low interest rates supported by global Quantitative Easing (QE) fuelled financial asset price rises over the last decade, with excess liquidity as much as company fundamentals driving US equities to record levels. The Federal Reserve's balance sheet increased a remarkable US$4.5 trillion between 2009 and 2014 as it printed money to buy US Treasuries and mortgage-backed securities and inject liquidity. Investors flocked into other assets, pushing up the prices of everything from Bitcoin to collectibles to property.

Then Quantitative Tightening (QT) withdrew liquidity from late 2017, leading to the severe December 2018 sharemarket sell-off. A return to a 'dovish' stance in 2019 helped a recovery. 


For all the work that analysts do to calculate the intrinsic value of a company and the right time to buy and sell, the actions of the US Central Bank heavily influence the investment outcome.

What about in Australia? Interest rates did not go as low as overseas, and our Reserve Bank did not participate in local QE. Peter Sheahan of Curve Securities (who I worked with when we were both young punks) has spent 33 years watching Australian interest rates and liquidity. He sent me a note last week saying that the Reserve Bank is using its daily money market dealings to control a system awash with liquidity. He said that for the first time since 2013, cash has been lent interbank at a rate lower than the official cash rate. The 90-day bank bill rate has fallen from 2.1% in January to 1.69% now, and our Central Bank has withdrawn over $4 billion from the system in April so far. There is a glut of savings and excess liquidity is looking for a home due to an underallocation to risk securities.

Peter believes cash sitting on the sidelines was one reason for the fall in Australian interest rates in the last year, as shown below, and there are signs of a reversal which may push up equities and rates. Like the US, the Australian market is affected by liquidity movements in our economy.


Australian yield curve movements to 5 April 2019

Focus on investing and legal insights

In an exclusive interview with Phil King, he defends the role of shorting, and shows how it can create opportunities in a 'long short' portfolio. He believes short activity is widely misunderstood and adds valuable liquidity. Then Robert Miller gives three rules for finding companies that can sustain their dividends.

In a special look at three legal cases affecting SMSFs, Kimberley Noah and Bryce Figot report on a trustee who had her powers removed, while Donal Griffin has a warning about SMSF documentation and heavy fines imposed on auditors who did not check investment strategies. 

I recently presented at an investment forum, and there were questions about how to access private equity after I showed the Future Fund's allocations. Nick Griffiths explains how private assets dwarf listed securities, and how investors can invest in this diversifying asset class. John Julian looks at infrastructure spending in the Budget and its impact on the overall economy.   

Following Hayne, investor liaison with corporate boards will move up a few notches, and Maria Leftakis describes trends in global engagement and survey results for better outcomes.

At the SMSF Association Conference this week, following a session on the wide range of policy proposals, the Q&A session focussed only on one subject: franking credits. We report on findingsof the Parliamentary Committee, with a Dissenting Report from Labor members. 

This week's White Paper is the AMP Capital look at the implications of the 18 May election, and the latest ETF Report from BetaShares below shows the sector continues to grow rapidly.

Finally, our apologies for the difficulties accessing our website immediately after the publication of our Budget Special Edition. Almost 5,000 people clicked onto the site in a few minutes and the server collapsed. Opens of our usual newsletter are normally spread over a longer time period.

Graham Hand, Managing Editor


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




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