Happy Easter 2019
Happy Easter to all our clients and we hope you have a safe relaxing holiday period. This being the Federal Budget edition of our newsletter, there is surprisingly little to report on with respect to the actual budget. There is much greater interest in the tightening federal election contest. A couple of Superannuation changes were announced on budget night including the relaxation to age 67 of the necessity to pass a work test to contribute to Super as well as an extension in the ability to bring forward three years of non-concessional contributions. There were also some minor adjustments to small business tax and some “can of tuna” personal tax cuts. All of these changes however, need to pass Parliament before they become law and will be subject to a Coalition election win.
Unlike recent Federal elections, the federal opposition (Labour) has not opted for the “small target” strategy and has been very open with its policies of significant change. $300 billion plus of new taxes is a bold gamble and will make for an interesting month or two ahead. For investors, the outcome of the election could have significant consequences. Franking credit refunds in superannuation are destined to be a thing of the past, proposed capital gains tax policy changes will make it more expensive to sell assets and taxation of pension payments is also set to increase. Accounting fees above $3000 a year are also proposed to lose their deductible status.
If Labour wins the election and passes its legislation, then this extra revenue raised will be spent on hospitals, schools, subsidising electric vehicles, windfarms and other renewable projects plus just maybe paying down some of the nearly AUD$0.8 Trillion debt the nation has. There is much uncertainly about whether Labour will win and win with a sufficient majority to push through the proposed changes, but if that should happen we will make the necessary adjustments to clients individually to manage and minimise the negative impacts this may have. In many cases there are strategies to minimise the pain from these changes for investors and we look forward to working through them with you if it becomes necessary.
Turning to markets, after everything looked grim in the December quarter 2018, the MSCI World Index (+12.4%) recorded its largest March quarter return in 21 years. This is underpinned by a complete unwinding of tightening biases from regional central banks, additional stimulus in China and the increasingly positive dialogue between the US and China regarding trade. The current global expansion will become the longest on record in June. However, the euphoria about that record has been contained by the first inversion of the US yield curve since 2007. Inverted yield curve as often a precursor to recessions so we are watching closely.
The Australian economy slowed notably in the second half of 2018 and looks set for an extended period of below-trend growth given the persistent headwinds of high debt, low wage growth and falling house prices. House prices are likely detract from economic growth in two ways. First, through lower housing construction which will be down for the next 12 months based on building approvals. The second impact is the wealth effect. Lower house prices are likely to spark further rises in precautionary savings, and declines in personal spending, which represents more than half of Australian GDP. Interestingly, from a financial stability stand point, high debt and low-income growth has seen a rise in loans in arrears, but at this stage nothing to be too concerned about. While unemployment remains relatively low loan defaults should stay at manageable levels.
We have begun adjusting portfolios to manage the growing risks that are becoming apparent in markets and look forward to assisting you individually in the near future.