Quarterly Newsletter - July
Major Indices (as of 1/07/10)
* PE ratio
dollar deficit, 2009-USD 11.7 trillion and growing rapidly
- USD 2.45 Trillion, number 1 largest surplus in the world
* PE ratios (based on historical
10 Yr Bond Rate – 2.93% US 30 Yr Bond Rate – 4.11%
|Oil - Nymex
(per million mbtu)
|Iron Ore ($/tonne) spot price
Source : Kitco, quotemarkets
|Baltic Dry Index (BDI)
|US Retail Sales Forecast
U.S. Retail Sales (mUSD)
Commentary – Past 3 months
Fourth Quarter 09/10 financial year saw
most share markets globally move down about 20% as
global concerns grew over the Euro debt crisis, persistent U.S. job
and housing market weakness,
and some slowing in Chinese growth.
An exception to this was the Indian BSE which rose slightly highlighting
again India’s resilience to the GFC. Somewhat surprisingly the
Chinese market has fallen further, now being very good value on some
mild concerns China may be slowing.
Europe's high-stakes debt troubles, persistent U.S. job and housing
US retail sales have been flat and US unemployment
is fairly stable at 10% unemployed, or 90% employed if you are looking
on the positive
India and other parts of Asia, especially South East Asia are
going along very strongly, oblivious to the Western world’s woes.
Baltic Dry Index (BDI) has weakened considerably, to 2,351.
GDP is still low in all the western countries with most of them hovering
around 0-2.5%, apparently coming out of recession with
for world growth in 2010 to reach 4.0% (IMF forecast)
Global Interest Rates have not really
changed this past 3 months while US long term bonds rates have not
changed much. The RBA (Australia) has led raised rates further to 4.5%
now high relative to the Western countries.
Currencies over the quarter were summarized
by a weakening in the Euro. The Australian dollar (AUD) also fell off
a cliff in May compared to all major currencies and ended the quarter
the major loser along with the Euro. The Chinese Government announced
that they will allow the Chinese Yuan to float (and hence appreciate)
more freely but still with some controls. Many analysts think the Chinese
currency is as much as 40% undervalued.
Generally most commodities declined significantly over the quarter
as concern grew about a second dip in the GFC caused by the European
and other Sovereign debts.
Oil declined slightly over the quarter to USD 76, while Natural Gas
increased strongly over the quarter from $3.87 to $4.62. This was
quite amazing considering the fall in all other commodities. This
shows the swing towards cleaner energies.
Gold was the other standout
performer for the quarter rising to $1,240 from $1,112 per ounce.
Copper fell back on renewed concerns about global growth to $2.89.
Ore rose sharply as it moves to spot prices rather than contract
prices. Coal also did well.
Soft commodities were generally weaker.
Australian properties are still trading at around 6-8x average salary
compared to around 2-3x in the USA and many other countries. This
still places Australia as having one of the most expensive property
markets in the world making it hard to see property prices going
upwards. It is more likely to have a decade of moving sideways.
Commentary – Forecast next 6 months
Share markets remain overvalued especially if earning growth is not
very strong. There is still a possibility for a second wave down in
the GFC caused by the European Debt Crisis.
The Baltic Dry Shipping
Index has dropped significantly which is a worrying sign and US Retail
sales forecasts are fairly stagnant. Suggesting
any recovery will still be weak and prolonged.
Share markets are likely
to move sideways or down in the next few months as valuations fall
back to more reasonable levels and the
issues around the European Debt Crisis play out.
Most markets PE
ratios suggest corporate earnings need to increase significantly
with the recovery otherwise share markets are definitively
Investors that hold significant cash should
still be patient for now and only enter the market gradually or on
into the market over time; however investors who have been
aggressively placed to benefit from the recovery should continue to
somewhat and lock in some profits just in case there is a second
in this 2 year old global recession.
The Euro should still
be avoided as should any currency where the country has excessive
debt levels as at last the world
the huge problems it faces with many countries heavily in
debt and no real solution to fix their trade deficits.
are looking well valued at present and with the Yuan likely to appreciate
suggests China is a good place
still do cautiously due the background of Global economic
India also looks quite good, but for similar reasons
The emerging economies that are well managed and have
strong trade surpluses and current account balances such as
China and alot of
SE Asia, as well and parts of Africa and South America
will continue to
flourish despite a slowdown in exports to the western
countries. Their currencies will strengthen, and they will continue
to buy commodities such as iron ore and copper to build
cities to house
That is, we will see the wealth
and currencies of the Western economies (excluding Japan) decline
whilst the well managed
becoming increasingly wealthy. In effect a massive
transfer from West to East.
What to do?
Keep some Cash or safe fixed interest. At
least 60% for Growth clients, 70% for Moderate Clients and 80% for
conservative clients. As Australian rates rise it may pay to hold
Avoid US, Euro, and the UK pound currency, and be
cautious still on all share markets as they are currently priced
for a perfect
and I believe still overvalued at present excluding China, India
and some other emerging markets..
Invest in countries with currency
surpluses and positive GDP (eg; China)
Avoid Bonds (they perform
poorly when interest rates start to rise)
In the short term only,
decrease or don’t increase exposure
to overvalued share markets
Be cautious or don’t buy
overvalued Australian residential property.
exposure to well valued Emerging Markets such as China and India
Euro Debt Crisis
Continuing on with the Sovereign debt theme from previous newsletters
where we evaluated US debt, Dubai’s debt crisis and so on this
newsletter we look at the Euro debt crisis led by Greece’s near
collapse followed closely by Spain Portugal, Ireland England and others
all with alarmingly high sovereign debt levels.
The most likely outcome
from this latest crisis is that the Euro will devalue and some countries
may even be forced out of the EU.
The side effect of all this again
is most likely to be an unsettling of global share markets with significant
downside risk especially
if you have exposure to European markets or the Euro.
The World Financial Imbalances
Looking back at the last two and half years what can we learn and
what can we see as the causal factors of all this havoc in the world
share markets and economies.
In my humble opinion, this is all happening
and will continue to happen for perhaps another two decades because
of the side effects of Globalisation.
That is, since
we began to predominately buy and sell goods and services on a
global basis not a national basis there has been a severe imbalance
in trade flows due mostly to cheap labour from the emerging economies.
has led to the developed world not manufacturing many goods and providing
less global services.
Some classic examples of this are the huge manufacturing
of goods in Chinese factories, and the massive call centre businesses
This is causing a massive shift of wealth from the West
to the East (see discussion on this topic in previous newsletters).
example is that most developed economies are struggling now with
huge sovereign (Government) debts as their economies
importing a lot more than they are exporting.
This is leading
to wave after wave of debt crises around the globe especially in
the developed economies.Where in
in the emerging economies where we saw such problems.
where will it all end and how does it affect investors?
The countries that have positive trade surpluses
and build up foreign account surpluses will get richer
and their economies
as will their currencies. As a consequence of
this we will see a rise in living standards and average salaries
well as property
values in these countries. Eg: China in the past
decade has had massive
trade surpluses and the salaries, shares and
prices have all risen dramatically. The Next
11 type countries
and Indian example. They include Indonesia, Vietnam,
Thailand, Philippines, Pakistan as well as many
in South America, Eastern
Europe and some smart African countries as well.
The countries that have negative trade surpluses
and run up debts will see declining or stalling
salaries and living
a gradual decline in their currency and hence
global wealth. Egs; USA,
UK, Europe (exclude Germany as it usually runs
surpluses from selling cars to the world) and many other developed
be ok as it usually runs surpluses again from
cars to the world.
Australia and Canada may also be ok while they
still have resources to sell, but once these finite minerals
well be in trouble too.
Investors therefore will need
to be very aware of what countries debt levels are, and then ideally
in those countries
that are benefitting
from the tectonic forces of Globalisation.
the good thing to come from all this change is that the people of
the world who work so hard
a few dollars
a day) will finally be lifted to a better life
which they deserve. They will earn more and begin to be
able to rise
out of poverty.
This will also affect immigration levels as people
realize they might be
better to stay in their country where wealth is rising
Federal Budget Summary May 2010
50% tax savings discount for interest income from 1
The Government plans to provide a 50% tax discount on up to $1,000
of interest earned by individuals, including interest earned on
deposits held in authorised deposit taking institutions, bonds,
debentures and annuities. Currently there are relatively higher
levels of taxation applying to interest income, compared to other
forms of investment income. The discount will be available for
interest income earned directly as well as indirectly, such as
via a trust or managed investment scheme, and is expected to benefit
around 5.7 million taxpayers in 2011-12.
Standard tax deduction from 1 July 2012
The Government plans to introduce a standard deduction for work-related
expenses and the cost of managing tax affairs. The standard deduction
will be $500 for the 2012/13 financial year, and then $1,000 for
the 2013/14 and subsequent financial years.
Medicare levy low income threshold from 1 July 2009
The Government will increase the Medicare levy low income
threshold to $18,488 for individuals and $31,196 for families.
amount of threshold for each dependent child or student will
also increase to $2,865. The Medicare levy threshold for
below age pension age will also be increased to $27,697. This
is to ensure that pensioners below age pension age will not
have a Medicare liability where they don’t have an
income tax liability.
Additionally, the low income tax offset will increase to $1,500
from its current $1,350 with the upper income threshold being
raised to $67,500 from $63,750.
Net medical expenses
tax offset from 1 July 2010
The Government plans to increase the threshold above which a taxpayer
may claim the net medical expense tax offset (NMETO) from $1,500
to $2,000. This threshold will be indexed to the Consumer Price
Index (CPI) on an annual basis.
Managed Investment Trusts – Government’s response
to the Board of Taxation’s review – effective
from 1 July 2011
The Government plans to introduce a new taxation regime
for Australian managed Investment trusts (MITs) in response
the Board of Taxation’s
Report on its review of the tax arrangements applying to MITs.
Capital protected borrowings – increase
to benchmark interest rate from 11 May 2010
The Government has proposed to increase the benchmark interest
rate that applies to capital protected borrowings to the Reserve
Bank of Australia (RBA) indicator rate for standard variable housing
loans plus 100 basis points. Prior to this announcement the benchmark
interest rate was set at the RBA indicator rate for standard variable
Co-contribution – permanent
reduction to matching rate and maximum payable
|Reduction rate for each $ above threshold
Co-contribution - indexation of income thresholds paused
for two years from 1 July 2010
The Government plans to freeze for 2010/11 and 2011/12 the
indexation applied on the income threshold above which the
co-contribution begins to phase down. The maximum co-contribution
of $1,000 is reduced by 3.333 cents for every dollar that
total income exceeds $31,920 until it reaches or exceeds $61,920.
discretion on excess contributions tax assessments.
This measure proposes giving the Commissioner the ability to exercise
its discretion prior to an assessment being issued for excess
Changes to First Home Owners
Savers Accounts (FHSA) scheme from date of assent
The Government proposes that savings in an FHSA can be paid into
an approved mortgage after the end of a minimum qualifying period,
rather than requiring it to be paid to a superannuation account.
The current rules require that FHSA holders keep their savings
in an FHSA for 4 financial years before they are able to use those
savings to buy a home. At present if an account holder buys a
home before the end of that 4-year period, the balance of their
FHSA must be transferred to their superannuation.11
The changes will apply for houses purchased after assent of the
legislation that will give effect to this measure.
Family Tax Benefit non-lodgement suspensions - exemptions
In the 2008 Budget, the Government had proposed to suspend FTB
payments to people who had not lodged their tax return in 12 months
and had not responded to Centrelink requests to do so. This measure
will be retained with two exceptions. Payments will continue to
people who do not have any FTB debt, or where ceasing the payments
would cause undue hardship.
Family Tax Benefit –A:
Strengthening participation requirements from 1 July 2010
In the 2009 Budget, the Government extended FTB Part A to cover
children aged 16-20 who do not have a Year 12 or equivalent qualification,
and who participate in full-time education or training, or part-time
education or training in combination with other approved activities.
The participation measure will now be strengthened. Children will
now be required to participate in full-time education or training.
Part-time education or training will not be sufficient. These
participation requirements will be introduced when the measure
commences on 1 July 2010.
Child Care Rebate capped
from 1 July 2010
The Child Care Rebate will be capped at $7,500 per child (2008/09
level) from the current annual cap of $7,778 per child. Also indexation
of the cap will be paused for four years from 1 July 2010. The
out-of-pocket reimbursement of child care expenses will remain
at 50 per cent up to the annual cap.12.
Special Disability Trust criteria from 1 January 2011
The Government will amend the eligibility criteria and allowable
uses for Special Disability Trusts. The definition of a beneficiary
will be expanded to include people with a disability who can work
up to seven hours per week.
Disability Support Pension
(DSP): refined assessment process
When determining eligibility for the DSP Centrelink will
have a greater focus on the individual’s potential
to work. Claimants who do not have sufficient evidence to
that they cannot
be assisted back to work will have their DSP claim rejected
and will instead be referred to an employment service to
employment capacity. Claimants who are clearly unable to
work will not be affected, including those with profound
serious medical conditions or terminal illness. In addition
to these changes from 1 July 2010, assessment for the DSP
simplified to fast-track more claimants who are clearly
eligible due to a cancer, congenital or catastrophic disability.
Henry response confirmation
As expected, the 2010 Budget reiterated the Government’s
commitment to the following proposals announced in response
to the Henry Tax Review:
• Increase of super guarantee rate from 9% to 12%, commencing 1
• Raising the super guarantee maximum eligibility age to 75 from
• Introducing a 15% low income earners Government contribution capped
at $500, effectively refunding contributions tax on up to
$3,330 of concessional contributions.
• Retaining the $50,000 concessional cap for those age 50 or over
who have super balances of less than $500,000.
• Reducing the standard company tax rate to 29% from 1 July 2013
then 28% from 1 July 2014.
• Reducing the small business company tax rate to 28% from 1 July
• Allowing small businesses to immediately write off assets valued
at under $5,000 and other assets in a single 30% rate depreciation
Personal tax rate
from 1 July 2010
|$0 - $6,000
|$6,001 - $37,000
|$37,001 - $80,000
|$80,001 - $180,000
To find out more please contact an adviser
at email@example.com .
NB : High Net Worth Financial Advising attempts to enhance overall
return for clients by investing in undervalued regions of the world
and undervalued asset classes, that have positive growth stories.
NB : The contents of this newsletter does not constitute personal
advice and is general in nature, please see your adviser for
suitable to your own needs and objectives.