It may seem that the worry list for investors is bigger and more confusing than ever before. Some of this may relate to US President Trump’s disruptive and “open mouth” approach as highlighted by the “trade war” and his frequent and sometimes contradictory tweets.

For example, on 24th July Trump tweeted “Tariffs are the greatest!” But 12 hours later he tweeted “The European Union is coming to Washington tomorrow to negotiate a deal on Trade. I have an idea for them. Both the US and the EU drop all Tariffs, Barriers and Subsidies!”

We think we know where he was coming from, but all this noise can create a lot of uncertainty for investors. But noise around Trump is part of a broader issue around information overload and broader again in terms of what a report by the RAND Corporation – a US non-partisan research organisation – has called “Truth Decay.”

As we have observed in recent years, there seems to be a never-ending worry list for investors that is receiving greater prominence as the information age enables the ready and rapid dissemination of news and opinion. But we need to recognise that much of this is just noise and ill-informed and that there is a big difference between information and wisdom when it comes to investing. The danger is that information and opinion overload is making us all worse investors as we lurch from one worry to the next resulting in ever shorter investment horizons in the process.

Truth Decay – what is it and what are its consequences?

Truth Decay as analysed by the RAND Corporation report is characterised by: disagreement about facts and their analytical interpretation; a blurring between fact and opinion; an increase in the volume and influence of opinion and personal experience over fact; and declining trust in traditional sources of facts such as government and newspapers.

It’s evident in: declining support for getting children vaccinated despite medical evidence supporting it; perceptions crime has increased when it’s actually declined; and a lack of respect for scientific evidence around global warming. Elements of Truth Decay were evident in past periods like the 60s and 70s, but increasing disagreement about facts makes the current period different.

Why is Truth Decay relevant for investors?

Truth Decay is relevant for investors because: it could lead to less favourable economic policy decisions which could weigh on investment returns; and investors are subject to the same forces driving Truth Decay such that it explains why the worry list for investors seems more worrying and distracting.

First, just as with the broader concept of Truth Decay various behavioural biases leave investors vulnerable in the way they process information. In particular, they can be biased to information and particularly opinions that confirm their own views.

Secondly, thanks to the information revolution we are now exposed to more information than ever on both how our investments are going and everything around them. In some ways this is great as we can check facts and analyse things very easily. But the downside is that we have no way of assessing all the extra information and less time to do so. So, it can become noise at best, distracting at worst.

Five ways to manage information and opinion overload

To be a successful investor you need to make the most of the power of compound interest and to do that you need to invest for the long term and not get blown around by each new worry. And the only way to do that is to turn down the noise on the worry list.

First, put the latest worry in context. The global economy has had plenty of worries over the last century, but Australian shares still returned 11.8% pa since 1900 and US shares 9.8% pa.

Second, recognise how markets work. Shares return more than cash in the long term because they can lose money in the short term. Short-term volatility is the price wise investors pay for higher long-term returns.

Third, find a way to filter news so that it doesn’t distort your investment decisions. For example, this could involve building your own investment process or choosing a few good investment subscription services and relying on them.

Fourth, don’t check your investments so much. On a day to day basis the Australian All Ords price index and the US S&P 500 price index are down almost as much as they are up. So, it’s a coin toss as to whether you will get good news or bad on a day to day basis. The less you look the less you will be disappointed and so the lower the chance that a bout of “loss aversion” will be triggered which leads you to sell at the wrong time.

Finally, look for opportunities that bad news and investor worries throw up. Periods of share market turbulence after bad news provide opportunities for smart investors as such periods push shares into cheap territory.

Source: AMP Capital

With tap and go payments becoming ever more popular and the advent of instant transfers between domestic bank accounts, how much longer will we be using cash as a form of payment?

According to recent survey results produced by You Gov Galaxy and commissioned by payments provider Square, the average answer to this questions is likely to be ‘about $38’ if you’re under the age of 40. Baby boomers are much more likely to have a few more notes and coins on them, carrying $72 in cash on average. And almost five million Aussies haven’t visited an ATM within the last 4 weeks or can’t even recall the last time they withdrew cash.

Put this together with the Reserve Bank of Australia’s report from 2016 that found only 37% of payments in Australia were being made in cash and you can see where we’re heading – a time when having cash just won’t be necessary or practical for the vast majority of the transactions we make.

Tap happy?

Unfortunately, the convenience of tap and go payments may end up having a negative impact on our ability to keep our spending within reasonable limits. According to a study from the University of Sydney, people can be expected to spend up to 50% more by paying with any payment type other than cash.

“There’s good empirical evidence that people spend more money when they don’t actually have to use cash, and that goes across different alternative forms of payment,” says Donnel Briley, Professor of Marketing and Behavioural Psychology at the University of Sydney.

A survey of high school students back in 2017 demonstrated that many teens simply don’t understand key concepts around personal borrowing with credit cards. This makes them particularly vulnerable to the perils of buying something without really thinking through how much it costs in real terms. When there is interest to pay on their purchase, as well as the opportunity cost of having already spent the money, young people can be particularly vulnerable, to buyer regret as well as serious financial struggles when they’re saddled with repayments on long-term debts.

Good and bad for business

As well as presenting economic challenges for consumers, a cashless world also has pros and cons for businesses. While some small and medium sized businesses might celebrate saying goodbye to hours spent counting notes and coins – 216 hours on average each year according to the You Gov Galaxy/Square survey – others could be losing out on revenue with less cash changing hands.

A 2017 survey by ME Bank reports a 51% fall in cash payments in the last five years for industry employees traditionally remunerated in cash, such as tradespeople and hospitality staff. Tipping and on-the-spot charity donations are two of the biggest casualties of the disappearance of cash, with each recording falls of 45% and 44% respectively in the frequency of cash payments in the same period.

Easier than EFT

A significant game changer for Australia’s move towards being cash-free could well be the National Payments Platform (NPP). Officially launched in February 2018, the NPP technology could end up replacing many EFT and cash transactions but hasn’t been offered broadly by financial services institutions yet. Assuming that widespread adoption of the NPP, and its associated services like PayID and Osko, are just a matter of time, the move towards a cash-free economy could pick up speed in the months and years to come.

Source: FPA Money and Life

An ETF is an investment fund that holds a basket of securities – such as shares or bonds that tracks a specified index – and is itself a listed share, traded on a stock exchange.

ETFs are low-cost, simple vehicles that can offer exposure to a wide range of Australian and global asset classes, indices and sectors, currencies and commodities, as well as a variety of investment strategies.

Investors can gain cost-effective, fast exposure to different markets that were once only accessible to institutional investors, including asset classes and strategies through a single investment by buying an ETF. As ETFs are listed, the investment is liquid, and therefore tradable at any time, however like shares, liquidity is dependent on market volumes and during time of significant market stress, liquidity (the ability to buy and sell) could decrease.

The appeal of ETFs

Typically, ETFs tend to be much cheaper in their annual management costs compared to traditional managed funds. They have no entry or exit fees – investors pay normal brokerage when buying or selling in the same way an investor trades shares.

The attraction of ETFs is that they are very flexible investment tools, which allow investors to easily improve their portfolio’s diversification; or to easily implement an investment view; or to use investment strategies that were once too complicated or expensive for them to consider. An investor can use ETFs for their entire asset allocation, or they can act as a low-cost complement, or alternative, to existing investments with active fund managers.

Understanding the risks

Investments carry risk, and ETFs are no exception to this rule. While there is the obvious risk of gain or loss of value depending on market activity, there are other risks to appreciate.

These range from risks specific to the assets the ETF is invested in, to the liquidity of the underlying investments, currency changes should some of the assets be international or even counterparty risk that is the risk the issuer of the ETF will be unable to fulfil the duties of managing the ETF.

Using ETFs in investments

The simplest way in which investors use ETFs is to establish – or diversify – an investment portfolio. For example, an investor who does not own any shares can simply buy an Australian share ETF, giving them a holding in hundreds of Australian shares, in a vehicle that aims to replicate the annual performance of the Australian share market index (give or take some differences in returns due to challenges of copying the index exactly). Adding a global shares ETF to your portfolio can widen this exposure to an international shares allocation; this might add thousands of shares to the portfolio depending on the particular ETF, picking up the world’s top companies (and brands), and tapping into the global revenue streams these generate.

This same investor can then very simply extend the diversification of their portfolio into other asset classes.

ETFs can also be used to gain exposure to a specific investment ‘theme’, as part of a tactical asset allocation process. For example, an investor who believes that the resources sector is poised to out-perform the rest of the Australian share market can tilt their portfolio toward over-weighting the resources industry by buying a relevant ETF. This tilt can be short-term or long-term. Alternatively, an investor who believes that the European economy will grow more strongly than the other developed-world economies could ‘play’ that view by buying a broad European share ETF.

Similarly, an investor who believes that the emerging markets will outperform the developed-world markets could bring an emerging markets ETF into their portfolio, and hold it as long as they believe this outperformance will prevail. Alternatively, this strategy could involve a view on a particular industry: an investor who believes that global spending on healthcare will increase as populations in many countries age – both in the developed and developing worlds – can tap into this theme by buying a global healthcare ETF.

To find out more about ETFs, please contact us.

Source: BT Financial Group, 2018

While a Will states how you would like your hard-earned assets to be distributed, it doesn’t automatically include your super. That’s because, unlike directly owned property or shares, super doesn’t necessarily form a part of your estate. The super fund trustee will distribute it in accordance with super law and the fund’s trust deed and those decisions may not be what you had in mind.

That’s why it’s important to let your super fund know your wishes. Creating a valid binding death benefit nomination will bind the trustee to pay the death benefit according to your wishes.

A binding death benefit nomination is one of a variety of nominations – outlined below – which legally allows you to advise or bind the trustee to pay your super benefit to who you want when you die, provided the nominees meet certain eligibility criteria.

1. No nomination

If there is no nomination, the trustee has discretion and often pays the super benefit to the estate. In this situation there is a chance your super benefits could go to someone you didn’t intend them to go to.

2. Non-binding death benefit nomination

When there is a non-binding death benefit nomination you can tell the trustee who you want your super benefits to go to. It will be considered by the trustee, but is not binding.  The trustee can still exercise discretion which may suit you if your situation has changed. Ultimately, the trustee will make the decision as to who to pay your super benefits to.

3. Binding death benefit nomination

With a binding death benefit nomination the trustee must pay super benefits to the nominated dependants and in the proportions you set out. However your nomination must be renewed every three years to remain valid.

Who can you nominate as a beneficiary?

There are government regulations around who can receive a superannuation benefit – it’s not whoever you wish. The beneficiary must be a ‘dependant’.

A dependant is:

• a spouse or de facto spouse
• children of any age, including step-children, adopted or children from previous relationships
• someone who is financially dependent on you
• someone in an interdependency relationship with you, such as a close living arrangement where one or both provides the financial, domestic, and personal support of the other.

In a situation where there is no nomination made, either binding or non-binding, then the super fund trustee will distribute your benefit in accordance with super law and the trust deed. In practice, this generally means the member’s spouse or other dependants such as their children. In cases where the member doesn’t have any dependants then it will most likely be paid to your personal legal representative.

Source: IOOF

A ‘black swan’ refers to an event or occurrence that deviates beyond what is normally expected of a situation and is extremely difficult to predict.

Brexit arguably is a ‘black swan’ that, paradoxically, has taken years to unfold. Despite this, we still do not know what the effects of Brexit will be.

We know the basic facts: on 23 June 2016, the UK held a referendum on leaving the EU, in which a majority of British voters voted yes.

On 29 March 2017, the UK government invoked Article 50 of the Treaty on European Union, commencing the legal and political process whereby a member state of the EU ceases to be a member.

On 20 June 2018, the UK Parliament passed The European Union (Withdrawal) Act 2018, which became law by Royal Assent on 26 June 2018. This Act declares “exit day” to be 29 March 2019, at 11pm Greenwich Mean Time, or midnight, Central European Time.

There is a great deal that we do not know

Negotiations between Britain and the EU are ongoing, and there is still uncertainty as to the ‘deal’ they will strike. The next formal European Council summit, due to be held on 18 October 2018, had previously been viewed as the deadline for striking a deal, but talks may continue beyond this date.

Commentators have suggested that the outcome of these negotiations may fall into one of the following broad categories:

Hard Brexit:

The UK leaves the EU in every sense, giving up full access to the single market and customs union, as well as all EU rules and regulations, financial commitments to the EU and the jurisdiction of the European Court of Justice (ECJ). Hard Brexit would see Britain gain full control over its borders, the laws that apply within its territory, and the responsibility for making its own trade deals with other countries – and with the EU – under the World Trade Organisation (WTO) rules for trade.

Soft Brexit:

This approach would try to leave the UK’s relationship with the EU as close as possible to the existing arrangement, particularly so as to retain unfettered access to the European single market and customs union.  But since the UK would not be a member of the EU, it would not have a seat on the European Council, nor would it be represented in the European Commission.

No deal:

A hard Brexit without the arrangements being pre-agreed between the UK and the EU.

In the light of the above, anything seems possible, even a fresh referendum or a snap general election, which could change everything.

The politics of Brexit remains fraught

After the government issued a statement in July, which included a number of concessions aimed at reviving negotiations with the EU, politics remains fraught within the Conservative Party among those who are in favour of a Soft Brexit and those who are not.

Examples of a Soft Brexit include Norway, Iceland and Liechtenstein, which are not members of the EU but are part of the European Economic Area (EEA). In return, they must make payments into EU budgets (which sets out the EU’s long-term spending priorities and limits), accept the EU’s “four freedoms” of movement of goods, services, capital and people, and be subject to EU law through the European Free Trade Association (EFTA) Court.

A Soft Brexit could be applied in the same way to the UK, but the UK government is likely to insist on tighter controls for immigration into the UK.

Brexit is debated not only among political parties, but also among other organisations. These include, on the one hand, Leave Means Leave, the Bruges Group, and the European Research Group, and the Open Britain group, Best for Britain, Britain for Europe, InFacts, and the People’s Vote campaign, on the other.

The initial effect of the Brexit vote, which caused panic on the stock markets, is now in the past. The British pound was impacted by the Brexit vote, falling by 13.3% on the day the result came out, from US$1.50 to a 31-year low of US$1.3012. The pound fell as low as US$1.15 in October 2016, which the Financial Times called a 168-year-low in terms of a trade-weighted index measuring sterling against a basket of its trading peers and is now trading at US$1.28.

However, just as no-one can predict the final outcome of the Brexit negotiations, no-one could possibly state categorically that all potential final deals and arrangements are factored into stock market prices. Brexit is very much a black swan still.

Source: BT

The days of retiring as soon as you can get an age pension may well be over. With Australians living longer and healthier lives than ever before, many seniors are choosing to stay in the workforce. In fact, around 13% of Australians aged 65 or over are still working, up from around 9% a decade ago.

If you’re heading towards 65 and could do with extra cash, or you simply need more time to ease into retirement, there’s some good news. The Australian Government has introduced a range of incentives to support older Australians who choose to remain in employment.

Taxation considerations are general and based on present taxation laws and may be subject to change. You should seek independent, professional tax advice before making any decision based on this information.

Here are three incentives to help you keep working at 65 – and beyond.

1. Boosting your Super

Even if you haven’t retired, you’re generally allowed full access to your super when you turn 65. So if you’re on a low income, for example, or if you’re working part-time, you can draw on your retirement savings to supplement your earnings. Another option is to receive a tax-free income stream from your super to allow you to make or increase tax-effective super contributions (for example, through salary sacrificing).

If you work for an employer and are earning at least $450 a month, they’re generally required to make compulsory Super Guarantee payments for you. To make voluntary contributions once you turn 65, for most types of contributions you must satisfy a ‘work test’ during the financial year.  Once you reach the age of 75, you’ll no longer be able make most types of voluntary contributions, whether you’re working or not.

It’s important to remember that compulsory employer contributions (such as Super Guarantee payments), and downsizer contributions can be made regardless of your work status or age.

You should also be aware that the government has announced a proposal to relax the work test for some recent retirees, as part of the 2018 Federal Budget. The proposal would mean that retirees aged 65–74 who have less than $300,000 in super will be able to keep making voluntary contributions for up to 12 months after the financial year when they last satisfied the work test. If the proposal is legislated, it will take effect on 1 July 2019.

Remember, the usual contributions caps still apply if you make contributions after age 65. So in any financial year, you can make up to $25,000 worth of before-tax contributions (including compulsory contributions such as your employer’s Super Guarantee payments) or up to $100,000 worth of after-tax contributions (provided your total super balance across all funds was less than $1.6 million just before the start of the financial year).

2. Tax Offsets

Once you turn 60, any money you draw from your super (either as a lump sum or a regular income stream) is usually tax free. What’s more, once you reach the pension age requirement, you may be eligible for the Seniors and Pensions Tax Offset (SAPTO), which lets you earn more before you have to pay tax or the Medicare Levy.

Depending on your circumstances, the SAPTO can lift the tax-free threshold up to $32,279 for a single pensioner or $57,948 for a couple. And if you and your spouse are both eligible for SAPTO, you may be able to have some of their unused offset transferred to you.

But SAPTO isn’t the only tax offset you could benefit from. You may also receive the Low Income Tax Offset (LITO) if you’re a low-income earner. And you might also be able to claim an offset for the costs of disability aids, attendant care or aged care, if these medical expenses exceed a certain threshold. To receive these tax offsets, you’ll need to meet certain requirements and conditions, so speak to your financial adviser.

As part of the 2018 Federal Budget, the government announced a temporary additional tax offset for low and middle income earners from the 2018–19 financial year until the 2021–22 financial year. Depending on your circumstances, this offset may be worth up to $530 annually.

3. Getting Centrelink Benefits

When you reach a specific age, you may be eligible for the age pension. Since 1 July 2017, this age ranges from 65 years and 6 months to 67 years, depending on your date of birth.

The age pension is currently worth up to $826.20 per fortnight for a single person or $1,245.60 per fortnight for couples, not including the pension supplement or energy supplement. Your pension entitlement is determined by the income test and the assets test – whichever one has the lower result based on your financial situation.

Under the income test, you can earn extra income of up to $168 per fortnight (or $300 for couples), before it impacts your pension. Once your assessable income exceeds this threshold, your pension will be reduced by 50 cents for every dollar you earn.

In addition, the Pension Work Bonus is designed to assist pensioners who are still working. Under this scheme, the first $250 of your fortnightly employment income won’t be included in the pension income test. If you earn less than $250 a fortnight, the difference will build up in a Work Bonus income bank – to a maximum of $6,500 – to offset any future employment income.

The government is proposing to expand the Pension Work Bonus scheme by $50 a week from 1 July 2019. This will allow you to earn up to $300 a fortnight without impacting your pension, with the maximum accrual amount increasing to $7,800. The government has also proposed to extend the scheme to self-employed people from that date.

Source: Colonial First State

With recent media coverage about insurance sales tactics, many Aussies might be concerned they’re being sold personal insurance policies – life, total and permanent disablement (TPD) and income protection – they don’t really need.

The fact that some Australians with multiple super accounts are likely to have duplicate personal insurance policies, is also putting the question of adequate insurance into the spotlight. After all, no-one wants to be paying for something they won’t benefit from.

Are Australians over or underinsured?

By focussing on problems with how insurance is sold or the issue of multiple policies through super, we’re overlooking the possibility that many Australians simply don’t have any one policy that will enable them to meet their financial obligations and maintain their lifestyle if the worst were to happen.

As a nation of people we’ve become more and more indebted in recent years. The latest Australian Bureau of Statistics data shows the average Australian household is servicing a high level of debt, thanks to both personal borrowing and home loans.

Average household debt has grown by 79% in real terms from 2003/4 to 2015/16 and this is largely because of borrowing to buy property. However, more households are burdened by credit card debt (55%) than a mortgage (34%).

According to a February 2018 report from Rice Warner, 94% of working Australians are likely to have some sort of life insurance policy in place, with an average estimated cover amount of $344,500. So it seems the majority of people will have something to fall back on in the event of their death. The report attributes this high incidence of cover to the introduction of compulsory default life cover by superannuation funds.

But it’s not only premature death that families need to worry about. With 81% holding a TPD policy and only one third of working individuals currently insured for income protection (IP), should people be taking out these policies to make sure they have all bases covered?

As the Rice Warner report highlights, insurance needs vary according to how many dependents you have and your age. They provide the following estimate of insurance needs for 30-year old parents with children:

• 8 times family income for life insurance on income replaced basis,
• 4 times family income for TPD insurance, and
• 85% of family income for IP insurance.

While these figures could be appropriate to one family’s situation, they may be way over the top or completely inadequate for another family.

At the end of the day, it’s really up to you how you budget for insurance cover – as a standalone policy or through your super fund. But what is worth doing is working out how much cover you need, and then comparing this with your current policy – whether it’s standalone or through super.

As the Rice Warner report points out, super fund trustees are having to make decisions about default insurance options based on their assumptions about general insurance needs. But those assumptions might not apply to you and your finances.

Source: FPA Money and Life

Market and Economic overview

Australia

• CPI rose 0.4% in the September, but the annual pace of Australian inflation has slowed to 1.9%. This reduces the likelihood of policy tightening by the Reserve Bank of Australia.
• For now, official interest rates remain at 1.50%, where they have been for more than two years.
• Australian unemployment declined to 5.0% in September, the lowest level since 2012. There likely remains scope for further job growth; unemployment was as low as 4.1% before the GFC.
• Data indicated that the national savings rate has increased to 3.5%, from 1.9% previously. This suggests Australian households are reining in their discretionary expenditure.
• Building approvals weakened sharply in August and only partly recovered in September, suggesting developers may be reducing activity levels following stagnation in residential property prices.
• Growth in the value of new mortgages also decelerated to its slowest pace since early 2016; another sign of the cooling housing market.

United States

• Initial estimates suggest US GDP grew at an annual pace of 3.5% in the September quarter. This was ahead of expectations and highlights ongoing strength in the world’s largest economy.
• Conditions remain particularly buoyant in the services sector – a survey by the Institute of Supply Management rose to a near record level in September. This gauge of the services sector suggests conditions are the most favourable since 1997.
• Factory and durable goods orders also remain buoyant, which augurs well for manufacturers.
• These conditions are supporting ongoing employment growth; a further 134,000 jobs were created in September.
• The US has added more than two and a half million jobs in the past year and unemployment has fallen to a 49-year low of 3.7%.

Europe

• Inflation in the Eurozone edged up to 2.1% in September, though is not yet sufficiently strong for the European Central Bank (ECB) to consider raising official interest rates.
• The ECB’s quantitative easing program is due to be withdrawn by the end of 2018. Some observers are suggesting that the Bank should reconsider, citing ongoing economic sluggishness.
• Unemployment in the Eurozone has fallen to 8.1%, the lowest level since 2008. The labour market continues to show significant variation between countries and age cohorts. The jobless rate is above 15% in Spain, for example, and the youth unemployment rate is 16.6% in the euro area as a whole.
• The Bank of England left official UK interest rates unchanged at 0.75%. With inflation under control and the housing market showing signs of weakness, no further rate rises are anticipated in the near future.

Asia

There were some mixed signals in Japan. The quarterly Tankan survey of manufacturing activity deteriorated, but capital investment has risen more than 13% over the past year as companies have taken advantage of tax incentives.

• Unemployment in Japan is now just 2.3%, close to 25-year lows.
• In China, the GDP growth rate fell to 6.5% yoy in the September quarter; the slowest pace since 2009.
• More encouragingly China’s trade surplus with the US widened to a record high, suggesting the implementation of tariffs has not yet significantly affected export demand.

New Zealand

• Exports are seeing a seasonal slowdown, but the NZ$4.33 billion figure for September was ahead of estimates. Dairy produce and meat remain the most important exports.
• Imports also increased markedly, however, resulting in the largest monthly trade deficit on record.
• Higher import values were primarily attributable to fuel prices, although machinery and vehicle volumes also increased.
• Higher fuel prices also helped push inflation up to 1.9% yoy in the September quarter. With the rate in the middle of the target 1%-3% range, the Reserve Bank of New Zealand has suggested it is in no hurry to amend policy settings. Official interest rates remain at 1.75% and are expected to remain there throughout 2019.

Australian dollar

The local currency was hampered by the sell-off in global share markets, mixed domestic housing data and further weakness in the Chinese yuan.

The ‘Aussie’ dollar declined 2.1% against the US dollar and was similarly weak against a trade-weighted basket of currencies.

Commodities

Commodity prices were mixed, largely reflecting uncertainty around a possible escalation in the trade war between the US and China and the associated impact on global economic growth.

Industrial metals mostly fell. Lead (-6.7%), aluminium (-3.3%) and copper (-1.7%) weakened, while zinc (+0.7%) edged higher.

Brent crude (-8.8%) fell sharply, after touching four-year highs at the beginning of the month. Hurricane Michael – the strongest storm to hit US mainland since 1992 – threatened to slash demand in the US south eastern fuel markets. Rising inventories and trade tensions also weighed on prices.

Gold (+1.8%) finally had a positive month after six consecutive months of falls, despite a strengthening US dollar. A slump in global equity markets stoked demand for gold as a store of value. Silver (+0.2%) and platinum (+2.5%) also posted gains.

Iron ore (+8.1%) had another strong month amid record high Chinese steel production and a rising Chinese steel rebar price. Expectations of more stringent checks and controls on China’s coking coal production during the winter season supported coking coal prices (+10.1%). Thermal coal (0.0%) finished the month flat, masking some price volatility during the month.

Australian equities

Market weakness in September extended into October, with the S&P/ASX 200 Accumulation Index declining -6.1%. Less than a fifth of index constituents rose and all sectors saw negative returns amid rising concern that solid economic data would result in central banks raising interest rates quicker than expected.

Australian M&A activity has increased sharply over the last 12 months, with several more potential deals announced in October, including a AU$3.70/share bid for MYOB Group from KKR & Co.

Bond proxy sectors such as Real Estate and Utilities fared relatively well despite falling -3.8% and -4.0% respectively. Lower Australian bond yields provided a degree of support.

The IT (-11.2%) and Energy (-10.5%) sectors were the worst performers. Afterpay Touch was the largest underperformer in the IT sector as the announcement of a Senate inquiry into the credit lending industry contributed to the stock falling -30.4% over the month. Nearly all constituents of the Energy sector fell as lower oil prices weighed on near term earnings expectations.

Stocks in the Financials (-5.9%) and Materials (-5.2%) sectors also struggled. AMP (-22.6%) fell to a 15-year low after providing a market update that showed net outflows of AU$1.5 billion in its wealth management business in the third quarter of 2018

Listed property

A-REITs had a weak month in September, returning -1.8%. Diversified A-REITs (+0.2%) was the best performing sub-sector, while Industrial A-REITs (-3.2%) was the weakest. Outperformers included Growthpoint Properties (+4.0%) and Investa Office Fund (+3.6%). While Growthpoint did not release any material news, it benefitted from recent M&A activity among peers.  The weakest performers were Scentre Group (-3.4%) and Vicinity Centres (-5.4%). Scentre Group was one of only two REITs whose June 2018 results were viewed as “credit negative” by credit ratings agency Moody’s.

Global equities

A miserable month for global equity markets at least had a happy ending, as better corporate earnings on both sides of the Atlantic helped to lift what was looking like the worst monthly performance since the GFC to “merely” the worst month in six years. US investors became nervous over longer-term rates rising to seven year highs, perceived hawkish comments from the US Federal Reserve in regard to monetary policy and a deterioration in the US earnings season after a bright start earlier in the month. Market volatility then contributed to the equity market malaise with a rush to safety and a still-higher USD, which itself was attributed to US earnings deterioration. Outside the US, markets were buffeted by fears about the escalating trade war between Washington and Beijing, slowing economic growth in China and the impasse over Italy’s proposed budget for 2019. The MSCI World Index ended the month down -5.4% in AUD terms.

One of October’s weaker performers was the Nikkei, which fell -9.3% in JPY terms. Global influences were compounded by an anaemic local earnings season, further strength in the Yen given its safe haven status and Japanese industrial production in September falling more sharply than expected. In spite of the Italian budget crisis, ongoing worries over Brexit and political uncertainty stemming from a poor election result for the ruling Christian Democratic Union party in Germany, European markets were surprisingly resilient – the UK FTSE and the German Dax were amongst the stronger performers for the month – down only -4.9% and -6.5% respectively in local currencies.

Emerging markets also struggled over October with the MSCI Emerging Markets Index down -6.8% in Australian dollars.

Global and Australian Fixed Interest

Bond yields traded in reasonably wide ranges. In the US, for example, yields rose sharply early in the month – reaching highs of 3.23% – before giving back most of these gains later. Benchmark 10-year Treasury yields rose 8 bps in the month as a whole, closing at 3.14% reflecting favourable economic data.

Yields drifted lower in other regions as investors reined in their risk appetite and favoured the relative security of government bond markets. Ten-year yields closed the month 14 bps and 9 bps lower in the UK and Germany, respectively.

Economic data in Europe has not rebounded to the extent anticipated and business and consumer sentiment both remain subdued. Investors also maintained a keen focus on Italy and the country’s proposed budgetary plan. Italian ministers have until 19 November 2018 to amend the budget and make it acceptable to the European Union. The spread between Italian and German bond yields continued to widen, reflecting investors’ unease.

Domestically, the CPI came in below the Reserve Bank of Australia’s 2% to 3% target range; removing a potential driver of Australian yields. The benchmark 10-year CGS yield closed October 4 bps lower, at 2.63%.

Global credit

Weakness in global equity markets affected sentiment towards corporate bonds and saw credit spreads widen globally. The yield on the investment grade Bloomberg Barclays Global Aggregate Corporate Index widened by 12 bps, closing the month at 1.24%.

High yield securities saw even more significant moves; the spread on the Bank of America Merrill Lynch Global High Yield Index (BB-B) widened by 48 bps, to 3.25%. The extent of these moves was similar to what was seen in March of this year during the most recent sell-off in equity markets.

The September quarter US corporate earnings reporting season broadly affirmed ongoing profitability strength. In a number of cases, however, spreads widened – and share prices fell – for issuers reporting strong earnings but noting some caution over future prospects. This added to a growing consensus that earnings may be close to a peak, as borrowing costs increase and with the impact of government stimulus now rolling off.

Source: Colonial First State. November 2018