With self-managed super funds (SMSFs) permitted to have up to four members, it may be a surprise for some to learn that approximately 70% of SMSFs have only two members and about a further 23% only have one.  Which means that only 7% of funds have three or four members.¹

If you consider that most of the two member SMSFs are likely to be “mum and dad” funds, and single member funds often arrive when one of the original two members has passed away, it begs the question – “where have all the children gone?”

Whilst it is always an important personal decision to set up and start your own SMSF, and an important decision as to who else you want to be in the same SMSF with, there are a couple of important elements you could consider in deciding whether to have your kids join your fund or not.  Most of these would apply to your children who are at least 18 years old, but there can be some aspects that are important for younger kids as well.

The first is the opportunity to teach your children more about finances and the importance of managing your money.  One of the reasons you’re likely to be in a SMSF is because you want control, and with control comes responsibility.  In fact one of the most important facets of being in an SMSF and being a trustee of your own fund is that you are ultimately responsible for the operation of the fund.  As much as you can, and probably should, outsource certain aspects to professional SMSF advisers, but ultimately the decisions rest with you.

Having your children involved in managing their finances and being responsible for the decisions they may make (both legally as well as personally) is a great way to make them more accountable for their saving and investment decisions.  And if they can do that in the safety of an SMSF environment where they have you as co-trustees, hopefully the disciplines can also spread to their other financial decisions outside of the SMSF environment.

Whilst having children under the age of 18 as members of the SMSF is permissible, they can’t be a trustee and usually the parents will assume this responsibility for them until they are of legal age.  However, it doesn’t mean you can’t start to include them as part of the process so they learn.

The second aspect to consider is around cost.  For many younger people, superannuation isn’t a huge consideration as they don’t have much of it.  Generally their employer sends the compulsory super guarantee off somewhere, often to a default fund, and in most cases the member hasn’t really chosen how to invest their super or understand what costs are involved.  It’s an issue for later in life.  The issue is, in a low return environment, the costs of their current super environment could actually work against them as it means they could have less super working for them.  And over the long term, that could make a difference.

But if they join your SMSF, is there the possibility that their costs will fall?  Whilst studies have said you may need somewhere between $200,000 and $500,000 in an SMSF to make it economically viable compared to a non-SMSF environment², don’t forget this is for the total amount across all members, rather than per member.  If you are already paying a set fee for the administration of your SMSF, will there be much of a change by adding a new member?

Third comes the opportunity for diversification.  Members with low balances are often forced to use a default investment arrangement and share risk and return with thousands of other members, simply because they don’t have enough to be able to build their own personalised investment portfolio.  In an SMSF, whilst they may not have enough for their own portfolio to begin with, there may be a greater level of control and understanding by pooling their super with yours to create a bespoke investment portfolio.

The last aspect to consider is around estate planning.  If your children are of an age where you have appointed them as executor to your will, when you pass away your children will have the ability to step in (as your legal representative) to administer the distribution of you super savings held through the SMSF.  To help reduce the burden this can place on your loved ones at that time, introducing your children earlier to your SMSF can make a significant difference as they will have a better understanding of where your super is, how you want it dealt to, how the fund operates and decisions that need to be made.

Running an SMSF is not easy, but neither is gaining an understanding of finance and the decisions that need to be made at different stages in life.  If using your SMSF and the guidance of your professional adviser is an option to get your kids’ financial future on track, isn’t it something worth considering?

Source: BT.

¹ ATO SMSF statistical report June 2016
² ASIC SMSF report 442 (information sheets 204 & 205)

Memory loss in your later years can be difficult, emotionally as well as financially. That’s why having a conversation with your loved ones, or devising a plan early on, could broaden your options and at the same time, help ensure your wishes are met should things take an unexpected turn. While you may be thinking ‘she’ll be right,’ taking steps toward simplifying your finances while you have your wits about you could benefit you, as well as those that care for you most.

Some statistics

While forgetfulness can be common among older adults, it’s not always cause for concern.

In saying that, the number of Australians living with dementia—something that typically involves progressive memory loss and the inability to perform everyday tasks—is on the rise. According to Alzheimer’s Australia:

• Three in 10 Australians over age 85 and almost one in 10 over age 65 have dementia
• Around 1.2 million people nationwide are involved in the care of a person with dementia.

Tips for covering your bases

If it’s something you’ve been thinking about, here are some tips to make sure your bases are covered, and to help eliminate personal and financial risks.

1. Simplify your finances

• Consider consolidating accounts, credit cards and super funds so you have less to manage.
• Diarise the regular bills that come in and when they’re due so that they’re accounted for.
• Think about whether setting up direct debits could take a load off.

2. Sort out your important documents

To make things easier for the person who’ll make decisions if you’re unable to, you may want to set up a file of your personal and financial information, and keep a copy in a safe location, such as with your solicitor. These documents may include:

• Personal records—birth certificate, marriage certificate, and will
• Tax file number, Centrelink and Medicare details
• Bank and super fund information
• Insurance policies
• A list of your assets and debts
• Investment-related information
• Details of your funeral wishes

3. Make sure your will is up to date and nominate an executor

It’s important you keep your will updated, as it’s a legal document that covers what you’d like to happen with your assets, and potentially your funeral later on. The contents of a will could raise controversy among family members, so it’s good to iron out any issues early on.

If you have nominated an executor to carry out the wishes in your will, let your family know and make sure this person agrees, knows their duties and where your will and other important documents are kept.

4. Appoint an enduring power of attorney

This person will make legal and financial decisions for you, if you can’t. It’s very important to choose someone you trust, as they’ll be responsible for looking after your bank accounts, ongoing bills, and even selling your house if you need to move into a care facility.

5. Confirm your super beneficiaries are current

Some people assume that how and in what proportions you want your super distributed can be included in your will. This isn’t necessarily the case, unless you’ve specified the necessary arrangements with your super fund beforehand, so you’ll need to make sure your beneficiaries are up to date and in order.

6. Determine your wishes around aged care

You may not require aged care, but in case you do, expressing your wishes may help those around you in determining the best course of action. The My Aged Care website (www.myagedcare.gov.au) provides more information.

Source: AMP

It’s a common enough scenario facing many older Australians: you find yourself living alone, due to divorce or the death of a partner, and the kids have moved away – often interstate or overseas – leaving you with no close family nearby. If this describes your situation, both you and your family might be worried about how you’ll stay safe in retirement.

According to the Australian Bureau of Statistics, around one quarter of all Australian’s aged 65 and over live alone, and while you may consider being independent a hallmark of ageing well, avoiding social isolation in retirement is important, and not just to avoid loneliness.

Being part of a community and having a purpose can be key to a happy, healthy life regardless of your age. Research has found that people who are socially isolated are at a higher risk of cardiovascular disease, infectious illnesses, cognitive deterioration and earlier death.

And remaining connected as you get older can also be important for your safety, as a network of contacts can help to monitor your health and wellbeing.

Ways to avoid isolation and stay safe

• Join a club that gets together on a regular basis to meet with people who have common interests, such as your local golf, tennis or bowls club, or Rotary or Probus club.
• Look into programs for seniors run by the local council, such as book clubs, or council-run courses to learn new skills.
• Find out if you have a local Men’s Shed which run a variety of skill-based classes, such as cookery or woodwork. (Visit their website at mensshed.org).
• Have a scheduled, regular catch-up with a friend or group of friends.
• Have a standing check-in with a family member, such as a fortnightly dinner or nightly phone call.
• Getting to know your neighbours can provide an excellent safety net and informal monitoring of both your wellbeing and the security of your home.
• Look into services that can put you in touch with volunteer visitors, such as the Community Visitors Scheme, which is available for people receiving home care packages through the government, or the Old Mate campaign. (Visit their website at oldmate.org.au).
• If you have medical issues, are susceptible to falls or just want some extra peace of mind, invest in a personal or medical alarm. When triggered, this sends an emergency alert to pre-set mobile phone numbers or a 24-hour monitoring service.

Consider your living arrangements

If you’d like to remain living at home, but health or mobility issues are making things a little more challenging, consider using Meals on Wheels or another in-home community care service. They can provide help with tasks like shopping, cleaning and gardening, plus regular check-ins on your wellbeing, so you can remain in your home for longer.

You could also consider making modifications to your home such as adding shower rails, hand rails, ramps or an emergency alarm.

To prevent losing touch with the community you could consider your retirement living options – if you’re a social being, perhaps you’d rather be in a retirement community than at home alone?

Or if a friend is in the same situation as you, consider moving in together. Not only would you have live-in company, but by splitting the costs of housing and bills you’d both save money too!

More options

If you feel like you need more advice, either for yourself or a loved one, visit the Government’s My Aged Care website (www.myagedcare.gov.au) to learn more about aged care options.

Source: AMP.

See how you could benefit your body, while upping the change in your back pocket at the same time.

For many of us, the new year often begins with good intentions and a handful of new year resolutions, which may or may not begin right on 1 January. You might be working toward the day you return to work, or sometime over the next few weeks.

Whatever your start date, if you’re like many Australians, your plans for the year ahead revolve around health and money, with data showing that popular pledges for 2018 include things like quitting smoking, cutting down on takeaway, drinking out less, and paying off debt¹.

The good news is, findings from comparison site Mozo reveal that those who persist in these areas could potentially save more than $20,000 a year². We check out some of the figures.

Ways to boost vitality and save

1. Chuck the ciggies

If your parents, partner, friends or kids haven’t given you enough grief about this one already, the potential savings to be made could be the motivation you need. Apart from the obvious health benefits, a pack-a-day smoker (assuming a pack is around $35) can burn over $12,000 a year³.

2. Cut the boozy nights out

When you add up the drinks, bar snacks and Maccas or kebab run on the way home, these nights out can end up costing quite a bit. On a good note, cutting out just two nights of drinking a week could save you around $4,000 over a 12-month period⁴.

3. Ditch the takeout for something home cooked

Have you ever added up what you spend a week on takeaway food? Figures reveal you could save around $3,000 annually by swapping three takeaway dinners for home-cooked meals—plus, a further $2,400 by taking the leftovers to work, rather than buying a $10 lunch at the café down the road⁵.

4. Write your grocery list and stick to it

Over a 12-month period, Aussies will waste more than four million tonnes of food, enough to bridge the gap between here and New Zealand three times⁶. Having a grocery list based on what you need and plan to cook means you can avoid buying too much, as well as food that’s not that good for you.

5. Opt for water over the takeaway coffee

Your intake of coffee might not be a bad thing, but giving up even one takeaway coffee Monday to Friday could save you around $1,000 a year⁷. Plus, substituting this with more water might be a good idea, as water has numerous benefits when it comes to your health and body⁸.

6. Combine exercise with your social life

Rather than meet up with friends for a beer, wine, greasy burger, hot chips or all of the above (as good as it sounds), swap that for a scenic walk or swim at the beach with friends. If you’re pet-less and have a mate with a cute dog that can come along with you, that might help too.

Meanwhile, if you’re able to stick to this plan and haven’t been using your gym membership that much, opting for a DIY-fitness plan, and cancelling any unused memberships could save you around $800 a year⁹.

7. Skip public transport and walk to work

You might not be able to walk all the way, depending on where your job is located, but you may be able to shave off some of what you pay on public transport by walking or riding your bike part of the way, while getting some exercise at the same time.

Extra motivation

These ideas might not be anything new, but when you see the figures and realise the potential savings you could make, you might be more inclined to stick with healthier habits, particularly if it means the end reward is enough money for a European holiday or another goal you’ve been working toward.

Source: AMP.

^{1-5, 7, 9} Mozo media release – New Year resolutions could bank an extra $30K in 2018
⁶ www.foodwise.com.au/foodwaste/food-waste-fast-facts/ – table 1
⁸ www.betterhealth.vic.gov.au/health/healthyliving/water-a-vital-nutrient – section 1

Changes aimed at improving housing affordability have passed through parliament. See what the new rules could mean for you.

Government proposals around improving housing affordability in Australia were passed through parliament on 7 December 2017¹.

As part of the changes, first home buyers will be given a tax concession through the ability to save for a home deposit inside super, while Australians aged 65 and over will be able to contribute the proceeds from the sale of their family home into super.

We take a look at what the changes could mean for you, bearing in mind that like with all important financial decisions, it’s a good idea to get financial advice before deciding what’s right for you.

Tax concession for first home buyers

From 1 July 2018, eligible first home buyers will be able to withdraw voluntary super contributions (which they’ve made since 1 July 2017), along with associated investment earnings, to put toward a home deposit.

How does it work?

Under the First Home Super Saver Scheme (FHSSS), first home buyers who make voluntary contributions of up to $15,000 per year into their super can withdraw these amounts, in addition to associated earnings, from their super fund to help with a deposit on their first home.

If eligible, the maximum amount of contributions that can be withdrawn under the scheme is $30,000 for individuals or $60,000 for couples.

Voluntary contributions can be made by salary sacrificing from before-tax income, by making personal tax-deductible contributions, or by making personal after-tax super contributions.

When the money is withdrawn, before-tax and tax-deductible contributions are taxed at your marginal tax rate, less a 30% tax offset, while after-tax contributions aren’t subject to tax.

Due to the favourable tax treatment, generally available through super, this scheme intends to help first home buyers grow their deposit more quickly.

Things to note

To make a withdrawal under the scheme, an application to the Australian Taxation Office will be required, and an eligible person is only allowed one FHSSS withdrawal in their lifetime.

There are super contributions which will not qualify and cannot be withdrawn under the scheme, such as super guarantee contributions made by your employer, as well as spouse contributions.

FHSSS amounts that are withdrawn and not subsequently used for a property purchase must be put back into super as after-tax contributions, or penalties will apply.

The first home buyer must reside at the property for at least six months in the first 12-month period from when it can be occupied.

Additional rules may apply to your situation, so make sure you do your research before making any decisions.

Super benefits for downsizers

Currently, people aged between 65 and 75 who want to make voluntary super contributions must satisfy a work test, and people over 75 are generally unable to contribute to their super.

From 1 July 2018 that will change. People aged 65 or over will be able to make an after-tax contribution to their super of up to $300,000 using proceeds from the sale of their family home – regardless of their work status, superannuation balance, or contribution history.

Both members of a couple will be able to take advantage of this proposal, meaning up to $600,000 per couple can be contributed toward super.

How does it work?

Proceeds from the sale of the family home that are contributed into super as part of this initiative can be made in addition to any other before-tax or after-tax contributions you’re eligible to make.

The government said the aim is to encourage older Australians, where appropriate, to free up homes that no longer meet their needs and make room for younger growing families².

Things to note

To qualify, the property sold needs to have been your (or your spouse’s) main place of residence for at least 10 years.

‘Downsizing’ contributions are not tax deductible and can be made regardless of super caps and restrictions that otherwise apply when making super contributions.

The property that is sold must be in Australia and doesn’t include caravans, mobile homes, or houseboats.

No special Centrelink means test exemptions apply to the downsizing contribution. Due to this, there may be means testing implications as a result of downsizing, which will need to be carefully considered.

Meanwhile, additional rules may apply to your situation, so make sure you do your research before making any decisions.

Where to go for more information

Like with most things, when you’re making a big financial decision, which could have implications, it’s worth doing your research and speaking to your financial adviser first.

^1-2 Turnbull Government delivers leg-up for first home buyers and downsizers press release

Source: AMP.

Investors spent 2017 monitoring activity in the US, political rhetoric and disruption, economic turmoil in the UK, North Korean activity and the impact of a range of natural disasters. So what should they consider in 2018?

Here are our top 5 themes.

1.     Synchronised global economic growth

Not since 2010 have we seen coordinated economic growth occurring across most regions and countries. According to the Organisation for Economic Cooperation and Development (OECD), the global economy is now growing at its fastest pace since 2010. The OECD projects that the global economy will grow by 3.6% this year and by 3.7% in 2018, before easing back to 3.6% growth in 2019.

The OECD expects the United States economy to grow at 2.2% in 2017, rising to 2.5% in 2018, then dropping back to 2.1% in 2019. The Eurozone is projected to grow at a 2.4% rate in 2017 and a 2.1% pace in 2018, before slowing to a 1.9% pace in 2019. Growth in China is projected at 6.8% in 2017, 6.6% in 2018, and 6.4% in 2019, as China rebalances its economy to a more domestic focused services-led growth model.

Japan has sealed its longest stretch of economic growth in 23 years, but that might be as good as it gets for a while, according to the OECD: it forecasts 1.5% growth for the Japanese economy for 2017, with growth lapsing back toward 1% in 2018 and 2019 as the decline in the working-age population accelerates.

The OECD also expects the emerging markets to help drive global growth. In particular, it believes India will show 6.7% growth this year, before accelerating to 7% in 2018 and 7.4% in 2019, on the back of reforms that are expected to boost investment, productivity and growth. Russia is well and truly out of recession, with the OECD seeing 1.9% growth in 2017 and 2018, and 1.5% in 2019. The politically troubled Brazil is also expected to exit recession, with a 0.7% growth rate in 2017, before solid improvement to 1.9% in 2018 and 2.3% in 2019. This level of economic growth should support strong growth in company earnings, and underpin improving global trade and commodity prices.

2.     Chinese growth is still strong

China’s economy surged in 2017, supported by government economic initiatives. With huge infrastructure spending expected to continue, China’s economy is expected to keep humming along – although at a slightly lower rate, as per the OECD forecasts above.

3.     Quantitative tightening is here

World markets had plenty of warning earlier this year that “quantitative tightening” – the unwinding of “quantitative easing” – was on the way. With the Federal Reserve firmly in quantitative easing mode, the European Central Bank beginning to follow – but with the Bank of Japan lagging, and the Reserve Bank of Australia unlikely to consider raising interest rates until later in 2018 – the world is likely to have a year of monetary policy divergence. Inflation should make a comeback in the US, but spare capacity in the Eurozone and Japan will mean this will not be uniform. In any case, even with quantitative tightening having begun, there is still an estimated US$18 trillion ($23.7 trillion) in the system, so share prices are not likely to come under undue pressure in 2018: if anything, asset prices should remain strong in 2018.

4.     In the long run, politics does not drive markets

Virtually anywhere an investor looks around the globe, politics is front page news, mostly for the wrong reasons. Washington is stuck in a theme of extreme partisanship; Germany doesn’t have a formal government at present, and may have to re-run its election; “Remainers” in the British parliament seem to be working with Brussels to circumvent the British electorate’s expressed desire to leave the European Union; Australia’s political conversation daily plumbs new depths of inanity relevant only to its participants; and everywhere, populist fringe parties seem to be the only ones profiting from a free-falling trust in politicians. On the geo-political front, North Korea’s regime is increasingly erratic and bellicose; the Middle East is as restive as ever; religious extremists increasingly affect the way modern societies live; and political crises continue to hold back African economic development. But to share markets, none of this matters, as long as company earnings can rise on the back of real economic growth.

5.     Amazon unlikely to kill Australian retail

Amazon’s impending – now actual – arrival in Australia has weighed heavily on the retail sector in 2017, having a definite impact on some companies’ (and retail landlords’) share prices. Amazon will definitely cut into the revenue and earnings of some Australian players, but it won’t blow the whole sector away. The advent of Amazon will be a good thing if it urges retailers to invest in ways to drive efficiencies, improve customer experience and lower prices.

Managing these themes and any ‘unknown’ market events that may arise in 2018 will come down to having a clear and up-to-date investment strategy, with carefully researched diversified investments, that are constantly monitored and reviewed.

Source: BT.

The recent share pullback has seen much coverage and generated much concern. This is understandable given the rapid falls in share markets seen on some days.

Considerations for investors

Sharp market falls with talk of billions of dollars being wiped off shares are stressful for investors as no one likes to see the value of their investments decline. However, several things are worth bearing in mind.

First, periodic corrections in share markets of the order of 5-15% are healthy and normal. For example, during the tech com boom from 1995 to early 2000, the US share market had seven pull backs greater than 5% ranging from 6% up to 19% with an average decline of 10%. During the same period, the Australian share market had eight pullbacks ranging from 5% to 16% with an average of 8%. All against a backdrop of strong returns every year.

During the 2003 to 2007 bull market, the Australian share market had five 5% plus corrections ranging from 7% to 12%, again with strong positive returns every year. More recently, the Australian share market had a 10% pullback in 2012, an 11% fall in 2013 (remember the taper tantrum?), an 8% fall in 2014 and a 20% fall between April 2015 and February 2016, all in the context of a gradual rising trend. And it has been similar for global shares, but against a strongly rising trend. In fact, share market corrections are healthy because they help limit a build-up in complacency and excessive risk taking.

Second, the main driver of whether we see a correction (a fall 5% to 15%) or even a mild bear market (with say a 20% decline that turns around relatively quickly like we saw in 2015-2016) as opposed to a major bear market (like that seen in the global financial crisis (GFC) is whether we see a recession or not. Our assessment remains that recession is not imminent:

• The post-GFC hangover has only just faded, with high levels of business and consumer confidence globally only just starting to help drive stronger consumer spending and business investment.
• While US monetary conditions are tightening they are still easy, and they are still very easy globally and in Australia (with monetary tightening still a fair way off in Europe, Japan and Australia). We are a long way from the sort of monetary tightening that leads into recession.
• Tax cuts and their associated fiscal stimulus will boost US growth in part offsetting Fed rate hikes.
• We have not seen the excesses – in terms of debt growth, overinvestment, capacity constraints and inflation – that normally precede recessions in the US, globally or Australia.

Reflecting this, global earnings growth is likely to remain strong, providing strong underlying support for shares.

Third, selling shares or switching to a more conservative investment strategy or superannuation option after a major fall just locks in a loss. With all the talk of billions being wiped off the share market, it may be tempting to sell. But this just turns a paper loss into a real loss with no hope of recovering. The best way to guard against making a decision to sell on the basis of emotion after a sharp fall in markets is to adopt a well thought out, long-term investment strategy and stick to it.

Fourth, when shares and growth assets fall they are cheaper and offer higher long-term return prospects. So the key is to look for opportunities that the pullback provides – shares are cheaper. It’s impossible to time the bottom, but one way to do it is to average in over time.

Fifth, while shares may have fallen in value the dividends from the market haven’t. So the income flow you are receiving from a well-diversified portfolio of shares continues to remain attractive, particularly against bank deposits.

Sixth, shares and other related assets often bottom at the point of maximum bearishness, ie: just when you and everyone else feel most negative towards them. So the trick is to buck the crowd.

Finally, turn down the noise. At times like the present, the flow of negative news reaches fever pitch – and this is being accentuated by the growth of social media. Talk of billions wiped off share markets, record point declines for the Dow Jones index and talk of “crashes” help sell copy and generate clicks and views. But such headlines are often just a distortion. We are never told of the billions that market rebounds and the rising long-term trend in share prices adds to the share market.

Source: AMP

Market and Economic overview

Australia

• Employment continued to rise in December, with a further 34,700 jobs being created. In 2017 as a whole, more than 400,000 new jobs were created in Australia, providing a significant boost to the economy.
• Consumer confidence has risen to its highest level in more than four years on the back of the improving labour market conditions.
• Higher confidence levels are being reflected in spending habits. November retail sales grew at the fastest monthly pace since February 2013, for example, and new car purchases are at record highs.
• In spite of the higher spending, inflation remains slightly below the Reserve Bank of Australia’s 2% to 3% target range. This suggests there is a limited likelihood of interest rate increases in the near term. Official interest rates were left on hold at 1.5% at the Bank’s last meeting in December.

United States

• For a few days in mid-month, politics overshadowed economic news. A number of government departments had to shut down as Congress failed to pass a new funding deal. A temporary solution was subsequently agreed, enabling investors to refocus on economic data releases.
• Corporate earnings were also announced by around a quarter of companies in the S&P 500. As ever, these releases attracted a great deal of scrutiny.
  • In spite of the improvement in economic conditions in the US over the past year, inflation appears to remain under control. Annual CPI of 2.1% was announced for calendar year 2017. Higher employment, improving confidence and buoyant retail sales have not yet resulted in significant inflationary pressure.
  • The recovery in US manufacturing continues. Industrial production rose 1.8% in 2017, the first gain since 2014.
  • The employment picture also remains encouraging. December’s jobs report was broadly in line with expectations, with 148,000 new jobs being created. Wage growth also continued to edge higher.
  • Towards the end of the month, investors focused on the release of employment statistics for January, which were released in early February. Data showed that a further 200,000 jobs were added in January, which was well above expectations.
  • Average hourly earnings also rose 2.9% yoy in January; the fastest pace of growth since 2009. This prompted some commentators to suggest that the labour market could be showing signs of overheating.

Europe

• Euro area GDP rose 2.5% in 2017 as a whole; the best performance in the past decade.
• Improved conditions have resulted in rising new job vacancies and have seen the unemployment rate fall to 8.7%. While this remains high by Australian standards, it is well below the 12%+ rate seen around five years ago.
• The employment picture has also improved in the UK, where the overall number of people in work is now higher than ever before. The official unemployment rate (4.3%) is the lowest in more than 40 years.
• Encouragingly, UK exports are rising and the manufacturing sector is performing well. Negotiations over ‘Brexit’ continue; this has the potential to derail the economy in a worst-case-scenario outcome for the UK.

New Zealand

• CPI data for the December quarter highlighted annual inflation of 1.6%. This was well below expectations and was the lowest quarterly reading in the whole of 2017.
• The subdued reading was attributed to moderating food prices, although selected other sectors including education and utilities continued to see quite strong price increases.
• The lower overall inflation reading affirmed investors’ existing view that the Reserve Bank of New Zealand is unlikely to raise interest rates from the current 1.75% throughout 2018.

Asia

• Data confirmed that the Chinese economy expanded 6.9% in 2017; ahead of the government target of 6.5%. The performance in 2017 was also an improvement on the 6.7% growth witnessed in 2016, which was the country’s lowest growth reading for more than 25 years.
• Elsewhere in Asia, Japanese inflation quickened to its fastest pace since early 2015, driven by rising food prices. In spite of the spike, official interest rates remain below zero (-0.1%).
• The Japanese government forecasts economic growth of 1.4% this year, which could result in inflation of around 2% in 2019.

Australian dollar

The Australian dollar appreciated by more than 1% against a trade-weighted basket of currencies in January.

The dollar performed particularly well versus the US dollar, rising to its highest level since May 2015 (US$0.8136). The move was supported by general weakness in the US dollar and a more positive outlook for global economic growth. Buoyant Australian economic activity was also supportive.

The Australian dollar lost ground against the British pound, partly reflecting the release of favourable UK economic data.

Commodities

Commodity prices were mixed during January, although most were supported by a weaker US dollar and growing optimism regarding the global growth outlook.

Coking coal saw the most noticeable change, falling -18%. A restocking cycle that helped prompt coking coal prices higher at the end of December was unwound in January, as stockpiles grew sharply. Iron ore tracked mostly sideways, as demand for higher-grade ores remained strong (see our Chart of the Month on the following page), despite evidence of easing restocking demand in January.

Base metals were mixed. Nickel (+10.6%) and Zinc (+8.5%) rose, while Copper (-0.8%) and Aluminium (-0.8%) edged lower.

Gold continued its strong momentum, adding 2.5% on a weaker US dollar.

Oil (+7.0%) continued its march higher, reaching three-year highs. Strong demand, OPEC production cuts and positive IMF economic growth forecasts all helped to support the oil price.

Australian equities

Following a strong December, the Australian equity market (S&P/ASX 200 Accumulation Index) edged -0.4% lower.

Bond proxy sectors Property Trusts and Utilities weighed on the broader market, with both falling appreciably (-3.3% and -4.5%, respectively) amid rising bond yields.

There was some divergence of stock performance within the Industrials sector (-2.1%), with Macquarie Atlas Roads (-8.7%), CIMIC Group (-8.4%) and Aurizon (-5.7%) among the underperformers.

Health Care was the best performer, adding 3.2%. The sector was boosted by gains in Sirtex Medical, which surged 66.1% after agreeing to a $1.6 billion takeover by US firm Varian. ResMed (+15.0%), Sonic Healthcare (+4.3%) and CSL (+3.6%) also outperformed.

Materials (+0.5%) and Energy (-0.5%) took a breather after both added 23% in 2017. Financials finished -0.8% lower, as the ‘big four’ banks all lost ground.

Within Consumer Staples (-0.1%), a2 Milk had another stellar month, adding 14.6%, bringing its gains for the past 12 months to 294%. This was insufficient, however, to offset weakness in sector giants Wesfarmers (-1.4%) and Woolworths (-1.3%).

In the Consumer Discretionary sector, strong gains in JB Hi-Fi (+17.2%) and Flight Centre (+15.4%) were offset by losses in Retail Food Group (-20.9%) and Fairfax Media (-9.0%).

Listed property

The S&P/ASX 200 A-REIT Index fell -3.3%.

Retail A-REITs (-2.3%) and Office A-REITs (-2.3%) were the stronger performers, while Industrial A-REITs (-3.9%) lagged.

All stocks lost ground in January. The worst performers included specialised A-REIT, Iron Mountain and diversified A-REIT, Abacus Property Group. Iron Mountain suffered for the second month in a row, having fallen more than 8% in December after announcing the acquisition of the US operations of IO Data Centers. The deal was subsequently closed in January. Abacus Property Group fell over the first half of the month, in particular, after announcing the retirement of its Managing Director, who had been with the Group for more than 21 years, with 11 years as MD.

Scentre Group and Vicinity Centres outperformed peers, although neither company released any meaningful news.

The global FTSE EPRA/NAREIT Developed Index (TR) was flat in USD terms. In local currency terms, Japan (+7.8%) was the strongest property market, while the US (-4.2%) underperformed.

Global equities

Global equity markets had a happy start to the new year. The MSCI World Index surged 5.3% in USD terms, having been up 7.2% before profit-taking and higher bond yields saw a weaker finish in the final week. Markets continued to set new records over the month in terms of both index levels and the sustainability of the recent rally. Investors even shrugged off some jitters over the potential for broader government shut-downs in the US, with the Senate threatening to block a funding bill. Markets were also supported by favourable economic data and solid earnings results in the US and Europe.

The US market was the strongest performer in local currency terms, with the S&P 500 up an impressive 5.7%. Of the 24% of S&P 500 companies that announced results in January, 81% reported sales above consensus estimates.

The FTSE 100 was one of the weaker performers, down almost 2%. Investors remain nervous over the potential outcome of ‘Brexit’ negotiations. Additionally, the resources-heavy UK bourse contains few information/bio technology companies that have been driving markets in the US and Asia.

Growth companies outperformed their value peers. MSCI World Growth was up +6.3% in USD terms, versus MSCI World Value, which added +4.3%. There was a similar gap in favour of large caps, with the MSCI World Large Cap Index (+5.5%) outperforming the MSCI World Small Cap Index (+3.6%).

MSCI Emerging Markets (+8.3%) also continued to strongly outperform their developed counterparts in USD terms, helped by the weakness in the US dollar. Latin American indices performed particularly well, with the resources-rich Brazilian bourse leading the way (+11.6%).

Global and Australian Fixed Interest

Buoyant investor sentiment towards risk markets in early 2018 resulted in a strong upward move in global government bond yields. US 10-year Treasury yields rose to their highest level since April 2014.

Market optimism was bolstered by US tax reforms passed at the end of 2017 and announcements that many US companies would be awarding pay rises and bonuses.

CPI remains below target in most countries, there was also a marked increase in market expectations for inflation worldwide.

Global central banks are also pulling back on asset purchases, most notably the European Central Bank (ECB). The ECB has started to talk about the possibility of lifting interest rates once its asset purchase program ends later this year.

Continued discussions on the North American Free Trade Agreement also exerted upward pressure on bond yields, with suggestions that the US, Canada and Mexico are nearing an agreement on trade talks. Other geopolitical issues were more subdued in the month, with limited developments on the ‘Brexit’, North Korea and President Trump impeachment fronts.

Global credit

Global investment grade credit spreads continued on the long-held tightening trend, reflecting ongoing optimism towards risk markets.

Issuance remained strong, with a number of global investment grade bond issues being met with demand as the hunt for yield continued.

Average credit spreads closed the month 9 bps narrower, at 0.85%. US credit moved 7 bps narrower, to 0.82%. In Europe, spreads closed January 12 bps narrower, to 0.74%.

US high yield credit spreads widened 27 bps, to 2.59%. The high yield market continues to be impacted by downgrades, particularly in the energy and mining sectors.

Source: Colonial First State.

There was a broad-based pick-up in the global economy in 2017. A number of advanced economies are growing at an above-trend rate and unemployment rates are low. Growth has also picked up in the Asian economies, partly supported by increased international trade. The Chinese economy continues to grow solidly, with the authorities paying increased attention to the risks in the financial sector and the sustainability of growth.

The pick-up in the global economy has contributed to a rise in oil and other commodity prices over recent months. Even so, Australia’s terms of trade are expected to decline over the next couple of years, but remain at a relatively high level.

Globally, inflation remains low, although higher commodity prices and tight labour markets are likely to see inflation increase over the next couple of years. Long-term bond yields have risen but are still low. As conditions have improved in the global economy, a number of central banks have withdrawn some monetary stimulus. Financial conditions remain expansionary, with credit spreads narrow.

The Bank’s central forecast for the Australian economy is for GDP growth to pick up, to average a bit above 3 per cent over the next couple of years. The data over the summer have been consistent with this outlook. Business conditions are positive and the outlook for non-mining business investment has improved. Increased public infrastructure investment is also supporting the economy. One continuing source of uncertainty is the outlook for household consumption. Household incomes are growing slowly and debt levels are high.

Employment grew strongly over 2017 and the unemployment rate declined. Employment has been rising in all states and has been accompanied by a significant rise in labour force participation. The various forward-looking indicators continue to point to solid growth in employment over the period ahead, with a further gradual reduction in the unemployment rate expected. Notwithstanding the improving labour market, wage growth remains low. This is likely to continue for a while yet, although the stronger economy should see some lift in wage growth over time. There are reports that some employers are finding it more difficult to hire workers with the necessary skills.

Inflation is low, with both CPI and underlying inflation running a little below 2 per cent. Inflation is likely to remain low for some time, reflecting low growth in labour costs and strong competition in retailing. A gradual pick-up in inflation is, however, expected as the economy strengthens. The central forecast is for CPI inflation to be a bit above 2 per cent in 2018.

On a trade-weighted basis, the Australian dollar remains within the range that it has been in over the past two years. An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.

Nationwide measures of housing prices are little changed over the past six months, with prices having recorded falls in some areas. In the eastern capital cities, a considerable additional supply of apartments is scheduled to come on stream over the next couple of years. To address the medium-term risks associated with high and rising household indebtedness, APRA introduced a number of supervisory measures. Tighter credit standards have also been helpful in containing the build-up of risk in household balance sheets.

The low level of interest rates is continuing to support the Australian economy. Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual. Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.

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