Financial Newsletter Sunshine Coast
Welcome to Unique Financial Partnerships, keeping you up to date with all financial planning, self managed superannuation funds, tax minimisation, life insurance, on the Sunshine Coast and around Australia.
The information in this newsletter is current at the time of printing. Contact us for updates.
INFLATION -
IS THE GENIE OUT
OF THE BOTTLE?
Australia’s headline inflation rate has fallen
dramatically over the past year, and now
stands at 1.5%, down from 5.0% a year ago.
In the short term, it’s likely that inflation will
remain low. This is good news for investors
and consumers. Low inflation means everyday
prices are not on the rise, making it easier to
plan, spend and save.
However, there is much debate among market
commentators about the path of inflation in the
medium term, with many believing that it may rise.
The long-term global impact of government stimulus
packages, and the central bank action of printing
money over the past year, would seem to support
this. Increases in money supply of this nature have
historically triggered inflation.
There are a number of other factors that might also
cause inflation to rise. Australia’s proposed emissions
trading scheme (ETS) may have some effect on general
price levels, particularly energy.
Further, as many of the emerging economies, such
as China and India, become wealthier, their food and
energy consumption is likely to increase dramatically.
This would boost demand for those commodities
globally, and may also lead to increased prices and
higher inflation in Australia.
Why should we be concerned if inflation does rise?
Inflation is particularly important for people, including
retirees, who are living off their accumulated assets. The
most worrying impact is that inflation erodes the value
of savings held in assets, particularly cash, as the lump
sum decreases in real terms. This means that without
careful planning, retiree incomes often cannot keep up
with price rises, leading to a fall in living standards.
For some workers, the ability to ensure that their wage
growth keeps up with inflation may be limited. In
addition, income earners should be aware of ‘tax creep’,
where increases in income that help to keep pace with
inflation lead to movements into higher tax brackets.
For investors holding fixed income investments that pay
a pre-determined return, inflation can also erode the
value of that income.
On the other hand, for investors holding significant
amounts of debt, particularly fixed rate debt, inflation
can be good news. The real value of those payments will
fall, meaning the debt is easier to service. The value of
the loan, too, will fall in real terms.
Growth assets, such as property and shares, which tend
to keep up with inflation over the medium to long term,
are ideal investments when inflation is on the rise.
Potential increases in inflation levels is something that
should be considered in the design of your investment
portfolio. If you believe inflation might impact your
standard of living, talk to your Futuro adviser about
“inflation-proofing” your portfolio.
WHERE TO NOW FOR INTEREST RATES?
Short-term interest rates are at historically low
levels because the Reserve Bank of Australia
(RBA) has aggressively eased official rates in
the face of the Global Financial Crisis (GFC).
This has eased the debt burden faced by
everyday Australians, and helped to soften the
impact of the GFC.
Recent economic data suggests that the worst of the
crisis has now passed. And the RBA has signalled that
it is likely to begin increasing short-term interest rates
when it is sure that the recovery is sustainable.
In the medium term, the RBA will increase interest rates
to ‘neutral’ levels, which they believe will not stimulate
economic activity by being too low and will not hamper
activity by being too high. That level is around 5% p.a.
for short-term interest rates, which is significantly higher
than the current level of 3%.
Interest rates and you
Although it is likely to be some time before we see
interest rates at 5%, it is worthwhile considering how
this could affect your personal circumstances and your
investment portfolio.
Debt
For variable rate loans, higher interest rates will mean
higher repayments. If interest rates are around 5%,
standard variable mortgage rates are likely to be
between 7.5–8.5% p.a. Interest rates on other loans,
such as personal loans and credit cards, will also be
around 2–2.5% p.a. higher than they are currently. It’s
important to make sure that you can manage these
increased repayment levels.
Bonds
Higher interest rates are likely to be bad news for bond
holders and bond funds because as interest rates rise,
their capital value diminishes. However, as these assets
are generally priced in the fixed interest market, which
tends to anticipate changes in interest rates before they
occur, we have already witnessed at least some of the
change.
Cash holdings
On the other hand, higher interest rates are good news
for those with cash holdings. Banks will pay higher
levels of interest on accounts and term deposit rates are
likely to rise. It is now time to make sure your accounts
meet your needs and have the potential to pay higher
interest in due course.
Growth assets
For growth assets, such as property and shares, rising
interest rates can be a double-edged sword. The fact
that interest rates are rising means that the economy
is getting stronger, so that the environment for these
assets is good.
However, residential property prices may become less
affordable and there may be some pressure on share
prices as higher yields are sought.
There are many factors to take into account when
designing your investment portfolio. Your Futuro
adviser can work with you to ensure that your portfolio
is well positioned to benefit from future interest rate
movements.
THE LUCKY COUNTRY
The global economy has been gripped by
one of the worst recessions of the past 40
years. Australia has not been immune to the
downturn, having recorded negative growth in
the first quarter of this year and weak growth in
the second.
Nonetheless, both the International Monetary Fund
(IMF) and the Reserve Bank of Australia (RBA) have
commented that the recession in this country has been
comparatively mild. This is due to a number of reasons,
the most important of which are outlined below.
China growth
Much of our growth over recent years has been based
on growth in China and the Asia–Pacific region, and
their demand for our resources. Although China’s
economy did slow last year, the Chinese government
stepped in with significant financial stimulus measures
and has instigated a number of other strategies to
encourage economic growth. As a result, demand for
our exports has not suffered as dramatically as it might
have.
Government surplus
Australia was in a strong economic position at the
beginning of the global financial crisis. Years of
surpluses meant that our nation’s overall debt levels
were low compared to most of the developed world.
At the beginning of the crisis, the
federal government acted quickly and
provided significant direct stimulus to the economy.
This has primarily been in the form of direct handouts
to individuals and home buyers, as well as tax breaks
for smaller businesses.
Interest rate flexibility
Our interest rates were also comparatively high at the
beginning of the crisis, so the RBA could decrease rates
quickly and aggressively. This also helped to buoy
consumer sentiment by lowering debt servicing costs.
Strong finance sector
In addition, our financial system has generally been
stronger than those of other developed nations
because our banks held comparatively little sub-prime
debt.
Low unemployment
While negative growth over 2009 in the US and the UK
is a certainty, and unemployment sits at well over 9%
and 7.5% respectively in those countries, Australia’s
growth rate, while low, will still be positive this year and
unemployment currently remains under 6%.
Australia finds itself, once again, being the lucky
country.
DON’T LET THE BURDEN BECOME TOO HEAVY
When explaining stress management to a
class, a lecturer raised a glass of water and
asked, “How heavy is this glass of water?” A
variety of answers were called out.
The lecturer replied, “The absolute weight
doesn’t matter. It depends on how long you try
to hold it. If I hold it for a minute, that’s not a
problem. If I hold it for an hour, I’ll have an ache
in my right arm. If I hold it for a day, you’ll have
to call an ambulance. In each case, it’s the same
weight, but the longer I hold it, the heavier it
becomes.”
He continued, “And that’s the way it is with stress
management. If we carry our burdens all the
time, sooner or later, as the burden becomes
increasingly heavy, we won’t be able to carry on.”
“As with the glass of water, you have to put it down for
a while and rest before holding it again. When we’re
refreshed, we can carry on with the burden. So, before
you return home tonight, put the burden of work down.
Don’t carry it home. You can pick it up tomorrow.”
Top tips for dealing with the burdens of life:
- Accept that some days you’re
the pigeon, and some days
you’re the statue. - Never put both feet in your
mouth at the same time,
because then you won’t have a
leg to stand on. - A truly happy person is one
who can enjoy the scenery on a
detour.
Remember life is short. Enjoy it!
Disclaimer
All representations and information contained in Futuro in Focus are made in good faith and are believed to be correct at the time of preparation. Articles are of a general nature and they do not purport to be specific investment advice. Individual needs or other considerations have not been taken into account, thus information contained herein should not be relied upon as a substitute for detailed advice. Futuro Financial Services will receive fees or brokerage from the provision of advice or placement of investments. You may, by contacting our Privacy Officer on 07 3018 0400 or by writing to Futuro Financial Services Privacy Officer GPO Box 942 Brisbane QLD 4001, request not to receive further editions of Futuro in Focus.
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