Australian Investors Need to Think Global

Microsoft, Amazon, Facebook, Google, Walt Disney, Coca Cola, Tencent, Alibaba, Nike, McDonald's, Visa, Tesla, Netflix, Spotify, Sony, Samsung, TSMC, Johnson & Johnson, LVMH, Salesforce. All massive global organisations, with incredibly strong brands, across a broad range of exciting growth industries. Huge opportunities. I do not believe you would find anything near an equivalent business to any of those listed here in Australia. So why, when the world is changing so rapidly, are most investors sitting on their hands holding 5 banks, 3 mining companies, a couple of retailers and Telstra? The reality is that if Australian investors do not have exposure to international shares going forward, their investment portfolio will be left behind over the long term. There are a few reasons for this.

Firstly, as I alluded to, there is very little genuine diversification in our market compared to the global market. The share market here is dominated by a handful of stocks big banks, big miners, Woolworths, Wesfarmers, CSL and Telstra. The ASX200 is made up of 30% financials and 20.3% materials. In fact, the 12 biggest companies by market capitalisation on the ASX represent about half of the entire market capitalisation of the stock exchange, or about $1 trillion out of the $2 trillion worth of companies listed on the ASX.

Secondly, Australia is also small, really small. The ASX accounts for about 2% of the global share market. A lot of big fish in a small pond. This dynamic makes it more difficult to find stocks that are great businesses as well as undervalued. Everyone knows about every stock. But there are great companies and opportunities across the world that many are missing out on. Unless companies are operating as global businesses, and in 2021 that is entirely possible, then many companies here are limited to a market of 25 million people. Stock market investors need to think much more like venture capital investors going forward and look at businesses that are global and scalable. 

Thirdly, asset prices here will continue to be forced up by sheer weight of fund inflows in the years to come. As it stands, there is just so much money in the superannuation system that it is distorting valuations of companies. This will only get worse in the years ahead. Currently, there is almost $3 trillion in the Australian superannuation system. That is more than the entire value of the Australian share market which is worth about $2 trillion. Additionally, there is about $120 billion being added each year in new contributions to the system. That is a huge amount of new cash that needs to be invested. A good percentage of which will be mandated by the super funds to go into the biggest stocks in the country. This is going to become an increasing problem for valuations, fund managers and ultimately investors.

Finally, the opportunities across the rest of the world are very different to those you can access here. There are entire industries and subsectors of industries that simply do not have a meaningful presence here in Australia. Whether it is the pharmaceuticals, technology, cybersecurity, or renewable energy the leading companies in the world are typically not found in Australia. There are no companies you can effectively include in an Australian focused portfolio as a substitute for exposure to the blue-chip companies I listed at the start of the article. You simply miss out. There are even greater opportunities being missed internationally at the mid cap and small cap end where the global leaders of tomorrow are emerging.

It has never really made any sense to me that most Australian investors invest such a high proportion in Australian stocks. While there is a level of familiarity and comfort derived from investing where you live, as technology makes access to international markets more efficient and affordable and research commoditised, it can no longer be ignored. In the decade ahead, diversification away from the Australian share market will be critical. Not only to reduce exposure to a concentrated number of stocks in a small local market, but to access the incredible opportunities increasingly available to all investors across the world.  

This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you.

Are We Entering a New Cold War?

The rise of China as an emerging superpower presents unprecedented opportunities and challenges for the world. Given recent tensions between China and the USA and their ongoing trade war, it raises questions about what it means for the future. Is it possible that we are entering a new Cold War? 

The short answer, in my opinion is yes, we already have. 

It might have started as a trade war, but it is now much more than that. Ultimately, it’s the rising superpower competing with the established one. At the moment there are half a dozen or more different issues of serious disagreement between the countries that could at any time take a turn for the worse and lead to serious escalation.

While there are obvious differences in political and economic ideology between communist China and capitalist USA, and their allies, this isn’t the only complication. Over the years, the trust between the two nations has been lost to the point that it becomes difficult to repair the relationship. 

The new reality for the world is that China and the USA are not only competing in economic terms. It’s a battle for power and influence in the global hierarchy for the next century and beyond. So, whether it's in relation to the South China Sea, Taiwan or another issue, we will continue to see posturing and positioning as they test each other out. 

Let’s not be naïve either, as the incumbent superpower, strategically, it is very likely that the USA would prefer to have whatever battles they need to have, sooner, while China are not yet as powerful. The US does not want a conflict, or the threat of conflict, when the countries are the same size and certainly not once China is more powerful. 

I don’t think this is a dramatic statement, simply an obvious one. 

The general assumption by many has been that there may be conflict decades down the track when China is able to challenge the USA as an equal. I think everyone is looking at it wrong. History has shown that, where their strategic interests are at risk, the US will take whatever action they deem necessary to nullify it. As such, it is my view that the threat of potential conflict is actually greater in the near term (this decade).

Obviously, this is an extremely complex issue. It will likely be the most important geopolitical issue of this century. It is not just about global politics, because after decades of globalisation, the impacts of these emerging risks have never been greater, or more widely felt, for all nations and industries. Certainly, businesses in many industries are already having to rethink how they manage their business to mitigate the risks. I also think investors should be taking these risks into greater consideration when making investment decisions.  

This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you.

So, here we are again. Lockdown

The whole issue of Covid-19 and how to manage it is probably the second most polarising topic I have seen in 10 years (the most polarising was easily Donald Trump’s presidency). There are many different perspectives and people don’t hesitate to share their particularly strong views on the best way to deal with it. Ironically, I’ve not heard anyone say: “well it’s hard to know, this is new territory, there are going to be mistakes but we’ve got to pull together and work it out as quickly as we can.” No one says that, instead everyone is an expert because they listened to a podcast and have a mate who also agrees with them.

What I have observed is that no one is objective on this issue. Everyone’s view is directly impacted by the most serious impact Covid-19 has on them and their family. If they are running a café in the CBD and face financial ruin, then lockdowns are ridiculous, and we need to learn to live with Covid-19. If someone has a child with pre-existing health concerns, they will tell you vaccines are essential to protect the community, and anyone not vaccinated is being irresponsible.

Understanding that the paradigm everyone views these topics through is important to separate the macro from the micro when discussing these topics. None of these individual views are unreasonable. If lockdowns will potentially ruin your business, then your view is not unreasonable. If your loved ones have pre-existing health issues your view that everyone needs to get vaccinated is not unreasonable. Conversely, if you are worried about the side effects of the vaccine, and want to wait, your view is not unreasonable. That’s the individual decision and views.

In terms of how this plays out from a macro perspective, we need to look at the best outcomes that can be achieved from a financial and economic perspective as well as health perspective. There will be collateral damage and criticism regardless of the decisions made and those people will reasonably have a grievance at the individual level. But from a big picture perspective, in the best interests of our nation, everyone would agree on one thing: We need to get back to normal life as soon as possible. We also have the means to do this but for some reason we continue down a path of indifference, half measures and state-based decisions.

To achieve a return to normal life as soon as possible the number 1 priority of the Australian Federal and State Governments must be getting the majority of the population vaccinated. From a health perspective it minimises the risk to everyone of death or illness as a result of Covid-19. It also minimises the interruption from a business perspective from lock downs and other restrictions and gives the economy every chance to move forward unimpeded. I say majority because people must be able to choose. They may have valid concerns and freedom to choose is a critical part of our society. However, there are plenty of incentives that can be introduced to ensure the majority are motivated to get vaccinated.

The current lockdowns are hardly a surprise, and it is very easy to see that Australia is lagging most of the world with our vaccine roll out. Currently Israel have over 60% of their population fully vaccinated, Chile and Hungary above 50% and the USA and UK over 45%. Australia sits well and truly behind most of the world at 4%. Ultimately, this will slow down our economic recovery. Overwhelmingly, Australia has managed the pandemic extremely well. Compare our situation to other nations and it’s clear that many other countries have endured major problems. But we have become a victim of our own success. As well as we managed the early stages of the pandemic it has led to complacency across the board.  

Other countries were desperate and thankful for a vaccine because thousands and thousands of people were dying, and their hospital systems were overwhelmed. In Australia we were not desperate, we were slightly inconvenienced, some people were concerned. But the majority of Australians went about their lives much as they did before, occasionally wearing masks, standing further apart and using more hand sanitiser than we probably needed to.  

There are a range of reasons for the slow up take and roll out of the vaccine. Regardless, I would expect that the current situation will be the catalyst for the government to step up the roll out and for the majority of the population to get vaccinated. Until this happens, we are going to continue to face the prospect of interruption to business, social restrictions, and potential health issues. Once it’s done, we can move forward as a nation and return to normal.

What You Don’t Invest in Matters

The poor results from recent high-profile IPO, Nuix and other well-known brands such as Adore Beauty, are an important reminder that sometimes the best decision is not to invest even when everyone else seems to be. I had multiple clients ask about those companies and others at the time when they were the next hot investment. There are a few simple rules that are worth keeping in mind to help decide if an investment is good for you or whether you might be better off ruling it out. This is especially useful when markets, or a sector of the market, has performed very well, and the market becomes flooded with new opportunities. Personally, if I can find a reason not to invest, a deal breaker of some kind, that’s great. It saves me a lot of time and effort and I can move on the next deal. 

With regards to Nuix, my notes at the time in response to client queries include: I am undecided (unconvinced). There are a few issues which make it less attractive than it appears at face value. The IPO/float process appears to have been well managed and structured to maximise the returns on listing day (good publicity, marketing and control of the stock allocations to increase demand). I think businesses in the data industry are complex and difficult to understand business models. Unless we really understand the model, we would keep clear. In relation to the float, they raise only $100m in new funds for the business to grow whereas $875m is existing shareholders selling down. It’s a company where the founders and management own very little of the company, majority are large institutions who invested many years ago. There is a lawsuit pending from one of the original co-founders. 

One of the first considerations for me is whether the company being listed is raising money to grow or if it’s effectively an exit. There’s a big difference between a founder raising capital to grow their business to take it to the next level and a large institution taking a company they invested in years ago to the market to sell it. In the first case, the founder will retain as much of the business as possible while raising funds to fuel growth and expansion. In the second case, the institutions may have invested much earlier and are pricing the float at the best possible price to maximise their return. If the majority of the proceeds raised are being used to fund the exit of existing institutional investors, then that’s not usually a great sign regarding their view of its future prospects.  

Another area I am very wary of are IPOs led by large private equity firms who have taken over a well-known brand that had fallen on hard times. They buy them cheap and get to work restructuring the business over 2-3 years before re-listing the company on the stock exchange. High profile examples in the last decade that come to mind include Myer and Dick Smith. You’ll often find that while the profit number looks great ahead of the listing, and the turnaround hailed a success, the reality is often that the business hasn’t received the level of the capital investment needed to sustain the performance or the business. It’s only after the sale or IPO that the lack of investment or other issues become a problem and cracks start to appear. Suddenly, six months or a year after the float, the company starts missing their profit guidance and shortly after the share price falls accordingly. So, while new IPOs are much talked about, they are not always as they seem. It is important to look beyond the positive PR and sales pitch and more deeply at the underlying motives of all the stakeholders before committing any capital.


This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you.

Why the Semiconductor Shortage Is a Major Issue for Everyone

A couple of months ago I wrote an article outlining 10 themes for 2021 and it is already time to add a new theme to the list. There is a critical shortage of semiconductors that will soon be felt in every part of the economy. If I was to redo my list today, I would rank this new theme in the top three for potential impact. It’s a serious issue that is beginning to impact some businesses, but it hasn’t really been felt by consumers in the main and certainly hasn’t yet been factored in by markets. This is a complex issue that encompasses about 5 of the 10 themes I previously identified. 

Semiconductors are critical to the production of electronic devices. In today’s economy that means everything. It’s no longer just computers and phones, semiconductors are prevalent in every industry, from cars, washing machines, microwaves through to kid’s electronics, video games and toys. But its far bigger than consumer goods, semiconductors impact industry, business, government and military operations. Beyond the everyday devices highlighted above, the future demand for semiconductors is only going to increase as technology becomes more sophisticated and becomes increasingly embedded in our daily lives. In the future, robotics, autonomous vehicles, AI, data centres, streaming and the internet of things are just some of the new areas that will see massive demand in semiconductors. There is huge growth in this sector. 

But right now, there is a shortage looming that is going to create problems for consumers and business. There are several factors at play here. Increased demand for devices during the pandemic for manufacturers already at capacity. Logistics problems and additional supply chain shortages due to Covid-19. It also highlights just how vulnerable the world is to the fragility of the global supply chain. Perhaps most importantly, about 60% of the semiconductor market comes from Asia with an increasing amount forecast to be controlled by China in the years ahead. Western nations are concerned from a national security perspective in the event of escalating tensions with China. 

As we have seen in Australia firsthand, in a variety of industries, China has no problem using demand for commodities as leverage and strategically positioning business decisions for political gain. This is a problem. You need a reliable supply. This is especially true for a product as critical as semiconductors. So, countries are going to move to ensure future supply. That means building out the capability to not only meet future demand for semiconductors but to ensure reliability of the supply chain for business and stability to mitigate national security risks. The USA and many nations in Europe are already planning to open more manufacturing facilities in the years ahead to keep up with demand and secure supply. 

There are very real and potentially dramatic consequences from the current shortage as it flows through the global economy. We are already starting to see the impact with prices of some devices jumping significantly, and others unavailable. While in the US, some automotive manufacturers are already having to shut their manufacturing plants due to the shortage. The questions will soon be very real about how this impacts the manufacturers of many devices and products around the world from Apple, Nintendo and Tesla through to small and medium size businesses in a variety of industries. This issue will impact prices, sales and profits. 

At the high-end, companies such as Intel, TSMC, SK Hynix and Samsung will continue to manufacture semiconductors, and this is a significant growth opportunity. The demand for semiconductors will likely continue to grow for decades to come. But like any other boom, sometimes there are even greater opportunities to be had in the companies that provide services to these manufacturers. Like the old saying ‘sell shovels in a gold rush’ I think there are even more interesting opportunities to be found in the companies in this part of the market that can provide machinery and services to such a rapidly growing market. 

This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you.

Lessons on Work, Money and Life

This week’s post is a little different. We’ve hit a few significant milestones in our house in the past few weeks and it has made me more reflective than usual. Recently, my wife and I celebrated our 25th wedding anniversary and just last week the youngest of our 4 children turned 18 years old. As I approach my 45th birthday and think back, what advice would I give to myself at 18? Or more importantly, as I look forward, what advice would I give my kids for the years ahead?

This is what I would tell them about work, money and life:

1. Make every single day count. There is one thing I know for sure, it’s that time stops for no one. That doesn’t mean be constantly busy or rush. It means be mindful, not wasteful.

2. Do what you love. Everyone says that these days, but people still struggle with it. Do what you really love, and you’ll end up being successful and more importantly, happy.

3. Give it a go. Whatever it is you really want to do, just go and do it. There will never be a perfect time, so don’t overthink it, just do it. If it doesn’t work out, then just start again.

4. Don’t be scared to try new things. If you don’t know what you want to do, try a bunch of things. You’re not going to find your passion thinking about it. Get out there and do.

5. Learn good habits. This goes for work ethic, health and fitness just as much as financial discipline. Start off by making it easy and build on it every day until its unbreakable.

6. Develop a good daily routine. This follows on from good habits. Almost everyone who I’ve seen succeed has a reliable routine. It’s what helps you get through the tough times in life.

7. Choose your partner wisely. It will probably be one of the single biggest factors in the happiness of your life. This applies to love and business.

8. Pick your battles. Don’t get distracted from your goals by everything that goes wrong or every problem that appears. Save your energy for the fights that really matter.

9. Enjoy the journey of life. It goes quickly and very few times is anything as serious or grave as it may seem. So, stress less and enjoy each day as it comes.

10. Buy books. The best investment you can ever make is to buy a book for $30 to get the insights a world class expert gained over a lifetime. It remains the best deal I’ve ever seen.

11. Spend less than you make. Always. Save and then invest. Once you build your savings add to your investments regularly. It doesn’t matter if its shares or property as long as you invest.

12. Credit cards are dumb. Pay cash. If you can’t pay cash, then guess what? You can’t afford it. Only use debt to buy appreciating assets like property and even then, with caution.

13. Start a business when you are young. Whatever it is you want to try once you’ve learned the basics try it. Start small scale and assume you’ll fail. But learn by doing.

14. Turn off notifications. And most social media for that matter. If you don’t consciously turn off from it, you’ll be distracted from your own goals by the barrage of addictive marketing.

15. Learn about money. Understand the magic of compound interest, the importance of cash flow and how to read a balance sheet. Invest don’t speculate.

16. Learn the power of words. They impact all your relationships, your ability to communicate at every level and negotiate the outcomes you want in life. They matter.

17. Be a lifelong learner. Be curious about the world. Travel and open your mind to other cultures and views. Most importantly never stop learning no matter how old you are.

18. Embrace change. In your everyday life and in the way technology is changing the world. Understanding how the world is changing is one of the most interesting parts of what I do.

19. Take regular holidays and breaks. Spend time with family and rest. I try to take a short mini break every 3-4 months if I can. Rest, rejuvenate and smell the roses along the way.

20. I assume I’ll die in 10 years. For perspective, it reminds me that life is short and to get on with it, but at the same time it's far enough away that I’m not too worried about it.

21. The meaning of life. In my younger years I gave a lot of thought to this and concluded it was a waste of time. There is none. It’s up to us to create whatever we want from our lives.

22. Have fun. Remember to laugh and enjoy every day if you can.

Feel free to share with your kids or grandkids if you think it may provide them with useful insights.

Are Defensive Assets Still Defensive?

I remember when I first started in the investment industry in 1998. A conservative self-funded retiree investing $2,000,000 in term deposits at 5% was easily able to secure a retirement income of $100,000 pa. It also doesn’t seem that long ago that I was able to lock in 7.00% pa fixed for 12 months on a term deposit for clients. That was 2007 just as the GFC hit and changed the investment landscape forever. Today, the best you can get for a term deposit is around 0.30% and that same $2,000,000 generates income of only $6,000 pa for the risk adverse investor. It is an incredible difference, a massive pay cut and reduction in the standard of living for people in that bracket.

What it means in reality is that the most conservative investors have to choose to either dip into capital or increase the level of risk they take to access higher yielding investments. For more sophisticated investors and larger portfolios this is still a problem. The allocation of funds to growth investments such as stocks and property tend to dominate investor attention. However, depending on the investor, traditionally a portfolio would have an allocation of somewhere between 10-50% to defensive assets too. These assets, such as cash, term deposits, domestic and international bonds, corporate bonds and hybrid note securities are intended to diversify risk, provide income and stability of capital. 

In today’s low yield environment how suitable are these options really? Cash and term deposits earn next to nothing. The yield on international bonds is so low that in some cases it’s actually negative. The biggest problem for bonds is if interest rates go up. It’s going to be a massive problem for bond investors. The value of bonds is more volatile than many investors appreciate. If the government bonds you hold are paying 1% on a $100 bond, then it’s going to be worth a lot less next year if the yield on new bonds issued is 2% on $100 bond. The higher interest rates rise the greater bond values will fall.

Bank hybrid note securities are interesting. They are considered at the riskier end of the defensive style assets and sit somewhere between shares and a bond, but they remain relatively attractive for a couple of reasons. The yield is a reasonable 2.5% to 4.0% but most importantly many have a floating interest rate. In other words, if interest rates go up, so too does the yield on the hybrid notes. This provides investors with higher income and will help them retain their capital value too.

My point here is that in the past, government bonds would provide yield and capital stability. But because of the unusual times we live in I don’t believe bonds provide either very well anymore. Increasingly, investors are allocating a greater proportion of their portfolio towards growth assets and reducing their exposure to defensive assets. It’s hard to disagree. While I favour holding cash to take advantage of potential buying opportunities, for most defensive assets there is a lot of potential downside risk and not a lot of potential upside gain. If we do enter a phase of rising inflation, investments that provide a hedge against subsequent rising interest rates are preferrable to those that don’t. To that end, it may be worth considering the potential benefits of floating rate investments and inflation linked bonds going forward as part of the allocation to defensive assets.

This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you.

What’s next for the Post-Covid Economy

It’s been about a year since I last wrote about Covid and how I saw it impacting the economy. It makes interesting reading to review the notes I wrote in March and April last year. The timeline and key actions played out broadly how I predicted. Governments worldwide pulled out all stops to keep the economy going, there were bouts of lockdowns and reopening, and the vaccine came along within a year or so. Despite the differing approaches in Australia between the states, as a nation we have done extremely well managing covid. We are now on the path to recovery. 

So, what’s next?

USA

The USA looks to be well on the road to return to normality. They are getting close to having 50% of their population vaccinated (first dose) and given many in the community have already had the illness they are getting very close to 75% of the population having immunity. This is incredible especially when you consider how badly they handled the early stages of the pandemic. They are far closer to a full reopening than most other countries including Australia. This is very positive for the US economy and US stocks and will flow through to drive growth in the global economy too. 

Australia

In Australia, the psychology behind the take up of the vaccine here in Australia has some really interesting cultural subtlety to it. Australians don’t like being told what to do and people appear wary of a vaccine that has been developed in record time. In the end, the majority of the population will get vaccinated here in Australia but it when they are ready and after a few people they know have had it. This might sound overly simplistic, but it is how people often think. Regardless, the economy is progressively reopening, and while we are lagging other western nations such as the US with our vaccination programs, I believe we will catch up quickly once we see other nations reopening their borders and international travel starting again without us.

Travel

Travel will be back, probably in the second half of this calendar year in the US and 2022 here in Australia. There is so much pent-up demand, just ask any mum and dad with a few kids. Disney recently reported that their resort bookings are back to 2019 levels. Corporate travel might be a little more subdued with the Zoom effect likely an ongoing trend for cost conscious business. But I’m broadly bullish that travel and the industries impacted by it will be reopening soon enough.

Inflation

Inflation will likely appear, but it will create volatility rather than a sharp correction in markets. The reason being that over the next 12 months the debate that has been between camps arguing “inflation vs no inflation” will change to “is inflation here to stay vs it’s a temporary jump”. So, there’s going to be volatility while the answer to that becomes clear. This transition period will be really important for markets because at the moment inflation and the rising interest rates that it will bring aren’t factored into asset prices around the world. The uncertainty around whether it’s a short term jump due to covid recovery and stimulus will save the market a more abrupt shock compared to inflation appearing due to long term issues. 

Unemployment

Unemployment is remarkably low at 5.5%. Given this time last year we were looking at mass job losses, this is great news. However, in April even though the unemployment rate improved the number of jobs fell. Delving into the numbers reveals fewer jobs, fewer hours worked and thousands of people who stopped looking for work. This isn’t necessarily a problem, and I expect job numbers to return steadily in due course, but the unemployment rate isn’t as good as the headline figure appears. In a jobs market approaching theoretical full employment, you’d expect to see greater wages growth, and employees demanding higher pay. In this market, there seems to be a general sense that it's good to have a job rather than people asking for a pay rise.

The Banks

The Banks are well positioned for the recovery with interest rates at record lows for now and the worst of the pandemic over. They have more capital than required which will likely mean the introduction of capital management programs and their dividends are returning to their pre-pandemic levels. In a low yield environment, with dividends of say 7% including franking credits, with the prospect of capital returns, and some capital growth, the banks will become especially attractive to investors in the next 12 months. 

Central Business Districts

Central business districts (CBD’s) around the country will return to their pre-pandemic glory sooner than people think. Many will tell you that working from home spells the end of the CBD, but I don’t think this is the case in reality. While working from home as a trend is here to stay, I think the empty space will refill soon enough. The company leasing 6 floors may only need 4 floors going forward but those 2 surplus floors will be sublet or relet to other businesses who can now access a CBD address for the same or less than they pay in say North Sydney. People want to be where the action and energy is. 

Summary

I think the Australian economy is in a very strong position. The huge government spending programs have helped keep the economy ticking over. I do think the size of the budget deficits and the amount the country is borrowing is excessive, but that is a discussion for another day. But as we look ahead to the next 12-24 months, we are in a great position. 

This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you.

Why Amazon Rules Retail

Regardless of the short-term movements in the market and the potential for rising inflation, the major companies of the next decade will continue to be tech companies. Regardless of the economic trials and tribulations ahead, technology will continue to change the world and determine what the future looks like. These companies are often more difficult to understand and value than traditional businesses and it is critical to look beyond the basic valuation metrics and ratios traditionally used in assessing stocks. There are a few reasons for this.

Firstly, the best tech companies are not focused on profit. They are racing to solve a problem and then win their market. That means scaling fast and capturing market share. Profit comes much later. This is a counter intuitive concept for many to become comfortable with, because one of the most basic business concepts for years has simply been that good businesses make profit and bad ones don’t. The internet started to change that 25-30 years ago with companies like Amazon relentlessly reinvesting in the growth of the business above all else. From a stock perspective, the profit figure will always be low and PE ratios went out the window. What matters more is the business model and the subsequent growth in customers, subscribers and revenue.

For years Amazon was derided by stockbrokers and investors as being ridiculously expensive. One of the main reasons was the stocks very high price to earnings ratio of 1,000 (or more). For context investors would typically see 10-30 as reasonable and 30+ as higher for a growth stock. In other words, the share price was many times the profit per share. Investors were bewildered at just how expensive the stock appeared and the media loved leading with news headlines about the crazy valuations. But they simply didn’t understand the strategy that Amazon and Jeff Bezos were pursuing. I am not saying we would buy the stock at any price, but profit wasn’t Amazon’s goal back then and it’s still not.

I am fascinated by Amazon and their business model as it evolves, especially the growth of their Amazon Prime subscribers. These customers pay a subscription fee to access a range of products, services and further discounts. With the infrastructure inherent within their business model, it now enables Amazon to sell almost any product, to anyone, anywhere in the world. With the scale they now have as they grow their fee-paying subscribers, they will eventually be able to sell products at cost. That’s why they are a threat to almost every retailer in the world. In the future, you will not be able to buy products more conveniently or more cheaply than with Amazon. After taking decades to build their strategic position it makes it very difficult for traditional retailers, who need to make a profit on the goods they sell, to compete with Amazon in the future.  

For Amazon, it really is about winning the whole market and gaining as many customers as possible. More importantly though and more difficult to identify is the strategy that I think will secure their dominance for the years and decades ahead. I am always very interested in the number of Amazon Prime subscribers when they release that information. The subscription fee is just the start. Eventually, they will be able to increase their subscription fee significantly and they won’t lose customers because the savings customers realise will still outweigh not having the subscription. These are the types of companies we are looking to include in our portfolios across industries. 

This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you.

Why are markets worried about inflation?

Inflation is low, so why is everyone worried about it? Basically, inflationary concerns exist because everyone knows it’s coming at some point. You simply can’t print as much money as governments around the world have printed, borrow as much as they have borrowed, all designed to stimulate the economy, and expect there to be no inflationary impact eventually.

This issue really started with the GFC. Presented with the potential for another Great Depression, governments worldwide decided to manage the issue over 20-30 years rather than see a very sharp 3–5-year problem as was seen in the 1930’s. So, to avoid a more damaging catastrophe, governments started quantitative easing programs (a form of printing money) and borrowing money to stimulate their economies. Those that led the way in the crisis, such as US Federal Reserve Chairman Ben Bernanke, were students of the great depression and well positioned to guide the US at that moment. To be fair, a few years of government deficits to smooth out what would otherwise have been a tough landing, is a sound policy in the middle of a once in a generation financial crisis.

However, there are a few problems with this approach in practice. Firstly, governments are terrible at correcting these budget deficits, and once you start, it’s difficult to reign it in. The deficits become entrenched structural deficits. Secondly, governments become reliant on borrowing money to stimulate their economy, not just in times of crisis, but every time there’s the hint of a problem. So, instead of going into deficit for a few years and getting these issues under control, governments constantly run deficits and their debt increases. Thirdly, that extra money is in the system in some way, and more is added to the economy each day. It’s the last point there that causes markets the most concern. Some inflation would be okay. That’s what central banks worldwide are hoping for, enough impact to get the wheels of economic growth turning. But everyone is so impatient these days. If things aren’t moving fast enough, then there’s ever increasing pressure on governments to do more. So, they do more. More stimulus means more borrowing.

What markets really fear is that enough has already been done, but that it takes longer than everyone thought to work its way through the economic system - years instead of months, decades instead of years. If that is the case, the concern is that the global economy has been flooded with money and that prices will increase substantially in the years or decade to come. There’s already a lot of money in the system and that is driving up asset prices across the world, from commodities shares, bonds and property. While this inflation isn’t driven by everyday consumers, they will be the ones who are eventually impacted. So, when markets drop on inflation fears, its not the prospect of inflation itself that is causing the jitters. It’s the fear of an inflationary period that may have been years in the making. The overriding concern being that such an inflationary period could potentially result in a dramatic rise interest rates.

It seems farfetched at the moment as inflation is very low, and interest rates are basically zero. However, the possibility of a high inflationary period is the underlying fear within today’s markets, in my opinion. Its not the signs of inflation per se or even inflation emerging that spark concern. Instead, it’s the fear that the prospect of inflation rearing its head is the start of a new problem that will impact all of us. As always though, those risks will bring with it opportunities.

This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you.

Is it time to take profit on tech stocks?

Is it time to take profit on tech stocks? Well, yes and no. While the phenomenal gains we’ve seen in technology stocks over the past 12 months are probably not sustainable in the short term, it doesn’t necessarily mean they are mispriced or overvalued. Having said that, part of the recent run has simply been due to the weight of money into these stocks as investors globally moved money away from traditional businesses and those that were negatively impacted by Covid. So, what we have seen and will probably see more of in the next few months, as the economic recovery gathers pace, is a lot of that money rotating out of tech companies back to where it came from.

In reality, we have seen some of that occurring already from time to time over the past few months. You’ll notice those days when the markets haven’t necessarily moved much but tech stocks are down sharply, and the financials and industrials are up about the same. That’s really just the weight of money from investors moving money between sectors. Tech companies have performed really well, so we have been taking some profits from time to time, which we think is prudent, and reinvesting into those more traditional businesses that will benefit from improving economic conditions in the 12 months ahead.

However, taking a 5 to 10-year view, there is no place I would rather be invested than tech. To be clear I am not talking about high-risk venture capital; that’s a separate discussion. I am talking about the market leaders such as Apple, Amazon and Microsoft as well as, more importantly, the emerging leaders such as Atlassian, Spotify and Zoom. These types of businesses, and others like them, are the future. They are global businesses that solve problems in new ways. They create new markets and can scale quickly. They disrupt and overtake the existing companies that have become complacent and profit focused.

So, while I am very mindful of the rotation out of tech and agree that taking profits from time to time is prudent, we are very bullish on tech in the long term. As the economy improves and the traditional financials, industrials and Covid affected stocks recover, we will likely see tech stocks pull back. I am not concerned with that as these are long term investments. These tech companies will continue to be a core part of our investment portfolio’s going forward and when our preferred stocks are down, we will continue to add to our core holdings as opportunities present themselves.

This information is of a general nature only and may not be relevant to your particular circumstances. The circumstances of each investor are different, and you should seek advice from an investment adviser who can consider if the strategies and products are right for you.

10 Themes for 2021

Having navigated the Covid pandemic over the past year, and as we look ahead to the next 12 months, it’s worth remembering this: there will always be another crisis. The next big problem. Some predictable, but many are not. But, when you look back and reflect over the events that occurred in the heat of battle it becomes apparent, with the benefit of hindsight, that these crises often present the best investment opportunities. Over the course of 20 years as an investment manager and investor I’ve seen it time and time again. It’s worth understanding exactly what this means because people are generally uncomfortable with uncertainty, and it’s easy to jump at shadows.

Certainly, in April 2020, with the share market in Australia having fallen 38% in about 4 weeks and the dramatically escalating Covid crisis, it did not feel like that was a fantastic time to invest. But it was. In February 2009, after about 16 months of the GFC crisis and a 56% fall in the Australian share market, it did not feel like that was a fantastic time to invest. But it was. In the face of extreme uncertainty, it is difficult to hold your nerve let alone have the courage to make further investments. But ultimately that is the key. Understanding the interplay within the macro themes, that ultimately impact and shape the future of the world, provides us with the insights needed to have conviction in the investments we hold.

To that end, we’ve outlined 10 key themes facing investors and businesses in the next 12 months. Some represent risks to be managed, others are opportunities, some are both. But in our view, these are all critical themes to keep in mind, as they will shape, not only the financial and economic outlook, but also the future of our society and the world at large. These themes, in order of potential impact, are:

1. Low interest rates

2. Stimulus

3. Covid / Covid vaccine

4. Economic flow through to business

5. Continued rise of technology

6. China risks

7. Inflation risk

8. Rise of crypto

9. Property market evolving

10. Govt debt

I will be writing more on these themes over the course of the year and look forward to sharing my unique insights on a broad range of topics, some relating to investment, some not. Hopefully you find them thought provoking and interesting.

Regards

Dion Guagliardo

Our latest thoughts update

It is now clear that with social distancing and the current lockdown we have an interim mechanism, until there is a vaccine, to avert a catastrophic health crisis and collapse of the health system. It means that we quickly move on to the next phase of finding the optimal balance between the economic and health impacts. I find that amazing given the nations prospects just 4 or 5 weeks ago. It highlights just how dynamic and unique this situation is and how well its been dealt with on all fronts here in Australia.

At its core, the decisions that need to be made next by government are not about assets or lives, but something more fragile and far more important, and that is the systems upon which they are built. So, while many will argue whether we should prioritise lives over the economy or the economy over lives, I think they have their priorities wrong. The priority of government in these times must be to preserve the integrity of the systems themselves that are fundamental to the future of our nation. Macro not micro.

What that means in practical terms is that once the health system has been stabilised and the coronavirus relatively contained, the government will move to reopen the economy up to the point that is required to stabilise it. It will likely mean releasing the lockdown valve enough to enable the economy to restart, but not to the point that we let the health system become overwhelmed. It will probably mean living with a higher level of new cases in the virus than we see now. A balance will be found.

Although the economy is not fully reopening until a vaccine is available, it will likely be progressively reopened or at least moved between higher and lower lockdown levels for months at a time. I think the most likely scenario to evolve will be one where we alternate between say 2 months of lock down followed by 2 months of lower restrictions before reverting to lockdown again, if required. Any increased economic activity that isn’t from government spending will be a significant and real bonus in the interim.

While all of this is good news, I still think the next month or so will be quite difficult for general sentiment as bad economic figures come out at the same time as people start to feel the impact of the slowing economy on their daily lives. The economic data will continue to generate headlines as the worst figures since the Great Depression. It will be worth remembering that we know the government is committed to borrowing huge amounts to ensure we get through the next 12 months and we know there is a vaccine coming soon.

I remain optimistic on the 12-month view and genuinely believe that the economy will bounce back quite quickly, post vaccine. However, it is difficult to know how bad the economic news will be in the very short term and any negative surprises will not be well received by the market. This will present opportunities. While we have commenced buying modest amounts of specific companies this month, we are taking a conservative approach, and will continue to do so in several tranches over the coming weeks and months.

Latest thoughts on the impact of coronavirus and the two biggest questions

We’ve seen a lot develop over the last two weeks. The majority of governments around the world are now taking this crisis as seriously as it needs to be taken from both a health and economic perspective. As far as I am concerned there are two main questions that have occupied my thinking relating to business and in turn investment markets. Firstly, how long will the economic shutdown last? And secondly, how quickly can the economy recover? Both raise more questions than answers at this point because there are simply so many unknowns. However, I have concluded that the answer to the first question is a logical one, while the answer to the second question is more complex.

I believe the shutdown will continue until there is a vaccine. That is the reality. The shutdown and restrictions in place will need to continue in some way shape or form until then. While a vaccine will literally cure the disease, until then everything is about managing the spread of the virus. If the virus is around, even in relatively low numbers, and the government was to lift restrictions then we are going to see it spread again in a second and third wave along with increased restrictions each time. From everything I have read a vaccine is a 12 month proposition. But we are going to find out just how quickly this can be done though, as however many billions of dollars are needed to create a vaccine, it is going to pale into insignificance against the trillions it will save the global economy.

With regards to how quickly the economy can recover, that is much more difficult to answer. No one knows the answer. I am optimistic that a version of the ‘business hibernation’ plan will work and the recovery will be swift. Everyone is going to feel the pain but everyone is going to work out how to get through the 12 months and get to the other side. In simplistic terms, the approach to managing the nation and its people’s expectations should simply be focusing them on the basics. The government needs to make sure everyone has food, shelter, water and power for the next 12 months. If you’ve that then you’re going to get through and live to fight another day. There is lots to work out here logistically but much of this is being put in place, rent and mortgage payments being deferred, wages and essential bills being covered. It gives everyone the best opportunity to restart, quickly and unimpeded, once everything reopens.

In Australia, Scott Morrison and the Federal Government, while initially slow to act, have caught up quickly in the last 2 weeks and are managing both the health and economic crises well in my view. Morrison is increasingly looking like a war time leader in his press conferences. The Government has a strategy and they are implementing it quickly. It’s not going to be perfect, it’s a crisis, that not how it works but they are stepping up and throwing everything at it. Meanwhile, The USA and a number of European countries are doing a terrible job of managing the health side of the crisis but appear to be responding ok from an economic perspective with massive stimulus packages across the board. It is worth noting that when announcing 6.6m new jobless claims for the week in the USA, the stock market actually went up. This goes back to what the impact of data being relative to expectations, as per my last note.

While share markets across the world have improved recently, we probably haven’t seen the bottom or the end of volatility. Fear will likely return in due course as the significant economic impact of the shutdowns across the world will bring both data and images that will draw comparison to The Great Depression. It may feel like that in the coming months. The media will love it. Investors will not. So shares will likely fall again based on fear. Do not be surprised by any of this. But the situations are completely different. That downturn continued for years (1929-1933) as governments of the day cut costs and spending and there was no end in sight. Today we have governments that are doing everything they can to stimulate the economy and we know that it is likely there will soon be a vaccine that will enable the economy to reopen for business. The foundation for today’s economy is very different and there will be good opportunities ahead.

My latest thoughts on coronavirus and what’s next

We have never seen such a unique and rapidly changing situation as this before. There are periods in history that are analogous to what we now face, but nothing close enough to really provide a road map. Regardless, there are still key aspects of this event that stand out to me as especially important to consider. In this case unlike most economic disasters, where everyone wonders what will spark the turnaround, with this one we know – once the virus is gone everything reopens – that’s the spark for the turn around. We know it’s coming; it might be 6 months or 12 months but its coming. This aspect is unique, its good news and it should remain front of mind going forward.

Once the virus is gone, and events are back on and people are traveling again, the speed with which the economy bounces back will ultimately be determined by how well everyone deals with the next 6 months. From a Govt perspective the entire world really needs 6-12 months of bridging finance. That’s got to be the mentality. They need to go hard and go early. The Govt approach must be to do whatever it takes to get through that immediate window until we reopen. If they do that we will be in a good position once we get to the other side. As much as we have now seen announced by the Federal Govt, State Governments and the Reserve Bank, we will see more in the coming weeks and months. As Govts will all over the world.

As much as Govt can do, everyone in the community is going to take a haircut. I emphasize that because to put ourselves in the best position for 12 months’ time as a nation I believe the individuals and businesses most badly impacted are going to ask for, and get, short term concessions that 3 months ago would have been unthinkable. Now they are needed. Individuals and businesses will get temporary reductions in rent, reduced interest rates, deferments of interest payments and deferments tax payments. These measures will help in the next 6-12 months so that the economic impact, while harsh in the short term, will hopefully get us to the other side in without creating a long-term problem for the economy.

My biggest concern in the face of rapidly rising unemployment is the flow on effect to the banking system and in turn property prices. However, I am optimistic that the record low interest rates we have, and the short-term nature of a pandemic will provide the banks and property owners the tools to manage through the worst of it. I cannot emphasize enough that knowing there is a point at which everything reopens is a critical advantage over past economic downturns. It may mean that instead of foreclosing and forcing a sale the banks may be more likely to be flexible and provide either interest only payments or possible even interest to be deferred or capitalised for those who lose their jobs. It all matters.

While the economic consequences are ahead of us, the share market has already factored a lot of this in. That is why markets are down so quickly. Over the coming months as the bad economic news is released its critical to understand and remember this. It is all about “expectations” from here. Is the bad news what was now expected or is it better or worse than expected? The bad news won’t move markets as much as how that news aligns or doesn’t align with what is already factored in. It also means that share markets will also turn around well before the economy does. In the meantime, we remain busy being patient and waiting for the dust to settle as we look for opportunities.

Latest thoughts on the impact of coronavirus for portfolio investors

A lot has happened since my last note just a week ago. Markets are down significantly, and the world is adjusting to the realities of what this pandemic means. Regardless of this our strategy remains the same. We hold our portfolio investments for the long term with a focus dividends and portfolio income. We are not concerned with short term fluctuations, regardless of their size. This will come and go and in 12 months or so the world will be back to business as usual.  

With regards to the coronavirus disease, it appears that the countries that have best managed the situation have moved early with regards to lock downs and social distancing measures. The early numbers show that these measures are very effective at slowing the spread of the virus. Those countries that are slow to implement these measures quickly find their hospitals and healthcare system under siege and are forced into more severe lock down measures in the end anyway.

Therefore, I now believe that lock downs and social distancing are going to be an essential tool in the fight to slow the spread and help our healthcare system cope. We are seeing more and more events being cancelled and I think it’s probable that we start to see this at scale in the coming weeks. The exponential growth in the number of cases from here means these measures are going to be critical and the earlier they are implemented the faster the overall turn around will be.

I remain convinced that the Federal Govt will go as far as necessary to manage the impact of this on the economy. The recently announced $18 billion stimulus package is a good start. But I believe there will be more announced in the coming weeks as required to support people, business, the economy, and more importantly in the short term, the health system. I also expect this to be the case from governments around the world.  

With regards to investment markets, we are starting to get into attractive buying territory. We are seeing the share prices of very good companies fall to unreasonably low levels. That’s not to say these prices won’t go lower, given the current level of uncertainty, they probably will. But if you’ve got a long term view the coming weeks will provide opportunities that don’t come along very often.

Thoughts on the impact of the Coronavirus

My latest thinking on the impact of the Coronavirus is this. I think the RBA will end up cutting interest rates again and will ultimately go to zero. I think the Federal Govt will release a massive stimulus package because of concerns of the economic impact of the virus. However, I don’t think it is going to be as bad as everyone fears. The key figure that leads me to think this is that it appears that children and young people either don’t get it or only get it very mildly. It appears the death rate of ages 0-9 is almost 0% and for 10-39 age group it is 0.2%  

If these figures in relation to younger people hold, I think they are a game changer. Once families realise that children are not materially impacted, I believe they will quickly revert to their usual routines and spending habits. It may also mean schools won’t be closed, weekend sport won’t be cancelled, and the family consumer will continue to spend, travel and go out again as quickly as they stopped. It may mean concern about the economic impact is overblown and that the share market may recover more quickly than expected.

Perhaps more importantly the fact the Coronavirus may lead the Federal Govt to release a big stimulus package could be a blessing in disguise for the economy. Without the Coronavirus I think that the already deteriorating Australian economy would be left to languish without the stimulus it needs. The economy may now get the injection it so clearly needs and by accident, the fears surrounding the Coronavirus may help the Australian economy, recover more quickly from its pre-existing woes than we could ever have expected it to.  

From a portfolio perspective, we are not sellers. We still hold cash and are looking for good opportunities in oversold companies. We would like to deploy this cash sooner rather than later. This is especially true if you are a retiree or long-term investor. Cash is not a particularly attractive asset as it earns you perhaps 1% pa when you can comfortably collect dividends of around 5% pa when invested. If you are a patient long-term investor, the short-term volatility we are seeing now won’t matter much in 20 years, the income you receive does.

Market volatility and Coronavirus (COVID-19)

I’ll make this short but wanted to comment on concerns around the Coronavirus disease (COVID-19)

In relation to the health issue:

• Transmission rate of about 2.6 newly infected from 1 case.

• Fatality rate of about 2.5%.

• The health risk is significant, much more severe than the standard flu, but not as severe as some early concerns.

In relation to the timeline and economic impact:

• It appears that China’s government has enacted measures that have slowed down the spread of the virus there.

• Slowing down the spread of the virus in other populous nations is critical. This is the current concern with new outbreaks recently.

• It will take time for the full economic impact to be understood as Governments react and as people’s daily routines and spending habits change.

In relation to the volatility in financial markets:

• There will be buying opportunities in the coming weeks as markets react further to the situation.

• I would not be in a hurry to add stocks at this point but prefer to be patient and take a wait and see approach.

• I would hold existing cash awaiting opportunities.

How much do you need to retire?

A typical client comes to us with a range of assets that they accumulated in an ad-hoc fashion over time rather than from executing a master plan. Not everyone who is wealthy is financially sophisticated; often they were just really good at what they did. They are usually just really good at running their construction or earth moving business or they’re great doctors or lawyers.

Most of our clients are not financial experts; they wouldn’t need us if they were, but they are smart, and they know the value of getting the right advice to help them optimise their position. I once had a client with $10m ask me if they had enough to retire. As much as it surprised me, it was a great reminder that everyone worries about the same types of things when it comes to retirement:

·         How much do we need to retire?

·         Do we have enough to retire?

·         How long will my money last?

There is not one simple answer because everyone’s situation is different, but these are easy questions to address. In financial terms, the three questions above are all a variation of the same equation, the basic variables of which are income, expenses and capital.

But for the purpose of the general concept, simple numbers are the best place to start. If you require income of $100,000 p.a. to meet your expenses in retirement and a typical investment portfolio produces income of 4% p.a., then you’ll need $2,500,000 in capital.

If you have more capital than this then you’ll be fine. If you have less capital than this then you have a decision to make, and you can either reduce your expenses or you can deplete your capital. There is no right or wrong answer it is up to you. But you need to understand the numbers.

I can’t emphasise enough how important it is to understand the context here and the impact of even the most basic variables. If we change the assumption for the typical investment portfolio in the scenario above to, say, 2.5% p.a., then you’ll need $4,000,000 in capital to generate the income figure of $100,000 p.a.

With regards to dipping into capital in retirement, people tend to fall into two camps; those that are petrified of spending any of their capital and those who are petrified that they won’t use it all before they die. My philosophy here takes into account real life, not just the financial side. When you’re 65 maybe you live for another 30 years, maybe you live for 2. But I’ll say this, life is short, and I have not yet seen anyone get healthier and more active as they got older.

The reality is that your first 10 years of retirement are going to be your best, so make the most of it. If you are 65 and have $3,000,000 in capital and you spent $50,000 from your capital to have an amazing holiday every year for 10 years does it matter that at 75 your capital has reduced to $2,500,000? Probably not. What if you don’t make it to age 75?

Obviously, the above scenarios are basic and don’t take into account specific circumstances, but the overriding concepts and philosophy still apply. For our clients we complete sophisticated financial models that include a range of assumptions around returns, inflation, tax structures and scenario planning to ensure they are prepared for the future and have peace of mind. Certainly, if the three questions at the start are keeping you up at night then it’s probably time to get that type of advice and start planning properly.

What if Labor wins the election?

Australian Federal Election 2019

The battle between Bill Shorten and Scott Morrison is not likely to overwhelm us with charismatic and inspiring speeches. Rather, it’s likely to be the political equivalent of a street fight. In short, I suspect Shorten wins because Australians vote leaders out if they annoy them, rather than vote a leader in. The Liberal party leadership issue annoyed a lot of voters.

Another important trend is that times have changed in the era of social media, and people are generally more progressive in their thinking than in the past. A good example of this is the same-sex marriage vote where roughly 70% of the population voted for it . Go back 20 years ago and it’s probably 70% against. This is the case in relation to many issues and many of the old heads on the conservative side haven’t picked the change in the community’s view. It will be a close fight and a lot can happen between now and then, but it appears the election is Bill Shorten’s to lose at this point. 

What does this mean for our clients? Many of our clients have already raised concerns around the upcoming federal election. Specifically, the concerns raised relate to some of the policies the Labor party have proposed in relation to property (negative gearing and CGT) and dividends (franking credit refunds). These are attention grabbing policies, but also typical of parties testing the pre-election market or appetite for these types of policies.

Negative gearing: The potential removal of negative gearing is far more nuanced than politicians seem to understand. This is not a strategy of wealthy property owners. The wealthy property owners actually have little to no debt. They have paid their properties off. This is a strategy of people on good income, using debt to try and build their wealth – that’s a lot of people. But here’s the thing, removing negative gearing doesn’t just impact those people, it also impacts those who aspire to buy an investment property in the future. That is a lot more voters than many appreciate and why I’d be surprised if it gains real support. In fact, I think it’s hard to find a group of voters that will actually support this proposed change. Let me know if you can think of one.    

Franking Credit Refunds: Another key proposal relates to removing the refunding of excess franking credits. Many people have investment portfolios that result in dividends with franking credits attached (tax already paid by the company) that offset the tax from their overall income. Where people have franking credits in excess of the tax owed, they receive a refund. The proposed change would now result in those refunds being lost, impacting self-funded retirees in particular. However, it’s worth noting that before the year 2000 that was how it worked. Back then portfolio construction included detailed consideration of the total income and total franking credits received so that franking credits were not lost or at least could be well managed. I would expect this to again become an important management strategy for investors. 

Superannuation: Regularly changing superannuation rules effectively undermines the integrity of the superannuation system. Both sides of politics are guilty of this because they don’t appreciate that to have confidence in the system people need to feel that the goal posts won’t move. But it is inevitable that politicians look at the massive pool of money within the superannuation system, crunch the numbers, and see that even a small percentage change will result in a windfall of billions of dollars. So, they always propose changes, usually to make the system ‘fairer’ because who would argue with a fairer system, right? But everyone has super now, and they don’t want the government touching it, so when this happens the voter outcry causes them to shelve the proposal.

In conclusion, I would be surprised if these policies actually become law in the form initially flagged. Typically, significant changes that impact a lot of people are met with voter outrage and are shelved, diluted or grandfathered all of which result in minimal real impact for those initially targeted. We are watching these developments closely and planning ahead.