Economic Update
Investors had a lot to consider over the
June quarter
US and European first quarter earnings were positive as
inventories were built back up from historical lows, which
also contributed to an expected spike in above average
GDP amongst many developed markets. Risk aversion
entered quickly in mid-April with concerns around the
sovereign debt risks in Europe, particularly for the PIGS
(Portugal, Italy/Ireland, Greece and Spain).
The S&P/ASX200 briefly broke through 5,000 points
which was up 66% from the March 2009 lows. The
index finished the quarter at 4,532, an 8.8% increase
over the 12 months to 30 June 2010, and at the time of
writing is close to these levels.
The RBA increased cash rates again to 4.25% in April
before a pause that is expected to last late into the year.
This had provided strength to the AUD, which had seen
93c before finishing the quarter at 85.5c with a more
stable outlook moving forward.
Debt levels of developed countries played on concerns
over future growth, while the proposed introduction of
the Resource Super Profit Tax (RSPT), announced in the
Australian Budget, created uncertainty for investors. The
RSPT has already been amended after former Prime
Minister Kevin Rudd’s departure to a softer Minerals
Resource Rent Tax under the Gillard Government.
China has implemented several policy measures to
ensure a more sustainable growth pattern into the
future. This has affected short term investor returns but
is expected to create stronger results in the future.
Through the adversity, smart investors have found
opportunity. This is expected to continue for the next 12
to 24 months.
Source | All Star Funds
Why Urbanisation Matters For Investors
Within the next two decades, the entire
US population will move into China’s cities.
Alright, not the US population, per se. But 350
million Chinese will leave behind their rural
life in a move expected to provide a massive
impetus to China’s urban economy.
China is not alone. All across the developing world, cities are acting as
people magnets. The UN forecasts the urban population of Asia will grow by
1.8 billion by 2050, while Africa will see nearly one billion people join city
life and 200 million from Latin America and Carribbean will leave their rural
homes behind. All up, more than 60% of the world’s population is likely to
live in cities by 2030 compared with fewer than one-in-three in 1950.
The attraction of city life lies in the financial incentives found there. In
China, urban incomes are already estimated to be three times those of the
rural population and studies forecast that urban China will come to have
disposable incomes and consumption demand twice that of Germany by
2025. But city infrastructure in the developing world is stressed by growing
populations. Emerging countries need to extend electricity grids, water mains
and transport links to support growing urban centres.
China and India are among the developing nations that have announced
major stimulus plans centred on infrastructure investment.
The Indian government is committed to raising infrastructure investment,
with various studies suggesting US$500 billion (A$570 billion) needs to
be spent to bring it up to standard. The power and transport sectors are
expected to attract around 60% of that money.
China’s expected urban migration over the coming decades is up 70% of its
total population. This could create one of the greatest booms in mass-transit
construction.
Redeveloping the developed world
While emerging markets must build core infrastructure from scratch,
in the developed world, much of the infrastructure is in place but needs
replacing. Failure to make significant progress towards upgrading the
basic infrastructure of the west could prove costly in terms of congestion,
unreliable supply lines and growing environmental issues, not to mention the
implications of standards of living and quality of life.
It is little wonder then that the global recession led to plans for a massive
government stimulus directed at rebuilding crumbling infrastructure. The US
committed around a third of its US$825 billion stimulus package to new
infrastructure projects, including US$150 billion over 10 years to clean
energies. More than a year later, much of the investment has yet to be made
so expect there to be ample opportunity for private industry to get involved
through public-private finance initiatives.
An investment in the urban age is an investment in the majority of the world’s people and in the growth of the world economy. It’s perhaps a 21st century
investment opportunity like no other that will have wide spread effects on industries and economies.
Prior to making an investment decision retail investors should seek advice from their PIS financial adviser. Please remember past performance is not a guide
to the future. Investors should also obtain and consider the Product Disclosure Statements (PDS) for the fund mentioned in this document.
Source | Fidelity International
What does orange mean?
This quarter, the ‘Many Colours of Professional Investment Services’ features Orange, chosen for its vibrancy.
It’s a combination of red and yellow so it shares some common attributes
with those colours. Orange has less strength than red and is calmed by
the cheerfulness of yellow. It denotes energy and warmth, and promotes
good health. Orange is found in nature in the changing of leaves in
autumn, citrus fruits, sunrise and sunset.
Embrace the symbolism of orange to help clarify your short and longterm
goals and use your energy to focus on being as productive as
possible. Feel confident towards accomplishing your financial goals and
implement personal strategies made with your financial adviser with a
renewed zest and optimism.
Time Is
On Your Side
Remember the old adage ‘time heals all wounds’?
We don’t always think of it in relation to investing but by taking a long-term approach we allow our
investments to recover from the downswings that are a natural part of any investment cycle, and reap
the rewards of the inevitable upswings.
More importantly time allows compounding returns to work their full magic. In fact, the power of
compounding becomes profound over time, and it’s quite startling to discover how much of a difference
a long-term approach can make.
The most powerful force in the universe
Let’s imagine for example that you’re back in your twenties. We’ll say that at the age of 21 you decide
to invest $5,000 adding an extra $1,000 each year until you turn 30. From here you stop investing
altogether.
We’ll also assume that as the years go by your money earns an average return of 8% pa (after fees
and taxes) which is always reinvested. To keep things simple, we’ll assume inflation is zero, so your real
return remains at 8%.
By the time you celebrate your 65th birthday, your investment would have grown to a massive $332,413.
And remember, you only invested $14,000 back in your youth.
It’s an amazing result. But to see just how extraordinary compounding can be, let’s look at a very
different scenario. We’ll say you wait until age 31 to invest $5,000, adding $1,000 a year to your
investment until age 65.
So over time, you personally contribute $39,000 to your savings pool. If we follow the same assumptions
that your money earns 8% annually and inflation remains at zero, under this second scenario your
investment would be worth $227,077 when you reach 65.
The dramatic difference is solely due to the effects of compounding. Remarkable isn’t it?
No wonder Albert Einstein called compounding the most powerful force in the universe.
Forget market timing, few get it right
Time doesn’t just make your money work harder, it means you don’t have to work at picking the right
moment to invest.
Plenty of people study investment markets, looking for that elusive signal that says ‘buy now’ or ‘sell
now’. Few everyday investors get it right.
Rather than worry about market timing, aim for time in the market. It’s a lot less hard work, and a much
more successful strategy.
Taxes and fees may also apply to your investment. These have not been considered in your calculations as they will depend on
your personal circumstances. Past performance is not a reliable indicator of future performance.
Source | BT
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Continued from left column
Top Up Your Super Tank!
Super is the best way to grow your retirement savings.
If you’re aged 60 or over, and you are a member of a
‘taxed’ superannuation fund, any money you withdraw
from your concessionally taxed super fund will be tax-free.
It doesn’t matter whether it’s a lump sum or a pension.
So there’s plenty of incentive to get as much money into
super as you can. And there’s NEVER been a better time
than right now!
The 2007 changes included abolishing the unpopular ‘reasonable benefits limit’, allowing you
to accumulate as much concessionally taxed money in your super fund as you like. However,
to offset this welcome break there’s a limit on how much you can put into super every year.
From 1 July 2007, your after tax personal contributions can’t exceed $150,000, or $450,000
averaged over three years.
If you are planning to retire soon there’s a number of strategies you could consider to boost
your super.
Who can contribute?
The opportunity to contribute up to $450,000 in super is available if you are under 65.
If you are 65-74 and meet the work test requirements you can still contribute up to $150,000
per annum. If you operate a small business or receive compensation as a result of permanent
disablement you can contribute even more.
What are some strategies?
Sell assets and contribute
If you’ve been thinking about selling assets – like an investment property – to make additional
contributions to your super as you approach retirement, now may be the time to do it.
If you leave it until later, what would be the potential capital gains tax (CGT) liability you would
face compared to selling the asset now and having future capital growth occurring inside the
concessionally taxed superannuation environment and even potentially CGT free if you convert
to a pension in retirement?
If you were relying on an income return from that investment, you could
consider starting a transition to retirement strategy if you’re over 55,
or undertake some gearing to provide extra income (and tax deductible
interest).
Borrowing to contribute
Borrowing money to take advantage of this super opportunity is clearly not
for the faint-hearted and won’t suit everyone. However, if you think it’ll take
longer than a few months to sell an asset this strategy may be for you. You
could borrow the money interest only and contribute it to super while the
opportunity is there. Once the asset is sold you would immediately repay
the loan before your interest costs got too high.
To add to your peace of mind you could take out some life insurance to cover
the loan principal, plus income protection in case you’re unexpectedly out
of action and can’t meet the interest payments. Your insurance can be held
inside your super fund with the premiums funded by the income return.
Other than the non - deductibility of the interest, this is effectively a negative
gearing strategy. The benefit is that any capital gains realised will be in
a concessionally taxed environment and possibly completely tax free if a pension is commenced. This tax saving would partially offset the
non-deductible nature of the interest.
Transfer business real property to SMSF
You may not be a small business owner but if you own the property a small
business is operating out of, you also have the opportunity to contribute up
to $450,000 to your super fund.
If the property is in your own name, you can consider establishing a Self-
Managed Super Fund (SMSF) because business real property is one of the
few exceptions to the general prohibition of in-specie transferring assets
to a superannuation fund.
CGT considerations will arise upon transfer and stamp duty will also need
to be considered (depending upon the State you are in).
If your property is valued at more than $450,000, establishing a tenantsin-
common relationship with the SMSF could be considered.
Act now
If you think you can take advantage of these super strategies, act now!
Make an appointment to see your Professional Investment Services (PIS)
financial adviser and top up your super tank.
Source | Asgard
What If
I Was Too
Sick To Work?
Falling seriously ill is probably the worst thing
that can happen to a working person – and
it does happen. According to the Australian
Bureau of Statistics 2008 yearbook, 7,624
Australians were unable to work1 and were
reliant on sickness allowance which today
pays just $205.75 each person a week for a
partnered person2.
These unfortunate people are part of the 69% of Australians who do not
have any personal income protection insurance3.
With the average Australian mortgage of $367,0004, let alone the costs of
a car loan and raising children, it is easy to see that illness will quickly mean
poverty for most Australian families.
Income protection insurance is a sensible and inexpensive way to make
sure hard working families are not at risk of quickly sliding into poverty.
Our ability to earn a living is our single greatest asset yet Australians are
insuring their cars and houses rather than their incomes.
For a healthy, non-smoking male of 40 working in an office job and earning
the average wage of $1,248.20 per week5 (and with a waiting period of
two months), income protection insurance costs $62.47 per month6. If he
becomes sick the insurer will pay him 75% of his income, or $1,014.00
per week until he is well enough to return to work – or until age 65 when
the contract ceases (the reason the benefit is not 100 per cent is to ensure
there is still an incentive to get well and back into a contributing role in
society).
Income protection can be easily accessed through an industry
superannuation fund by purchasing additional units of cover, or via a life
insurance adviser – and one of the significant benefits of the product is
that if it is bought separately to superannuation, it is a tax deductible cost7,
which significantly reduces its impact on the household budget.
Speak with a qualified PIS financial adviser to get
appropriate advice for your personal needs.
1. ABS 1301.0 2008 Year Book Income and community support. Accessed 28 January
2010.
2. www.centrelink.gov.au accessed 28 January 2010
3. www.Lifewise.org.au TNS/IFSA Investigating Income Protection Insurance in Australia July
2006 accessed 28 Jan 2010
4. AFGonline.com.au report dated 3/12/09 accessed 5/1/10
5. ABS 6302.0 Average weekly earnings Australia. August 2009. Accessed 28/1/10
6. Quote provided by AIA Australia April 2010
Quotation figures as at 23 April 2010 based the following:
Male, aged 40, non-smoker
White collar duties
Income Protection
Indemnity Value
Benefit Period – to age 65
Waiting period – 60 days
Benefit Indexation not included
Claims Escalation not included
7. Please consult tax and financial professional to obtain appropriate advice
Source | AIA
Trivia
The liquid inside young coconuts can be used
as a substitute for blood plasma.
No piece of paper can be folded in half more
than seven times.
Donkeys kill more people annually than plane
crashes or shark attacks.
You burn more calories sleeping than you do
watching television.
Oak trees do not produce acorns until they are
fifty years of age or older.
The first product to have a barcode was
Wrigley’s chewing gum.
The King of Hearts is the only king without a
moustache.
American Airlines saved $40,000 in 1987 by
eliminating one olive from each salad served
in first-class.
Venus is the only planet that rotates
clockwise.
Apples, not caffeine, are more efficient at
waking you up in the morning.
Most dust particles in your house are made
from dead skin!
The first owner of the Marlboro Company died
of lung cancer. So did the first ‘Marlboro Man’.
Walt Disney was afraid of mice.
Pearls dissolve in vinegar.
The three most valuable brand names on
earth: Marlboro, Coca Cola, and Budweiser, in
that order.
It is possible to lead a cow upstairs but, not
downstairs.
Dentists have recommended that a toothbrush
be kept at least six feet away from a toilet to
avoid airborne particles resulting from the
flush.
Source | the funkyway.com
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