When I put “pen to paper” on the second day of the second month of 2015, it was clear to me as I looked to the year ahead that things have not changed significantly of recent years.
The world is still grappling with the impact of the Global Financial Crisis and the financial problems built up over the last 40 years. Every western country seems to have a government struggling to get policies though. Much of this is caused by the demographic shift triggered by baby boomers retiring. We have now half of all baby boomers in retirement, meaning less people to pay tax and more people looking for government support.
In the last year we have seen the US tapering their Quantitative Easing (QE) program, only to have Japan and Europe start their respective versions. These programs are designed to provide a level of comfort to both consumers and companies that low interest rates will be here for a long time.
The foremost issue for the Australian Government is that spending is increasing while revenue (i.e. tax) is, at best, neutral. Yet most of the revenue and expenditure measures announced in last year’s Federal budget to address this imbalance have failed to get through parliament. I think the only certainty is that taxes will rise. From the 1970s up until the GFC most taxes were falling in Australia. Only a few decades ago the top marginal tax rate was 66% and almost half of Australian tax payers where at this level. In the last few years we have seen a slow increase in marginal tax rates at the top level, a dramatic lift in the Medicare levy, a reduction in the ability to claim a tax deduction for contributions to superannuation, and so forth. The problem is that as more Australians retire and do not pay tax the burden for funding government spending falls on those still working – a situation that probably isn’t sustainable.
The take out message for high net worth individuals is that if we expect taxes to rise then effective tax management becomes more important. Whilst getting a tax refund is a national pastime, there are fewer expenses that can be claimed. Hence tax efficiency needs to derive from effective asset and financial structuring. What this means is that superannuation at zero or 15% tax is better that 30%. A company at 30% tax is better than an individual at 47% – and a blend of all these or using family trusts makes more and more sense towards protecting and growing assets.
As you can see by the chart below, interest rates in Australia are lower than anyone can remember, but they are still higher than elsewhere. If we look at Canada (a country with similar demographics and economy to Australia) their Interest Rate is 0.75% compared to our 2.25%. We may think rates on a term deposit are low, yet by looking abroad we can see how much lower they could go.
Graph 1. Reserve Bank of Australia Interest Rates 1985 – 2015
Source: Reserve Bank of Australia, 2015
Great for those borrowing money, not so great for those with interest bearing investments such as term deposits.
We have also seen a rise in the value of house prices in most capital cities in the last few years. We want our house to go up in value so we are better off, but we also want houses to be more affordable for our children, clearly a dichotomy. Sydney house prices on a global measure appear to be 30-50% more expensive than they should be.
The Australian Stock market has largely been trading sideways since 2010. We had a dip in 2010/11 against the backdrop of Euro and Greek debt crisis and then a recovery. There is not a lot of growth but investors are getting good returns from dividends and franking (tax) credits.
Whilst it is not possible to pick the top or bottom of markets, it is possible to determine valuation. Below is our current view of the Australian Share Market.
Graph 2. ASX 200 Share Price Valuation
Source: Equitas Wealth Pty Ltd, 2015
As you can see in the last four years by our valuation the share market has been priced fairly which means it is no longer cheap but not overpriced either.
We are starting to see some economic growth in Sydney following a sluggish few years. This seems to be driven by construction, particularly infrastructure and large apartment buildings.
We are seeing improved profits in some sector such as Banks and Telcos. We have started to see companies moving from a focus on cost management to looking for revenue drivers in the last year, which is a positive sign.
In summary, my perspective on 2015 looks like this:
- Interest rates will remain at current low levels for the foreseeable future.
- As it has been for the last few years, the Australian Share Market is still fair value but cannot grow dramatically without company profits growing and companies growing their revenue.
- All governments including the Australian Federal Government will be looking for ways to increase tax.
- I expect a lot of noise from Global markets and on topics from the Middle East and Oil to Eurocentric debt crisis; for Greece to declare itself broke; and for the IMF to say houses in Sydney are expensive (not that we don’t already know this).
Our outlook continues to remain positive – Australia is in good shape. We have a government intent on supporting those who want to look after themselves, which I believe will bring rewards in the mid-term.