I have been writing a prelude to the coming year for a few years now. As I sit here to compose my 2016 preview, again I see global machinations impacting on economies, financial markets and more importantly, confidence. The theme continues with what we have seen over the last 8 years, namely:
- volatility and falls in the stock market,
- government intervention in to economies,
- interest rates at historical lows,
- a diversity of opinion on the housing market from those who say it will correct to those saying the boom is only just getting started, and
- the more recent development of falling oil prices.
We have seen a move over the last 6 months from a focus on Greece to important economies such as China and the US. The US is in good shape and we need to keep a cautious eye on China.
We are facing a battle for the US presidency in this year and no doubt this will provide some entertainment and of course closer to home there will be a Federal election.
The economy and business is changing and government policy can’t keep up. We see this in everything from governments struggling to find a way to tax global profits to trying to figure out if Uber is a Taxi or is it just someone picking you up on their way home from work.
We know that unpredictable market conditions make everyone from the media to analysts to investors really nervous. Yet in my view, Australia is in good shape:
- low unemployment
- low interest rates
- economic growth in Sydney and Melbourne following a sluggish few years
- significant infrastructure investment
- a new Prime Minister who seems to be well received by both individuals and companies, remembering that confidence is an important ingredient to a good economy.
At the political level, we have a government intent on innovation and getting on with growing the economy, which I believe will bring rewards in the mid-term.
Australians are already one of the longest lived populations on the planet, and our longevity is steadily improving. Australian life expectancies are rising much faster than commonly understood and this has serious implications for government policy and spending – especially in economic, retirement incomes, health and welfare policy. The foremost issue for the Australian Government is that spending is increasing while revenue (i.e. tax) is, at best, neutral.
I think the only certainty is that taxes will rise.
The take out message for high net worth and higher income individuals is that if we expect taxes to rise then robust tax management becomes more important. Effective asset and financial structuring, such as using family trusts, makes more and more sense towards protecting and growing assets.
Moreover, higher income individuals have the opportunity to be substantially self funded in retirement and to support the retirement lifestyle of their choice. Taking steps to maintain an income well into ones 60s has a demonstrable bearing on accumulating the assets to fund a comfortable (long) retirement.
As you can see by the chart below, interest rates in Australia are lower than anyone can remember, but they are still higher than in many other developed economies including the US and Canada.
Graph 1. Reserve Bank of Australia Interest Rates 1985 – 2016
Source: Reserve Bank of Australia, 2016
The Australian Stock market has largely been trading sideways since 2010. Following a dip in 2010/11 against the backdrop of Euro and Greek debt crisis, then a recovery, was a drop mid last year with worries about Greece, China and the US raising interest rates and falling oil prices. There is not a lot of growth, nonetheless investors are getting reasonable returns from dividends and franking (tax) credits.
Below is our current view of the Australian Share Market.
Graph 2. ASX 200 Share Price Valuation
Source: Equitas Wealth Pty Ltd, 2016
Whilst it is not possible to pick the top or bottom of markets, it is possible to determine valuation. By our valuation, the share market has been fairly priced for the last four or five years but still isn’t making much headway.
WA, and Perth in particularly, are hurting due to the mining downturn. Yet this is more of a return to normal economic levels for the state than an economic crisis. We are seeing economic growth in Sydney and Melbourne. There is more infrastructure investment in Sydney than in the last 40 years – airports, motorways, rail links and light rail. Added to the business and residential property construction, positive impacts are starting to flow through to other parts of the economy.
Interestingly, in the last decade 70% of new dwellings were apartments. There are a number of factors driving this, not least of all is people wanting a cosmopolitan lifestyle.
In summary, my perspective on 2016 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, including tinkering with Super and government benefits.
- I expect the noise from Global markets to continue and on topics from the US election, to taxing global companies and to Oil pricing.
- And Lastly Sydney house prices will either go up, down or stay the same, the only certainty seems to be more and more apartments being built.
Our outlook continues to remain positive – Australia is in good shape. We have a government intent on innovation and getting on with growing the economy, which I believe will bring rewards in the mid-term.