Alternate Assets – Gold, Bitcoin Etc

Gold twist as inflation hedge

A major holding in gold could become standard in portfolios worldwide as investors – institutional and retail – hedge against the potential for a sharp rise in inflation in the next few years. Diversification Some wealth and fund managers are looking at replacing part of their bond holdings with bullion, writes William McInnes.

Asignificant holding in gold could become standard in portfolios worldwide as investors – institutional and retail – hedge against the potential for a sharp rise in inflation in the next few years.

Advisers have generally prepared for unexpected inflation by allocating a percentage of portfolios to short-term bonds, enabling managers to frequently roll over those bonds at high interest rates, helping investors keep up with inflation.

But wealth and fund managers are looking at replacing at least part of the bond holding in portfolios with gold.

‘‘We’re looking at it on a longer-term trend ourselves because when bonds are paying so little, you need to start looking at that,’’ says Hamilton Wealth Partners managing partner Will Hamilton.

Positive, letalone high,yields onshort-term bonds are increasingly rare across the globe, meaning investors aren’t getting the same benefit from holding debt they once did.

In Japan and Europe’s largest markets, two-year bonds are negatively yielding, meaning investors will receive a smaller amount at the bond’s maturity than what they paid, essentially meaning borrowers are paying for the privilege of taking on debt.

Even in Australia, the two-year yield is just 0.26 per cent, with the front end of the yield curve largely pinned down by the Reserve Bank of Australia’s yield curve control.

While gold doesn’t receive the same regular income as bonds, it still acts as a hedge against inflation, and with the potential for inflation to rise unchecked by central banks, its price could remain well supported.

The US Federal Reserve indicated in late August that rates were likely to stay lower for longer, even if inflation did creep higher, leading many to question if holding bonds in a portfolio is as wise a decision as it once was.

Break-even rates – a market-based measure of expected inflation over a given period – have risen sharply since March on expectations that inflation will not be severely affected after COVID-19 as central banks loosen the reins.

‘‘Stimulus is going to continue for some time and you’re still going to see QE keeping bonds down artificially, so I think that there is a risk of inflation coming back in,’’ says Hamilton. ‘‘It’s going to be good for gold and not so good for fixed income in the short term.’’

In late August, the $US16 billion ($22 billion) Ohio Police & Fire Pension Fund approved a 5 per cent allocation to gold to hedge against the risk of inflation. Typically, pension funds have a much lower holding in gold, with less than 20 per cent of institutional investors having a gold allocation.

Portfolios have traditionally been weighted on a 60:40 basis, with 60 per cent in equities and 40 per cent in bonds. But some investors are tipping that a 60:35:5 portfolio, with a 5 per cent weighting in gold, could become the new normal.

‘‘You’re starting to see pension funds change that very consensus allocation of capital to include gold,’’ says Tribeca Investment Partners Asia chief executive Ben Cleary.

‘‘There are always outliers and funds doing their own thing, but the industry tends to follow one another and you might well be looking at a new consensus model that includes a lot higher level of gold.’’

Cleary says he’s seen broad signs across the market that a strong change is underway, with Warren Buffett’s Berkshire Hathaway buying a stake in Toronto-based gold miner Barrick Gold in mid-August.

‘‘The private high net worth individuals look like they’re adding gold, pension plans look like they’re adding gold, and institutional investors look like they’re adding gold,’’ says Cleary.

Any substantial move towards a higher weighting of gold across the industry would have huge ramifications for the price of the precious metal, with only a limited supply available.

‘‘If you look at all the stocks, all the ETFs, all the physical gold bars, futures markets, you wouldn’t be able to implement [a 5 per cent allocation],’’ says Cleary. ‘‘Lots of people have been making the point that even if it’s 1 per cent, that’s bigger than the entire gold equity market.’’

Unlike bonds, gold delivers no income, no dividends and costs money to store. But while storage can be an issue for large institutions, retail investors can easily gain exposure to the commodity through ETFs.

‘‘Investors are first and foremost buying gold and gold miners as safe-haven assets, which is continuing to push up the gold price and we are likely to see further gains,’’ says VanEck head of Asia Pacific Arian Neiron.

‘‘There are many out there who believe systemic risks are growing because of the unsustainable nature of the US Fed’s QE program and the huge and unsustainable level of US government debt. These risks are growing.’’

He suggests investors are less concerned about hedging against inflation, however, and more interested in its defensive qualities in an uncertain environment.

‘‘Until greater certainty emerges, investors will keep buying gold and gold miners. People aren’t buying gold as an alternative to bonds, or even for the high price,’’ says Neiron.

‘‘They are buying it as a defensive asset with low correlation to equities – not just as an inflation hedge and not as an alternative to bonds.’’

There’s no doubt gold’s stellar run this year has been driven by huge uncertainty, however the state of the bond market after COVID-19 means it could well continue.

‘‘I think that gold went into portfolios based on COVID-19 fears, but we will see whether it stays,’’ says Hamilton. SI

Gold twist as inflation hedge2020-09-19T09:10:15+10:00

The death of cash – and what you can do about it

Super funds have a problem with their pure cash options right now as net returns are approaching zero and starting to turn negative.

As an asset class, cash is meant to provide capital stability and liquidity. And yet with the actual Reserve Bank of Australia cash rate (as opposed to the RBA’s target rate) sitting at just 0.13 per cent, and cash-like instruments such as short-term bank bills offering only 0.10 per cent, it is hard for super funds to provide a cash option with positive returns after accounting for their 0.25 per cent administration fees and any other costs of managing cash.

One solution might seem to be term deposits, where you can still earn about 1 per cent. But I have heard multiple stories of the banks turning away institutional investors wanting to place large sums in term deposits because they are flush with funding.

The challenge is the banks have attracted huge deposit inflows because of both the risk aversion induced by the crisis and their once-very-attractive TD rates (recall they temporarily offered 1.7 per cent rates after the second RBA rate cut in March). At the same time, their balance-sheet growth remains sluggish because business and household credit growth is constrained as a result of COVID-19.

Over and above deposits, the banks also have access to ample low-cost funding via the RBA’s new term funding facility, which has been crucial for supporting their now skinny, single-digit returns on equity. Whereas a 12-month term deposit costs a bank about 1 per cent, they can borrow three-year money from the RBA at a much lower rate of just 0.25 per cent under the TFF.

For the avoidance of doubt, the death of cash is absolutely part of the monetary policy plan as the RBA seeks to reanimate economic activity. By crushing returns on risk-free savings, policymakers are encouraging households and businesses to explore other investment opportunities.

The goal of this column is to outline the near-cash opportunities, moving from lower to higher risk in liquidity, volatility and creditworthiness terms.

Most investors are unfortunately stuck with this unavoidable risk/return trade-off. A tiny minority can generate superior returns from low-risk and liquid assets by trading them very actively, although that luxury is not available to mums and dads.

Solet’sstartbyunderstandingwhatexactly cashis.Whatwethinkofarisklesscash depositisactuallyasenior-ranking, unsecuredloantoabank.Ifwehavelessthan $250,000inthedeposit,itisprotectedbya governmentguarantee.Abovethisthreshold, wearetakingpurebankcreditrisk.

The odd thing about deposits is that we do not revalue them day to day. We hold them at face value and assume our investment is never at risk, even though there are always residual probabilities of loss. To illustrate this point, there are actually safer bonds issued by the banks that sit above deposits in the capital structure.

These are known as ‘‘covered bonds’’, which denotes their secured, as opposed to unsecured, status. A covered bond gives an investor recourse to both the bank and a pool of assets that the bank pledges to protect investors in an event of default. (Deposits don’t have this benefit.)

While theoretically the risk of loss on a covered bond is lower than cash in a bank deposit (above the $250,000 government guarantee), the value of covered bonds fluctuates every day – albeit modestly – based on the market’s estimates of the change in the creditworthiness of the issuing institution. You could technically have a small paper loss on a covered bond while your riskier bank deposit superficially appears like it has outperformed.

AnAAA-ratedBankofQueensland coveredbondcurrently offersanall-in interestrateofabout 1percentannually, similartowhat yougetona 12-monthTDbut notablywayabovethe RBA’scurrent0.13per centcashrate.The coveredbondis,however, tradeable,whichmeans itaffordsdaily liquidityincontrastto TDsthatnormallylock yourmoneyupfor atleastonemonth.

One step down are senior unsecured bank bonds. These rank behind deposits and covered bonds in order of priority, but they do sit equally (or pari passu) with other cash instruments, including bank bills and negotiable certificates of deposit.

If a bank defaults on an interest repayment on a senior unsecured bond, it is in default across all these securities and therefore trading insolvent. Technically, the probability of default on deposits and senior bonds is therefore the same (recovery rates will be a little different).

Most bank-issued senior unsecured bonds are liquid and tradeable. As with covered bonds, they are also eligible for the RBA’s repurchase (or repo) facilities, which coupled with their high tradeability makes them a preferred asset for investors who want to hold very liquid portfolios. A BBB+ Bank of Queensland senior unsecured bond pays all-in interest of up to circa 1.3 per cent right now with the benefit of daily liquidity (i.e. no one-month lock-up as per a TD).

An alternative to bank-issued senior bonds are, of course, those bonds issued by companies. The RBA recently changed its rules to make some senior-ranking corporate bonds eligible for its repo facilities. There are, however, several hazards with corporate bonds. First, most of these organisations have inferior credit ratings to the major banks, and therefore expose one to a higher risk of loss.

Second, they do not benefit from government guarantees. A bank has government-guaranteed deposits as its key source of funding, and can also tap the RBA for longer-term money via both the TFF or the central bank’s standard lending facilities.

The major banks actually pay the government billions of dollars in tax annually (via the wholesale liability levy) to compensate taxpayers for the provision of these government guarantees, which make the banks too big to fail.

So while you can sometimes get better interest rates on senior-ranking corporate bonds, they tend to be much more illiquid and carry higher probabilities of loss.

History is replete with examples of these blow-ups. Consider, for example, the $325 million of senior unsecured bonds issued by Virgin on the ASX in November

last year, that are now worthless. At the

time, the investors who bought

them presumably thought they

were quite safe.

A step down from senior

bank bonds are

subordinated, or Tier 2,

bonds. Today these pay much higher all-in interest rates of about 2.5 to 3 per cent annually.

Major bank Tier 2 bonds are rated BBB+, which is the same rating as Bank of Queensland or Bendigo Bank’s senior bonds (BoQ and Bendigo Tier 2 is rated BBB-, the same as major bank hybrids). They have lower liquidity than senior bonds, and are not eligible for the RBA’s repo facilities.

Tier 2 bonds carry some other risks. In particular, if the banking regulator ever determines that a bank has become ‘‘nonviable’’ (i.e. effectively insolvent), it can unilaterally require the bank to convert Tier 2 bonds into ordinary shares. This is naturally a low-probability risk for large Australian banks.

Below Tier 2 bonds one finds bank hybrids, which are technically called Additional Tier 1 capital securities. Today major bank hybrids offer all-in returns of about 4 per cent to 4.5 per cent annually. Most are listed on the ASX and have solid liquidity, with up to $125 million trading on individual days during the toughest times in March. Here, too, there is a risk/return trade-off. As with Tier 2 bonds, the banking regulator can bail in hybrids into equity if it judges a bank has become non-viable.

There are also some additional risk factors. The major banks typically hold about 11 per cent of first-loss, common equity Tier 1 capital as a share of their riskweighted assets, which is a buffer protecting their hybrids and bondholders. If losses result in this equity layer shrinking to just 5.125 per cent, bank hybrids automatically convert into ordinary shares.

Whileboththeseeventsarelowprobability, theyneedtobeunderstoodandpriced.There areothercomplexitiesinthetermsofbank hybridsthatmustbecarefullyappraised, whichcanmateriallyaffecttheirvalue.

The major banks’ hybrids are rated BBB-, which technically puts them on the cusp of the ‘‘investment-grade’’ bucket spanning BBB to AAA. Hybrids issued by Macquarie and the regional banks are rated in the BB or ‘‘high yield’’ band. They can, therefore, play a role as a high-yield alternative.

The only way to avoid the inevitable risk/ return trade-off described here is to have an edge in the pricing and trading of these assets, which can enable sophisticated investors to generate capital gains above and beyond the bonds’ raw yields. Before doing anything, you should seek good financial advice.SI

Christopher Joye is a portfolio manager with Coolabah Capital, which invests in fixed-income securities including those discussed in his column.

The death of cash – and what you can do about it2020-07-02T15:06:58+10:00

COVID19 – Key Government Support Measures

3th April 2020

 

The Government’s economic response continues to build on the initial announcements in March 2020 to households, businesses and the community in general as events unfold across the Australian economy.

The measures announced to date are designed to support businesses in managing short-term cash flow challenges to retain staff, provide support to individuals, severely affected communities and regions, and to ensure the continued flow of credit in the Australian economy.

Please also note that given the progressive announcements by Federal Government/ Treasury, State Government and Lending Institutions, we highly recommend that up to date information and guidance is sought.

In addition, you may also have concerns with respect to Investments and how the current environment/ markets may have impacted your long term strategy and opportunities presented by the current volatility.

This aspect of advice is also something our office is equipped to assist with, as we are classified as‘an essential business’, we continue to operate both physical presence in our offices as well as remote support during these uncertain and unprecedented times.

It is also worth noting that there are instances where initiatives announced have yet to pass the passage of Parliament, this adds to the importance in obtaining clarity prior to taking action on any of the announcements made to date.

  1. INDIVIDUALS / HOUSEHOLDS

The Government will provide significant payments to assist lower-income Australians, including pensioners, other social security and veteran income support recipients and eligible concession cardholders.

Job Keeper Payment (not yet law) – Paid to you via your employer up to $1,500/Fnight ( 6mths )

The JobKeeker payment is a $1,500 (gross) fortnightly payment per eligible employee of a business. The amount will be paid to the employer and is designed to assist employers to continue paying their employees. Eligible employers will receive payments from the beginning of May and payments will be backdated to          30 March 2020. The payments will be available for a maximum of six months.

Centrelink/ My Gov. – Recipients of ( JobSeeker, Youth All’ce, Parenting, Farm Household & Special Benefits)

Over the next six months, the Government is temporarily expanding eligibility to income support payments and establishing a new, time-limited Coronavirus supplement to be paid at a rate of $550 per fortnight. This will be paid to both existing and new recipients of JobSeeker Payment, Youth Allowance Jobseeker, Parenting Payment, Farm Household Allowance and Special Benefit.

Under the JobSeeker Payment scheme – an eligible employee (assuming they are single with no children) would be expected to receive a fortnightly payment of up to $565.70 plus the $550 Coronavirus supplement (resulting in a total fortnightly payment of up to around $1,115).

Please also note that the JobSeeker recipients may also be eligible for other Government entitlements.

Centrelink/ MyGov – Payments to support households up to $750 Once Off Suplement

The Government is providing two separate $750 payments to social security, veteran and other income support recipients and eligible concession cardholders. The first payment will be made from 31 March 2020 and the second payment will be made from 13 July 2020. Around half of those that benefit are pensioners. These payments will help to support confidence and domestic demand in the economy.

The second payment will not be made to those eligible for the Coronavirus supplement. Recognising that many Australians have saved over their lives to support themselves in retirement, the Government is implementing these two measures to support retirees in managing the impact of recent volatility in financial markets and the impact of low-interest rates on their retirement savings.

Superannuation – Temporary early release of superannuation – Up to $20,000 ( Via  :  MyGov )

The Government is allowing individuals affected by the Coronavirus to access up to $10,000 of their superannuation in 2019-20 financial year and a further $10,000 in 2020-21. Such payments are tax free and will not affect Centrelink or Veterans’ Affairs payments.

Superannuation / Income Streams – Temporarily reducing superannuation minimum drawdown rates

The Government is temporarily reducing superannuation minimum drawdown requirements for account-based pensions and similar products by 50 per cent for 2019-20 and 2020-21. This measure will benefit retirees with account-based pensions and similar products by reducing the need to sell investment assets to fund minimum drawdown requirements, ie if <65Yrs reducing min. drawdown from 4% to 2%.

Centrelink/  My Gov. – Reducing social security deeming rates – ( No action needed )

On 12 March, the Government announced a 0.5 percentage point reduction in both the upper and lower social security deeming rates. The Government will now reduce these rates by another 0.25 percentage points.

As of 1 May 2020, the upper deeming rate will be 2.25 per cent and the lower deeming rate will be 0.25 per cent. The reductions reflect the low interest rate environment and its impact on the income from savings. The change will benefit around 900,000 income support recipients, including around 565,000 Age Pensioners who will, on average receive around $105 more of the Age Pension in the first full year the reduced rates apply. This will be automatically re calculated by the Government.

Land Lords / Local Government – Relief from State Taxes – Land Tax / Other Tax Imposts / Strategies

The Local Government Departments have also indicated that measures will be put in place to provide deferral of state tax obligations for up to 8mths to individuals impacted by the COVID19 virus.   Applications can be made via each State Government’s website.  For example: NSW is offering behind-the-scenes deals with landlords to take one of two options to defer land tax payments.

Landlords are able to access an eight-month instalment plan, without interest, starting in May, or they can defer paying for three months with a six-month instalment plan inclusive of interest.

Landlords can also seek Income Tax Variation from the ATO to bring forward the cashflow benefit from negative gearing typically made available at year end via tax returns. AMCO can assist in this respect.

The NSW Government has also a personalised savings finder : https://www.service.nsw.gov.au/campaign/cost-living

  1. BUSINESSES SUPPORT

Cash Flow Assistance – Boosting Cash Flow for Employers

The Government is enhancing the Boosting Cash Flow for Employers measure it announced on 12 March 2020. Up to $100,000 will be made available to eligible small and medium-sized businesses, and not-for-profits (NFPs) that employ people, with a minimum payment of $20,000. These payments will help businesses and NFPs with their cash flow so they can keep operating, pay their rent, electricity and other bills and retain staff.

Small and medium-sized business entities with aggregated annual turnover under $50 million and that employ workers are eligible. NFPs, including charities, with aggregated annual turnover under $50 million and that employ workers will now also be eligible. This will support employment at a time where NFPs are facing increasing demand for services.

Under the enhanced scheme, employers will receive a payment equal to 100 per cent of their salary and wages withheld (up from 50 per cent), with the maximum payment being increased from $25,000 to $50,000. In addition, the minimum payment is being increased from $2,000 to $10,000.

An additional payment is also being introduced in the July — October 2020 period. Eligible entities will receive an additional payment equal to the total of all of the Boosting Cash Flow for Employers payments they have received. This means that eligible entities will receive at least $20,000 up to a total of $100,000 under both payments.

Local Government – Relief from State Taxes – NSW – Land Tax / Payroll Tax & Other Cash Incentives

The Local Government Departments have also indicated that measures will be put in place to provide deferral of state tax obligations for up to 12 mths to businesses impacted by the COVID19 virus.

Applications can be made via each State Government website.  For example: NSW is offering behind-the-scenes deals with landlords to take one of two options to defer land tax payments.

Landlords can go on an eight-month instalment plan, without interest, starting in May, or they can defer paying for three months with a six-month instalment plan inclusive of interest.

The NSW Government has also created a $1 billion Working Fund for NSW to fund / sustain business, create new jobs and retrain employees. The fund is already in place with 1000 new staff for Service NSW announced this week to be funded by the program. The Working for NSW fund will comprise $750 million in new funding and $250 million announced last week for additional cleaning services.

Thousands of small businesses across NSW struggling to cope with the COVID-19 shutdown will receive grants of up to $10,000 under a new assistance scheme announced today by Premier Gladys Berejiklian, Treasurer Dominic Perrottet and Minister for Finance and Small Business Damien Tudehope.

https://preview.nsw.gov.au/news/10000-grants-to-provide-fast-relief-for-nsw-small-businesses-battling-covid-19

https://preview.nsw.gov.au/news/billions-tax-relief-for-business-1-billion-fund-for-jobs-and-help-for-vulnerable

Defer Insolvency Proceedings / Director support – Temporary relief for financially distressed businesses

The economic impacts of the Coronavirus and health measures to prevent its spread will see many otherwise profitable and viable businesses temporarily face financial distress. It is important that these businesses have a safety net to make sure that when the crisis has passed they can resume normal business operations. One element of that safety net is to lessen the threat of actions that could unnecessarily push them into insolvency and force the winding up of the business.

The Government is temporarily increasing the threshold at which creditors can issue a statutory demand on a company and to initiate bankrupt proceedings against an individual as well as temporarily increasing the time companies and individuals have to respond to statutory demands they receive. The package also includes temporary relief for directors from any personal liability for trading while insolvent, and providing temporary flexibility in the Corporations Act 2001 to provide targeted relief from provisions of the Act to deal with unforeseen events that arise as a result of the Coronavirus health crisis.

The ATO will tailor solutions for owners or directors of business that are currently struggling due to the Coronavirus, including temporary reduction of payments or deferrals, or withholding enforcement actions including Director Penalty Notices and wind-ups.

Tax Incentive – Increasing the instant asset write-off

The Government is increasing the instant asset write-off threshold from $30,000 to $150,000 and expanding access to include businesses with aggregated annual turnover of less than $500 million (up from $50 million) until 30 June 2020. In 2017-18 there were more than 360,000 businesses that benefited from the current instant asset write-off, claiming deductions to the value of over $4 billion.

This measure will support over 3.5 million businesses (over 99 per cent of businesses) employing more than 9.7 million employees.

Tax Incentive – Backing business investment

The Government is introducing a time-limited 15month  investment incentive (through to 30 June 2021) to support business investment and economic growth over the short term, by accelerating depreciation deductions. Businesses with a turnover of less than $500 million will be able to deduct 50 per cent of the cost of an eligible asset on installation, with existing depreciation rules applying to the balance of the asset’s cost. This measure will support business investment and is estimated to lower taxes paid by Australian businesses by $6.7 billion over the next two years. This measure will support over 3.5 million businesses (over 99 per cent of businesses) employing more than 9.7 million employees.

Cash Flow Incentive – Supporting apprentices and trainees

The Government is supporting small business to retain their apprentices and trainees. Eligible employers can apply for a wage subsidy of 50 per cent of the apprentice’s or trainee’s wage for 9 months from 1 January 2020 to 30 September 2020. Where a small business is not able to retain an apprentice, the subsidy will be available to a new employer that employs that apprentice. Employers will be reimbursed up to a maximum of $21,000 per eligible apprentice or trainee ($7,000 per quarter). Support will also be provided to the National apprentice Employment Network, the peak national body representing Group Training Organisations, to co-ordinate the re-employment of displaced apprentices and trainees throughout their network of host employers across Australia.

This measure will support up to 70,000 small businesses, employing around 117,000 apprentices.

Cash Flow Incentive – Support for Coronavirus-affected regions and communities

The Government will set aside $1 billion to support regions most significantly affected by the Coronavirus outbreak. These funds will be available to assist during the outbreak and the recovery. In addition, the Government is assisting our airline industry by providing relief from a number of taxes and Government charges estimated to total up to $715 million.

  1. CREDIT SUPPORT – BUSINESSES & INDIVIDUALS

The Government, the Reserve Bank of Australia and the Australian Prudential Regulatory Authority have taken coordinated action to ensure the flow of credit in the Australian economy. Timely access to credit is vital for businesses and individuals to manage the impacts of the Coronavirus.

Applications for credit should be directly via your lending institution / lease provider or contact our office if you cannot access prompt support or relevant information.

Deferral of Loan / Lease Obligations ( Leasing companies and Landlords )

The Government also announced a measure where loan and lease obligations can be deferred for up to 6 months, if this support is required, impacted individuals / businesses are encouraged to apply directly with their bank and in the case of leases, leasing company /  landlords and negotiate accordingly.

Support for immediate cash flow needs for SMEs

Under the Coronavirus SME Guarantee Scheme, the Government will provide a guarantee of 50 per cent to SME lenders to support new short-term unsecured loans to SMEs. The Scheme will guarantee up to $40 billion of new lending. This will provide businesses with funding to meet cash flow needs, by further enhancing lenders’ willingness and ability to provide credit. This will assist otherwise viable businesses across the economy who are facing significant challenges due to disrupted cash flow to meet existing obligations.

Quick and efficient access to credit for small business

The Government is cutting red tape by providing a temporary exemption from responsible lending obligations for lenders providing credit to existing small business customers. This reform will help small businesses get access to credit quickly and efficiently.

Reserve Bank of Australia — Supporting the flow and reducing the cost of credit

The Reserve Bank of Australia (RBA) announced a package on 19 March 2020 that will put downward pressure on borrowing costs for households and businesses. This will help mitigate the adverse consequences of the Coronavirus on businesses and support their day-to-day trading operations. The RBA is supporting small businesses as a particular priority.

The RBA announced a term funding facility for the banking system. Banks will have access to at least $90 billion in funding at a fixed interest rate of 0.25 per cent. This will reinforce the benefits of a lower cash rate by reducing funding costs for banks, which in turn will help reduce interest rates for borrowers. To encourage lending to businesses, the facility offers additional low-cost funding to banks if they expand their business lending, with particular incentives applying to new loans to SMEs.

In addition, the RBA announced a further easing in monetary policy by reducing the cash rate to 0.25 per cent. It is also extending and complementing the interest rate cut by taking active steps to target a 0.25 per cent yield on 3-year Australian Government Securities. Support for Non-ADI and smaller ADI lenders in the securitisation market The Government is providing the Australian Office of Financial Management (AOFM) with $15 billion to invest in structured finance markets used by smaller lenders, including non-Authorised Deposit-Taking Institutions (non-ADI) and smaller Authorised Deposit-Taking Institutions (ADI). This support will be provided by making direct investments in primary market securitisations by these lenders and in warehouse facilities. Australian Prudential Regulatory Authority — Ensuring banks are well placed to lend The Australian Prudential Regulatory Authority has announced temporary changes to its expectations regarding bank capital ratios. The changes will support banks’ lending to customers, particularly if they wish to take advantage of the new facility being offered by the RBA.

COVID19 – Key Government Support Measures2020-04-07T10:28:41+10:00

Golden touch not guaranteed (Diversifaction)

Safe havens Gold is usually a natural hedge in bear markets but the COVID-19 disruptions are not normal, writes Michael McCarthy.

People prize gold for a variety of reasons. But for investors, its key characteristic is its inverse correlation to shares. In investment terms, inversely correlated assets are highly valuable, especially to long-only portfolios. An asset with an inverse correlation moves in the opposite direction from other assets. Historically, when shares go down, gold more or less goes up. This makes it a natural hedge.

Holding gold in a portfolio can drag on returns in a strongly rising sharemarket, but usually softens the blow when stocks stumble.

This is the central case for investors to hold shares in gold-mining companies. Diversification is a powerful risk management tool available to all investors, large and small. However, diversification fails when all the assets in a portfolio move in the same direction at the same time.

Gold shares demonstrated the benefits of diversification as worldwide reports of the COVID-19 outbreak first hit equity markets on February 20. As the S&P/ASX 200 index halted its ascent, and rolled over, gold shares rose.

A problem arose on February 28, when Australian gold miners relinquished their immunity to the wholesale sell-down that spread across asset classes, and the globe. Unfortunately, this may become the new normal for gold shares in this disrupted investment environment.

The trouble started in the underlying market for the metal. Gold is the most widely traded commodity on earth. The standard for tradeable gold is universal, at a purity of 99.5 per cent or higher. This means the spot price of gold (the price for immediate delivery) is a global market – usually. In March, the price of gold in Chicago (to underpin gold futures trading) started to rise above the price in London. At one point, the same gold bar was worth $US70 per ounce more in the US than in Britain.

This divergence in prices is highly unusual. A number of factors contributed, including high demand for physical gold in the US and disruption to gold refiners, as they are not considered an essential industry.

Traders reportedly hired cargo space on jets to fly gold to Chicago to take advantage of this difference in prices. The spot price of gold became unstable, and the spread between the bid and offer blew out from the normal US30-50¢ to $US10-15.

The shutdown of refiners raises a major issue for gold miners’ revenues, even if gold prices go up. All activity in Switzerland, a major refining centre, has ceased after more than 10,000 reported COVID-19 cases. The Canadian Mint is running restricted operations. The Perth Mint reported record buying of bullion and silver. The combination of record demand for physical gold and restricted supply through a lack of refining capacity could see gold miners fall as gold prices surge.

There is another discomforting scenario. Among share traders there is a legendary tale from 2008 about a Sydney-based hedge fund. The traders running the fund anticipated the market rout, and profited as markets fell into disarray. They were among a handful of moneymanagersgloballythatreportedapositive return for the first half of 2008.

Yet by the end of the year they were out of business. The reason? As distress spread, investors were forced to sell what they could, not what they should. The hedge fund lost all of its funds under management because they remained liquid while many other funds froze redemptions.

If market disruptions continue, this may see investors liquidating gold holdings, just because they can. If the gold price also loses its ability to shine while stocks fall, the impact on gold producers’ share prices is compounded. This could mean that gold stocks will not only fail to act as a hedge, they may decline at a faster rate than the rest of a portfolio. SI

Michael McCarthy is chief market strategist at CMC Markets.

Golden touch not guaranteed (Diversifaction)2020-04-07T10:14:56+10:00

AMCO Stimulus from Government 23 March 2020

23rd March 2020

 

SUMMARY OF THE ECONOMIC RESPONSE

The Government’s economic response will support households and business through the period ahead. It is designed to support businesses in managing short-term cash flow challenges, provide support to individuals, severely affected communities and regions, and to ensure the continued flow of credit in the Australian economy.

 

  1. Support for individuals and households

The Government will provide significant payments to assist lower-income Australians, including pensioners, other social security and veteran income support recipients and eligible concession cardholders.

Income support for individuals

Over the next six months, the Government is temporarily expanding eligibility to income support payments and establishing a new, time-limited Coronavirus supplement to be paid at a rate of $550 per fortnight. This will be paid to both existing and new recipients of Jobseeker Payment, Youth Allowance Jobseeker, Parenting Payment, Farm Household Allowance and Special Benefit.

Payments to support households

The Government is providing two separate $750 payments to social security, veteran and other income support recipients and eligible concession cardholders. The first payment will be made from

31 March 2020 and the second payment will be made from 13 July 2020. Around half of those that benefit are pensioners. These payments will help to support confidence and domestic demand in the

economy. The second payment will not be made to those eligible for the Coronavirus supplement. Recognising that many Australians have saved over their lives to support themselves in retirement, the Government is implementing two measures to support retirees in managing the impact of recent volatility in financial markets and the impact of low-interest rates on their retirement savings.

Temporary early release of superannuation

The Government is allowing individuals affected by the Coronavirus to access up to $10,000 of their superannuation in 2019-20 and a further $10,000 in 2020-21. Individuals will not need to pay tax on

amounts released and the money they withdraw will not affect Centrelink or Veterans’ Affairs payments.

Temporarily reducing superannuation minimum drawdown rates

The Government is temporarily reducing superannuation minimum drawdown requirements for account-based pensions and similar products by 50 per cent for 2019-20 and 2020-21. This measure

will benefit retirees with account-based pensions and similar products by reducing the need to sell investment assets to fund minimum drawdown requirements.

Reducing social security deeming rates

On 12 March, the Government announced a 0.5 percentage point reduction in both the upper and lower social security deeming rates. The Government will now reduce these rates by another

0.25 percentage points. As of 1 May 2020, the upper deeming rate will be 2.25 per cent and the lower deeming rate will be 0.25 per cent. The reductions reflect the low interest rate environment and its impact on the income from savings. The change will benefit around 900,000 income support recipients, including around 565,000 Age Pensioners who will, on average receive around $105 more of the Age Pension in the first full year the reduced rates apply.

 

  1. Support for businesses

Boosting Cash Flow for Employers

The Government is enhancing the Boosting Cash Flow for Employers measure it announced on 12 March 2020. The Government is providing up to $100,000 to eligible small and medium-sized businesses, and not-for-profits (NFPs) that employ people, with a minimum payment of $20,000. These payments will help businesses and NFPs with their cash flow so they can keep operating, pay their rent, electricity and other bills and retain staff.

Small and medium-sized business entities with aggregated annual turnover under $50 million and that employ workers are eligible. NFPs, including charities, with aggregated annual turnover under

$50 million and that employ workers will now also be eligible. This will support employment at a time where NFPs are facing increasing demand for services.

Under the enhanced scheme, employers will receive a payment equal to 100 per cent of their salary and wages withheld (up from 50 per cent), with the maximum payment being increased from $25,000 to $50,000. In addition, the minimum payment is being increased from $2,000 to $10,000.

An additional payment is also being introduced in the July — October 2020 period. Eligible entities will receive an additional payment equal to the total of all of the Boosting Cash Flow for Employers

payments they have received. This means that eligible entities will receive at least $20,000 up to a total of $100,000 under both payments.

Temporary relief for financially distressed businesses

The economic impacts of the Coronavirus and health measures to prevent its spread will see many otherwise profitable and viable businesses temporarily face financial distress. It is important that these businesses have a safety net to make sure that when the crisis has passed they can resume normal business operations. One element of that safety net is to lessen the threat of actions that could unnecessarily push them into insolvency and force the winding up of the business.

The Government is temporarily increasing the threshold at which creditors can issue a statutory demand on a company and to initiate bankrupt proceedings against an individual as well as

temporarily increasing the time companies and individuals have to respond to statutory demands they receive. The package also includes temporary relief for directors from any personal liability for trading while insolvent, and providing temporary flexibility in the Corporations Act 2001 to provide targeted relief from provisions of the Act to deal with unforeseen events that arise as a result of the Coronavirus health crisis.

The ATO will tailor solutions for owners or directors of business that are currently struggling due to the Coronavirus, including temporary reduction of payments or deferrals, or withholding enforcement actions including Director Penalty Notices and wind-ups.

Increasing the instant asset write-off

The Government is increasing the instant asset write-off threshold from $30,000 to $150,000 and expanding access to include businesses with aggregated annual turnover of less than $500 million (up

from $50 million) until 30 June 2020. In 2017-18 there were more than 360,000 businesses that benefited from the current instant asset write-off, claiming deductions to the value of over $4 billion.

This measure will support over 3.5 million businesses (over 99 per cent of businesses) employing more than 9.7 million employees.

Backing business investment

The Government is introducing a time-limited 15 month investment incentive (through to 30 June 2021) to support business investment and economic growth over the short term, by

accelerating depreciation deductions. Businesses with a turnover of less than $500 million will be able to deduct 50 per cent of the cost of an eligible asset on installation, with existing depreciation rules applying to the balance of the asset’s cost. This measure will support business investment and is estimated to lower taxes paid by Australian businesses by $6.7 billion over the next two years. This measure will support over 3.5 million businesses (over 99 per cent of businesses) employing more than 9.7 million employees.

Supporting apprentices and trainees

The Government is supporting small business to retain their apprentices and trainees. Eligible employers can apply for a wage subsidy of 50 per cent of the apprentice’s or trainee’s wage for

9 months from 1 January 2020 to 30 September 2020. Where a small business is not able to retain an apprentice, the subsidy will be available to a new employer that employs that apprentice. Employers will be reimbursed up to a maximum of $21,000 per eligible apprentice or trainee ($7,000 per quarter). Support will also be provided to the National Apprentice Employment Network, the peak national body representing Group Training Organisations, to co-ordinate the re-employment of displaced apprentices and trainees throughout their network of host employers across Australia.

This measure will support up to 70,000 small businesses, employing around 117,000 apprentices.

Support for Coronavirus-affected regions and communities

The Government will set aside $1 billion to support regions most significantly affected by the Coronavirus outbreak. These funds will be available to assist during the outbreak and the recovery. In

addition, the Government is assisting our airline industry by providing relief from a number of taxes and Government charges estimated to total up to $715 million.

 

  1. Supporting the flow of credit

The Government, the Reserve Bank of Australia and the Australian Prudential Regulatory Authority have taken coordinated action to ensure the flow of credit in the Australian economy. Timely access to credit is vital for businesses to manage the impacts of the Coronavirus.

Support for immediate cash flow needs for SMEs

Under the Coronavirus SME Guarantee Scheme, the Government will provide a guarantee of 50 per cent to SME lenders to support new short-term unsecured loans to SMEs. The Scheme will guarantee up to $40 billion of new lending. This will provide businesses with funding to meet cash flow needs, by further enhancing lenders’ willingness and ability to provide credit. This will assist otherwise viable businesses across the economy who are facing significant challenges due to disrupted cash flow to meet existing obligations.

Quick and efficient access to credit for small business

The Government is cutting red tape by providing a temporary exemption from responsible lending obligations for lenders providing credit to existing small business customers. This reform will help small businesses get access to credit quickly and efficiently.

Reserve Bank of Australia — Supporting the flow and reducing the cost of credit

The Reserve Bank of Australia (RBA) announced a package on 19 March 2020 that will put downward pressure on borrowing costs for households and businesses. This will help mitigate the

adverse consequences of the Coronavirus on businesses and support their day-to-day trading operations. The RBA is supporting small businesses as a particular priority.

The RBA announced a term funding facility for the banking system. Banks will have access to at least $90 billion in funding at a fixed interest rate of 0.25 per cent. This will reinforce the benefits of a lower cash rate by reducing funding costs for banks, which in turn will help reduce interest rates for borrowers. To encourage lending to businesses, the facility offers additional low-cost funding to banks if they expand their business lending, with particular incentives applying to new loans to SMEs.

In addition, the RBA announced a further easing in monetary policy by reducing the cash rate to 0.25 per cent. It is also extending and complementing the interest rate cut by taking active steps to

target a 0.25 per cent yield on 3-year Australian Government Securities. Support for Non-ADI and smaller ADI lenders in the securitisation market The Government is providing the Australian Office of Financial Management (AOFM) with $15 billion to invest in structured finance markets used by smaller lenders, including non-Authorised Deposit-Taking Institutions (non-ADI) and smaller Authorised Deposit-Taking Institutions (ADI). This support will be provided by making direct investments in primary market securitisations by these lenders and in warehouse facilities. Australian Prudential Regulatory Authority — Ensuring banks are well placed to lend The Australian Prudential Regulatory Authority has announced temporary changes to its expectations regarding bank capital ratios. The changes will support banks’ lending to customers, particularly if they wish to take advantage of the new facility being offered by the RBA.

PACKAGE IMPLEMENTATION

The Government is moving quickly to implement this package. To that end, a package of Bills is being introduced into Parliament on 23 March 2020 for urgent consideration.

Subject to passage of the Bills through Parliament, the Government will then move to immediately make, and register, supporting instruments.

AMCO Stimulus from Government 23 March 20202020-03-24T16:21:43+11:00

Volatility and Perspective for 2020

17th April 2020

After period of optimism, global investment markets including Australia have hit the panic button on fears about the possible economic impact of the coronavirus (COVID-19).

The thing with such market corrections is that it is impossible to predict what will trigger them or how long and severe they will be.

It is worth noting that the Australian Economy has had the enviable record of almost 30 years of unbroken record of growth, yet to be tested once again in the March and June quarters.  Australia is amongst a few countries in the world still enjoying the praised AAA rating by major rating agencies such as Standard & Poors, Moody’s and Fitch Ratings.

The Federal Government initially introduced a $17bn stimulus, with the Reserve Bank standing behind the banking system to ensure that the AAA rating is maintained.  The total stimulus has since been increased to over $200bn.

At times like these, it’s good to get some perspective

Taking the long view

When the financial markets are in turmoil and account balances start to fall, there can be a strong temptation to seek assistance and have “something done” to stem any perceived losses.

Yet it is often the case that staying the course, or doing nothing, proves to be the better path.

Here is one recent example: A hypothetical 60% GROWTH  :  40%  DEFENSIVE portfolio that stood at $1 million on the morning of November 1, 2018, would have lost 5.7% of its value by January 2019.

Yet selling the portfolio at that time and fleeing the market, even if briefly, would have cost an investor tens of thousands of dollars in two months, versus the alternative of staying invested.

When faced with a similar situation, consider how you might feel if markets rebounded and you could have recouped all your money, and more.   When fear is driving markets, it’s important to get back to basic investment principles and think long term.

That is why it is best to stick to the long-term plan and strategy that has been built around your personal financial plan.

Any changes should be made because of changes in your life, not changes in the markets. If you have questions about making portfolio changes it is best to have a detailed discussion with our office before acting.

Staying the course can pay off, abandoning same can be costly; below is one such example there are many others in the past.

The global stock market drop in late 2018 offered a lesson in investor behaviour

Avoid knee-jerk reactions – ( Ride Out a Rough Period )

At this point, markets are responding to uncertainty. Nobody knows what the extent of the economic fallout will be, so the temptation is to bail out of growth assets ( shares / property ) and put your cash in the bank. Or ‘jump ship’ and switch to a ‘safer’, more conservative option in your superannuation fund.

While the urge to act and protect your savings is understandable, knee-jerk reactions can be a mistake and prove very costly afterwards.

It is near impossible to time the markets. Not only do you risk selling when prices are near rock-bottom, but you also risk sitting on the sidelines as the market recovers, and as history tells us it always does. The above is an example of this ( including chart below ) and there are many other instances of recovery following market corrections, namely, 1987 and 2008 ( those of us that are old enough to remember ).

In addition, it is worth noting that after the dotcom crash, the S&P500 fell 27%, rose 19%, fell 26%, rose 22% only to fall again 33% before recovery.  Similarly, during the GFC the index fell 18%, rose 12%, fell 47%, rose 25% and then fell 27% before recovery.

In an ever-changing world, the basics of investing stay the same. By sticking to some timeless rules it’s much easier to avoid emotionally driven reactions and instead focus on your long-term financial goals.

Low risk comes with lower returns

Many people are concerned when investing in shares because of the perceived risks. Growth assets such as shares and property do entail higher risk than cash in the bank, but they also deliver higher returns over the long term.

Perhaps the biggest risk of all is not earning the returns you need to achieve your goals.

While domestic and international shares produced stellar returns over the past few years, cash returned just 1 – 2 per cent which was below the level of inflation.

Cash returns were not much better over the past seven years, averaging 2.2 per cent a year.  Imagine investing $200k in term deposit for a year and receiving $4,400 which will then be taxable !

In addition, central banks are progressively reducing these rates to even lower levels and this trend is likely to continue further, hence this pain has not ended yet for investors trapped in this asset class.

Spread your risk and Diversify

Shares, property, bonds and cash all have good years and bad. While shares and property tend to provide the highest growth over time, there will be years when prices fall or go sideways. In some years, bonds and even cash produce the best returns.

In the long term though, the average rates of asset classes prevail.  This forms the basis for long term asset allocation which is the key determinant of investment returns.

A good way to reduce volatility and enjoy smoother returns over time is to diversify your investments across and within asset classes. That way, one bad investment or difficult year won’t ‘sink your ship’, this is how your portfolio has been constructed.

The most appropriate mix will depend on your age, the timing of your goals and your risk tolerance. You will need cash for emergencies and short-term goals, with enough money in growth assets to build your portfolio and last you through your retirement.

The portfolios we design all take this into account and we ensure that the investment mix is right for you, they are constructed to deliver over the long-term.

Best defense:  Making a plan and sticking to it

The financial plan and asset allocation we have developed has been set up with your long-term goals and objectives in mind.

That means we focus on the factors of your investment strategy that we can control (including such things as asset allocation,  costs and where applicable, general income tax considerations including estate planning opportunities).

Taking this into account and balancing against the current market volatility and downturn in the global / local economy, it is worth noting that these are factors which are outside the level of control of investors and advisers alike.

On the other hand, we are reminded by history that corrections (bearish market conditions), while inevitable, don’t last forever.

For example, a 40% market drop, will require a 67% growth from the reduced level to reach the previous point.  This is one reason why recovery is generally with a much stronger rate (once underway) and following significant market corrections.

Reflecting on past market corrections, including the GFC, Market Crash of 1987 etc, the longest duration of previous market declines have been between 1 month and 21 months.

This tells us that ‘storms’ pass by over time, there is no question that we need to ensure we cover our cashflow needs during the volatile period and not disturb our long term ‘nest egg’.

It is our view that these corrections in the markets (and any commentary that might cause justified concern / potential to veer off course) are best put in perspective, and instead the plan is allowed to stay on course to achieve the stated long-term goals and objectives.

Likewise, it is vital that fundamental mistakes are prevented during these testing times.

We are committed to providing support to you and your family during what are without question, difficult economic times coupled with significant global threats.

We are here, are aware of the challenges faced and will approach all matters with care and promptness and in the fullness of time, will reflect on the positive outcomes after all the hard work.

 

17th April 2020

Danny D. Mazevski 

Chartered Tax & Financial Adviser

FIPA   CTA  FTMA  MBA (Un.NSW/SYD)  Dip.FS   JP

Volatility and Perspective for 20202020-04-21T10:54:05+10:00

Yield curve worry as bond markets spin

A sharp sell-off in bonds just days after investors rushed to the safety of fixed income markets sends conflicting signals about the US economy and the global dovish tilt.

On Monday, the US Treasury market posted its biggest one day sell-off in three months following the release of better than expected manufacturing data from China and the US.

The yield on US 10-year Treasuries climbed nearly 9 basis points for the biggest single-day jump since January 4, breaking above the 2.5 per cent level.

On Tuesday, the Reserve Bank of Australia punctured the more upbeat mood, saying growth has slowed and downside risks ‘‘have increased’’. This caused Australian 10-year bond yields to dip, from 1.835 per cent immediately before the decision, to 1.812 per cent. They hit a record low 1.72 per cent last week.

But the positive implications of a selloff in US Treasuries may not be enough to erase the memory of the inversion of three-month and 10-year US government bond yields for the first time since 2007. The historic move, which happened on March 22, is a classic signal of recession.

BNY Mellon’s John Velis said the yield curve inversion matters.

An inversion is not insignificant, said Dr Velis, BNY Mellon’s new head of macroeconomics and foreign exchange. “It’s almost axiomatic that when the curve inverts, low growth and usually a recession follows.”

It is frequently argued that years of bond purchases by the US Federal Reserve have made the yield curve a less reliable barometer of the economy’s health than in the past.

Dr Velis, who joined the $1.7 trillion asset manager from State Street last year, rejects this. “You hear a lot of people tell you, ‘Well, it’s different this time because the Fed has bought all the bonds at the long end of the curve, and so have other central banks, so the curve doesn’t show the same sort of information that it used to’. It’s not your father’s yield curve in other words.’’

He disagrees. “If you look at why long bond yields have fallen, it’s because inflation expectations have fallen. I learnt the hard way in 1999 when the US curve inverted.

‘‘At that time I was telling people, ‘Don’t worry about it because inflation’s lower than it has ever been,’ and the government at the time, believe it or not, was running a balanced budget.

“So I was going around telling people the flat curve back in 1999 is not the same curve that we have been looking at since the end of World War II. It was, and since then I’ve been very reluctant to dismiss any signals from it.”

Dr Velis pointed to a similar flattening of the Canadian, Australian and German yield curves as examples of how bond markets are reflecting lower economic growth in other parts of the world.

Australia’s yield curve has also inverted, on both the three-month bank bill and less-liquid three-month Australian government bond measure. The last Australian yield curve inversion occurred in July 2016.

Market-based measures of domestic inflation expectations have also hit record lows.

The Fed is keeping a close eye on what is happening outside the US economy, Dr Velis noted. “They choose their words carefully but if you keep pointing out international concerns in a very sort of high-level way, that means that there are really some international concerns.”

The strategist admitted to being impressed that the Fed changed its stance on interest rates so quickly, pivoting from raising rates in December last year, to telling markets in January that it would be patient. At its March meeting, it removed all expectations for rate increases in 2019.

‘‘I’m kind of pleased that they were able to reverse as quickly without worrying what the PR effect would be on it. That’s impressive.

‘‘I said in December that we would be more likely to talk about rate cuts at the end of 2019 than we would be talking about how much further the Fed was going to be hiking at that time. I just didn’t expect that it would happen by the end of March.’’

Dr Velis believes the central bank has been paying attention to data that ‘‘a lot of people have been ignoring’’, including lower investment, and signs that the labour market is cooling, evidenced by unemployment insurance claims halting their decline.

Broadly, he predicts that investors will become more defensive.

He is also on alert for a rise in abnormally low foreign exchange market volatility: ‘‘Typically what happens is that when it breaks, it breaks very quickly and suddenly and people rush for the exits.

‘‘Whether or not this dovish turn by the Fed will be enough to sort of stem that tide and give people confidence and prevent a large crash and the disruption from rising volatility remains to be seen. In the past this has not been the case.’’

Yield curve worry as bond markets spin2019-04-11T13:17:41+10:00