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Market Commentary: April 2025

Mon, 19 May 2025 05:43:01 GMT

The focal point for investment markets during April was US President Donald Trump’s announcement of tariffs on 2nd April. In the announcement he proposed a 10% tariff on essentially all imports, with steeper rates for major trading partners such as China (34% on top of existing 20% tariffs) and the European Union (20%). In addition, a 25% tariff on all foreign made cars and auto parts was announced in an effort to reset US trade deficits and re-invigorate US manufacturing. Later in the month President Trump suspended many of the announced tariffs for 90 days to allow time for negotiations and greater consideration.

In April the European Central Bank cut its deposit facility rate by 0.25% to 2.25%. In Australia the Reserve Bank of Australia left rates unchanged and the US Federal Reserve did not meet in April with a meeting scheduled for early May.

Australian large cap equities gained 3.81% in April, after being down as much as 7.81% during the month, led by the Communication Services sector (+6.72%), Information Technology sector (+6.37%) and the Consumer Discretionary sector (+6.12%). On the other hand, Energy (-7.72%) and Materials (+0.70%) were laggards as investor concerns regarding global economic growth due to tariffs weighed on these sectors.

Currency hedged global equities fell 5.04% for the month as the Australian dollar gained 2.48% versus the US dollar. At month’s end the Australian dollar closed at US$0.6402, up from US$0.6247 a month earlier. Unhedged global equities fell 1.84% for the month. US equities were down as much as 11.21% during the month before closing down 0.68%.

Bond yields in both Australia and the US moved lower during the month with the US 10 year bond yield falling 5bps to 4.16% and the US 2 year bond yield falling 28bps to 3.60%. In Australia, the Australian 2 year bond yield fell 41bps to 3.27% whilst the Australian 10 year bond yield fell 22bps to 4.16%. The price of gold increased by as much as 11.21% before closing the month up 5.29%.

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Market Commentary: March 2025

Tue, 08 Apr 2025 00:57:33 GMT

Risk off was the pervading theme during March. Investor concern regarding the announcement of US tariffs in early April and their impact on global economic activity undermined investor confidence. An increasingly uncertain economic backdrop led investors to re-calibrate their views of future risks and focus on equity market valuations. In addition, an Australian federal election was called for 3 ^rd May in a race that appears too close to call at this stage.

In March the Bank of Canada cut rates by 0.25% to 2.75 whilst the European Central Bank cut its deposit facility rate by 0.25% to 2.5% as disinflation continued in the European region. The US Federal Reserve held the US Fed Funds rate at 4.25% to 4.5% at its March meeting.

In Europe the German parliament approved a package focused on defence and infrastructure spending and in the process stepped away from decades of fiscal conservatism. The spending package includes the set-up of a €500 billion infrastructure fund, to be spent over the next 12 years. In China the National People’s Congress occurred with a key outcome being China’s commitment to a 5% growth target this year. Elsewhere there were widespread protests in Turkiye and unrest in the Serbian National Assembly.

Australian large cap equities fell 3.30% in the month led by the Information Technology sector (-9.66%). Other sectors to fall sharply during the month were Consumer Discretionary (-6.28%) and Health Care (-4.60%). On the other hand, Communication Services (+1.74%), Utilities (+1.52%) and Materials (-0.32%) outperformed during the month. Small Cap Australian equities (-3.60%) underperformed large caps for the month.

Currency hedged global equities fell 5.04% for the month as the Australian dollar gained slightly versus the US dollar at month’s end closing at US$0.6247, up from US$0.6209 a month earlier. Unhedged global equities fell 4.67% for the month.

Bond yields in both Australia and the US were mixed during the month with the US 10 year bond yield finishing little changed from a month earlier at 4.21% and the US 2 year bond yield falling 11bps to 3.88%. In Australia, the Australian 2 year bond yield fell 5 bps to 3.68% whilst the Australian 10 year bond yield rose 9 bps to 4.38%.

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Market Commentary: February 2025

Thu, 13 Mar 2025 04:50:43 GMT

The positive sentiment that propelled investment markets in January dissipated in February. The threat of tariffs on Mexico, Canada and China by the United States together with valuation concerns for mega-cap technology companies following announcements by DeepSeek in January and rising risks of stagflation all contributed to the more circumspect stance of investors.

In February the Bank of England cut rates by 0.25% to 4.5% as inflation in the fourth quarter of 2024 reached 2.5%. In Australia, the Reserve Bank of Australia (RBA) cut the cash rate by 0.25% to 4.10%. This was the first rate cut by the RBA since November 2020. Australia’s four major retail banks were quick to react passing through the rate cut to mortgage holders post the announcement.

Australian large cap equities fell 3.91% in the month led by the Information Technology sector (-12.28%). Other sectors to fall sharply during the month were Health Care (-7.66%) and Energy (-515%). On the other hand, Communication Services (+6.44%), Utilities (+3.15%) and Consumer Staples (+1.47%) outperformed during the month. Small Cap Australian equities (-2.80%) outperformed large caps for the month.

Currency hedged global equities fell 0.36% for the month as the Australian dollar was largely unchanged versus the US dollar at month’s end closing at US$0.6209, down slightly from US$0.6218 a month earlier. Unhedged global equities fell 0.89% for the month.

Uncertainty regarding the impact of possible tariffs by the US government impacted US consumer sentiment with the Conference Board consumer confidence index for February falling from 105.3 in January to 98.3 in February. In addition, the Conference Board’s expectations index (an indication of expectations for future spending growth) weakened to an eight month low of 72.9 raising the possibility of a period of stagflation for the US economy. Bond yields in both Australia and the US reflected the uncertainty with the US 10 year bond yield falling 33 bps to 4.21% and the US 2 year bond yield falling 21bps to 3.99%. In Australia, the Australian 2 year bond yield fell 7 bps to 3.73% whilst the Australian 10 year bond yield fell 14 bps to 4.29%.

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Market Commentary: January 2025

Mon, 10 Feb 2025 21:28:58 GMT

Investment markets had a positive start to 2025. A ceasefire deal between Israel and Hamas was announced during the month and helped ease geo-political tensions. The ceasefire deal will be carried out in three stages with stage one of the ceasefire agreement expected to last 42 days. In the US the inauguration of President Trump occurred during the month and the 47 ^th President of the United States of America was quick to hit the ground running signing a multitude of executive orders. Towards the end of the month investors in artificial intelligence linked companies were thrown a curve ball when Chinese company, DeepSeek, released its free artificial intelligence chatbot app. The app quickly became the most downloaded free app on the Apple App Store in the US. The release of the DeepSeek app in January caused ripples for artificial intelligence related companies given the company’s claims of relatively cheap development costs together with the fact the app is open source meaning anyone can copy, download and build on it.

The European Central Bank (ECB) cut its three key ECB rates by 25 bps in January as inflation expectations continued to moderate in the region. In the US, official cash rates were maintained at the US Federal Reserve’s target of 4.25% - 4.50%. The Bank of Japan raised its short-term policy rate from 0.25% to 0.50% at its January meeting – the highest level in 17 years. The first meeting of the Reserve Bank of Australia (RBA) for 2025 will be held in February with expectations building the RBA will announce a rate cut at this meeting.

Australian large cap equities gained 4.45% in the month led by the Consumer Discretionary sector (+7.13%). The two worst performing sectors for the month were Utilities (2.40%) and Communication Services (1.52%). Currency hedged global equities gained 3.46% with the Australian dollar appreciating versus the US Dollar by 0.3 cents (0.48%) to close the month buying US$0.6218. Unhedged global equities returned +2.58% for the month.

Bond market performance was mixed for January. The Australian 10-year government bond yield increased by 7bps to 4.42% and the Australian 2-year government bond yield fell by 6bps to 3.80%. The US 10-year government bond yield fell by 3bps to close at 4.54% and the US 2-year government bond yield fell 4bps to 4.20%.

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Market Commentary: December 2024

Wed, 08 Jan 2025 22:39:02 GMT

Investors adopted a more cautious stance in December after November’s equity market rally in response to a Trump victory in the US Presidential Election. The major contributing factor to the more circumspect positioning of investors in December was the US Federal Reserve. In December the US Federal Reserve continued to lower cash rates with a cut of 25 bps that now sees the target cash rate move to a 4.25%-4.50% range. This move was widely anticipated by investors. The surprise for investors was that the US Federal Reserve’s new median rate projection for 2025 indicated just two 25 bps cuts for the year – down from four 25 bps cuts in September.

The European Central Bank (ECB) cut its three key ECB rates by 25 bps in December as inflation expectations continued to moderate in the region. In Australia the Reserve Bank of Australia (RBA) maintained the official cash rate at 4.35% as underlying inflation remains uncomfortably high.

Australian large cap equities fell by 3.1% in the month led by the Materials (-4.5%) and Information Technology sectors (-4.4%). The two best performing sectors for the month were Communication Services (+1.4%) and Consumer Staples (+0.6%). Currency hedged global equities fell by 1.9% and with the Australian dollar falling versus the US Dollar by 3.2 cents (-5.0%) to close the month buying US$0.6188, unhedged equities returned +2.6%.

Despite major central banks easing cash rates further in the month, bond market performance was mixed. The Australian 10-year government bond yield increased by 2bps to 4.36% and the Australian 2-year government bond yield fell by 9bps to 3.86%. The US 10-year government bond yield increased by 40bps to close at 4.57% and the US 2-year government bond yield gained 9bps to 4.24%.

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Market Commentary: November 2024

Thu, 05 Dec 2024 00:26:52 GMT

In November all eyes (and markets) were focused on the US election, and with a Trump win it set the tone for a rally in developed markets. US equities posted a strong gain of 6% in USD terms with all sectors and market captilisations up. Asian equities faired worse as the potential tariffs on Chinese exports into the United States saw Asian equities and, in particular Chinese equities, sell off on negative sentiment.

Further comments on the US election and implications are outlined below.

The US Federal Reserve continued to lower cash rates with a cut of 25bps in November that now sees the target cash rate move to a 4.50%-4.75% range. The Bank of England also lowered cash rates by 25bps to 4.75%. The Reserve Bank of Australia left cash rates unchanged in November at 4.35%. The RBA noted that “Inflation has fallen substantially since the peak at the end of 2022 as supply chain issues have abated and higher interest rates have been working to bring aggregate demand and supply closer to balance. Underlying inflation in the September quarter is still too high. While trim mean inflation declined to 3.5% over the year it was little changed at 0.8% in the quarter”.

Australian large cap equities rose by 4.0% in the month led by the IT sector (+10.5) and Utilities (+ 9.1%) with the only negative sectors being Energy (-0.7%) and Materials (-2.6%). Currency hedged global equities rose by 4.9% and with the Australian dollar falling versus the US Dollar by 1.0 cent (-1.1%) to close the month buying US$0.6512, unhedged equities returned 5.2%.

With major central banks easing cash rates further in the month it was no surprise to see bond yields fall. The Australian 10-year government bond yield fell by 16bps to 4.34% and the Australian 2-year government bond yield fell by 9bps to 3.95%. The US 10-year government bond yield fell by 12bps to close at 4.17% and the US 2-year government bond yield fell by 2bps to 4.15%.

What are the implications of a second Donald Trump presidency?

The US election in November resulted in a resounding victory for Republicans with Donald Trump elected President and Republicans also controlling the House of Representatives and Senate. The so-called “Red Sweep” should allow for a relatively easier passage for laws to be passed and change to be implemented by Republicans. However, the window to enact change may be relatively short with mid term elections due in 2 years and the Republican majority in both the House of Representatives and Senate small.

Policy agenda

The policy agenda of President Trump and Republicans is key to determining any market implications. To this end, the key areas to focus on are summarised below:

Immigration – Restricted immigration access to the US, tighter border controls and potential deportation of undocumented immigrants are all policies flagged pre-election by the Trump campaign.

Move to “small” government – Trump has promoted a move to make government more efficient by decreasing red tape and reducing wasteful spending. Elon Musk will co-chair a newly created Department of Government Efficiency (DOGE) with an initial target of US$2 trillion in government spending cuts.

Tax Cuts – Trump has stated he will seek to make 2017 personal tax cuts which are due to expire next year permanent. In addition, he has promoted a cut to the corporate tax rate with domestic profits to be taxed at a lower rate than international profits for corporations thereby encouraging companies to bring back manufacturing to the US.

Trade – One of the more contentious policies is to impose large tariffs on imports from China and to a lesser extent other countries. In addition to tariffs there may be further restrictions to trade in the form of capital controls, which effectively restrict inflow and outflow of foreign capital.

Foreign Affairs/Geopolitics – Trump has stated he will quickly resolve the Russia/Ukraine conflict and would move to find a resolution in the Israel – Hamas/Hezbollah conflict (although at the time of writing a ceasefire has been negotiated between Israel and Hezbollah).

It is difficult to quantify the economic implications of any policy changes given we don’t know the timing of implementation and any possible retaliatory actions in relation to tariffs. For instance, deportation of undocumented immigrants has the potential to create a labour drain and tighter jobs market. However, if aggressive spending cuts are implemented on government departments this may see a significant reduction in employees and increase the unemployment rate for the US. In a broad sense the Trump policy agenda is expected to be supportive for US economic growth, complicated for international trade relations and carries the risk of higher inflation in the US.

US investment markets have initially been bolstered by the “Red Sweep” with US stocks, Bitcoin and the US dollar all moving higher in November. On the flip side, Chinese equities fell in November as investor anxiety regarding tariffs was increased. US bond yields moved higher during November. Longer term, the implications are less clear with some initial thoughts summarised below.

US Equities – A boost to profitability because of a potential cut in the corporate tax rate would be positive. Whether companies choose to use the increased profits to re-invest in growth or simply buy back shares will have very different implications for longer-term economic growth and share market performance. There may be opportunities for smaller US based companies to gain market share without competing head-on with cheaper imports with some industries advantaged more than others.

International equities – Trade is likely to be complicated by tariffs and capital controls. For instance, if heavy tariffs are imposed on Chinese imports to the US will the Chinese move to re-direct trade to other jurisdictions or retaliate by imposing tariffs on US imports? If trade flows are re-directed we may see protectionist policies enacted across a wider number of countries and an increasing importance on bilateral agreements between nations.

US government bonds – Higher inflation (particularly as a result of tariffs) together with a US budget deficit that is likely to increase will see upwards pressure on US government bond yields. Investors should watch for any signs of rating agencies becoming more concerned about the US government deficit.

US dollar – Likely to continue to be supported as capital flows, attractive bond yields and relatively attractive economic growth all provide support.

Finally, the unconventional nature of Donald Trump will result in surprises for investment markets over the next four years. Whilst there has been an initial positive reaction by investors to the Republican election victory investors should be mindful of valuations and ensure they are adequately diversified to best navigate the road ahead.

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Market Commentary: October 2024

Mon, 04 Nov 2024 04:37:23 GMT

In October a rise in bond yields, coupled with a rising US dollar and waning impacts of the Chinese stimulus in September saw growth assets generally fall with bonds also producing negative returns.

Despite the US FED starting the easing cycle in September with a 50bps cash rate cut, longer dated bond yields rose in October by ~50bps as markets priced in a more pro-growth agenda from China and also potential higher inflationary pressures in the US post the election. All eyes in the US are on the US election (5 ^th November) and whilst the polls show a very close call between Trump and Harris, the market implications for a new US President remain unclear. The ability of the future President to enact policy will be dependent on control of the House of Representatives and Senate and the willingness to push through policy.

After five months of gains Australian large cap equities fell by 1.5% in the month with Financials and Healthcare the major positives, conversely Energy, Materials, Consumer Staples and Utilities all sold off aggressively. Currency hedged global equities fell by 0.9% and with the Australian dollar falling versus the US Dollar by 3.3 cents (-4.8%) to close the month buying US$0.65872, unhedged equities were up returning 3.9%.

The Australian 10-year government bond yield rose by 51bps to 4.50% and the Australian 2-year government bond yield rose by 43bps to 4.05%. The US 10-year government bond yield rose by 50bps to close at 4.28% and the US 2-year government bond yield rose by 53bps to 4.17%.

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Market Commentary: September 2024

Thu, 31 Oct 2024 00:38:30 GMT

In September, the US Federal Reserve cut the US Fed Funds rate by 0.5% to 4.75-5.00%. US inflation appears to be under control with August data revealing US inflation at an annualised rate of 2.5% p.a. much lower than the 9% p.a. peak seen in 2022. US employment whilst resilient has softened, justifying a more accommodative monetary policy stance. The European Central Bank also cut rates in the month by 25bps to 3.50% following on from their previous 25bps cut in June due to falling inflation and slower economic growth.

The surprise cut and stimulus came from China towards the end of the month. China’s economic growth has been tepid since COVID-19 related shutdowns. The property market has been in a crisis, there’s low consumer confidence, discretionary spending has fallen, overseas investment has reduced and China’s GDP growth target for the year at 5% looks to be a challenge.

How did China stimulate? They reduced the amount of cash that Chinese banks must hold in reserve by 50bps, freeing up 1 trillion yuan (~A$140bn) of liquidity. China also reduced mortgage rates by an average of 50bps, reduced the downpayment required for second home purchases from 25% to 15% and they plan to issue 2 trillion yuan (~A$280bn) in special sovereign bonds to further invest in the economy. All of these actions saw Chinese equities rally (up over 20% in the month) alongside materials stocks that had been sold off aggressively on the recent Chinese economic weakness.

Unfortunately, in September the Middle East conflict escalated to much more extreme levels since the conflict started back in October 2023. With the Hezbollah leader having been killed, retaliation has been high with nuclear threats rising. At the same time the Russia-Ukrainian conflict continues and without the US acting as the “world’s police”, hope is needed that both these conflicts abate with minimal further loss of lives. Markets have shrugged off both of these conflicts. However, if they continue/escalate further then supply chain issues and higher inflation risk destabilising investment markets.

Australian large cap equities rose by 2.8% and in doing so closed at a new record high. The Materials sector was the strongest up 13% thanks to the Chinese central bank stimulus, Financials broadly flat and Healthcare falling the most in the month down 3.2%. Currency hedged global equities rose by +1.4% as the Australian dollar strengthened versus the US Dollar by 1.5 cents to close the month buying US$0.6913 and unhedged equities returned -0.5%

The Australian 10-year government bond yield rose by 3bps to 3.99% and the Australian 2-year government bond yield fell by 6bps to 3.62%. The US 10-year government bond yield fell by 12bps to close at 3.78% and the US 2-year government bond yield fell by 28bps to 3.64%.

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Market Commentary: August 2024

Tue, 03 Sep 2024 02:58:11 GMT

In early August markets were volatile as almost simultaneously the Bank of Japan hiked interest rates at the same time as US employment data was released showing that payrolls softened. This led to the Japanese currency strengthening versus the US Dollar which in turn saw Japanese equity markets fall by over 20% in a day and US technology stocks sell off as the unwinding of the infamous “carry trade” occurred. However, by month end markets were little changed as fears of a massive unwinding of the carry trade dissipated.

What is the carry trade and why is it important? Effectively the carry trade is a decades long phenomenon whereby investors borrow in a low yielding currency (i.e. the Japanese Yen which has yielded almost 0% since 2000) and invest in higher yielding assets and/or equities. When the Yen strengthened as quickly as it did in early August some investors were forced to repay their borrowings in Yen by selling the assets that had been bought with the cheap currency.

Whilst the unwinding of the carry trade has the propensity to dislocate asset markets, the extent of how much needs to be unwound (if it at all needs to be unwound) is up for debate. What was witnessed within markets in August was that buyers were willing to step in and purchase assets that were sold off resulting in a rather benign month in terms of end returns.

US inflation data fell to an annulised rate at the end of July of 2.9% which led to the US Federal Reserve Chair claiming that the “time has come” to start cutting US interest rates, potentially by up to 0.5% when the FED meets on the 18-19 ^th September.

In Australia the unemployment rate rose to 4.2% in July. Importantly, this increase in unemployment was due to a record high participation rate of 67.1% indicating that there is a high number of people in jobs and looking to find jobs. The RBA held interest rates at 4.35% in August.

Australian large cap equities rose by 0.7% with very few surprises in the August reporting season. Unhedged Global equities were negative in the month (-1.2%), mainly due to the weaker US Dollar as investors priced in an increased probability of a cut to the US Fed Funds rate next month. Currency hedged global equities rose by +1.8% as the Australian dollar strengthened versus the US Dollar by 2 cents to close the month buying US$0.6765

The Australian 10-year government bond yield fell by 15bps to 3.97% and the Australian 2-year government bond yield fell by 20bps to 3.67%. The US 10-year government bond yield fell by 13bps to close at 3.90% and the US 2-year government bond yield fell by 34bps to 3.92%.

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Market Commentary: July 2024

Mon, 05 Aug 2024 01:55:39 GMT

Australian markets were influenced in July by a slight softening in inflation data that saw bond markets go from pricing in a potential rate hike at the next RBA meeting (5 ^th - 6 ^th August) to a potential rate cut by February. This lifted Australian equites to new highs and also saw bond yields fall (prices increase).

Australia’s annual headline inflation data whilst it rose to 3.8% in the June quarter (up from 3.6% in the March quarter), the core inflation number (a key focus of the RBA) fell from an annualised rate of 4.0% to 3.9% insinuating that the RBA cash hikes may have done their job.

Chinese growth ambitions softened in the month with retail sales falling due to the knock-on negative wealth effect from lower property prices and low wage growth. China still has ambitions of a 5% growth target for 2024 however the current stimulus of infrastructure investment and more recently a cut in the short- and long-term interest rates are not having the desired impact.

Australian large cap equities rose by 4.2% with strong returns from the majority of sectors. Materials and Energy were negative for the month as global growth, and particularly Chinese growth, softened lowering the prices of key commodities.

Global equities were positive in the month, with unhedged global equities up 4.0%, however many of the mega cap tech companies that have dominated the returns over the last year were mostly negative as investors used softer outlooks and potentially stretched valuations for some of these companies to rotate away and invest into the previously out of favour sectors.

The Australian 10-year government bond yield fell by 20bps to 4.12% and the Australian 2-year government bond yield fell by 29bps to 3.88%. The US 10-year government bond yield fell by 37bps to close at 4.03% and the US 2-year government bond yield fell by 49bps to 4.26%.

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Market Commentary: June 2024

Thu, 04 Jul 2024 22:27:18 GMT

Australian inflation data in May came in at an annualised rate of 4.0% which was slightly ahead of expectations and moved up from an annualized rate of 3.6% in the 12 months to April 2024. The stronger than expected CPI quashed hopes of a cut in the Reserve Bank of Australia (RBA) cash rate in the next few months and increased the probability the RBA may need to raise rates at its August meeting.

Australian large cap equities rose by 1.2% led by the Financials and Consumer Staples sectors. US equities were again strong led as the Artificial Intelligence thematic continued to resonate with investors and propelled NVIDIA to become the world’s largest listed company with a market capitalisation that breached the US$3 trillion level. The European Central Bank (ECB) reduced its key deposit rate by 0.25% to 3.7% in June, the first cut to rates since 2019. Similarly, the Bank of Canada reduced its overnight rate to 4.75% from 5.0% in June which was the first cut since March 2020. Hedged global equities rose by 2.29% whilst unhedged global equities rose by 1.61%, the Australian dollar strengthened by 0.3% in June buying US$0.6670.

The Australian 10-year government bond yield fell by 10bps to 4.31% whilst the Australian 2-year government bond yield rose by 4 bps to 4.16%. The US 10-year government bond yield fell by 10bps to close at 4.40% and the US 2-year government bond yield fell by 12 bps to 4.75%.

In June US inflation for the year to May was released with the annual rate of inflation falling to 3.3% (down from 3.4% the previous month) which is still much higher than the US Federal Reserve’s targeted 2% inflation rate. US bond yields responded favourably to the improved inflation data over the month.

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Market Commentary: May 2024

Wed, 05 Jun 2024 05:03:24 GMT

In May US inflation for the year to April was released with the annual rate of inflation falling to 3.4% (down from 3.5% the previous month) which is still much higher than the US Federal Reserve’s targeted 2% inflation rate. Despite the higher inflation print bond yields, or to put it another way, the expected future cash rates fell assisting US equity valuations.

Australian inflation data in April came in at an annualised rate of 3.6% which was slightly ahead of expectations. Also released in April by the Australian Bureau of Statistics was the unemployment rate which rose slightly in April to 4.1%. These data prints have led the market to believe that future cash rate expectations are an accurate assessment of risks and rewards to the Australian economy i.e. the RBA is unlikely to cut rates soon and bond yields were fairly static in the month.

Australian large cap equities rose by 1.0% led by the Information and Technology and Utilities sector. Further effervescence in Artificial Intelligence (AI) led by strong earnings reports helped lift US large cap technology names. The expectation that the European Central Bank (ECB) will cut rates led to European equities posting strong returns led by the financial and real estate sectors. Hedged global equities rose by 4.0% whilst unhedged global equities rose by 2.0%, the Australian dollar strengthened by 1.4% in April buying US$0.6653.

There was little change to Australian bond yields, the Australian 10-year government bond yield fell by 1bp to 4.41% whilst the Australian 2-year government bond yield rose by 2bps to 4.12%. The US 10-year government bond yield fell by 19bps to close at 4.50% and the US 2-year government bond yield fell by 18bps to 4.87%.

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Market Commentary: March 2024

Fri, 05 Apr 2024 00:01:53 GMT

In March equities moved higher and many markets continued making new all-time highs as bond yields fell slightly driven by the further expectation that central bank rate cuts are due to occur in 2024. However, the Bank of England, the European Central Bank and the US Federal Reserve are yet to cut rates after their recent tightening cycles.

The Bank of Japan (BOJ) raised rates in March which is their first rate hike in 17 years and they have finally moved away from negative interest rates. Inflation has exceeded the BOJ’s 2% target over the year. The BOJ statement was “dovish” in its tone and markets shrugged off the rise to a cash rate of 0-0.1%. Conversely, the Swiss National Bank was the first “G7” (a group of seven advanced industrial economies) central bank to cut rates with a reduction of 0.25% to 1.50%.

The US Federal Reserve (FED) held rates steady in March. However, they did slightly raise their growth and inflation expectations for 2024. Despite the increase in inflation and growth expectations FED members are still forecasting three rate cuts in 2024.

The RBA met on the 19th March and left the cash rate unchanged at 4.35%. The RBA noted that “while recent data indicate that inflation is easing, it remains high. The Board expects that it will be some time yet before inflation is sustainably in the target range. The path of interest rates that will best ensure that inflation returns to target in a reasonable timeframe remains uncertain and the Board is not ruling anything in or out”.

Australian large cap Equities rose by 3.1%, the only sector that didn’t advance was Communication Services (-0.6%). Australian Real Estate Investment Trusts (A-REITs) rose by 9.7% and Energy (+5.3%) and Utilities (+4.8%) also performed well. Hedged global equities rose by 3.4% whilst unhedged global equities rose by 3.0%, the Australian dollar was relatively flat in March buying US$0.6521. One dynamic seen in markets in March was small and midcap companies, that over the last 12 months have underperformed, outperformed large caps - the belief that a recession will be avoided, funding costs will reduce and profit taking in the large cap names that have done well assisted this cohort of stocks.

The Australian 10-year government bond yield decreased by 15bps to 3.99% and the 2-year government bond yield decreased by 6bps to 3.68%. The US 10-year government bond yield fell by 5bps to close at 4.21% and the US 2-year government bond yield fell by 2bps to 4.63%.year government bond yield rose by 22bps to close at 4.25% and the US 2-year government bond yield rose by 43bps to 4.65%.

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Market Commentary: February 2024

Tue, 12 Mar 2024 03:31:01 GMT

In February as per in January the US and Australian equity markets continued to move higher and achieve further new all-time highs. During the month US inflation fell to 3.1% annually from 3.4% driven by a decline in petrol prices. Offsetting lower petrol prices were higher housing and food costs. It’s worth noting that Core Inflation (which excludes volatile items such as food and energy) was flat at 3.9% annually. Australian inflation was reported late in February and came in at 3.4% annually, the same level as the prior month. The conclusion from these data prints is that whilst inflation is to a degree contained, there’s still a way to go before inflation is back between 2-3%. Longer dated bond yields rose in the month reflecting this dynamic.

The RBA kept the cash rate on hold in February at 4.35%. The US Federal Reserve didn’t meet in February. Investor focus remains on how many rate cuts will occur throughout 2024 and 2025 and potential opportunities in bonds as markets reflect these changes. As an aside the RBA will no longer meet 11 times a year opting for eight times a year with the meeting held over two days, the next meeting is scheduled for March 18 ^th -19 ^th .

Australian large cap Equities rose by 0.9% driven by the Information Technology (up 19.5%) and Consumer Discretionary (up 9.2%) stocks with the Materials and Energy sectors the laggards falling by 6.0% and 5.0% respectively. Hedged global equities rose by 4.7% whilst unhedged global equities rose by 5.9%, as the Australian dollar weakened by 1% in the month to US$0.6496. US equities were the standout (+5.3% in USD terms) as some of the larger technology companies released earnings and outlook statements that re-ignited investor fervour for those companies exposed to the Artificial Intelligence theme.

The Australian 10-year government bond yield increased by 8bps to 4.15% and the 2-year government bond yield decreased by 1.5bps to 3.74%. The US 10-year government bond yield rose by 22bps to close at 4.25% and the US 2-year government bond yield rose by 43bps to 4.65%.

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Market Commentary: January 2024

Wed, 07 Feb 2024 22:28:00 GMT

In January the US and Australian equity markets achieved new all-time highs delivering returns for the 12 months to 31st January in their local currencies of 20% and 7% respectively. US equities were lifted by the strength of the “Magnificent 7” labelled stocks being Microsoft, Meta Platforms, Tesla, Apple, Alphabet, Amazon, and NVIDIA. The rally in equities was driven by cooling inflation coupled with the expectation that a hard landing, i.e. a recession, will be avoided and that cash rate reductions will start to occur soon. Therefore, risks to equity returns going forward have lessened. Bond yields didn’t move significantly in January noting that in December yields fell significantly reflecting the future potential cash rate reductions due in 2024 and 2025.

The US Federal Reserve (FED) met in January and elected to maintain its current 5.25-5.5% cash rate setting. Despite low inflation in the US employment is still very strong. The market is expecting lower cash rates in 2024, however the FED needs to ensure that they do not create a second wave of higher inflation that will be even harder to tame. At the end of January the Australian Bureau of Statistics reported that inflation in Australia for the December 2023 quarter rose 0.6% and 4.1% annually. The Reserve Bank of Australia (RBA) did not meet in January.

Australian large cap Equities rose by 1.1% driven by the Energy sector and Financials (both up ~5%) whilst the Material sector fell by ~5%). Hedged global equities rose by 1.8% whilst unhedged global equities rose by 4.5%, as the Australian dollar weakened by 4% in the month to US$0.6565.

The Australian 10-year government bond yield increased by 12bps to 4.07% and the 2-year government bond yield increased by 4bps to 3.75%. The US 10-year government bond yield rose by 16bps to close at 4.04% and the US 2-year government bond yield fell by 4bps to 4.21%.

Key Developments Post Month-End

The RBA met on the 6th February and elected to retain the current cash rate at 4.35% noting that "While there are encouraging signs, the economic outlook is uncertain and the Board remains highly attentive to inflation risks. The central forecasts are for inflation to return to the target range of 2-3 per cent in 2025, and to the midpoint in 2026".

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THIS IS A PUBLICATION OF PERSONAL FINANCIAL SERVICES LIMITED ABN 26 098 725 145 (AUPFS). ANY ADVICE IN THIS ARTICLE IS GENERAL ADVICE ONLY AND DOES NOT TAKE INTO ACCOUNT THE OBJECTIVES, FINANCIAL SITUATION OR NEEDS OF ANY PARTICULAR PERSON. IT DOES NOT REPRESENT LEGAL, TAX OR PERSONAL ADVICE AND SHOULD NOT BE RELIED ON AS SUCH. YOU SHOULD OBTAIN FINANCIAL ADVICE RELEVANT TO YOUR CIRCUMSTANCES BEFORE MAKING PRODUCT DECISIONS. WHERE APPROPRIATE, SEEK PROFESSIONAL ADVICE FROM A FINANCIAL ADVISER. WHERE A PARTICULAR FINANCIAL PRODUCT IS MENTIONED, YOU SHOULD CONSIDER THE PRODUCT DISCLOSURE STATEMENT BEFORE MAKING ANY DECISIONS IN RELATION TO THE PRODUCT AND WE MAKE NO GUARANTEES REGARDING FUTURE PERFORMANCE OR IN RELATION TO ANY PARTICULAR OUTCOME. WHILST EVERY CARE HAS BEEN TAKEN IN THE PREPARATION OF THIS INFORMATION, IT MAY NOT REMAIN CURRENT AFTER THE DATE OF PUBLICATION ANDAUSTRALIAN UNITY PERSONAL FINANCIAL SERVICES LTD (AUPFS) AND ITS RELATED BODIES CORPORATE MAKE NO REPRESENTATION AS TO ITS ACCURACY OR COMPLETENESS.

Market Commentary: December 2023

Wed, 10 Jan 2024 04:18:33 GMT

In December bond yields continued their retreat (prices increased) which in-turn caused growth asset prices to also increase further. This rapid change in direction of bond yields over the last two months has helped to deliver a 5% return in passive fixed income investments for the year and has also seen strong gains from growth assets with Australian equities up ~12% and International equities (both currency hedged and unhedged) up over 20% in the last 12 months.

Both the Reserve Bank of Australia (RBA) and the US Federal Reserve (FED) kept interest rates on hold in December at 4.35% and 5.25-5.50% respectively. However, with US inflation now running at an annualised rate of 2% in the third quarter (down from 4% at the start of the year), members of the FED indicated that at least three rate cuts were on the cards for 2024 and a further four cuts penciled in for 2025 causing bond yields to rally.

Australia’s unemployment rate increased ever so slightly in November to 3.9%. The increase in the unemployment rate was due to more people seeking work which led to a record high participation rate – something the RBA will be keen to understand better before they consider a potential cash rate cut.

Australian large cap Equities rose by 7.2% with all sectors positive. Real Estate and Healthcare where the best performing sectors delivering 11% and 9% respectively for the month. Hedged global equities rose by 3.9% whilst unhedged global equities rose by 1.8%, as the Australian dollar strengthened by 3% in the month to US$0.6812.

The Australian 10-year government bond yield decreased by 46bps to 3.96% and the 2-year government bond yield decreased by 40bps to 3.71%. The US 10-year government bond yield fell by 45bps to close at 3.88% and the US 2-year government bond yield decreased by 43bps to 4.25%.

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Market Commentary: November 2023

Thu, 14 Dec 2023 05:09:47 GMT

November saw a large reduction in bond yields as the market took a better-than-expected US inflation print to conclude that the US Federal Reserve has beaten inflation, are done with further rate hikes and that a pivot (cash rate cuts) are on the cards for early 2024. The result of this change in belief saw a rally in growth assets, in particular bond proxies such as listed real estate and infrastructure, and the US Dollar weakened.

US inflation year on year to October slowed from 3.3% to 3.2% which triggered a rally in bond yields and equities- this was the total opposite of what happened in October when US GDP was strong, and the market reacted by pricing in a higher for longer cash rate outlook with yields rising and equities selling off. The best example of this market volatility over the last two months can be seen in Australian listed real estate trusts (AREITs) whose prices were down 5.8% in

October but rallied 11.0% in November.

Australian inflation fell in October to an annual pace of 4.9%. It was the first time in almost two years that inflation has fallen below 5%, and much softer than the figure of 5.6% for the year to September. With a cash rate at 4.35% and inflation running at an annualized rate 4.9% monetary policy would appear accommodative. However, the rate of change indicates inflation may be peaking and therefore the RBA can be less hawkish on their cash rate outlook.

Australian large cap Equities rose by 4.8% with Healthcare the standout returning 11.7% and the Energy sector the weakest falling 7.4% as the oil price fell in the month. Hedged global equities rose by 8.0% whilst unhedged global equities rose by 4.4%, as the Australian dollar strengthened by 4% over the month to US$0.6605.

The Australian 10-year government bond yield decreased by 51bps to 4.41% and the 2-year government bond yield decreased by 35bps to 4.11%. The US 10-year government bond yield fell by 60bps to close at 4.33% and the US 2-year government bond yield decreased by 41bps to 4.68%.

Key Developments Post Month-End

The RBA met on 5th December and decided to keep the cash rate at 4.35% The RBA noted that: “Whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks. In making its decisions, the Board will continue to pay close attention to developments in the global economy, trends in domestic demand, and the outlook for inflation and the labour market”.

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Market Commentary: October 2023

Wed, 08 Nov 2023 03:15:32 GMT

October was marred by the start of the Israel-Gaza conflict with the devastating and continuing loss of lives for those in and around the conflict zone. This conflict currently shows no signs of abating and, coupled with the ongoing Russia/Ukraine conflict, is impacting investors’ confidence with investors finding haven in assets such as the US Dollar and gold with the latter briefly rising above the key US$2,000/oz level.

The US third quarter Gross Domestic Product was higher than expected, expanding at an annual rate of 4.9% due to increased consumer and government spending. This surge in production activity saw US bond yields lift higher as markets react to the “higher for longer” cash rate rhetoric. In Australia, the resilience of consumers to higher cash rates saw the quarterly inflation print lifting to 1.2% in July-September (annualised at 5.4%), giving the Reserve Bank of Australia the green light for a Melbourne Cup Day rate hike after being on hold for the last four months.

Growth assets sold off in the month due to the uncertainty around the Israel-Gaza conflict coupled with the further rise in bond yields as economies continue to shrug off the rising interest rate environment, further testing central bankers’ resolve. Australian large cap Equities fell by 3.6% with only the Utilities sector in the black. US reporting season had no major surprises however future guidance was a little weaker than anticipated. Hedged global equities fell by 2.7% whilst unhedged global equities declined 1.0%, as the Australian dollar declined by 1.5% over the month to US$0.6337.

Australian Real Estate Investment Trusts (AREITs) declined by 5.8% due to their valuations being impacted rising bond yields.

The Australian 10-year government bond yield increased by 44bps to 4.93% and the 2-year government bond yield increased by 38bps to 4.46%. The US 10-year government bond yield rose by 36bps to close at 4.93% and the US 2-year government bond yield increased by 4bps to 5.08%.

Key Developments Post Month-End

The RBA met on 7th November and decided to increase the cash rate by 0.25% to 4.35% with the market also pricing in a chance of another rise 0f 0.25% in December.

The RBA noted that “inflation in Australia has passed its peak but is still too high and is proving more persistent than expected a few months ago. The latest reading on CPI inflation indicates that while goods price inflation has eased further, the prices of many services are continuing to rise briskly. While the central forecast is for CPI inflation to continue to decline, progress looks to be slower than earlier expected”.

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THIS IS A PUBLICATION OF AUSTRALIAN UNITY PERSONAL FINANCIAL SERVICES LIMITED ABN 26 098 725 145 (AUPFS). ANY ADVICE IN THIS ARTICLE IS GENERAL ADVICE ONLY AND DOES NOT TAKE INTO ACCOUNT THE OBJECTIVES, FINANCIAL SITUATION OR NEEDS OF ANY PARTICULAR PERSON. IT DOES NOT REPRESENT LEGAL, TAX OR PERSONAL ADVICE AND SHOULD NOT BE RELIED ON AS SUCH. YOU SHOULD OBTAIN FINANCIAL ADVICE RELEVANT TO YOUR CIRCUMSTANCES BEFORE MAKING PRODUCT DECISIONS. WHERE APPROPRIATE, SEEK PROFESSIONAL ADVICE FROM A FINANCIAL ADVISER. WHERE A PARTICULAR FINANCIAL PRODUCT IS MENTIONED, YOU SHOULD CONSIDER THE PRODUCT DISCLOSURE STATEMENT BEFORE MAKING ANY DECISIONS IN RELATION TO THE PRODUCT AND WE MAKE NO GUARANTEES REGARDING FUTURE PERFORMANCE OR IN RELATION TO ANY PARTICULAR OUTCOME. WHILST EVERY CARE HAS BEEN TAKEN IN THE PREPARATION OF THIS INFORMATION, IT MAY NOT REMAIN CURRENT AFTER THE DATE OF PUBLICATION ANDAUSTRALIAN UNITY PERSONAL FINANCIAL SERVICES LTD (AUPFS) AND ITS RELATED BODIES CORPORATE MAKE NO REPRESENTATION AS TO ITS ACCURACY OR COMPLETENESS.

Research Insights: Israel – Gaza (Palestine) conflict

Tue, 31 Oct 2023 21:38:49 GMT

Research Insights: Israel – Gaza (Palestine) conflict

Background

The historic dispute of middle eastern territories between Israel and the State of Palestine became destructive on October 7th as the Palestinian militant group, Hamas, launched what has been labelled as a “terrorist attack” on Israel resulting in more than 1,400 Israelis being killed. In addition, Hamas took an estimated 230 Israeli soldiers and civilians hostage. Not surprisingly, an ongoing military retaliation against Hamas has ensued mainly involving air strikes against Hamas targets. The situation has been further complicated by the involvement of Lebanese Shia Islamist political party and militant group, Hezbollah. Both Hamas and Hezbollah are funded by Iran which has incentivized the U.S. to send troops to the region in a show of support for Israel and the US has been involved in bombings of facilities used by Iran’s Islamic Revolutionary Guards Corps and other Iranian proxies in neighboring Syria.

On the weekend the conflict escalated with Israel commencing a ground war in Gaza, the largest city in the State of Palestine. Unfortunately, as the conflict escalates the tragic loss of civilian lives is also escalating. The loss of basic needs such as power, water and food is further exacerbating the hardship as humanitarian aid to Gaza is being stymied by border access and a lack of safe access to impacted areas.

Implications

There are many potential implications resulting from this conflict notwithstanding the Russian-Ukraine war is still ongoing after 20 months, all of which is creating an unstable global environment. The degree to which the Israel-Gaza conflict diverts attention away from Russia’s invasion of Ukraine is uncertain but does have the potential to test the resolve of those nations supporting Ukraine. Providing support in various forms (military presence, funding, troops, military hardware) to both Ukraine and Israel potentially leads to governments having to ration support as the public interest in international conflicts wanes, particularly if cost of living pressures mount and economic growth slows.

Security of supply issues for oil are increasing given the uncertainty of how the Israel-Gaza conflict plays out. As a result, the price of oil has increased and has the potential to move even higher. A sustained increase in the price of oil will have global implications such as increased costs, higher inflation and ultimately higher cash rates that could stall economic growth.

During times of heightened geo-political uncertainty investors tend to adopt a more cautious, “risk-off” stance. Profit taking in growth assets such as equities and property occurs, and investors are happy to hold more cash to take advantage if investment markets move lower. US dollars and gold, typical investment havens, have appreciated in value due to increased investors interest.

Conclusion

Over the last 18 months investors have had to grapple with a “higher for longer” outlook for interest rates which has seen implied investment valuations change. The Israel-Gaza conflict is likely to add to volatility in investment markets in the near term and in October investment markets have sold off as shown in the table below.

It is normal to feel heightened levels of anxiety during periods of increased geo-political conflict. However, the longer-term strategy of having a well-diversified and liquid portfolio of assets is something investors should focus on.

These volatile periods in investment markets have the potential to provide significant misalignments in asset valuations and also provide opportunities to take advantages of such misalignments. However, the environment has the potential for investors to make emotion-based decisions in the short-term which negatively impact their potential returns over the longer term. Investors should remain patient and refrain from knee-jerk, emotion-based changes to asset allocation.

This information has been produced by Australian Unity Personal Financial Services Ltd (‘AUPFS’) ABN 26 098 725 145, of 271 Spring Street, Melbourne, VIC 3000, AFSL. Any advice in this document is general advice only and does not take into account the objectives, financial situation or needs of any particular person. It does not represent legal, tax, or personal advice and should not be relied on as such. You should obtain financial advice relevant to your circumstances before making investment decisions. Nothing in this document represents an offer or solicitation in relation to securities or investments in any jurisdiction. Where a particular financial product is mentioned, you should consider the Product Disclosure Statement before making any decisions in relation to the product. A PDS can be obtained from your financial adviser or directly from the product issuer. We make no guarantees regarding future performance or in relation to any particular outcome. Past performance is not indicative of future performance. Whilst every care has been taken in the preparation of this information, it may not remain current after the date of publication and AUPFS and its related bodies corporate make no representation as to its accuracy or completeness. Published: November 2023 © Copyright 2023

Market Commentary: August 2023

Wed, 06 Sep 2023 01:04:13 GMT

Equity markets were weaker in the month as signs of slower economic growth, both internationally and domestically, weighed on investors’ minds. The combination of volatile bond yields, economic data indicating softer economic growth, Chinese property concerns and a mixed financial reporting season all contributed to equity markets falling in August.

The US employment data showed that non-farm payrolls (a widely accepted measure of US labor strength) increased which in turn saw the unemployment rate drop to decades low of 3.5%. However, later on in the month US job openings fell to their lowest level in 2.5 years and the Job Openings and Labour Turnover Survey report (JOLTS) showed that the number of people quitting their jobs also fell indicating some fracturing within the labour market.

In China a continuation of their property crisis saw their largest private lender report a first half loss of US$6.7bn, this coupled with falling exports and weaker consumer spending prompted the Chinese central bank to lower their cash rate. Expectations are for further rate cuts and additional stimulus to help restore confidence, especially when you consider that youth unemployment in urban areas was at 20% in June, a data point that China omitted from publishing in July.

Australian annual inflation in July fell from 5.4% to 4.9% which implies that the RBA’s decision to hold rates at 4.10% in August was well considered. Cooling inflation coupled with a slowing Chinese economy and the interest rate differential between Australia and the US saw the Australian dollar down 3.8% against the US dollar over the month buying US$0.6470 at the end of the month.

Australian Equities fell by 0.70% with only Consumer Discretionary, Real Estate and Energy in the black. Hedged global equities fell by -1.9% but the significantly weaker Australian dollar led to a 1.6% gain for unhedged global equity investors

The Australian 10-year government bond yield fell by 3bps to 4.03% and the 2-year government bond yield fell by 14bps to 3.79%. The US 10-year government bond yield rose by 15bps to close at 4.11% and the US 2-year government bond yield fell by 1bps to 4.87%.

Key Developments Post Month-End

The RBA met on 5th September and decided to leave the current cash rate at 4.10% noting that “the recent data are consistent with inflation returning to the 2–3 per cent target range over the forecast horizon and with output and employment continuing to grow. Inflation is coming down, the labour market remains strong and the economy is operating at a high level of capacity utilisation, although growth has slowed".

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Market Commentary: July 2023

Tue, 08 Aug 2023 23:17:32 GMT

Investment markets were up in July due to optimism regarding evidence of softening inflation. However, this didn’t stop some central banks from tightening monetary policy further. The US Federal Reserve raised interest rates in July to a range of 5.25-5.50% along with the European Central Bank raising rates to 3.75% the highest level since the year 2000. The Reserve Bank of Australia kept rates on hold in July.

US equities were one of the best performing markets and were buoyed by earnings that met the previously lowered analyst expectations and also helped by stronger than expected Gross Domestic Product (GDP) that recorded a 2.4% annual growth rate for the June quarter, up strongly from economists’ predictions. Globally the energy sector benefitted from strong economic data and production cuts from the group Organization of the Petroleum Exporting Countries Plus (OPEC+).

Australian Equities gained 2.8% led by the energy sector that was up 8.8% with the Healthcare sector being negative for the month along with Consumer Staples. Currency-hedged international equities were up 2.8% with both Asian and European equities contributing to global equity returns. Unhedged international equities gained 2.1% and the Australian dollar was slightly up (+0.8%) against the US dollar buying US$0.6717 at the end of the month.

The Australian 10-year government bond yield rose by 4bps to 4.06% and the 2-year government bond yield fell by 28bps to 3.94%. The US 10-year government bond yield rose by 12bps to close at 3.96% and the US 2-year government bond yield fell by 2bps to 4.88%.

Key Developments Post Month-End

The RBA met on 1st August and decided to leave the current cash rate at 4.10% noting that “the higher interest rates are working to establish a more sustainable balance between supply and demand in the economy and will continue to do so. In light of this and the uncertainty surrounding the economic outlook, the Board again decided to hold interest rates steady this month”.

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Market Commentary: June 2023

Thu, 06 Jul 2023 03:15:03 GMT

In June investment markets brushed off the potential for further interest rate hikes as economies appear to be weathering the higher inflation and higher cash rate regime much better than central bankers had anticipated.

The US Federal Reserve kept rates on hold in June as inflation for the year to the end of May printed 4.0%, down 0.9% for the year ending the prior month. Despite the US FED Funds rate increasing strongly over last 12 months economic growth remains resilient with US GDP growing at an annualized rate of 2.0% to the end of March 2023, revised up from a rate of 1.3%.

The Bank of England raised the UK cash rate by 0.5% to 5.0% as core inflation for the year to May came in at 7.1% (up from 6.8% in April). The European Central Bank delivered a 0.25% rate hike in June which sees the European cash rate lift to 3.5%.

The RBA met on 6 ^th June and elected to increase the cash rate by 0.25% to 4.10%. Australian unemployment fell in May to 3.6% with jobs gained well ahead of expectations. Persistently strong employment data coupled with strong retail sales in May (with discretionary spending and dining out strong) will concern the RBA as the rate hikes over the last 12 months are not having their desired impact yet. The Australian Bureau of Statistics’ May monthly inflation indicator came in at an annualised rate of 5.6% which was a decline from April’s print of 6.8%.

US equities were up strongly in the month (S&P500 +6.5%) which was driven by a handful of mega-cap stocks. The Australian share market increased over the month (+1.9%) led by Materials and Information Technology stocks whereas the Healthcare sector was one of the few negative sectors. Currency-hedged international equities were up 5.6%, assisted by the aforementioned gains in US equities, and unhedged international equities gained 3.1%, blunted by the Australian dollar which increased (+2.5%) against the US dollar, buying US$0.6664 at the end of the month.

The Australian 10-year government bond yield rose by 42bps to 4.02% and the 2-year government bond yield rose by 67bps to 4.22%. The US 10-year government bond yield rose by 19bps to close at 3.84% and the US 2-year government bond yield rose by 49bps to 4.90.

Key Developments Post Month-End

The RBA met on 4 ^th July and elected to retain the current cash rate at 4.10% noting that “interest rates have been increased by 4 percentage points since May last year. The higher interest rates are working to establish a more sustainable balance between supply and demand in the economy and will continue to do so. In light of this and the uncertainty surrounding the economic outlook, the Board decided to hold interest rates steady this month. This will provide some time to assess the impact of the increase in interest rates to date and the economic outlook" .

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A beginner's guide to buying property through your super

Thu, 08 Jun 2023 06:33:09 GMT

A beginner's guide to buying property through your super

By Kellie Cowie

Published on February 1, 2023

Hearing from people that they've used their superannuation money to buy a property might leave you feeling like you are missing out on some property market 'magic trick'. So, how does it work?

One of the growing ways people manage their superannuation is by moving their money from industry or retail superannuation funds that manage your investment for you into a self-managed super fund (SMSF) which provides freedom to control how retirement savings are invested.

This option is only for some as it can be an expensive, time-consuming and hands-on approach to managing your superannuation where the onus falls on you to ensure your investments comply with various superannuation and taxation laws.

How it works

SMSF lending allows you to combine your existing superannuation funds with a loan to purchase an investment property. This can be either a residential property (house or apartment) or commercial premises (e.g. warehouse or office space).

When planning what type of property to buy and whom you plan to rent it to, the ATO stipulates a strict checklist of conditions to determine if a particular property is suitable and whether the purchase transaction can be completed compliantly.

It is important to remember that your SMSF must fulfill the sole purpose test to be eligible for super fund tax concessions, meaning it cannot be used for any purpose besides providing a retirement benefit to the members. The ATO advises that there can be civil and criminal penalties if these conditions are not correctly applied.

SMSF lending

Not all lenders offer products suitable for SMSF lending, so professional assistance can help you find the right loan to meet your needs. Interest rates and application fees on SMSF loans can vary greatly and be higher when compared to other types of residential home loans.

The type of loan offered is called a limited recourse borrowing arrangement (LRBA). An LRBA protects the SMSF as a whole by safeguarding other assets held by the SMSF from the lender if the loan defaults.

Costs to consider

Establishment costs - the initial costs of setting up all of the required legal entities, purchasing the property, and applying for a home loan can be expensive and need to be considered.

Ongoing cash flow - you must have enough cash flowing into your SMSF to cover ongoing expenses like loan repayments and other property costs, including insurance, council rates and property management.

Paying out the loan - once the home loan has been paid off in full (up to 30 years after the property purchase, depending on the loan term), the legal title of the property needs to be transferred out of the holding trust (known as a Bare Trust) and into the SMSF, which may result in government taxes like stamp duty being payable (again), as it is classified as a sale of the property.

Getting started

So, you understand how it works and have decided you would like to explore your options. The first step is to build a team to guide you through the process.

It would be best if you had some or all of the following:

An accountant to crunch the numbers and ensure tax laws are considered;

A financial planner to create a holistic investment strategy for your financial future. They'll take into consideration your overall financial needs and objectives;

A legal professional to create the required legal entities and to navigate the legalities for you;

A mortgage professional to guide you to the right SMSF lender's product for your needs. They are also invaluable team members in helping you to successfully complete the application process through to the settlement of your new property and beyond.

Once you have established your dream team, it's time to set up the required SMSF entities. Then you can crunch the numbers and apply for home loan pre-approval (so you know how much you can spend on a property). Then it's time to go shopping.

To read the original article, please visit A beginner's guide to buying property through your super | Money magazine

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Market Commentary: May 2023

Thu, 08 Jun 2023 05:58:04 GMT

In May investment markets fretted over the US Government’s debt ceiling negotiations as Democrats and Republicans aimed to strike a deal that would suspend the debt-issuance cap for 2 years to avoid a default. Any default would have significant ramifications for the US dollar and the credit quality of US debt with impacts felt across asset classes.

The RBA surprised markets with a 25bps rate rise, taking the cash rate to 3.85% and driving the Westpac Consumer Sentiment index to a deeply pessimistic reading – down 7.9% to 79.0 (a reading of 100 is neither optimistic nor pessimistic). The US Federal Reserve and European Central Bank also raised policy rates during the month. In contrast to US inflation which cooled to 4.9% for the year to the end of April, Australian inflation rose 6.8% for the same period, up from 6.3% for the year to March, with housing, food and transport components the key drivers.

China’s economic expansion, as measured by the National Bureau of Statistics Purchasing Managers Index, contracted slightly in May following a sharp contraction in the prior month. Commodity prices fell as renewed optimism about Chinese economic growth began to wane.

A surge of enthusiasm in companies linked to Artificial Intelligence (AI) saw the US technology-heavy NASDAQ stock market index gain 7.6% in May. Locally,the Australian share market declined (-2.4%) with Consumer Discretionary, Financials and Consumer Staples stocks impacted most. On the other hand, Information Technology stocks surged, benefiting from enthusiasm regarding AI developments. Currency-hedged international equities were down 0.2% and unhedged international equities gained 1.2% as the Australian dollar declined (-1.7%) against the US dollar, buying US$0.6503 at the close of the month.

The Australian 10-year government bond yield rose by 27bps to 3.61% and the 2-year government bond yield rose by 51bps to 3.55%. The US 10-year government bond yield rose by 22bps to close at 3.64% and the US 2-year government bond yield rose by 40bps to 4.40%.

Key Developments Post Month-End

Lawmakers in the US agreed to a debt ceiling deal in a bipartisan deal laden with compromise.

The RBA met on 6th June and elected to increase the cash rate by 0.25% to 4.10% noting that “this further increase in interest rates is to provide greater confidence that inflation will return to target within a reasonable timeframe."

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Market Commentary: November 2022

Thu, 08 Dec 2022 00:16:01 GMT

Markets enjoyed another month of solid gains in November as weaker than expected US and Australian inflation prints saw investors reconsider the pace of future interest rate hikes by Central Banks.

The prospect of inflation being brought under control in 2023, along with cash rates and bond yields peaking triggered a significant rally in most growth assets, despite a new round of COVID-19 lockdowns in China. Daily new cases of COVID-19 reached a record-high, resulting in up to 400 million Chinese citizens living with restrictions as the country persists with its zero-COVID approach.

During the month, the US Federal Reserve raised interest rates by 75bps to a target rate of 3.75%-4.0% and the RBA raised the cash rate in November by 25bps to 2.85%. RBA Governor Lowe noted in his Monetary Policy Statement that “the Board recognises that monetary policy operates with a lag and that the full effect of the increase in interest rates is yet to be felt in mortgage payments”.

The Australian share market was up 6.7% in November led by the Utilities and Materials sectors. A fall in Australian bond yields aided bond proxies such as AREITs which gained 5.8% for the month. Currency-hedged international equities gained 5.4% while unhedged international equities rose by 2.0%, hindered by a stronger Australian dollar that was up 5.0% in November and now buying US$0.6711. Asian equities (excl Japan) rose double-digits as China eased some quarantining requirements and simplified travel restrictions which may aid economic growth.

The Australian 10-year government bond yield fell by 23bps to 3.53% and the 2-year government bond yield fell by 12 bps to 3.11%. The US 10-year government bond yield decreased by 44bps to close at 3.61% and the US 2-year government bond yield decreased by 17bps to 4.31%.

Key Developments Post Month-End

The RBA raised the cash rate by a further 25bps in December to 3.10% and in its accompanying Statement noted the following:

“The Board expects to increase interest rates further over the period ahead, but it is not on a pre-set course.” “The path to achieving the needed decline in inflation and achieving a soft landing for the economy remains a narrow one.”

“A further increase in inflation is expected over the months ahead, with inflation forecast to peak at around 8 per cent over the year to the December quarter. Inflation is then expected to decline next year due to the ongoing resolution of global supply-side problems, recent declines in some commodity prices and slower growth in demand.”

“The Bank’s central forecast is for CPI inflation to decline over the next couple of years to be a little above 3 per cent over 2024.”

Benchmark Returns

IMPORTANT INFORMATION

Should you switch your home loan to a fixed interest rate product?

emil@rezolveit.com.au (Emil Badenhorst) — Mon, 12 Apr 2021 01:54:19 GMT

Should you switch your home loan to a fixed interest rate product?

With the official cash rate at a historical low and the possibility of further RBA cuts on the horizon, this is possibly the most frequently asked question of professional mortgage brokers today. The question is often focussed on the timing with consumers asking if now is a good time to fix their interest rate or if they should wait and see if the interest rates fall even lower. Saving interest is not necessarily the most important thing to consider if you are thinking about fixing your loan. This article will explain the pros and cons of fixed interest rate loans and the real reasons why you should consider one.

What is a fixed rate home loan?

A fixed rate home loan allows you to lock in an interest rate for a fixed term, which means your loan repayments will remain the same during the fixed term even if variable interest rates should rise. It allows you to plan exactly how much your repayments will be for the life of the fixed term, making budgeting easier. You can usually choose to fix the interest rate on your loan for a term between 1 and 5 years. After this period expires, loan will usually automatically revert to the standard variable rate unless you re-negotiate another fixed term or refinance your loan to another product.

Is switching to a fixed rate product a good interest saving strategy?

The motivation to switch to a fixed interest rate product is primarily to save money in the event of an interest rate rise for some people. These homeowners are looking for ways to save money in the event of an interest rate rise. Their strategy is to go with a variable rate product for now so they can pay the lowest interest possible in the short term and then switch to a fixed interest rate product to keep their interest rate low when interest rates look as though they are going to rise. They are interested in locking in their interest at the lowest possible rate when it is most prudent to do so. The problem with this interest savings strategy is that no one can accurately predict the interest rate movements. This makes it extremely difficult to know when it might be advantageous to switch or if switching will have a beneficial effect on saving interest. To save money on interest by switching your loan to a fixed rate product, variable interest rates would need to rise well above the interest rate you are paying on your fixed rate loan (and fixed rate loans usually have a higher interest rate than variable loans). You also need to consider that if the interest rates should fall during the fixed interest term of your loan then you will be missing out on any interest savings you would have received if your loan was a variable interest loan.

Consider your financial circumstances before making the switch.

Deciding to switch to a fixed interest rate loan should be influenced by other factors other than the possibility of any substantial saving on interest. The point of a fixed interest rate loan Is to assist with budgeting your household expenses more effectively when your finances might be tight. As an added bonus you are temporarily protected from interest rate rises. If interest rates do increase during the fixed interest term of your loan, you will have until the end of this term to determine how you will manage to cover the increased payments after the fixed period expires.

Fixing your loan may not be a good idea if you require flexibility. For example, it may not be a good idea to switch your loan to a fixed interest rate if you are looking to sell your house in the future, if you are wanting to increase your loan or redraw from it, if you are wanting to refinance to access equity or if you are wanting to make extra repayments. Fixed rate home loans usually have sizeable penalties if you need to make any changes or pay off the loan during the fixed term of the loan which could cost you thousands of dollars.

The split option is designed for greater flexibility and a sense of security when it comes to fixed interest rate loans.

Many lenders offer a home loan product that gives you the capacity to split your loan between both the variable and fixed interest rate options. This gives you the advantage of partial protection in the event of interest rate rises but also could offer you facilities like an offset account which would be very beneficial if you are a good saver and the ability to make extra repayments and redraw them if you need to.

It is important to remember that with a split loan, you are still locked into the product for the length of the fixed rate term and if you need to sell your home or repay the fixed portion of your loan early for any reason then you would still be required to pay penalties.

To find out if switching to a fixed interest rate loan is the right move for you, it is a good idea to talk to a professional mortgage broker about your personal financial situation and goals.

Building a New Home

emil@rezolveit.com.au (Emil Badenhorst) — Mon, 12 Apr 2021 01:50:38 GMT

Building a New Home

The freedom of being able to design and build your own new home may be one of the most exiting adventures. You may enjoy the flexibility when it comes to being able to construct your own property to suit your style and the knowledge that everything will be entirely new. Building your new home is a new chapter that comes with a lot of excitement and new memories. Whether you are buying off the plan or doing the build yourself, call us now about finding and securing the right loan for your financial position.

Building your property

It is extremely important to find the right loan when building your home as it can potentially save you a lot of money on interest. Rather than delivering the entire loan amount for the build at once, a construction loan will allow you to borrow in stages as your home is being built. This means that your builder will be paid throughout the construction process. Using this loan type means that you only have to pay interest on the loan amount you have actually used.

Depending on your lender and their criteria, they will usually require council-approved plans and a fixed-price building contract before they will approve your construction loan. A valuation expert will then use these to help them estimate the on-completion value of the property. Once this process has been completed, the lender will then assess the final loan application on whatever is less out of the building contract and the valuation report.

The benefits of construction loans

A construction loan allows you to only pay interest on the actual amount you have drawn as the build is being financed, not the entire loan amount. The lenders valuation expert will usually inspect the progress of the build at certain stages as the build evolves. The lender will then authorise the next draw down on your loan to pay the builder. The biggest benefit of a construction loan is the way your builder is being paid. A construction loan comes with a level of protection as it will prevent the build from falling behind schedule as well as avoiding any issues with the quality of work as the builder won’t be paid until each stage has been completed and inspected.

In some cases lenders may provide a slightly higher interest rate for construction loans, so talk to us to ensure you’re getting the best loan for your needs.

What is ‘buying off-the-plan’

Buying off-the-plan refers to you only being required to pay the deposit up front. It is a term used to describe the scenario where you buy your home from a developer before it has been built. This financial scenario may bot be as simple as buying an established home as there is a large period of time between paying your deposit and final loan settlement. You will also be required to seek advice from a solicitor regarding the details in the contract of your off-the-plan property purchase. This is to ensure that you are on the same page as the developer regarding what is included in the contract before you sign it.

Talk to someone at Geelong Financial Group today

As your local Geelong Mortgage Broker, we are here to explain the processes involved with arranging your finances to build your new home. It is important that you find the most suitable loan for your needs and objectives as there are many important things to consider when building your own home and we are here to help you through every step. You may also be eligible for the First Home Owner Grant (FHOG) when building a new home, or you may qualify for stamp duty concessions or exemptions in some circumstances even if it isn’t your first property purchase.

Planning ahead is the key to success when building a new home as construction loans can be complicated which is why it is a good idea to call us for help. If you are ready to make your new dream home a reality, please call us today on (03) 5229 2048.

Investment Property Refinance Made Easy!

emil@rezolveit.com.au (Emil Badenhorst) — Mon, 12 Apr 2021 01:42:08 GMT

Investment Property Refinance Made Easy!

The clever investor knows that assessing your investments regularly is essential for identifying opportunities to develop wealth. Refinancing your investment property at the right time is vital to a successful strategy. Discuss with us and we will help you decide when it is best to refinance and we will make this an easy process for you.

There are two main reasons to refinance your investment property as explained below.

Refinancing to access your equity could be a good decision if you were wanting to expand your investment portfolio as you could potentially use this equity as a deposit to purchase another property or another kind of investment opportunity. You could also access your equity to renovate your property as it may assist in adding value to your investment property. Increasing the value will fast-track the capital growth and could increase the rental value to increase cash-flow. The other reason you may refinance your investment loan is to change it to a different loan.

When refinancing an investment property, the costs involved with the process are usually tax-deductable. This is inclusive of borrowing expenses, exit fees or penalties. The first five years of owning your investment property usually allow you to claim back borrowing expenses back incrementally and if you refinance within that timeframe you can claim the remaining tax deductions immediately. Your tax accountant will be able to explain the benefits appropriate to your situation or if you don’t have one, we can assist with a referral.

Depending on your investment portfolio you may decide to use multiple lenders. This strategy can be used to avoid cross-collaterisation. This is where you secure a loan against two or more properties instead of one. Cross-collaterisation can be inconvenient when selling your property and risky if property prices should fall. If you use one lender, your properties may default to being cross-collaterised however some investors do prefer this. It depends on your individual financial situations, goals and the size of your investment portfolio whether you may choose to go with one lender or several.

If you have decided to review one of your mortgages you might as well ask us to assess all of your investment loans to ensure they are all up to scratch. You may decide it is time to restructure all your loans or you may decide to refinance some and leave others. We are happy to assist with whichever option you choose. Talking to your financial planner or tax accountant is also a good idea to guarantee that that it is the right strategy for you financially. We’d love to help you find the right finance to fulfil your needs so contact us today to discuss your options.

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