Inflation has remained a prominent concern this month, as the Reserve Bank of Australia (RBA) lifted the cash rate by 50 basis points, smashing the record for the highest single rate rise in 22 years and bringing the cash rate to 0.85%. Further, the RBA has suggested that there may be further rises after every monthly meeting until December, with an expected cash rate of 2.75% at the end of the year.
Banks were fast to act on the rate rise, with many already passing on the rate rise in full to their customers through increased interest rates.
GDP growth slowed to just 0.8% in the March quarter, down from an impressive 3.4% increase in December last year. This is mainly due to the rising living costs faced by households and supply issues caused by the war in Ukraine.
The NSW government delivered their state budget this month, including more than $7.2 billion in cost-of-living measures, including the Premier’s Back to School program and the new Energy Bill Buster Program.
Time to adjust the goal posts
While the new financial year is a line in the sand that is important from a taxation perspective, it can also be a useful point to take a step back and take stock of the bigger picture – your personal and professional goals.
Goals are important from a personal standpoint and essential when it comes to running a successful business. They can provide a clear focus for your efforts, a way to track progress and be a powerful motivator.
Dealing with change
The past couple of years have been a period of profound change, impacting the way we work and live but the reality is there will always be circumstances beyond your control. Your situation is ever evolving, as are your hopes and dreams for your future.
Personal finances and goals
While Australian household financial comfort improved around 3 per cent through the latter half of last year, that may not have been your experience, particularly as the costs of living have steadily increased.i You may be a little behind where you would like to be and wanting to step things up a little or make some adjustments to take into consideration any changes in circumstances. For those whose financial positions have taken a turn for the better, that creates opportunities and it’s worth thinking about what that means for your short-term and longer-term goals.
Even setting the financial side of things aside, it’s important to review whether what you aspire to has shifted. Our values and aspirations change as we move through life and it’s important to check in and see if your goals still resonate as strongly as they once did or whether you need to redefine what you want to work towards.
Goal setting for business
If you run a business, you have made it through ‘interesting times’. Some sectors have prospered while others have been decimated. If it’s been a while since you have thought about your goals in relation to your business, the following tips will help you raise your head above the day-to-day ‘noise’ and adjust your objectives.
Here is a good process to follow which will help you ensure your goals – whether they be personal; or for your business – are still fit for purpose.
Step 1. Review and re-evaluate
The first step is to review your goals, assessing what is REALLY important to you. Reflect on why you set your goals in the first place and make sure they truly reflect your objectives. The goal of building your business to generate a certain amount of revenue may be more about the satisfaction of achieving sustainable growth than a dollar value. Equally, your dreams of early retirement may be more about spending more time with loved ones which you don’t necessarily have to retire to do.
Take into consideration the events of the past 12 months and how they have impacted – positively or negatively – on your progress towards your objectives. If your goals are still as important to you given your present circumstances, think about what it will take to achieve them.
Step 2. Redefine
This is where the real change happens. Allow yourself to redefine what success means to you. That can mean accommodating a change in direction or circumstances; or even letting go of a goal that is no longer relevant or adjusting to accommodate a new goal. It’s important to be realistic about what you can achieve, moving the goal posts does not always mean setting more ambitious goals. It’s fine to pull back a little – particularly if it makes the goal more achievable.
Step 3. Re-engage and commit
The final step after you redefine your goals is to commit to them and fully engage in the goal in order to reap the benefits of the process you have just undertaken. This step can be as simple as breaking your goals down into a series of milestones and creating a process and support structure for achieving them.
In no time at all you will be seeing positive outcomes from your efforts and lining up for that winning kick into your newly aligned goalposts. – GOAL!
The road ahead for shares
Trying to time investment markets is difficult if not impossible at the best of times, let alone now. The war in Ukraine, rising inflation and interest rates and an upcoming federal election have all added to market uncertainty and volatility.
At times like these investors may be tempted to retreat to the ‘’safety” of cash, but that can be costly. Not only is it difficult to time your exit, but you are also likely to miss out on any upswing that follows a dip.
Take Australian shares. Despite COVID and the recent wall of worries on global markets, Aussie shares soared 64 per cent in the two years from the pandemic low in March 2020 to the end of March 2022.i Who would have thought?
So what lies ahead for shares? The recent Federal Budget contained some clues.
The economic outlook
The Budget doesn’t only outline the government’s spending priorities, it provides a snapshot of where Treasury thinks the Australian economy is headed. While forecasts can be wide of the mark, they do influence market behaviour.
Australia’s economic growth is expected to peak at 4.25 per cent this financial year, underpinned by strong company profits, employment growth and surging commodity prices. Our economy is growing at a faster rate than the global average of 3.75 per cent, and ahead of the US and Europe, which helps explain why Australian shares have performed so strongly.ii
However, growth is expected to taper off to 2.5 per cent by 2023-24, as key commodity prices fall from their current giddy heights by the end of September this year.
Commodity prices have jumped on the back of supply chain disruptions during the pandemic and the war in Ukraine. While much depends on the situation in Ukraine, Treasury estimates that prices for iron ore, oil and coal will all drop sharply later this year.
Share market winners and losers
Rising commodity prices have been a boon for Australia’s resources sector and demand should continue while interest rates remain low and global economies recover from their pandemic lows.
Government spending commitments in the recent Budget will also put extra cash in the pockets of households and the market sectors that depend on them. This is good news for companies in the retail sector, from supermarkets to specialty stores selling discretionary items.
Elsewhere, building supplies, construction and property development companies should benefit from the pipeline of big infrastructure projects combined with support for first home buyers and a strong property market.
Increased Budget spending on defence, and a major investment to improve regional telecommunications, should also flow through to listed companies that supply those sectors as well as the big telcos and internet providers. But there are other influences on the horizon for investors to be aware of.
Rising inflation and interest rates
With inflation on the rise in Australia and the rest of the world, central banks are beginning to lift interest rates from their historic lows. Australia’s Reserve Bank has recently raised the official cash rate after 11 1/2 years of no increases.
Global bond markets are already anticipating higher rates, with yields on Australian and US 10-year government bonds jumping to 2.98 per cent and 2.67 per cent respectively.iii
Rising inflation and interest rates can slow economic growth and put a dampener on shares. At the same time, higher interest rates are a cause for celebration for retirees and anyone who depends on income from fixed interest securities and bank deposits. But it’s not that black and white.
While rising interest rates and volatile markets generally constrain returns from shares, some sectors still tend to outperform the market. This includes the banks, because they can charge borrowers more, suppliers and retailers of staples such as food and drink, and healthcare among others.
Putting it all together
In uncertain times when markets are volatile, it’s natural for investors to be a little nervous. But history shows there are investment winners and losers at every point in the economic cycle. At times like these, the best strategy is to have a well-diversified portfolio with a focus on quality.
For share investors, this means quality businesses with stable demand for their goods or services and those able to pass on increased costs to customers.
If you would like to discuss your overall investment strategy don’t hesitate to get in touch.
ii https://budget.gov.au/2022-23/content/bp1/download/bp1_bs-2.pdf
iii https://tradingeconomics.com/united-states/government-bond-yield
Building wealth in diversity
What a difference a year makes. In recent months, Australian shares hit a record high, the Aussie dollar dipped to levels not seen since the GFC and interest rates were cut to historic lows.
Towards the end of 2018, shares were in the doldrums and while experts agreed the Aussie dollar would go lower most tipped the next move in interest rates would be up.
All of which goes to show that when it comes to predicting financial markets, the only sure thing is uncertainty. There’s no avoiding market risk, but it does need to be managed if you want to build enough wealth to live comfortably in retirement and achieve other life goals along the way.
Thankfully, there is a way to reduce the impact of market volatility on your overall investment portfolio. Hint: it’s not by putting all your money in the bank.
Mix it up
The best way to reduce the risk of one bad investment or a downturn in one market decimating your returns is to hold a mix of investments. This is what is referred to as diversification or not putting all your eggs in one basket.
To smooth your returns from year to year and avoid the risks of short-term market volatility, you need a mix of investments from different asset classes.
The difficulty of predicting the market in the short-term was certainly in evidence in the year to June 2019.
Investors who panicked at the end of 2018 and sold their shares would have missed out on the unexpected rebound in global shares.
A year of surprises
Australian shares returned 11 per cent in the year to June 30. Global shares returned 11.9 per cent while US shares returned 16.3 per cent, partly reflecting the fall in the Aussie dollar from US74c to US70c.i
The worst performing asset class in the year to 30 June was Australian residential property, down 6.9 per cent.ii But while the housing market downturn was constantly in the news, good news in other sectors of the property market went largely unnoticed.
The best performing asset class by far in the year to June was Australian listed property, up 19.3 per cent.
The gap in performance between direct residential property and listed property highlight another important aspect of diversification. You also need to diversify within asset classes.
Look beyond your backyard
Where property is concerned, that means investing across a range of property types and geographic locations. By diversifying your property investments, you reduce the risk of short-term price fluctuations in one location which can result in a big loss if you are forced to sell at the bottom of the market.
The same holds true for shares. Many Australians have a share portfolio dominated by the big banks and miners, attracted by their fully franked dividends.
The danger is that investors with a portfolio heavily weighted towards local stocks are not only exposed to a downturn in the bank and resources sectors but also the opportunity cost of not being invested in some of the world’s most dynamic companies.
Time is your friend
Over the last 30 years the top performing asset class was US shares with an average annual return of 10.3 per cent. Australian shares (9.4 per cent) and listed property (9.2 per cent) were not far behind.iii
And then there was cash. In a time of record low interest rates cash in the bank returned 2 per cent in the year to June 30, barely ahead of inflation of 1.6 per cent. The return was better over 30 years (5.6 per cent), but still well behind the pack.
While it’s important to have enough cash on hand for daily living expenses and emergencies, it won’t build long-term wealth.
There’s no telling what the best performing investments will be in the next 12 months, as past performance is not an indicator of future performance. What we can be confident about is that a portfolio containing a mix of investments across and within asset classes will stand the test of time.
If you would like to discuss your overall investment strategy, please give us a call.
i https://static.vgcontent.info/crp/intl/auw/docs/resources/2019_index_chart.pdf?20190730%7C193023
iii https://www.vanguardinvestments.com.au/au/portal/articles/insights/mediacentre/stay-the-course.jsp
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This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information. Investment Performance: Past performance is not a reliable guide to future returns as future returns may differ from and be more or less volatile than past returns.
Authorised Representative No. 1243642 and Bottrell Wealth Pty Ltd is Corporate Authorised Representative No. 1243427 of InterPrac Financial Planning Pty Ltd (AFSL 246638).
