20 April 2023
Can we have boring please?
It sounds like a cliché but there is never a dull moment in markets. Not too long ago most people were unaware of what SVB (Silicon Valley Bank) was. Today everyone is an expert with reams of analysis as to where it all went wrong!
It has been a tumultuous month for markets starting with several small/mid-sized banks in the US shutting down and depositors redeeming their money as questions about the viability of these banks gained momentum. This was topped off with one of the cornerstone establishments of Swiss banking, Credit Suisse, being bought out by UBS to avoid a banking collapse and possible contagion across the global banking sector. The story didn’t end there as Credit Suisse AT1 debt holders (equivalent to Australian hybrids) got wiped out with assets being written down to zero while equity holders retained some value. This put the whole notion of the capital structure into question where debt holders are meant to rank above equity holders which created more volatility in markets and forced the European Central Bank and the Bank of England to come out to reassure markets by stating that the traditional capital structure remains true and that the Credit Suisse AT1 debt issue is isolated to Switzerland’s unique banking rules.
For many the current banking melodrama is invoking bad memories of the global financial crisis (GFC) of 2008. It is important to note that the banking sector has significantly de-risked since 2008 notably in terms of Tier 1 capital ratios which have increased substantially since 2008 following the Basel III banking framework which was brought in post the GFC in order to strengthen the banking system. One of the issues with banks such as SVB was a lack of governance and oversight by the US regulator, which contrasts with the Australian banking sector which has largely adopted the Basel III requirements. Another notable difference from the GFC was that central banks reacted quickly to the current crisis, unlike in 2008 where central banks dragged their heels until the banking system was on the verge of breaking.
So, are we out of the woods? It seems that the swift action of central banks has settled markets for now. The broader risk remains contagion and like many significant events in history while they don’t necessarily repeat, they do rhyme. There is no doubt that there are many nervous bankers out there taking a good look at their business models and capital reserves.
From a practical perspective we would expect the cost of debt to rise as a result of the banking issues. There is a view that this would in effect be the equivalent of two rate hikes and that it may trigger central banks to take a more dovish stance in raising rates to fight inflation. To date there is no evidence of this and central bank commentators have tried to delineate between stability of the system and inflation. However, one cannot dismiss the notion that the rapid rise in rates has exposed cracks in the markets with the current banking issues an example of this.
Market Developments During March 2023 included:
The month of March ended with the S&P/ASX 200 Accumulation Index down -0.2%. The primary driver was the uncertainty arising from bank failures in the US and Europe. This, coupled with high, albeit easing, inflation added to investors’ uncertain market sentiment. The Materials sector (+5.9%) rebounded with Communications (+3.4%) also performing strongly while the Property (-6.8%) and Financials ex-Property (-4.9%) sectors were the worst performers. Over the quarter, Consumer Discretionary (+11.4%) was the best performing sector.
Materials led all sectors for the month, reaping the benefits of higher commodity prices. The Property sector sold off following concerns around commercial real estate valuations, which stemmed from investor sentiment around higher interest rates and macroeconomic headwinds. Meanwhile, the collapse of major overseas banks led to selloffs within the Financials ex-Property sector. Overall, investors grappled with the inflation-driven interest rate outlook facing central banks globally and its implications on future economic outlook.
Global equities rallied after a sharp initial decline for the month, led by volatility across the Financial Services sector, notably Silicon Valley Bank and Credit Suisse. This was alleviated with expectations of potential easing in central bank tightening via the US Fed’s dovish outlook commentary for the year. Emerging markets performed similarly to developed market counterparts returning 3.7% (MSCI Emerging Markets Index) and 3.9% (represented by the MSCI World Ex Australia Index) in Australian dollar terms, respectively.
Investor confidence was maintained as relatively positive, with global macro data continuing to the upside. Mixed performance was seen across Asia with China posting fresh economic stimulus geared towards growth, as well as varied reception to the Fed’s dovish comments. This was reflected by the Hang Seng Index and the CSI 300 Index, returning 3.5% and -0.5%, respectively (in local currency terms) for the month. In the US, indications of no further rate rise lead the rebound, with the S&P500 Index posting a monthly return of 3.7%
In Germany, the DAX 30 Index reported a gain of 1.7% for the month (in local currency terms) after posting decreasing manufacturing data indicating further weakness ahead, which was shared by the rest of the continent with the FTSE Eurotop 100 Index reporting similar returns of 1.0% (in local currency terms) for the month.
At the start of March, the RBA raised the cash rate target by 25bps to 3.6%, stating global inflation remains high and is expected to take some time before it returns to target rates, while growth in the Australian economy has slowed and is expected to be below trend. However, uncertainty within the global financial sector was reflected across the Australian 2- and 10-year Government bond yields which fell by 70bps and 56bps, respectively. Australian fixed income performed strongly during the month with the Bloomberg Ausbond Composite 0+ Yr Index returning 3.2%.
Globally, markets were jolted by the financial sector woes in the US and Europe, which significantly impacted financial conditions and bond yields during the month. In Europe, UBS's takeover of Credit Suisse caused turmoil in bond markets, with Swiss authorities allowing Credit Suisse's riskiest bonds to be wiped out, and equity holders receiving a small amount of equity in UBS as part of the transaction. The US 2- and 10- year Government bond yields fell by 80bps and 45bps, respectively. The Fed continued to raise rates for the ninth consecutive time to 4.75%-5%, demonstrating their commitment to ending the inflation problem despite the banking crisis. In the United Kingdom, GILT yields followed the US, as 2- and 10-Year Gilt yields fell 60bps and 22bps, respectively.
REITs (listed property securities)
The S&P/ASX 200 A-REIT Accumulation index continued to fall in March after selling off in February, with the index finishing the month –6.8% lower. Global real estate equities (represented by the FTSE EPRA/NAREIT Developed Ex Australia Index (AUD Hedged)) also regressed, returning -3.6% for the month. Australian infrastructure continued its positive momentum during March, with the S&P/ASX Infrastructure Index TR advancing 0.3% for the month.
The Australian residential property market increased by 0.8% month on month in March represented by Core Logic’s five capital city aggregate. Sydney (+1.4%) and Melbourne (+0.6%) were the best performers whilst Adelaide (-0.1%) was the only city to regress during March.
22 March 2023
Is this a bear market rally or are we off to the races?
The start of 2023 has been generally positive for markets. While the rally has been a welcome relief from the tumultuous market environment in 2022, the key question is whether the recent rally has legs or whether it is simply a bear market rally with more volatility to follow as we progress into 2023.
The market has been skittish over the past 12 months with any positive news on the inflation front, such as any sign that inflation is moderating, resulting in the market rallying. While the most recent rally has partially been driven by some evidence that we are closer to reaching peak inflation, we have also seen liquidity pumped into the market which has no doubt supported market returns. Central banks have been generally decreasing their balance sheets with key central banks such as the US Federal Reserve moving from a quantitative easing policy to a quantitative tightening policy. This has reduced the overall liquidity that’s supporting markets. However, we have also seen some central banks, notably the Bank of Japan (BoJ) and the People’s Bank of China (PBOC), add liquidity to markets in recent months, which markets have liked. We do not believe that this trend is structural and that the direction of inflation and potential impact on economic growth will be the key driver of markets as we progress throughout 2023.
Our base case remains that the third quarter of 2023 will be ‘d-day’ for markets as the direction which company earnings will take, due to the impact of higher interest rates, will be clearer. The most recent company reporting season suggests that there is evidence of slowing in demand, however this is not consistent across all sectors and companies.
Overall, we believe that market returns may trend sideways for the full year with a possible downturn later in the year. In such an environment being able to pick out the ‘winners’ from the ‘losers’ will be increasingly important as simply riding the broader market to generate returns will be more challenging.
Market Developments during February 2023
February saw the S&P/ASX 200 Accumulation Index finish negatively after its strongest month on record in January. The main driver of the negative performance was the persistently high CPI figures in the US and the evaluation of earnings season in the Australian market. Utilities (+3.4%) and Information Technology (+2.7%) were the top performers, whilst the Materials (-6.6%) and Financials (-3.1%) sectors were the biggest laggards in the month.
The Utilities and Information Technology sectors led all sectors as several companies reported robust earnings or positive corporate actions (i.e., Origin Energy). In contrast, the Materials and Financials sectors were the worst performers as concerns around the global macroeconomic outlook and policy response, coupled with the evaluation of earnings reports resulted in selloffs within these sectors.
Investors continued to grapple with the inflation-driven interest rate outlook facing central banks globally and the implications that this may have on the future economic outlook.
Resilient economic data in February resulted in a rise in bond yields and a decrease in equity markets. With renewed inflation concerns, US equities stumbled with the S&P500 declining 2.4% during the month.
The European Central Bank, Bank of England, and Federal Reserve announced rate hikes at the beginning of the month. The overall message from their accompanying statements was that inflation remains excessively high despite recent declines and that central banks must continue their efforts.
Economic data suggesting a postponed recession prompted investors to adjust their forecasts for the peak in interest rates and future rate cuts, given the potential lengthier route to target inflation.
Despite the typical positive correlation between robust economic data and stock market performance, equity markets had priced in anticipated rate cuts and were more dismayed by the possibility of reduced monetary easing than they were encouraged by the delayed recession.
Across the globe, a rebound of consumer confidence helped the Eurozone stay positive with the FTSE 100 returning 1.8% and the DAX 30 returning 1.6%, while the Hang Seng Index fell 9.9% driven by escalating geopolitical tensions.
In a continued bid to reduce inflation to target levels, the Reserve Bank of Australia has raised the cash rate for a ninth month in a row, with a 25 bps increase announced in February. This brings the current February cash rate to 3.35%. Meeting minutes noted uncertain global outlook, upward surprises on inflation and wages, and the substantial increases in rates so far. The bond market reflected the rate rise with yields rising over the course of the month. Australian 2Yr and 10Yr Govt Bond yields rose by 49 bps and 30bps, respectively, leading to the Bloomberg AusBond Composite 0+ Yr Index to return -1.3% over the month. The Australian CPI inflation over the year to December 2022 was 7.8%.
Globally, fixed income markets were much the same. The US. Federal Reserve announced another 25bps rate rise on February 1, bringing the target cash rate to 4.5%-4.75%. US 2Yr and 10Yr Bond yields rose by 41bps and 69bps respectively. Similarly, U.K. 2Yr and 10Yrs Gilt yields rose by 61bps and 37bps, respectively, following the BoE decision to raise the Bank Rate by 50bps.
REIT’s (listed property securities)
The S&P/ASX 200 A-REIT Accumulation index sold off in February after a strong start to the calendar year in January, with the index finishing the month -0.4% lower. Global real estate equities (represented by the FTSE EPRA/NAREIT Developed Ex Australia Index (AUD Hedged)) also regressed, returning -3.6% for the month. Australian infrastructure performed well during February, with the S&P/ASX Infrastructure Index TR advancing 1.9% for the month.
The Australian residential property market experienced no change (0%) month on month in January represented by Core Logic’s five capital city aggregate. Melbourne (-0.4%) and Brisbane (-0.4%) were the worst performers whilst Sydney (+0.3%) advanced during the month for the first time in twelve months.
8 March 2023
Changes announced to superannuation fund balances above $3m
Recently, the Australian Government announced the upcoming changes to tax concessions for superannuation balances above $3 million.
What does this mean for you?
There is no current impact for your superannuation fund. This announcement is a proposal only and is required to go through the parliamentary process before it is approved. If approved, the changes are proposed to commence on 1 July 2025 and is limited to those individuals who have more than $3 million in super at the end of a financial year. Therefore, it’s the balance at 30 June 2026 that matters initially. It should be noted that it’s $3 million per person, not per fund. The $3 million will however include all of a member’s super, ie both their pension and accumulation accounts combined.
How will the earnings and tax be calculated?
According to the factsheet released by Treasury, for people subject to the new rules there are three essential elements:
- There will be a new, extra tax (at 15%) on some of their super’s earnings.
- The tax will be levied on the member personally, not their fund.
- They will be allowed to elect to take money out of their fund to pay it.
For those familiar with “Division 293” tax, the last two elements will feel familiar as this is how this additional tax is also managed.
The two key terms in the proposal are those in bold above – just some of the fund’s earnings will be taxed and earnings for this purpose has a special definition. Formulas and examples have been provided outlining how the calculations will work, but will include details such as opening balance, closing balance, contributions and pension payments. At this stage it has been stated that earnings will not only include the income a super fund would normally pay tax on – things like interest, rent, dividends or capital gains on assets it’s actually sold; but also growth in assets that the fund hasn’t yet sold. This is the area that seems most contentious and will require specialist advice on how to manage if affected.
How Boyce can help
At Boyce, we are committed to providing you with the latest information and advice on government legislation and its impact on your financial situation. As stated above, this announcement is a proposal only and is required to go through the parliamentary process before it is approved. As further details emerge we will provide updates via our e-alerts or direct contact.
If you would like more information or if you have any questions relating to this proposed change or your superannuation fund in general, please contact your Boyce accounting team who can connect you with one of our superannuation or financial planning specialists.
3 March 2023
Your Annual Statement package has been updated
We are happy to announce that Boyce is currently transitioning to a new Corporate Registry Services program.
Why are we making this change?
The main reason for the change is to improve our services to you. This transition will allow us to be ready for the ASIC’s database upgrade that is in progress as well as offer enhanced collaboration options with you in the future. Please be assured that maintaining your confidential information has been our priority during this transition.
How will this change effect you?
The main change that will impact you will be how you pay your annual statement. Your annual statement package email and payment reminder emails will have a different format and wording.
In addition to paying your ASIC fee the existing way by referring to the ASIC invoice statement, the new format will include a ‘Pay Now’ button for your convenience. An example of this button is below.
The Pay Now button will take you directly to the Australia Post payment gateway and allow you to pay your ASIC invoice via credit card.
Please remember to always check that the ASIC Billpay code when you enter it from the ASIC invoice is confirmed by Australia Post as being ASIC.
You will start to receive the newly formatted emails from email@example.com beginning Wednesday 8th March 2023.
If you have any queries, please do not hesitate to contact the CRS team on 02 6884 6499 or firstname.lastname@example.org .
20 February 2023
Your Finance Update - February Summary
Positive start to the year - what more is to come?
Over the course of 2022 our message to investors has been simple. Markets are in a period of transition and with transition comes some pain. The rapid shift from record-low interest rates and liquidity-fuelled markets, to one of higher interest rates and central banks shrinking their balance sheets has impacted markets. This has been coupled with the ongoing effects of Covid on economies, notably China and the unexpected conflict in Ukraine. Both events contributing to rising inflation which has been the topic du jour for all of 2022.
What can we expect from markets in 2023?
We should hit peak inflation in 2023. Central banks around the globe have been aggressively raising rates to curb inflation. In Australia, the December CPI figure hit 7.8% with the cash rate target reaching 3.10%. Cyclical indicators have been broadly trending down and we are yet to see the full impact of rate rises on households. We believe that demand will show more material signs of slowing in the second and third quarter of 2023, which should see inflation stabilise.
Mild recession is a possibility
The inverted yield curve is suggesting that a recession is on the cards. Historically, recessions have occurred 12 to 18 months after the yield curve has inverted. While the likelihood of a recession is elevated, the relatively strong labour market is expected to reduce the risk of a deep prolonged recession. We do however expect segments of the economy to be hit harder than others, such as the construction industry, which has already experienced a downturn following rises in interest rates. Conversely Australia’s exposure to materials and the reopening of China from strict Covid lockdowns is expected to benefit things such as iron ore exports.
Company earnings to slow second half of 2023
We are yet to see the full impact on demand of interest rate rises. While the savings ratio has been declining as households increasingly dip into their savings, households are still spending, with travel spending being the big winner. However, our expectation is that we will observe a slowdown in demand in the second half of the year as many household budgets get a jump in their mortgage repayments as their fixed rate loans roll-off and they move towards the higher variable rate. This should see a slowdown in discretionary spending which should show up in company earnings later in the year.
Range trading market
Markets have started 2023 on a positive note. Some of acute issues that adversely impacted markets in 2022 have subsided. Energy prices, which rose sharply following the Russian invasion of Ukraine have fallen with European gas prices falling by over 27% in January alone. Furthermore, the consumer is still buoyant despite higher interest rates.
As 2023 progresses and the impact of rising rates makes its way through the economy and company earnings come under increased pressure, we may see the market pull back. Net-net it is plausible that 2023 may be a relatively flat market characterised by spikes in volatility both to the upside and the downside.
Market Developments during January 2023
The Australian market commenced the year convincingly, with the S&P/ASX 200 Accumulation Index rising by 6.2% and every sector finishing positively apart from the Utilities (-3.0%) sector. The gain represents the best start to the year since the inception of the Index. The Consumer Discretionary (+9.9%) and Materials (+8.9%) sectors led the market, as investor optimism around the future cash rate and inflation trajectory in an Australian and global context buoyed the broader market.
The Utilities sector was the biggest laggard as investors pivoted away from more defensive sectors in favour of more cyclical exposures. The Consumer Discretionary sector performed robustly as companies reported earnings. The Materials sector performed strongly as several commodities continued their recent rally on the back of the China re-opening demand. Further, the volatility in the Australian market was relatively subdued. Broadly speaking, the more ‘growth’ oriented and interest-rate sensitive sectors exhibited solid performance as investors weighed up the potential for central bank policy rate cuts in Australia and other global economies.
Global equities started on a positive note as optimistic views around inflation fed through to possibilities around a reduction in central bank tightening. Emerging markets outperformed developed market counterparts returning 3.8% (MSCI Emerging Markets Index (AUD)) versus a 3.0% gain according to the MSCI World Ex Australia Index (AUD).
Investor confidence was elevated during the month as global macro data surprised to the upside combined with China reopening earlier than expected. This was reflected by the Hang Seng Index and the CSI 300 Index, returning 10.4% and 7.4% respectively (in local currency terms) for the month. In the US, over a third of companies have reported, with earnings in aggregate being 0.6% above consensus and the S&P500 Index posting a monthly return of 6.3% (in local currency terms).
In Germany, the DAX 30 Index reported a gain of 8.7% for the month (in local currency terms) as it continued to benefit from the easing of supply disruptions, a decline in the risk of gas rationing and further fiscal support.
With no RBA meeting in January, there has been a pause on rate hikes, with rates expected to rise once again in February. This led to Australian 2- and 10- year Government bond yields falling by 23bps and 50bps, respectively. The fall in bond yields resulted in almost every fixed income sector being in the green, resulting in the Bloomberg AusBond Composite 0+ Yr Index to return 2.7% over the course of the month. Inflation has now risen to 7.8%, over the past 12 months to December, and CPI rose 1.9% this December quarter according to ABS data.
Subsequently the RBA increased rates at their 7 February meeting by 25 basis points to 3.35 per cent. The December inflation figures were cited as a factor in this increase and the RBA observed that GDP growth, a tight labour market and wages growth are also factors being taken into consideration when making interest rate decisions.
Globally, fixed income markets showed a mixed story, with US markets bracing for another rate hike in the next Federal Reserve Meeting on February 1. US 10-year Bond yields rose 37bps and US 90 Day T-Bill yields rose 30bps. In the United Kingdom, markets also await the return of the BoE meetings in February, with the current January bank rate sitting at 3.50%. Over January, U.K. 2 Year Gilt yields fell 11bps and U.K. 10 Year Gilt yields by 34bps.
REIT’s (listed property securities)
The S&P/ASX 200 A-REIT Accumulation index had a strong start to the calendar year advancing during January, with the index finishing the month 8.1% higher. Global real estate equities (represented by the FTSE EPRA/NAREIT Developed Ex Australia Index (AUD Hedged)) also finished strongly, advancing 8.2% for the month. Australian infrastructure performed well during January, with the S&P/ASX Infrastructure Index TR advancing 1.9% for the month.
The positive start to the year is a welcome sight for REIT investors, as the listed property sector suffered a material decline in 2022. 2022 was the worst-performing year for REITs since the global financial crisis. Capital raising is expected to be a prominent theme in Q1 this year with the significant change in debt markets and cost of capital. In the global REITs market, we have already seen eight capital offering instruments in January, raising a total of $4.1bn in capital, in contrast to the $250m raised in December.
The Australian residential property market experienced a –1.1% change month on month in January represented by Core Logic’s five capital city aggregate. Brisbane (-1.4%), Sydney (-1.2%), Melbourne (-1.1%) and Adelaide (-0.3%) all performed poorly whilst (0%) stayed relatively neutral.