Market Update - September Summary

21 September 2023

Market Update - August Summary

18 August 2023

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Your Finance Update - June Summary

22 June 2023

Summary of Key Views – Cloudy skies

Inflation is likely to ease substantially in the coming months as base effects roll off and tighter credit conditions hit consumption and aggregate demand. Services inflation, rent rises and wage pressures however persist, meaning inflation could remain sticky and above central bank target ranges for some time. Financial conditions are therefore likely to remain tight as central banks keep a foot on the brake while managing pockets of stress via targeted liquidity support.

Domestically, a large number of home borrowers will roll off ultra-low fixed rate home loans onto significantly higher mortgage rates in the coming months. This means there is more tightening to come for the Australian household sector irrespective of how much higher the RBA takes the cash rate.

Consumer confidence remains weak both here and in the US, and with the cash buffers built up during the pandemic largely eroded, signs that economic growth has begun to slow have emerged. US GDP came in well below expectations at +1.1% (annualised) for the first quarter.

On a positive note, valuations are looking more appealing across a range of asset classes. Australian equity valuations are almost looking as attractive as they were during the peak stresses of the pandemic on a P/E basis. Tight financial conditions coupled with a weakening cyclical environment lead us to believe that the second half of 2023 continues to present some headwinds for risk assets notwithstanding the more attractive valuations we are seeing.

In the current environment, a focus on quality investments, liquidity, active portfolio management, diversification and risk control become even more critical for portfolio constructors. We continue to monitor developments regarding inflation, monetary policy and the global economy, and will adjust our portfolios, as necessary, to navigate through the challenges and opportunities ahead.

Market Developments during May 2023

Australian Equities

In May the S&P/ASX 200 Accumulation Index finished with a loss of 2.5%. Rising costs have begun to materialise for consumers as retail turnover plateaued, with another RBA hike and a fall in the iron ore price also impacting returns. Information Technology (I.T.) shares rose significantly (+11.6%), with Utilities making the only other meaningful jump (+1.1%). Consumer Discretionary (-6.1%) and Staples (-4.6%) were noteworthy laggards. Materials (-4.4%) and Financials ex-Property (-3.3%) also dragged on the Index. In total, 7 of the 11 sectors posted losses.  I.T. advanced on the positive news from some of its names, while attention on the rise of artificial intelligence also aided gains. Meanwhile, retail spending data led to investors positioning for a slowdown, as cost of living pressures saw consumers pull back on non-essential shopping. As doubts linger around the economic recovery in China, the sliding price of iron ore hampered Materials. Financials ex-Property were pushed down by poor US banking sentiment, as well as concerns about the domestic outlook for earnings and margins.

Global Equities 

Global equities ended with a predominantly negative month with declining economic data. Emerging markets underperformed developed market counterparts returning 0.4% (MSCI Emerging Markets Index (AUD)) versus a 1.2% gain according to the MSCI World Ex Australia Index (AUD).

The U.S. markets had mixed results, with the debt ceiling debate being suspended on top of another expected rate hike. Lower unemployment and promising developments in the technology sector, particularly artificial intelligence and chipmakers, led a positive gain of 0.4% in the S&P500 Index (in local currency terms).             

Equities across Asia were also mixed, Japanese stocks became more attractive for investors with sound earnings results with share buyback announcements for large cap stocks. The Nikkei 225 Index reached new highs with a gain of 7.0% for the month (in local currency terms). China’s economic growth recovery continued to perform beneath investors' expectations with demand also decreasing. This was reflected by the Hang Seng Index and the CSI 300 Index, returning -7.9% and -5.6% respectively (in local currency terms) for the month. Investors are waiting for stronger indications of an economic recovery in China, potentially led by the technology sector.

 

Fixed Interest

Credit markets saw a decline as interest rates rose again in May when the Reserve Bank of Australia increased the official cash rate from 3.60% to 3.85%, leading to a -1.21% return of the Bloomberg AusBond Composite 0+ Yr Index. Over the course of the month, spreads widened as Australian 2Y and 10Y Bond yields rose by 50bps and 27bps, respectively. Persistent inflation pressures along with a strong labour market and rising wages have the potential to keep inflation rates above the RBA target for an extended period.

Global markets were taken aback in early March by the unexpected failure of three small- to mid- size US banks, followed by the collapse of Credit Suisse. The effects from the March turmoil continue to affect markets with the Bloomberg Barclays Global Aggregate Index (AUD hedged) returning -0.54% over May. In a decision widely expected by markets, the U.S Federal Reserve again increased rates by 25bps bringing the federal funds rate to a target of 5.0%-5.25%. Bond yields continued to grow with US 2Y and 10Y Treasury Note yields rising 45bps and 22bps, respectively.

 

REIT’s (listed property securities)

The S&P/ASX 200 A-REIT Accumulation index regressed in May after a strong rally in April, with the index finishing the month –1.8% lower. Global real estate equities (represented by the FTSE EPRA/NAREIT Developed Ex Australia Index (AUD Hedged)) also regressed, returning -3.8% for the month. Australian infrastructure continued its positive momentum during May, with the S&P/ASX Infrastructure Index TR advancing +1.5% for the month.

The Australian residential property market experienced an increase by +1.4% Month on Month (as represented by CoreLogic’s five capital city aggregate). Sydney was the biggest riser (+1.8%) alongside Brisbane (+1.4%) also performing strongly. All five capital cities performed positively in the month for the first time in over two years.

 

Your Finance Update - May Summary

29 May 2023

Caution amidst the calm?

An eerie calm has fallen over markets in recent weeks, as the banking stresses of early March fade into the background. Market measures of risk, such as the VIX, have retreated, while global equity markets have rebounded strongly, buoyed by a resurgence in technology stocks.

We remain somewhat cautious. We have seen a rapid shift from record-low interest rates and abundant liquidity to an environment of higher interest rates, central banks shrinking their bloated balance sheets and a general tightening in lending standards. These tighter liquidity conditions will continue to impact the economy and markets over the course of the year.

From a macro perspective, inflation has peaked but is proving sticky. While goods inflation has come down as the covid-era shortages have largely eased, services inflation and rising wage costs are complicating issues. We think central banks may have more work to do to really drive those inflation numbers down. A lengthy period of sub-par growth may be required to tame inflation, meaning a pause is more likely than an outright pivot, barring any further financial instability.

Growth has been surprisingly resilient to date thanks in part to a resilient consumer, tight labour markets, a milder European winter than expected and the China re-opening story. However, our base case remains that growth will slow as the year progresses, as the lagged effect of rising interest rates and cost of living pressures make their way through the economy.

In our view, none of these factors point to a great environment for risk assets despite the more attractive valuations we are seeing. We remain close to benchmark with a slight underweight in global equities while remaining alert to risks and opportunities as they emerge.

 

2023 - 2024 Federal Budget: Highlights

10 May 2023

2023-24 Federal Budget: Highlights

On Tuesday the 9^th of May, the Labor Government handed down the 2023-24 federal budget. The main themes of this budget were stated to:

• provide temporary and targeted cost of living relief;
• strengthen Medicare;
• focus on investments and measures that relate to renewable energy, with the goal of making Australia a renewable energy superpower.

 

The key highlights from the budget include.

• $20,000 instant asset write off – The Government has announced it will temporarily increase the instant asset threshold from $1,000 to $20,000 from 1 July 2023 to 30 June 2024 for small businesses.
• Energy Price Relief – The Government proposes to provide $1.5 billion over two years from 2023/24 to establish the Energy Bill Relief Fund to provide targeted energy bill relief to eligible households and small business customers.
• Medicare levy exemption – From 1 July 2024 eligible lump sum payments will be exempt from the Medicare Levy for low-income taxpayers who satisfy the eligibility requirements.
• Small business energy incentives - Deduction of an additional 20% of the cost of eligible depreciating assets that support the electrification and more efficient use of energy.
• Fringe benefits tax (FBT) -  Amendments to the Electric Car Discount.
• The budget now forecasts a surplus of $4.2 billion with a cash deficit of $13.9 billion for 2022/23.
• Inflation is expected to remain at 6% for 2023-24 but is expected to fall to 3.25% in 2023-24 before returning to the target band of 2-3% in 2024-25.
• Unemployment is expected to rise to 4.25% in 2023-24 and then to 4.5% in 2024-25.

 

For more information on the budget announcements please read below.

 

Small Businesses

• $20,000 instant asset write off – While the temporary full expensing measures will cease from 30 June 2023, the Government has announced it will temporarily increase the instant asset threshold from $1,000 to $20,000 from 1 July 2023 to 30 June 2024 for small businesses with an aggregated turnover of less than $10m. Additionally, the measures preventing small business entities from re-entering the simplified depreciation regime for 5 years if they opt out will continue to be suspended until 30 June 2024.
• Small business energy incentive – Small and medium businesses with an aggregated turnover of less than $50m will be able to deduct an additional 20% of the cost of eligible depreciating assets that support the electrification and more efficient use of energy. Up to $100,000 of total expenditure will be eligible for the Small Business Energy Incentive, with a maximum bonus deduction of $20,000. Eligible assets and upgrades will need to be first used or installed ready for use between 1 July 2023 and 30 June 2024.

 

Business

• Increase to Road User Charge – The current Road User Charge of 27.2 cents per litre for diesel will increase over 3 years to 32.4 cents per litre by 2025-26, leading to a reduction in fuel tax credit entitlements.
• Build-To-Rent Developments - For eligible new build-to-rent projects where construction commences after 7.30PM AEST on 9 May 2023 the Government proposes to:
  • Increase the rate for the capital works tax deduction to 4% per year (ordinarily 2.5%);
  • Reduce the final withholding tax rate on eligible fund payments from managed investment trust (MIT) investments from 30% to 15%, to apply from 1 July 2024.
• PAYG and GST instalment uplift factor – The GDP uplift factor will be set at 6% (rather than 12% as would otherwise apply) for instalments with respect to the 2023-24 income year.
• Fringe Benefit Tax (FBT) – amendment to the Electric Car Discount – From 1 July 2025 the Government is proposing to sunset the eligibility of plug-in hybrid electric vehicles from the FBT exemption for eligible electric cars.
• Expanding the general anti-avoidance rule (Part IVA) – From 1 July 2024 the Government proposes to expand the scope of the general anti-avoidance rule in Part IVA so that it can apply to:
  • Schemes that reduce the tax paid in Australia by accessing a lower withholding tax rate on income paid to foreign residents; and
  • Schemes that achieve an Australian income tax benefit, even where the dominant purpose was to reduce foreign income tax.

 

Large Businesses

• Implementation of a global minimum tax and a domestic minimum tax - The Government proposes to implement key aspects of the Pillar Two of the OECD/G20 Two-Pillar Solution to address the tax challenges arising from digitalisation of the economy.  These rules are intended to apply to large multinationals with annual global revenue of EU750 million (approximately AUD$1.2billion).  This will include:
  • a 15% global minimum tax rate for large multinational enterprises with the Income Inclusion Rule (IIR) applying to income years starting on or after 1 January 2024 and the Undertaxed Profits Rule (UTPR) applying to income years starting on or after 1 January 2025; and
  • a 15% domestic minimum tax will apply to income years starting on or after 1 January 2024.
• Reforming the Petroleum Resource Rent Tax - From 1 July 2023, the Government will be capping the deductions to 90% of assessable PRRT income.

 

Individuals

• Medicare levy exemption – From 1 July 2024 eligible lump sum payments (such as compensation for underpaid wages) will be exempt from the Medicare Levy for low-income taxpayers who satisfy the eligibility requirements including the requirements for the lump sum payment in arrears tax offset.
• Personal tax rates – There were no announcements in respect to changes in personal tax rates.  As such it is expected that the stage 3 tax cuts will commence from 1 July 2024 as previously legislated.

 

Agriculture

• Increasing concessional tax treatment for carbon abatement and biodiversity stewardship income – The Government has announced that it intends to delay the start date of the biodiversity certification component of the 2022/23 March Budget measures titled Primary Producers – increasing concessional tax treatment for carbon abatement and biodiversity stewardship income from 1 July 2022 to 1 July 2024.
• The Government is proposing to provide an additional $1billion over 4 years from 2023/24 (and $268.1m per year ongoing) to strengthen Australia’s biosecurity system. To assist in funding these initiatives the Government proposes to add a biosecurity protection levy on Australian producers of agricultural, forestry and fishery products from 1 July 2024, set at a rate equivalent to 10 per cent of the 2020–21 industry-led agricultural levies, which is estimated to increase receipts by $153.0 million over 3 years from 2024–25. The levy is intended to recognise the benefits that primary producers derive from Australia’s biosecurity system, including detection, identification and response associated with invasive pests and diseases, maximising trade opportunities, and enhancing access to premium overseas markets.

 

Superannuation

• Increased taxation on super account balances above $3m – the Government has confirmed its intention to apply an extra 15% tax on total superannuation balances above $3 million from 1 July 2025.
• Payday super – employers will be required to pay their employees' super guarantee at the same time as their salary and wages from 1 July 2026.

 

Additional Highlights

• Energy Price Relief – The Government proposes to provide $1.5m over two years from 2023/24 to establish the Energy Bill Relief Fund to provide targeted energy bill relief to eligible households and small business customers, which includes pensioners, Commonwealth Seniors Health Card holders, Family Tax Benefit A and B recipients and small business customers of electricity retailers. It is intended that this plan will provide up to $500 in electricity bill relief for eligible households and up to $650 for eligible small businesses.
• Cyber security - The Government is proposing to provide $101.6m over 5 years from 2022/23  (and $11.8m per year ongoing) to support and uplift cyber security in Australia. This includes $23.4m over 3 years from 2023/24 to the Department of the Treasury for a small business cyber wardens program delivered by the Council of Small Business Organisations Australia, to support small businesses to build in-house capacity to protect against cyber threats.

 

Please note that the budget measures announced above will only take effect once they become law. To know more about how this budget will affect your financial position, please reach out to your Boyce Advisor.