However, we believe the probability of a major global systemic risk event due to Brexit is low in the short term. We believe the European Central Bank and Bank of England staready to provide sufficient liquidity to ensure their banking systems continue to function. Quantitative easing (QE) could also be redeployed in the United Kingdom (UK) or stepped up in the Eurozone to support sovereign bond markets if needed. The uncertainty and distraction created by Brexit are likely to result in reduced investment, increased savings and lower economic growth in the short term. In response, the Bank of England decided to reduce the cash rate to 0.25 per cent in early August.

It is important to distinguish between the nine nations that are members of only the EU and the 19 nations that are members of both the EU and the Eurozone. Leaving the Eurozone is more problematic than leaving the EU because there is no existing legal process to follow. There are four countries that are outside the EU but are part of the single market as members of the European Free Trade Association (Norway, Iceland, Switzerland and Lichtenstein). We believe it is 50 per cent likely that the UK will proceed to trigger Article 50 and negotiate an agreement to remain in the single market.

US interest rates may rise more than markets expectIn the US, a range of economic indicators show that the US economy continues to recover, including an improving housing sector, a likely stable federal deficit, competitive wages – despite the appreciation of the US dollar and a relatively low reliance on exports. Several transitory factors have been keeping inflation below the Fed’s two per cent target. However, as the oil price bottoms out, the US dollar stabilises and the labour market continues to tighten, wage growth and inflation pressures are likely to normalise. Consistent with previous cycles, this will require the Fed to tighten monetary policy, probably more so than the market is expecting.

The Eurozone is likely to continue benefiting from a weaker currency, a stronger US economy, lower commodity prices, and an improvement in borrowing conditions and credit flows in an environment of ultra-low interest rates.
However, the combined effects of high debt levels, labour market rigidities and unfavourable demographics are likely to present ongoing headwinds for growth. The Eurozone also remains vulnerable to major shocks, such as an escalation of geopolitical tensions with Russia, the election of Eurosceptic governments or a collapse in the Chinese yuan. Each of these scenarios could trigger a dramatic uplift in periphery Eurozone sovereign bond yields, and would heavily test the resolve and mandate of the ECB.

While we remain concerned about the short to medium-term outlook for China, we do not believe that China is about to have a financial crisis or experience a hard economic landing. China’s rapid economic growth in recent years, fuelled
by the large credit stimulus during the GFC, has been unsustainable. Although credit growth has slowed, it continues to grow at 15 per cent per annum.

Prospects for equity markets

Our base-case outlook for the next three years assumes a continued recovery in the US with modestly rising inflation, a continued slowdown in China (but not a financial crisis or hard landing) and an improvement in the economic outlook for Europe. We remain cautious about the outlook for equity markets given the recent Brexit vote, the environment of abnormally low interest rates, historically elevated price-earnings multiples, risks associated with the recapitalisation of the Italian banking system and the continued withdrawal of US monetary policy stimulus. While the Fed and other central banks believe their policies are highly stimulatory, such policies also act as a tax on the world’s savers by reducing or eliminating interest income.We continue to believe markets are mispricing the likely future path of the federal funds rate and long-term interest rates in the US. It is prudent to remain cautious in this environment.

We continue to see attractive opportunities for Australians to invest in high-quality global businesses, although pricing is less attractive than in recent years. Risks to the Australian dollar appear weighted to the downside and the Australian economy remains exposed to the continued unwinding of the commodities boom, domestic housing investment boom and household credit boom, which further weakness in China could exacerbate. Domestic economic weakness and global disinflationary forces are putting downward pressure on Australian interest rates at a time when the US economy is moving towards full employment and higher interest rates. The challenges facing the Australian
economy serve as a reminder to investors of the importance of achieving meaningful portfolio diversification to preserve capital and higher risk-adjusted returns over the investment cycle.

To discuss your investment options, speak to your financial planner at Leenane Templeton on 02 4926 2300 or email success@leenanetempleton.com.au

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Achieving any goal in life usually involves starting with a plan. Investing is no different. One of the most important things to understand before you embark on an investment plan is the relationship between risk and return.

Some investors focus only on maximising returns without considering the risk taken to achieve those returns. Others are so concerned about losing money that they seek to avoid risk altogether. Yet the single, most important lesson investors can learn is that risk and return cannot be separated.

Common risk profiles

There are many investments available with different levels of risk to cater for investors of different risk profiles. As the investment timeframe is naturally linked to life stage, risk profiles can be generalised across age groups (that is, the younger you are, the longer investment timeframe you have and the more aggressive you can be). There is no ‘one size fits all' approach to risk profiling among age groups.

There are a number of risk profiles, but for the sake of this article, we have outlined the three main profiles:

Conservative

Conservative investors are generally prepared to accept lower returns with lower levels of risk in order to preserve capital. Conservative portfolios tend to be allocated predominantly to defensive assets, such as cash and fixed interest, with the remainder in growth assets.

For this reason, people in retirement (in the wealth protection phase of their investment journey) may adopt a more conservative attitude to risk. They have less time to ride out the ups and downs of the share market and tend to have less of their portfolios allocated to shares and other high risk asset classes.

Balanced

Balanced investors generally have more of an equal mix of growth and defensive assets, and are comfortable with taking calculated risks to achieve good returns.

Growth

Growth investors are more comfortable with a higher level of risk in order to achieve potentially higher returns. Their prime objective is to accumulate assets over the medium to long-term and capital security is secondary to potential wealth accumulation.

Investors in this category can therefore expect to have around 85 per cent of their portfolio allocated to growth assets, although still diversified across shares, property and alternative assets.

Whichever risk profile you may fit into, the most important consideration when it comes to investing is that your investment plan needs to be tailored to your individual needs and goals.

Source: Macquarie

To learn more about how your risk profile will impact future savings, talk to your financial planner.
Call (02) 4926 2300 or email us. 

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One of the principles of successful investing and building wealth is to make regular contributions – in this way, you buy when asset prices are low and you also buy when they are high. You don’t have to agonise over when to invest and, on average, your buying price will be lower over the long term.

This is called “dollar cost averaging” and many investors unknowingly benefit from it.

But before you can invest you first need to have saved some money to invest! It’s easy to get started.

Step 1

Many of us fall into the trap of paying everyone else first and then we get what’s left over. This not only diminishes our self-worth, but more often than not, there’s not much left over when everything else has been paid which can also be depressing.

Step one in establishing a regular savings plan is to pay you first. Even if it’s only 10% of what you receive… it’s yours (and you’re the one who’s worked hard for it!). Then you can focus on paying everyone else.

Step 2

Open a separate bank account to place that 10%. Online savings accounts offer better interest rates, low or no fees and they are easy to set up and maintain. Establish a regular automatic transfer from your everyday account so you don’t miss the money. And leave it there to build.

Step 3

While you are saving, start looking for opportunities to invest your money to earn a higher return. One option when starting out is to invest in a managed fund. Managed funds pool your savings with thousands of other investors, giving “small” investors access to a wide range of quality investments, managed on your behalf. These funds allow you to start investing with as little as $1000 which is built upon with monthly instalments that can be automatically transferred from your savings account.

This is where we come to the “science” of dollar cost averaging. By investing the same amount every month your contributions are purchasing units on a regular basis, irrespective of the current market price. Over time, the power of regular purchasing has shown that investments are bought at lower average prices, giving you more units for the same outlay, which again compound as you reinvest the returns.

Investing doesn’t diminish the importance of regular saving – after all you can’t invest money if you don’t save it first! Stop procrastinating and start building your wealth today.

Our team of award winning financial planners are available to discuss how saving and building wealth will open up many opportunities for you and help secure your future.
Call (02) 4926 2300 or email us.

Disclaimer

If saving, building wealth and investing are areas in which you would like more information, please do not hesitate to call the expert team at Leenane Templeton.

The post Building wealth a little at a time appeared first on Newcastle Financial Planners & Financial Advisors.

On top of this, there are other major events that can cause serious problems around the world if they go unchecked.

Examination of the world share markets can help investors decide which events are temporary set-backs to the market upturn, and which are more serious threats to global economic health.

Overview of world share markets

Europe

Events in Cyprus and North Korea have caused a bit of a pause in the market resurgence that started in May 2012. Cyprus was significant, not because of its size but because of precedents set in the European Union's handling of the affair. 

The head of the European Central Bank, Mario Draghi, commented the European Central Bank (ECB) would "do what it takes" to preserve the euro.  It was Draghi's comments that triggered the current market strength, as it was taken to signal a clear commitment by the ECB to preserve the euro.  As a result, markets start to recover from their very depressed level. 

However, events in Cyprus have shaken some of this confidence, after the government initially proposed a measure that would have seen ordinary bank depositors hit with a ‘tax’ on their savings.  It therefore appears to have drawn a very clear line between ‘doing what it takes’ and ‘absolutely anything’ to save the euro. 

While the decision to give rich Cypriot bank depositors a massive haircut was unpalatable, it wasn't that long ago depositors in Icelandic Banks also got a nasty surprise.  A few years later and Iceland is actually looking pretty good.  So it’s possible to draw the conclusion that tough measures, while unpopular in the short-term with the electorate, could in the medium or long-term be in the best interest of the economy and the people.

There is no doubt European countries, with very few exceptions, are struggling to get their economies back on track.  As a region, Europe continues to struggle with high production costs, dodgy bank and state finances and extreme unemployment in southern regions.  Unemployment is so high in troubled southern countries there is a real risk of civil unrest, which hampers the implementation of necessary reform.   Chart A shows the difference in unemployment rates within Europe.

Unemployment Figures in Europe

Chart A – Source: Bloomberg – latest figures available as at May 2013

We’ve already seen the debacle of the Italian election, and this is just the latest example of a trend where politicians who promise anything to reduce the financial hardship of the population, regardless of how unsustainable or impractical the promise, are given power.

How long this kind of situation can continue is unknown, but any sensible evaluation of the situation suggests that at some point, some hard decisions will need to be made, no matter how unpopular. 

North Korea

The rhetoric from North Korea obviously isn't helpful for anyone – least of all North Korea.  Conflict in Asia has the potential to derail the world growth engine of the past few years.  However, even the North Koreans must realise that they have nothing to gain by actually going to war.  

We can assume China would take a dim view of activity that impairs its growth prospects.  While the brinkmanship has stepped up a level, the most likely outcome is this too will blow over.

USA

The US is looking much stronger, as the economy has been swamped with cheap money for some time.  A low exchange rate and low borrowing rates finally appear to be breathing life back into US industry, providing welcome relief on unemployment.  Chart B shows the growth in employment over the past 12 months.

Chart B – Source: United Department of Labor as at March 2013

Recent data coming out of the US, such as housing and employment figures, has been positive and, coupled with low interest rates, suggest the US is well on the road to recovery. 

Japan

Japan is a real outlier.  Recent efforts to reflate the economy have been very well received by equity markets (the Nikkei is up 33.3 per cent in the first four months of 2013), and the collapse of the yen will help recovery.  But let’s face facts: we've been here before.  While policy changes are encouraging there are still plenty of things that can go wrong. 

Impact for Australian investors

Despite these setbacks, equity markets have been performing really well.  The S&P/ASX 300 Accumulation Index of Australian shares is up 7.6 per cent in 2013 to 31 May, and US based S&P 500 is up by over 14.0 per cent, and has exceeded its historic high.

The Australian market as a whole will do okay over the long-term, thanks to the Australia’s access to natural resources. But there is a supply response coming in iron ore production that will lower commodity prices, and this may be a drag on Australian equity markets in the short-term.

While capital works in the resources sector may be near their peak, these projects will ultimately flow through into improved production that will benefit the economy generally, though there may be some painful adjustments. Expect the prices of resources companies to be volatile.

Outside of resources, Australian companies are struggling with a high Australian dollar, and higher interest rates than international peers.  It's hard to see them improving without a radical fall in the Australian dollar.

Factors driving markets

Equity markets are no longer undervalued.  In fact, the Australian market is starting to look pricey.  Nevertheless, we believe equity markets still have a way to go given the very low returns from cash and bonds.

Low interest rates and bond yields effectively determine the price of all assets.  Prospective returns from these assets are currently very low.  Over long periods of time the equity risk premium, loosely defined as the extra return investors expect from equities over bonds, has been stable. 

Therefore, low interest rates ultimately imply higher prices for growth assets, which ultimately flow through to lower prospective returns. It’s fairly easy to justify paying a higher price for equities, property and other investments in this environment. 

In the short-term, this is really positive for markets, as prices are more likely to rise as the price of growth assets adjusts to the lower interest rate environment.  However, in the longer term it means we will all have to get used to lower returns from all asset classes. In other words, we probably will all need to start saving more than we thought to fund retirement.

Investment opportunities worldwide

Investors really wanting to take advantage of opportunities in equity markets should consider international equities as well as Australian equities.  Compared to some international equity markets, the Australian market is relatively restricted in certain sectors.

For example, some of the emerging technologies around 3D printing look really interesting.  3D printing has the potential to automate many production processes, which in due course could restore the competitiveness of a more expensive, labour intensive industry.  Companies at the forefront of this technology could be revolutionary.

Other tech companies, such as those in computing and social networking, are now mature.  But the social change brought about by the revolution in shopping habits is still in its infancy.  

In this new world, companies that have a strong brand will excel.  Consumers that are dealing with faceless vendors over the internet are more likely to buy a trusted brand, given they have little reason to trust the vendor.

Managing opportunities and risks

There are always both opportunities and risks in equity markets. Opportunities take time to play out, and adverse events always seem to be reflected in markets immediately. If investors keep a close eye on their objectives, and make sure their portfolios remain appropriate for their circumstances, they may be more prepared to respond to changes in the market. Among other things, that might mean taking profits as equity values rise – if the portfolio risk is creeping up.

As always, diversify, diversify, diversify.  Almost all investors will benefit from an allocation to growth assets, particularly equities.  Conversely, it’s easy to confuse boundless optimism with delusion.  Even the happiest optimist should make sure an investment portfolio reflects not just attitude, but personal circumstances.

For more information about how you can invest in Australian and international equity markets, speak to the Financial Adviser's here at Leenane Templeton.

Source: Australian Unity, May 2013

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In order to meet the definition of ‘business real property’ the property must be wholly and exclusively used in one or more businesses. When looking at this business real property Trustees should be wary of breaching the ‘in-house’ asset rules.

An ‘in-house’ asset is considered to be:

• Loan to or investment in a related party of the fund;
• An investment in a related trust of the fund; or
• A leased asset arrangement between the trustee and a related party.
   

The level of in-house assets that a SMSF can hold is currently limited to five per cent of a fund’s overall asset value.

The test applies at the end of each income year, as well as at any time that a new inhouse asset is acquired. Breaching this limit can result in the ATO deeming the fund to be non-complying, which may have major tax implications for the fund.

To be exempt from the ‘in-house’ asset rules the property must be subject to a lease arrangement on arm’s length terms.

Trustees are obliged to ensure that the fund deals with the related tenant as if the tenant was an unrelated party.

Trustees should ensure that rent is paid at the amount and frequency required by the lease, that annual increases required by the lease are complied with.

The rental payments cannot fall into arrears and all outgoing expenses are to be paid by the party specified in the lease.

There are serious consequences for SMSFs that fail to maintain the arrangement on arm’s length terms. In some circumstances auditors are required to immediately report the breach on non-compliant activity to the ATO.

An immaterial breach will also cause a contravention to be reported to the ATO if the breach occurs in more than one year or if the fund is recently established.

A breach may also result in an ATO audit of the SMSF, which can be a costly exercise.

Click here for our SMSF Advisors web site

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Unlike the previous surcharge, this will affect high income earners who earn more than $300,000. This will increase the take on their contributions from 15% to 30%.  We understand that in calculating the $300,000 it will take into consideration, your taxable income, reportable fringe benefits, and concessional contributions. For a husband and wife couple this has the potential to be a $15k per year tax increase.

It is unclear when this is likely to commence but we will find out more on the 8th May on handing down of the federal budget.

Planning Opportunity.

If you are a small business person it is not unusual for you to exceed the $300,000 threshold, in particular if your are selling a business or drawing out large dividends. This therefore presents an enormous opportunity to plan in advance. So please pre-book a meeting / call to talk with us after 8 May once we have more details to hand, email: success@leenanetempleton.com.au

Call Newcastle Financial Advisors today. 

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