Investment News

The only problem with short-term benefits is that they are only available for a limited time. Your own, long-term wealth must be able to withstand the test of time.

Read our insights to keep up to date with the latest news, trends and changes related to investment strategies and advice.

Federal Budget 2021: what individuals need to know

The 2021 Federal Budget was announced on 11 May 2021 and Pekada will provide you with the resources to determine the potential impact to you, the opportunities and how to manage them effectively.

After the economic turmoil of 2020, the 2021-22 Federal Budget focused on measures to promote economic growth and recovery with big spending and very few surprises.

The biggest winners aged care, women, health, and childcare. Perhaps laying the foundations for an Election announcement?

There were also some wins for superannuation, although the rate of superannuation guarantee or changes to minimum pension requirements didn’t see any proposed changes. As a result, superannuation guarantee will increase to 10%, and minimum  pension drawdown requirements will revert to their standard levels from 1 July 2021.

On a positive note it was good to see the data confirming the economy is recovering rapidly, but the Treasurer did temper the excitement on this, noting that we cannot take the gains we have made for granted. Probably a fair point, as a fair chunk of the heavy lifting has come as a result of tax receipts off the back of an iron ore spot price that is 4 times higher than forecast. The deficit is still significant, however it is hard to argue that something of this magnitude isn’t required.


NOTE: It’s important to remember that the Budget announcements are still only proposals at this stage. Each of the proposals must be passed by Parliament before they’re legislated – and could change.





Repealing the work test for non-concessional contributions and salary sacrifice contributions for people aged 67 to 74

Expected to be 1 July 2022
The Government has announced it will allow individuals aged 67 to 74 to make or receive non-concessional (including under the bring-forward rule) or salary sacrifice superannuation contributions without meeting the work test, subject to existing contribution caps.

However, individuals aged 67 to 74 years wanting to make personal deductible contributions will still have to meet the existing work test. This measure is proposed to have effect from the start of the first financial year after the enabling legislation receives Royal Assent. The Government stated it expects this to occur prior to 1 July 2022.


Reducing the eligibility age for downsizer contributions to 60

Expected to be 1 July 2022
The Government has announced it intends to reduce the eligibility age to make a downsizer contribution from 65 to 60 years of age.

The downsizer contribution rules allow people to make a one-off after-tax contribution to super of up to $300,000 from the proceeds of selling their home they have held for at least 10 years. Under the rules, both members of a couple can make downsizer contributions for the same home and the contributions do not count towards a member’s non-concessional contribution cap.

This measure is proposed to have effect from the start of the first financial year after the enabling legislation receives Royal Assent. The Government has stated that it expects this to occur prior to 1 July 2022.


First Home Super Saver Scheme – increasing the maximum releasable amount to $50,000

Expected to be 1 July 2022
The Government has announced it will increase the maximum releasable amount for the First Home Super Saver Scheme (FHSSS) from $30,000 to $50,000.

Under the existing FHSSS rules, an eligible person can only apply to have up to $30,000 of their eligible (voluntary) contributions, plus a deemed earnings amount, released from super to purchase their first home.

This measure is proposed to have effect from the start of the first financial year after the enabling legislation receives Royal Assent. The Government has stated that it expects this to occur prior to 1
July 2022.


Removing the $450 per month minimum superannuation guarantee threshold

Expected to be 1 July 2022
The Government has announced it intends to remove the $450 per month minimum superannuation guarantee (SG) income threshold.

Under the current rules, an employer is not required to pay superannuation guarantee contributions for an employee who earns less than $450 per month.

This measure is proposed to have effect from the start of the first financial year after the enabling legislation receives Royal Assent. The Government has stated that it expects this to occur prior to 1 July 2022.


Complying pension and annuity conversions

Effective first financial year following Royal Assent The Government has announced people with certain complying income stream products will be given a two-year window to commute and transfer the capital supporting their income stream (including any reserves) back into a superannuation account in the accumulation phase. The member can then decide whether to commence a new account based pension, take a lump sum benefit or retain the balance in the accumulation account.

The income streams affected by this measure include:

  • market-linked income streams (otherwise known as Term Allocated Pensions),
  • complying life expectancy income streams and
  • complying lifetime income streams,

that were first commenced prior to 20 September 2007 from any provider, including self-managed superannuation funds (SMSFs).

Under the measure, any commuted reserves will not be counted towards an individual’s concessional contributions cap but they will be taxed as an assessable contribution of the fund. When commuted, any social security treatment the product carries such as 100% or 50% asset test exemption and/or grandfathering for income test purposes will cease.

However, the Government has confirmed there will be no re-assessment of the social security treatment the product received prior to the commutation. Therefore, the member would not be required to pay back any overpaid entitlements.

The Government has also confirmed the existing transfer balance cap rules will continue to apply. Therefore, on commutation the member will receive a debit in their transfer balance account based on the debit value method that applies.

Income streams not included in this measure include flexi-pensions offered by any provider and lifetime products offered by a large APRA-regulated defined benefit scheme (eg some older corporate funds) or public sector defined benefit scheme (eg CSS, PSS).


Relaxing residency requirements for SMSFs and Small APRA Funds (SAFs)

Expected date 1 July 2022
The Government plans to relax the residency requirements for SMSFs by extending the central management and control test from 2 to 5 years and removing the active member test.

Under current rules, SMSF trustees living overseas who intend to return to Australia at some point can be away for a period of up to two years and the fund will still meet the central management and control test. Under the proposal, the trustee will be able to be away for up to five years and still meet the test.

Further, the active member test will be abolished. Under this test, if the fund had members that were ‘active’ by making contributions or rollovers into the fund, the residency status of the fund could be jeopardised. This means that members who are overseas for a period of time often cannot make contributions to their SMSF or SAF. In contrast, a non-resident can contribute to large APRA and industry funds without putting the fund’s residency status at risk.

Abolishing the active member test simplifies the rules and ensures that members and trustees who are temporarily overseas can continue to make contributions to their SMSF or SAF without jeopardising the fund’s complying status.




Retaining LMITO in the 2021-22 income year

Effective 1 July 2020
The Government will retain the low and middle income tax offset (LMITO) for the 2021-22 income year, providing further targeted tax relief for low- and middle-income earners. The LMITO provides a reduction in tax of up to $1,080. The table below shows the amount of offset an individual client is entitled to depending on their taxable income:


This announcement means that an individual’s effective tax-free income threshold for 2021-22 financial year remains the same compared with the current financial year. An individual who is not eligible for seniors and pensioners tax offset can effectively have taxable income of up to $23,226 without having to pay income tax.


Modernising the individual tax residency rules

Effective 1 July following Royal Assent
The Government will replace the individual tax residency rules with a new, modernised framework. The primary test will be a simple ‘bright line’ test — a person who is physically present in Australia for 183 days or more in any income year will be an Australian tax resident. Individuals who do not meet the primary test will be subject to secondary tests that depend on a combination of physical presence and measurable, objective criteria. The measure will have effect from the first income year after the date of Royal Assent of the enabling legislation.


Simplifying self-education tax deductions

Effective from the income year after Royal Assent Currently, tax deductions for Category-A self-education expenses must generally be reduced by $250.

The Government has proposed removing this $250 reduction amount to effectively allow individuals to claim a tax deduction for all Category-A self-education expenses.

Category-A expenses include tuition fees, textbooks, stationary, student union fees, student services and amenities fees, public transport fares, car expenses worked out using the ‘logbook’ method (other than the decline in value of a car), running expenses for a room set aside specifically for study.




Increasing the flexibility of the Pension Loans Scheme

Effective 1 July 2022
The Pension Loans Scheme (PLS), a voluntary, reverse mortgage type loan available through Services Australia, currently allows a fortnightly loan of up to 150% of the maximum rate of Age Pension. From 1 July 2022, the Government will implement two changes to the scheme – a No Negative Equity Guarantee and lump sum advances.

No Negative Equity Guarantee
A No Negative Equity Guarantee will be introduced so borrowers, or their estate, will not have to repay more than the market value of their property, in the rare circumstance where their accrued PLS debt exceeds their property value.

Lump sum advances
Eligible people will be able to receive one or two lump sum advance payments totalling up to 50% of the maximum Age Pension each year. Based on current Age Pension rates, this is around $12,385 per year for singles and around $18,670 for couples combined. Note, the total amount eligible people are able to receive under the pension loans scheme, including
any lump sum advance payments, has not changed. The total amount cannot exceed 150% of the maximum Age Pension which is around $37,155 per year for singles and around $56,011 per year for couples.




Increase in child care subsidy

Effective 1 July 2022
The Government announced it will:

  • increase the Child Care Subsidy (CCS) rate by 30 percentage points for the second child and
    subsequent children aged five years and under in care, up to a maximum CCS rate of 95% for
    these children, commencing on 11 July 2022, and
  • remove the CCS annual cap of $10,560 per child per year commencing on 1 July 2022.
    This will provide greater choice to parents who want to work an extra day or two a week. Removing
    the annual cap helps support the choices of parents to work the hours they want to work and, in
    particular, reduces barriers that secondary income earners face when seeking to work more.

The current hourly fee caps will continue to apply.




Increased funding for Home Care

Effective 1 July 2021
To support senior Australians to remain at home, the Government is funding an additional 80,000 Home Care packages:

  • 40,000 released in 2021-22
  • 40,000 released in 2022-23

Additional respite care services will be provided to assist carers and enhanced support services will
be provided to assist senior Australians to navigate the aged care system


Increased funding for residential aged care

Effective over 3 phases: 2021, 2022-23, 2024-25
To improve and simplify residential aged care services, the Government is implementing a range of measures To improve residential aged care quality and safety, including a new star rating system to provide senior Australians, their families and carers with information to make comparisons on quality and safety performance of aged care providers.

Reforms to residential aged care services and sustainability, including a new Government-funded Basic Daily Fee supplement of $10 per resident per day, funding to implement the new funding model, the Australian National Aged Care Classification (AN-ACC), and implementation of a new Refundable Accommodation Deposit (RAD) Support Loan Program; and
a range of measures to grow and upskill the aged care workforce.



We are here to help

For our ongoing service package clients, your financial adviser will be in touch with any specific actions or impacts to your situation.

If after reading this you want to chat, get some clarification in regards to any of the above measures outlined in the 2021-22 Federal Budget, please contact us so that we can discuss your particular requirements in more detail.


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March 2021 Investment Market Review – US Stimulus adds to equity market momentum

Talking points for March 2021

  • Share markets moved higher once again in March, encouraged by supportive economic data and confirmation of the U.S. stimulus program.
  • Bond yields continued to rise in the U.S., whereas Australian yields reversed some of the large increase recorded in February.
  • Property & infrastructure posted solid gains over March after lagging for much of the equity market rally over the past year.




International equities

The $US 1.9 trillion fiscal stimulus package was signed into law by President Biden last month. This program is expected to have a materially positive impact on spending and company earnings in the US economy. As such, the program was viewed positively by the US share market, which gained 4.4% over the month. Advances on Continental European markets were even stronger, with Germany positing an increase of nearly 10% for the month. Economic data in Europe has shown significant improvement, with a key leading indicator of manufacturing activity recoding its strongest result on record. The Japanese market posted a more modest 0.7% gain, which consolidated some strong increases over recent months.
Emerging markets lagged developed markets over March, with negative returns in China contributing to this under performance. The fall in Chinese share prices was partially in response to new legislation in the United States requiring tougher audit and disclosure standards for dual listed stocks.



Australian Equities

Gains on the Australian market were approximately 2% less than the global average, with the S&P ASX 200 Index rising by 2.4% over March. A pull-back in commodity prices explained some of the underperformance of the Australian market, with oil, iron ore and copper prices all lower following a period of strong increase. As a result, resource stocks finished the month 4.1% lower, with the energy sector flat. Banking and consumer stocks though, again moved higher, with economic data continuing exceed expectations and support the outlook for domestic company earnings. Employment data has been particularly encouraging, with the unemployment rate in February being 5.8% – well below the peak of 7.5% recorded in July. The number of job vacancies is currently higher than the level prevailing prior to the COVID crisis. The improvement in the labour market has provided increased confidence that the end of the Job Keeper program in March won’t result in significant disruption to household spending and the broader economy.

Following a period of extended underperformance, the more defensive equity market sectors rallied over March. Utilities jumped 6.8% with telecommunications 6.2% higher and property trusts up 6.6%. The small decline in Australian bond yields may have been one factor supporting these sectors as the stable yields on offer from property and infrastructure styled assets became more attractive in relative terms.



Fixed Interest & Currencies


Central banks around the globe continued to re-enforce their commitment to maintaining existing low short term interest rates. Chair of the US Federal Reserve, Jerome Powell, suggested that existing monetary policy support will remain in place until the US economy has fully recovered. However, this statement did not stop longer term interest rates in the US from increasing with the 10-year Treasury yield jumping 0.3% in March to 1.74%. This followed a 0.33% increase in February. Expectations that the US stimulus program will produce both higher economic growth and higher inflation contributed to the rise in longer term interest rates. The higher yields in the US pushed bond prices lower, resulting in negative returns for global fixed interest investors for the second consecutive month. In Australia, however, there was some reversal of the large spike in yields that took place in February, with the local 10-year bond yield dropping 0.13%. This brought the Australian yield back to 1.74% – the same level as that prevailing in the US.

With key commodity prices weakening and local bond yields falling, there was less support for the Australian currency over March. The $A slipped by US 2.3 cents to close the month at US 76.0 cents. Despite the decline last month, the $A remains 23% higher than it was one year ago.




The overwhelming consensus driving financial markets continues to be one in which the vaccine rollout underpins a strong economic recovery, which supports growth in company earnings. Included in this consensus is the view that central banks will maintain existing exceedingly low interest rates, thereby providing the rationale for further valuation expansion on equity markets. Over recent months, most hard data has re-enforced this consensus view and equity markets have continued to advance as a result.

During March however, the market rally was not universal. Support for Chinese equities faltered, and there was a pull back in the price of several commodities. This had some impact on the Australian share market, which underperformed peers, and also is likely to have contributed to a fall in the $A. As the world’s second largest economy, which has become increasingly embroiled in geopolitical issues, any signs of faltering in China’s equity market and broader economic performance deserves close attention. China’s early success at normalising economic activity following the COVID crisis has meant its economic cycle moved ahead of the rest of the globe. Maintaining normalised levels of economic activity post COVID stimulus programs may be more difficult than is assumed in the dominant financial market consensus view.

Given there is some uncertainty over the sustainability of strong economic growth once stimulus measures expire, a weighting in investments towards the more defensive equity sectors such as property infrastructure continues to be adopted in out portfolios. There was some long overdue price appreciation in these sectors in March, however, valuations still remain attractive relative to other parts of the equity market.





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5 Financial habits that will pay dividends in 2021 and beyond

After a tough 2020, we’ve been reflecting on what that means for you, your families and your goals. All things considered, I feel we have been lucky here in Australia, but given the continued unpredictability of COVID-19, it’s perhaps wise to remember the lessons we’ve learned that will be worth holding onto through 2021 and beyond.


1. Markets are all about probabilities and risk management.

Or let me say this more bluntly—markets cannot (unfortunately) be timed with precision—by you, me, or any other expert. Let’s say, hypothetically, we had anticipated there was going to be a global pandemic, avoiding the sharp declines in the global stock markets, as you decided to withdraw your investment(s). Even with this knowledge (without a crystal ball), it would have been extremely difficult to predict the timing and strength of the rebound in the market. In this case, the severe downturn has (in many instances) corrected itself within six months. Ultimately, you would likely still be sitting on the sidelines, waiting for a better entry point to get back in.


2. Reconnect with your goals.

The best financial advice is personalised and tailored with strategies to help you reach your goals. If you start feeling anxious about your finances or the state of markets, take a break from day-to-day market monitoring and check in on your financial goals. I’d love to be involved in this process. By reacquainting yourself with your goals, we can adapt and improve—including why you set them in the first place and how your current financial strategy can help you reach them. “Staying the course” is never easy amid volatility or market nerves, but goal setting can help slow down a racing mind, take a breath, and redefine what you really want in life.


3. Be your own devil’s advocate.

If you’re starting to lean toward a change in your financial circumstances (for example, selling an underperforming investment or chasing the latest popular investment trend), ask yourself why someone else might buy/sell that same investment. Our minds have an easier time remembering and noticing facts and ideas that support our opinions but forcing ourselves to take a different perspective before acting can reveal every angle of a decision. This technique can also help you when you’re sifting through information online. If you keep coming across evidence that supports your opinion, challenge yourself to find a site that convincingly shows the opposite. Or even better—come to me, and we can explore it together.


4. Get to know your biases and turn down the noise.

Reading or hearing about unexpected asset value changes can put any financially-minded person on edge. You’ve hired us to help manage this for you, so one useful tactic is to set a schedule for how often you check your portfolio to turn the volume down on that noise. The schedule should focus on the appropriateness of your investments in relation to your goals.

In relation to this, research shows that understanding our behavioural biases can help us spot them in our decisions. There is a saying that the best financial advisers are just as aware of psychology as they are financial analysis. Taking some time to read about the psychology behind our decisions and emotions is an advancement toward financial independence.


5. “The intelligent investor is a realist who sells to optimists and buys from pessimists.”

This saying is an old favourite that comes from Benjamin Graham, one of the founding fathers of value investing. We’ve seen the full spectrum of fear and greed in the past year—but it pays to be a humble realist. Humans have overcome incredible challenges throughout the centuries, and we are on our way to overcoming the latest challenge. But don’t be fooled into thinking the recovery will be smooth or doomed. It will have speed bumps, with each change in sentiment creating potential opportunities for the intelligent investor.


The Pekada team are well placed as your go-to resource to help you thrive financially, identifying opportunities, navigating future challenges and working towards whatever it is that is important to you. If you want to chat about the above or your personal situation then please get in touch with us.


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February 2021 Investment Market Review – Rising bond yield challenge equity valuations

Talking points for February 2021

  • Longer term interest rates rose sharply in February, creating negative returns for fixed interest asset classes.
  • Despite share markets reacting negatively to rising bond yields, solid growth early in the month meant most share markets finished February in positive territory.
  • Rising confidence over the success of the vaccine rollout, combined with confirmation of the United States fiscal stimulus program, has boosted confidence in the broader economic outlook.






International Equities

A material slowdown in new COVID cases and progress on the vaccine rollout, particularly in the U.K. and the United States, boosted investor sentiment in early February. Also contributing to share price growth was an encouraging earnings reporting season, as well as the $US 1.9 trillion fiscal stimulus package in the U.S. gaining approval through various committees. The resulting gains on share markets were significant early in the month and sufficient to more than offset the negative impact from rising bond yields later in the month. Japan, where the effect of higher bond yields was less significant, was the strongest performer amongst the major markets, with the Nikkei Index gaining 4.7%. The Japanese market has now increased 25% over the past 6 months, placing it well ahead of other major developed markets.

Emerging markets were generally weaker than developed markets over February, despite strong gains in commodity and energy prices. Brazil, which remains heavily impacted by the COVID second wave, produced negative results, whilst China’s gains were not as strong as in previous months.




Australian Equities

Gains on the Australian market were slightly less than the global average, with the S&P ASX 200 Index rising by 1.5%. The profit reporting season for the period ending December 2020 showed significant recovery in company earnings, with results generally more favourable than market expectations. Higher resource and energy prices reinforced the outlook for earnings growth in resources sector. Over the month, iron ore prices advanced another 2%, whilst the price rises for base metals were more significant. This reflected the more positive outlook for global economic growth and inflation, which also impacted on the oil price, which gained 17% over the month. As a result, resources (up 7.5%) and energy (up 2.4%) were positive contributors to the Australian market last month. Also leading the market higher was the financial sector (up 5.2%), where banks were well supported due to improved earnings and expectations that stronger lending and higher nominal bond yields would be supportive of future interest margin growth. Ongoing strength in the residential property market was also supportive of the banking sector, paving the way for the banks to reverse some of the loan loss provisions that impacted on earnings and dividends when the COVID crisis first took hold.

However, not all sectors delivered positive results as higher bond yields became a catalyst for rotation away from companies with high earnings growth expectations (where the higher interest rates have a greater impact on share price valuation metrics). This was particularly noticeable in the Information Technology sector, where prices dropped by an average of 8.9%. Other sectors shown to be interest-rate sensitive were Property Trusts (down 2.6%) and Utilities (down 8.0%) as the steady yields expected from these sectors became less attractive to investors relative to the higher bond yields available.





Fixed Interest & Currencies

As was the case in January, expectations of improved economic growth and inflation drove longer-term bond yields higher. The increase in yields was particularly significant in Australia, where the 10-year government bond yield jumped from 1.09% to 1.87%. In the U.S., the yield increase was more moderate with the 10-year Treasury yield moving 0.33% higher to 1.44%. The rise in yields resulted in negative returns from many fixed interest investments (as bond prices fell). However, investments linked to variable (rather than long term) interest rates largely avoided these losses. With central banks maintaining a commitment to keep cash interest rates at record low levels until unemployment normalises, the rise in longer-term yields has created the steepest yield curve experienced for some time.

As indicated on the chart above, Australian longer-term yields are now back above U.S. yields. This yield differential is supportive of the Australian dollar. In addition, the Australian currency was boosted by stronger commodity prices again in February. Against the $US, the $A rose from US 76.5 cents to US 78.3 cents. As a result, global investments hedged back into Australian dollars performed better than unhedged investments, which has been the prevailing trend for the majority of the past year.






The rise in longer-term interest rates over February was a logical and expected result of the significant improvement in the economic outlook that has emerged across the globe in recent months. With short term interest rates being maintained at record low levels and further substantial stimulus to come, particularly in the United States, the stage is set for further inflationary pressures emerging and the potential temporary overheating of economies. The magnitude of the impact of this stimulus coinciding with the expected success of the vaccine rollout should not be underestimated. As such, it remains too early to move fixed interest portfolios back towards longer-term bonds, despite the higher returns now on offer.

High levels of consumer confidence backed up by stimulus-induced purchasing power continues to produce an environment highly supportive of company earnings and equity markets. With the global economy in a cyclical upswing, the rotation away from the more expensive growth-orientated stocks, towards “value” stocks positioned to benefit from a broader economic recovery, may have some way to run. Active managers who can navigate this transition may be well placed to outperform passive investments in this environment.

However, whilst the immediate environment appears supportive of equity markets, increasingly investors should be focussed on the “post-recovery” environment. The steeper the upswing in spending in the months ahead, the greater potential there is for a sharper decline once the cycle matures, and the stimulus is unwound. To assist in the management of this post-stimulus downturn, investors should take opportunities to purchase more defensive sectors, such as listed property and infrastructure, which are currently trading at attractive valuations relative to the broader equity market. Whilst being less exposed to economic cycles, these sectors would still benefit from an upswing in inflation as revenues and asset values increase. As such, property and infrastructure can play an important role in protecting the purchasing power of an investment portfolio as well as stabilising returns across a full economic cycle.


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January 2021 Markets Review – A pause in the global sharemarket rally

Talking points for January 2021

  • Markets were subdued in January with th pandemic still looming large across the global economic landscape. It is reported that there are over 100 million confirmed Covid-19 cases worldwide at the start of February. Vaccine rollouts have not been without early logistical challenges.
  • Following strong returns in the preceding quarter, it seems likely there was some profit-taking in January which contributed to a loss of momentum.
  • One of the most talked about stories which will cause a rethink for aspects of investing (speculating) was the share price performance of US computer game retailer GameStop. A collective move spurred on by Reddit thread “WallStreetBets” created a price rise of 2,879% in the three months to the end of January (no I didn’t accidentally leave an extra digit in, that is 2879%). Media coverage of this was massive, as the story really captured the interest the mainstream. To this point, there hasn’t been a significant effect on markets overall.
  • Australian Equities were the only broad asset class to post a positive result and outperformed their global peers, with global equities slightly negative for the month. 
  • Australian listed property and infrastructure continued their trend of underperformance with a rough start to 2021, whilst rising bond yield generated small negative returns across fixed interest benchmarks.


International equities

China remained the best performing market in January with both Hong Kong and Shanghai managing better than +3%. Economic indicators here continue to show increased activity due to government stimulus and rising international demand for Chinese exports. The other major markets were muted – focused on the more fraught outlook in Europe and the US due to the economic impact of COVID and changes in government support and restrictions.

In the US, the new economic stimulus package is being prepared and is expected to be approved in March, paving the way for increased consumer spending via an additional $1,400USD payment to individuals. The US company reporting season has been slightly better than expected, despite a 1% reported decline second-quarter earnings. The UK has been assessing the impact of finally executing the BREXIT deal, and there have been significant impediments to trade in food, goods, and services – as well as COVID related impacts on trade and activity. Despite these impacts, share market losses have been minimal.



Australian equities

The Australian market rose 0.3% in January. Consumer Discretionary stocks – particularly retailers – delivered a 4.7% return in the month. Retailers benefited from strong consumer spending in the December Quarter, following government support payments and expenditure being redirected from travel. A large build-up of savings in the household sector implies further buoyant consumer spending may be possible. Banks performed well, as the proportion of poorly performing loans continued to drop, which should enable banks to restore some of the dividends that were cut last year.

However, Property Trusts were weak, as reports of new Covid-19 cases emerged and a drawn-out return to ‘normal’ appeared more likely. As the vaccine rollout progresses and lockdown restrictions ease, sold-off sectors such as retail may continue to strengthen and close the valuation gap with in-favour sectors such as industrial and specialised.



Fixed interest & Currencies

Longer term bond yields increased in both the US and Australia, with 10-year government bond yields now approximately 1.1% in both countries. Expectations of improved economic growth and inflation appear to be driving longer term bond yields higher. However, we do not yet see the evidence of consumer price inflation needed to justify a significant rise in interest rates. Nonetheless, inflationary expectations have increased over recent months as strong consumer spending and some areas of supply disruption provide two preconditions for inflation. Another potential source of inflationary pressure is higher energy and commodity prices. Prices for Iron Ore, in particular, have continued to push higher, as Chinese import demand remains buoyant and Brazilian supply weak. However, offsetting these factors is spare capacity in labour markets, where elevated unemployment continues to be a deflationary force.

The Australian dollar is showing signs of plateauing, following a period of strong growth. In January, the $A fell US 0.6 cents to close at US 76.5 cents. Australia’s currency remains underpinned by strong trade fundamentals. Higher commodity prices have supported the trade balance and neutralised the impact of lower export volumes and stronger spending on imports by Australian consumers. As a result, the trade balance has remained in a strong surplus position over recent months.




Whilst there were pockets of volatility, share markets have been relatively steady over the past few months up to the end of January. This follows a significant rally to end the 2020 calendar year. It isn’t a majot surprise that a period of consolidation was overdue. Markets are seeking more certainty to continue pushing higher in the short term, but there is still much to play out in terms of the success of the vaccine program in allowing ‘normalisation’ of economic activity to return.

Although the vaccine rollout is demonstrating inevitable challenges, the path to normalisation remains visible and this forms the basis of the market consensus assumption that 2021 will display a strong cyclical economic recovery. Hence, there remains a material risk that any evidence emerging to the contrary of this consensus assumption will produce negative impacts on share markets as forecasts for improvements in company earnings will need to be reassessed.

A second risk that has emerged as being slightly more significant over recent months is that of higher inflation and higher longer term interest rates. The rise in bond yields that has occurred to date has not had any noticeable impact on equity market sentiment. However, with valuations at such elevated levels when compared with historic norms, a change in the longer term market assumption around interest rates could start to challenge some of the basis for current valuations.



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Magellan’s Global Equity Retail Funds Restructure explained

The Restructure is a proposed series of transactions which will have the effect of consolidating three of Magellan’s existing global equities retail funds, being the Magellan Global Fund, MGE and MGG into a single trust (the Magellan Global Fund) which has two unit classes: an Open Class and a Closed Class.

Post-Restructure MGF Partnership Offer and Bonus MGF Options Issue

Should the Restructure proceed, and subject to the necessary regulatory approvals, Magellan intends to undertake a $1 for $4 offer to subscribe for Closed Class Units and issue of bonus options. As part of Magellan Financial Group’s partnership approach with investors in Closed Class Units and to minimise dilution, Magellan Financial Group will fund both the 7.5% additional Closed Class Unit partnership benefit and the 7.5% MGF Option exercise price discount.

Product disclosure statements for the MGF Partnership Offer and Bonus MGF Option Issue are expected to be lodged with ASIC in January 2021.

To be eligible to participate in the MGF Partnership Offer, you must be a unitholder in Magellan Global Fund on the record date of 8 December 2020. Entitlements under the MGF Partnership Offer will be determined on the Calculation Date which is expected to be 8 January 2021. To be eligible to participate in the proposed Bonus MGF Option Issue, you must be a Closed Class Unitholder in Magellan Global Fund on the Bonus MGF Option Issue Record Date, expected to be 26 February 2021.

The Bonus MGF Option Issue is only available to eligible Closed Class Unitholders and will not be offered to Open Class Unitholders.


Key dates:

Full details can be found at Magellan’s website, however if you have any queries you can also contact your financial adviser.


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A big news week to start November might just mean “groundhog day”

The first week in November had a very different feel this year for most Victorians. In the past, the excitement of the Melbourne Cup long weekend meant a big weekend of plans and socialising with family and friends. The first week in November 2020 was less about the social happenings and more about what was happening in politics and financial markets.

So why is the first week in November so important?
The November Reserve Bank Board (RBA) meeting provides our central bank with the last genuine opportunity to influence the broader economy with interest rate changes before the Christmas break. The big show in town is the fact that once every four years it also the week of the US Presidential election. In 2020, the week was particularly noteworthy, with the following outcomes:

  • The RBA announced a lowering in the cash interest rate target to a new record low of 0.10%. The target yield for the 3-year government bond was also lowered to 0.10%. In addition, a “quantitative easing” program was introduced, that will result in the RBA purchasing $100 billion of government bonds of maturities of around 5 to 10 years over the next six months, in an attempt to further lower interest rates across the yield curve.
  • A Democrat victory in the US election, paired with Republican control of the Senate. This provided financial markets with their “preferred” scenario of political stability without the prospect of the new President having unencumbered power to alter policy settings dramatically.
  • The second wave of COVID-19 infections in the Northern Hemisphere has seen the United Kingdom, France and other European countries introduce another round of lockdowns, expected to be in place until at least the end of November. An experience that us Melburnians know all too well!


What is the impact this time around?
Following a period of weakening in equity markets and rising global bond yields over October, the above events appeared to have reset markets with equities rallying again and bond yields shifting lower. Expectations are that interest rates will have to remain low for an extended period due to the continuation of the COVID crisis, combined with the new US administration more limited in its ability to add substantial fiscal stimulus. Central banks now appear primarily focused on restoring employment and economic growth. Domestically, this sentiment was highlighted by the RBA’s latest policy announcement.

In equity markets, the extension of the period of low interest rates and COVID related restrictions has a somewhat disparate effect. Companies with above average earnings growth prospects tend to benefit the most from low interest rates as there is less “penalty” for the time delay applied in the valuation of future earnings that skewed to future years. In addition, although some businesses are clearly negatively impacted by lockdowns and broader implications of COVID, others have thrived and using the events of 2020 to change business models or accelerate changes that were already in train.

Information technology (IT) is a high growth sector and sits at the intersection of the positive influence from low interest rates as well as the business model changes caused by COVID. IT has led most major markets higher over recent years, particularly in the US where it is the largest sector and has appreciated by 23% per annum over the past three years – dwarfing the overall US share market increase of 10% per annum.


Potential risks to the groundhog day scenario
The current scenario reads as constrained economic growth, low interest rates, and disparate sharemarket growth where specific sectors such as IT and healthcare are the big winners. Sound familiar? I could forgive you for thinking you are reading news from 2018-2019, as the events of the past week are delivering a groundhog day vibe from the past few years. Having said that, there some risks to the continuation of this scenario:

  • Valuations – given the dominance of the same prevailing trend over recent years, bond yields and share prices in high growth sectors like IT appear priced for perfection. In the case of the Australian and US central banks, there seems little appetite to take interest rates below zero, creating a lower bound, which should ultimately cap bond prices and interest rate sensitive equities.
  • Inflation – the ongoing maintenance of low bond yields is dependent upon the continuation of low inflation. Financial markets and central banks do appear confident that inflation will remain low. This expectation is built upon the spare capacity in the labour market (eg. unemployment) keeping wages growth subdued. However, whilst spare capacity is a key influence on inflation, it is by no means the only influence. The experience of the 1970s and 1980s demonstrated that high inflation could coexist with higher unemployment. Not just that, the unprecedented nature of the recent government spending combined with heavy purchasing of government bonds by central banks has rapidly pushed up money supply growth and household savings. This ultimately could create demand conditions that are inflation inducing at a time when supply in certain industries is being artificially constrained by COVID related measures.
  • Vaccine development timeline – an earlier than expected COVID vaccine release should be unambiguously positive for equity markets. However, the associated stimulatory impact on spending could rapidly build on the inflationary pressures discussed above. The resulting upward shift in bond yields may then trigger a significant change in the pattern of price movement on equity markets, with those higher growth sectors that have dominated price growth in recent years being the least supported.
  • An unexpected US Senate result – financial markets appear to be operating on the assumption that the new US administration will be constrained somewhat by a Republican controlled Senate. However, there is an outside possibility that Senate control will be determined by a run-off election in the State of Georgia in early January. Given that Georgia appears to have favoured Joe Biden in the Presidential election, a Democrat victory in the Senate can’t be ruled out at this stage. Such an outcome would be likely to change inflation and interest rate expectations, with policies such as a doubling of the minimum wage and a larger government spending program more likely to be introduced.
  • The COVID crisis worsening – after the initial sell-down in March, share markets have been prepared to “look through” the downturn in company earnings associated with COVID and push prices to record high levels in some markets. Implicit in the market’s response is the expectation that COVID will have only a temporary impact on the earnings. However, should a vaccine take longer than expected to be developed and distributed, and infection rates continue to require lockdowns, then the impact on company earnings may have to have a more significant effect on share prices. The subsequent pullback in valuations would likely impact companies that have experienced the biggest recent price appreciation the most – with these companies ultimately requiring a healthy economy to meet the earnings growth rate assumed in current valuations.


Where to from here?
So while financial markets have in the short term had a positive reaction to the events of the past week, the base case assumed by markets is far from guaranteed. With local cash rates now virtually zero, investors will be seduced into following the momentum of markets and shift portfolios to those investment categories and styles that have performed better in the past. <<insert rant that last years winners are often not this years winners, and following the herd is a recipe for frustration>>. However, given the heightened valuations of some of these investments and the potential for the broader economic scenario to shift rapidly, investors should consider diversifying well beyond “yesterday’s winners” to build a robust strategy for the years ahead.

In short, the fundamentals of good investing remain in play. If you are unsure how your portfolio might be impacted, or if a change needs to be made then get in touch via




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Investing for children

This is one of the main reasons that new parents come to see a financial advisor, that they would like to set up an investment for their new child. An investment for a child is usually a great idea but I would like to add one important point before I start.

Making yourself financially successful first is the most important thing. Putting money aside for your children’s futures is a great thing but not if it is at the expense of you meeting some of your other financial goals. Making yourself financially safe and secure will only benefit your whole family over the long term. That been said, if you have put steps in place and you are financially secure and want to start an investment for your children, here’s what you should be thinking about.


The type of investment

Choosing the right investment is always important as it can be the difference between a successful outcome or not. When we’re looking at investing for children, we are usually looking at a long term horizon. When we are investing for the long term we can afford to take on some risk and volatility and this should be something that you’re thinking about when choosing the right investment, you want to choose something that has the potential for growth.

With us currently experiencing record low interest rates, we can no longer keep putting money away in the bank and expect to see big returns in the future. Depending on the amount of money your starting with, a diversified index fund can be a good way to get diversification at a small cost. I find these can usually be good for people just starting out with lower balances.

If you are planning on putting a bit more away then you could potentially look at building your own individual share portfolio, however you need to make sure that this is well diversified so that you don’t leave yourself open to any unnecessary risk. Some people also look towards managed funds as way of getting someone else to manage the investment for them whilst still having an active approach towards investing.

The options for investing for children is pretty much the same as if you were to set up an investment for yourself, it’s just that the goal is to provide funds for your children for the future, so your investment options can be almost limitless. It doesn’t have to be complex, just make sure that the fee’s are competitive if you are going into an index or managed fund, that it’s well diversified and that it is in line with your risk profile. That last point is really important, there’s no point investing in something super high growth if you’re a conservative investor, you probably won’t sleep well at night if that’s the case!


The structure

As with any investment, this is crucial and can make a huge impact in the total return of the investment. The structure means how the asset or investment is owned. When your looking at what structure the investment should be held in, it’s important to look at a couple of things. Your current tax position, what you want the investment to achieve and the time frame for that investment.

There are many different structures that can be looked at for children. I’m going to run through a few and hopefully give you some pro’s and con’s of each to help you towards making a decision. The first one that most people look at is investing in your personal name. This is usually the simplest of options but you need to take into account the tax outcome, keeping in mind that hopefully with this investment we are creating a sizeable capital gain at the end. This structure can work well if you have one spouse who may not be working or working part time and therefore on a lower marginal tax rate, however if both spouses are high income earners then this may not be the best option out there as a lot of the income and gains can be eaten up by tax.

A very popular option for investing for children are investment bonds. Investment bonds are taxed internally at the company tax rate and if held for over ten years there is no capital gains tax payable. This can mean that they become a very attractive option for higher income earning parents. There are some rules around contributions where each year you are only allowed to contribute 125% of what you contributed the previous year or else that ten year period starts again but these are often small prices to pay for the potential tax benefits that come with investing within this structure.


The strategy

The strategy when investing for children doesn’t have to be far removed from what you should be doing with your own investment strategy and that is contributing to it on an ongoing basis over time. By putting funds in on a regular basis you will give the investment the best chance to be successful as you are buying in at different points in the market. Most product providers will allow direct debits so a lot of the time you don’t have to think about it, the money will come from your bank account and get invested, I really like this as it removes another thinking point as to when you are going to deposit and means that you are more likely to follow the strategy and therefore more chance of success.

As I said at the start, the most important thing you can do to provide for your children is to be financially successful yourself. That been said, starting an investment that is separate from your own wealth creation to cover things such as education expenses, first car or even first home deposits can usually be a good idea. Like any form of investment you need to be clear on the goals for those funds and then decide on the best way to achieve those goals.



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Budget 2020 – what you need to know

This is without doubt one of the most exciting times of the year, well at least for some of us. Last night the Treasurer, Josh Frydenberg, released the Government’s highly-anticipated 2020-21 Budget, featuring the bringing forward of tax cuts, superannuation reforms, measures for Centrelink clients and additional aged care funding.  After going into a record deficit of $213.7 billion to support individuals and businesses during the Coronavirus crisis, the focus of this year’s Budget is to regrow the economy by creating job opportunities and encouraging spending.

Pekada’s team have reviewed the Budget and prepared a summary of the key measures for you, and will be updating our the Federal Budget 2020 page here throughout the day.

NOTE: It’s important to remember that the Budget announcements are still only proposals at this stage. Each of the proposals must be passed by Parliament before they’re legislated – and could change.



Personal tax cuts
The Government has announced that it will bring forward stage two of the previously legislated tax cuts that were due to take effect from 1 July 2022 by two years. As a result, from 1 July 2020:

  • the Low Income Tax Offset (LITO) will increase from $445 to $700. The increased LITO will be reduced at a rate of 5 cents per dollar between taxable incomes of $37,500 and
    $45,000. The LITO will then be reduced at a rate of 1.5 cents per dollar between taxable incomes of $45,000 and $66,667.
  • the top threshold of the 19% tax rate will increase from $37,000 to $45,000, and
  • the top threshold of the 32.5% tax rate will increase from $90,000 to $120,000.

What this could mean for you

  • The following chart shows the tax cuts you might receive this financial year based on your income levels and the amount of tax you’re currently paying.

Low and Middle Income Tax Offset
The Low and Middle Income Tax Offset (LMITO) was introduced in the 2018 Budget, to complement the existing Low Income Tax Offset (LITO). In 2019, the base rate for the LMITO increased from $200 to $255 and the maximum payment increased from $530 to $1,080. The Government had planned to discontinue the LMITO when the stage two cuts were to be introduced in mid-2022. However, even though the stage two cuts have been moved forward to the current financial year, the LMITO will also remain in place for the
2020–21 financial year.

What this could mean for you

  • If you qualify for LMITO you will receive payment after you submit your next tax return. Depending on your income, the maximum LMITO you can receive is $1,080. However, the LMITO is scheduled to cease next year. This means you could end up paying more tax in the 2021–22 financial year than in 2020–21. Dual income couples can both be eligible for the LMITO, up to a combined total of $2,160.



Default super accounts
Currently, if you start a new job and you don’t let your employer know where you want them to pay your super contributions, they will open a super account for you. The account will be in your employer’s default super fund. This may result in you having multiple super accounts.

By 1 July 2021, your employer will be able to obtain information about your existing super account from the ATO. They will then pay your super contributions into this account, unless you instruct them to pay it to a different account.

For people who don’t yet have a super account, their employer will be able to open an account for them in their default
super fund.

What this could mean for you

  • Over 4 million Australians currently have multiple super accounts, and this means they’re paying more than one set of super fees and possibly multiple insurance premiums as well. The Government estimates that this is costing Australians $450 million each year. The intention of this change is to keep people’s super accounts attached to them, so they can take them from job to job.
  • By having only one super account, you can stop paying unnecessary fees and insurance premiums that may be eroding your super balance. Having all your super together can also help your super savings accumulate faster.

Performance testing for MySuper products
MySuper products follow a strict set of government guidelines. They tend to offer their members lower fees, simple features and limited investment options.

The Government feels there are too many underperforming super funds in the market, and this is impacting members’ retirement savings. From 1 July 2021, MySuper products will be subject to an annual benchmarking test. If the fund is found to be underperforming, it will need to inform its members by
1 October 2021.

Further, if a fund is found to underperform for two consecutive years, they won’t be permitted to accept new members until their performance improves.
By 1 July 2022, all super funds will need to do the annual benchmarking test – not just MySuper products.
What this could mean for you

  • How your super fund performs can make a big difference to the amount of money you have when you retire. This change means that your super fund will need to tell you if your fund has underperformed compared to other super funds. You can then make a decision about whether you want to stay with your fund or change to another fund.

YourSuper online comparison tool
To help members easily compare super funds, the Government will release an interactive online comparison tool called YourSuper by 1 July 2021 which will:

  • rank MySuper products by fees and investment returns
  • provide links to super fund websites
  • show if you have more than one super account so you can consider consolidating them.

What this could mean for you

  • Choosing a super fund can be daunting. This comparison tool will make it easier to see what each super fund charges in fees and how they have been performing. However, it’s important to remember that past performance is not always an indication of future performance.



Additional support payments for welfare recipients
Government support recipients will receive two separate economic support payments of $250, to be paid progressively from December 2020 and March 2021.

This follows two previous payments of $750 to eligible recipients, with the new payments estimated to cost a total of $2.6 billion.
What this could mean for you

You may be eligible for the two payments of $250 if you’re currently receiving:

  • Age Pension (including Age Pension (Blind))
  • Carer Allowance*
  • Carer Payment
  • Commonwealth Seniors Health Card
  • Disability Support Pension (including Disability Support Pension (Blind))
  • Double Orphan Pension*
  • DVA Gold card
  • DVA Payments
  • DVA Seniors Card
  • Family Tax Benefit (fortnightly recipients)*
  • Family Tax Benefit (lump sum recipients)*
  • Pensioner Concession Card (PCC) holders (covers non- income and asset test PCC holders and people who have an extended entitlement to a PCC even though their payment has stopped).


Health services
Coronavirus has taken its toll on the mental health of many Australians. Therefore, the number of psychological services funded by Medicare will be doubled from 10 to 20, effective immediately.

The NDIS will also receive additional funding of almost $4 billion, to provide essential support to Australians living with a disability.

Women facing ovarian cancer will now be able to access the drug Lynparza through the PBS. Rather than costing $140,000 per course, general patients will now pay around $41 for a script while concession card holders will be charged $6.60.

What this could mean for you

  • If you currently access any of these services, or think you may need to in the future, it’s important to understand what you’re eligible for. As the first step, we recommend you speak with your doctor.

New jobs in key industries
The Government is committing $1.5 billion over five years from 2020–21 to support the building of competitiveness, scale and resilience in the Australian manufacturing sector. It will focus on six key industries of strategic interest:

  • defence
  • space
  • medicine and medical products
  • food and beverages
  • resources technology
  • recycling and clean energy.

Rural communities will benefit from $2 billion in funding over 10 years to improve water infrastructure, while regional businesses will benefit from an expansion of the instant asset write-off scheme. Regions that rely on international tourism will benefit from their share of $51 million in funding over two years to diversify their markets.

While the Budget doesn’t offer much financial relief to female workers currently impacted by Coronavirus, the government is committing $240 million over four years towards a range of employment initiatives for women. These include increasing female workforce participation in male-dominated industries such as construction.

What this could mean for you

  • With the pandemic causing massive job losses around the country, these measures are designed to get as many Australians back to work as possible. While some industries may currently offer more opportunities than others, it’s likely that many industries will be in a state of flux for years to come.


For our ongoing service package clients, your adviser will be in touch with any specific actions or impacts to your situation.

If you have any queries in the interim or would like further clarification in regards to any of the above measures outlined in the 2020-21 Federal Budget, please feel free to give me a call to arrange a time to meet so that we can discuss your particular requirements in more detail.


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July 2020 – Investment Update

  • The impact of COVID continues to dominate economies and markets. Infection resurgences in many countries helped to slow activity after economic rebounds in June.
  • Global equity markets rose in July as easy monetary policy sustained asset values.
  • Fixed interest markets provided low positive returns as investors remained cautious and sought defensive assets following the strong equity market rebound from the March low.
  • Currencies have broadly been influenced by weakness in the $US, as the attraction of the $US as a safe haven has subsided following the height of the financial market COVID crisis in March.
  • Commodities have shown good returns for the month as activity in China continues to improve despite some new COVID outbreaks. Demand has improved but supply is broadly still affected by COVID shutdowns and is supporting prices. Notably Iron Ore remains above US$100 per tonne.


International Equities

The Chinese market was clearly the strongest last month as the country continued to reopen with relatively low numbers of reported COVID infections. The central government has encouraged lending and supported provincial governments in spending initiatives in the hope of accelerating economic activity. The US market remained quite strong with better than expected quarterly earnings results from 83% of S&P500 companies. However, that is only good news relative to expectations. For the companies which have so far reported, June quarter earnings growth is sitting at negative 44%, (17% better than analysts’ expectations). Generally, analysts overestimate the upside and underestimate the downside, so this result is a pleasant surprise. In annual terms, revenue shrank 9%, despite the positive impact of the “FANGs” (Facebook, Apple, Netflix, Google) which are now the largest companies in that market and have broadly benefited from the impact of COVID. Other major European and Asian markets were muted by uncertainty related to COVID, the pace of reopening and often conflicting government directions and policy decisions. While the market in mainland China was strong, Hong Kong was affected by the impact of legal changes imposed by the central government, leaving a high level of uncertainty around that market.


Australian Equities

The Australian market was up 0.5%, sustained by strong performances from Resources and Technology companies, however the Energy and Health Care sectors were markedly weaker. The lockdown in Victoria has added further burdens to elective medical procedures and will reduce reported profits for Healthcare service companies. CSL, the largest company in the sector and a strong performer over the past year, continued a slow decline from April highs.

Earnings reports have not yet impacted market performance, but August will be an interesting month as we see companies report for the six-months to June. Technology stocks have been strong in many markets; however, the share price performances of Australian technology companies have beaten even US technology share prices since the market low in March. The operations of these companies are likely to demonstrate strong growth, but whether that is enough to justify these price rises is an open question.

Primary producers of oil and gas are seeing lower revenue and the energy sector has continued to underperform. Energy Utilities have been impacted as well, as the demand for power has declined at the same time as prices, leaving most receiving lower revenues. Property trusts were flat in July, as concern increases over the forecasts for office property asset values. In addition, the major shopping centre property owners are expected by some analysts to see up to 25-30% declines in asset value over the next 12-18 months. In the period to June they have so far booked falls in the value of shopping centre assets of 9% to 14%.


Fixed Interest & Currencies

Local bond yields were little changed in July with Australian yields remaining higher than US rates. This gap widened over the month, with the U.S. 10-year Treasury Bond yield falling from 0.66% to 0.55% (which compares with the Australian equivalent yield of 0.82%) . Along with stronger commodity prices, this yield gap provided additional support for the $A relative to the $US, with the exchange rate rising 5.1% to US 72 cents.  Central banks remained steadfastly on the path of providing whatever liquidity necessary to ensure the smooth operation of markets. The US Fed was aggressive during the month in ensuring all niches of the fixed interest market were able to trade unimpeded. The RBA has also returned to direct intervention in the interest rate curve ensuring that rates out to three years duration stay low. The European Union managed an historical agreement to issue bonds as a community, rather than as separate sovereign nations, ensuring that governments can continue to raise funds to protect economies. Despite this wave of liquidity, inflationary expectations are still relatively low, although there was an increase in US expected 10-year average inflation from 1.3% to 1.6%. None-the-less, there appears little pressure for interest rates to rise (and bond prices to fall) in the near term, given unemployment is high and inflation low.



Share markets and government bond markets continue to provide conflicting signals as to the future state of the broader economy. The ongoing rally on share markets implies a relatively high degree of confidence around an economic recovery in the near term, with little fundamental long term damage to company earnings. Conversely, the maintenance of low bond yields (which declined further last month in the U.S.) implies that central banks will be required to keep interest rates low for an extended period – which would normally only be possible if the economy remained weak.

Complicating the outlook further is the high level of uncertainty resulting from the massive fiscal and monetary policy stimulus put in place over recent months. As there has been no precedence for the magnitude of this policy, the consequences are somewhat unknown. Interestingly, inflationary expectations lifted last month despite the lack of any real positive economic news. Potentially, this rise in inflationary expectations is in response to escalating money supply measures as government expenditure adds to deposit balances and purchasing power. In Australia, the Broad Money measure of money supply (which includes cash and private sector financial institution deposits) has increased by 10% over the past year. This inflationary potential, however, is in contrast to the actual inflation data for the June quarter in Australia, which showed that prices dropped by 1.9%.



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