The Government has announced its intention to introduce mandatory standards for large superannuation funds to, amongst other things, deliver timely and compassionate handling of death benefits. Do we have a problem with paying out super when a member dies?

The value of superannuation in Australia is now around $4.1 trillion. When you die, your super does not automatically form part of your estate but instead, is paid to your eligible beneficiaries by the fund trustee according to the fund rules, superannuation law, and any death benefit nomination you made.

Complaints to the Australian Financial Complaints Authority (AFCA) about the handling of death benefits surged sevenfold between 2021 and 2023. The critical issue was delays in payments. While most super death benefits are paid within 3 months, for others it can take well over a year. The super laws do not specify a time period only that super needs to be paid to beneficiaries “as soon as practicable” after the death of the member.

How to make sure your super goes to the right place

Death benefits are a complex area. The superannuation fund trustee has discretion over who gets your super benefits unless you have made a valid death nomination. If you don’t make a decision, or let your nomination lapse, then the fund has the discretion to pay your super to any of your dependants or your estate.

There are four types of death nominations:

  1. Binding death benefit nomination
    Directs your super to your nominated eligible beneficiary, the trustee is bound by law to pay your super to that person as soon as practicable after your death. Generally, death benefit nominations lapse after 3 years unless it is a non-lapsing binding death nomination.
  2. Non-lapsing binding death benefit nomination
    If permitted by your trust deed, a non-lapsing binding death benefit nomination will remain in place unless you cancel or replace it. When you die, your super is directed to the person you nominate.
  3. Non-binding death nomination
    A guide for trustees as to who should receive your super when you die but the trustee retains control over who the benefits are paid to. This might be the person you nominate but the trustees can use their discretion to pay your super to someone else or to your estate.
  4. Reversionary beneficiary
    If you are taking an income stream from your superannuation at the time of your death (pension), the payments can revert to your nominated beneficiary at the time of your death and the pension will be automatically paid to that person. Only certain dependants can receive reversionary pensions, generally a spouse or child under 18 years.

Who is eligible to receive your super?

Your super can be paid to a dependant, your legal representative (for example, the executor of your will), or someone who has an interdependency relationship with you. A dependant for superannuation purposes is “the spouse of the person, any child of the person and any person with whom the person has an interdependency relationship”. An interdependency relationship is where someone depends on you for financial support or care.

What happens if I don’t make a nomination?

If you have not made a death benefit nomination, the trustees will decide who to pay your superannuation to according to state or territory laws. This will be a superannuation dependant or the legal representative of your estate to then be distributed according to your Will.

Where it can go wrong

There have been a number of court cases over the years that have successfully contested the validity of death nominations. For a death nomination to be valid it must be in writing, signed and dated by you, and witnessed. The wording of your nomination also needs to be clear and legally binding. If you nominate a person, ensure you use their legal name. If your super is to be directed to your estate, ensure the wording uses the correct legal terminology.

One of the reasons for delays in paying death benefit nominations cited by the funds is where there is no nomination (or it is expired or invalid), there are multiple potential claimants, and the trustee needs to work through sometimes complex family scenarios.

The bottom line is, young or old, check your nominations with your superannuation fund and make sure you have the right type of nomination in place, and it is valid and correct. While there still might be a delay in getting your super where it needs to go if you die, the process will be a lot quicker and less onerous for your loved ones. 

If credit card surcharges are banned in other countries, why not Australia?  We look at the surcharge debate and the payment system complexity that has brought us to this point.

In the United Kingdom, consumer credit and debit card surcharges have been banned since 2018. In Europe, all except American Express and Diners Club consumer surcharges are banned. And in Australia, there is a push to follow suit. But, is the issue as simple as it seems?

The push for change

The Reserve Bank of Australia (RBA) launched a review in October 2024 of Merchant Card Payment Costs and Surcharging. The review explores whether existing regulatory frameworks are still fit for purpose given the rate of technological change and complexity, and if there is a need for greater transparency – surcharges, transaction fees, and the way in which payments are regulated, are all up for review. Ultimately, the review is about reducing costs to merchants and consumers.

In general, customers dislike surcharges and would be happy to see them go – they represent a personal loss of value in much the same way a discount is seen as a personal gain. And, they have support for a ban from the large credit card providers and financial institutions with the Australian Banking Association’s (ABA) submission to the RBA review saying, “The current surcharging framework is clearly not working and requires targeted reform. Consumers should never be surcharged for bundled costs like POS systems, business software products or other business incentives.” The reference to “business incentives” is where a higher fee is charged by the payment service provider to provide the merchant with reward points and other incentives.

The push for a ban accelerated when the government announced that it would ban debit card surcharges from 1 January 2026, subject to the outcome of the RBA review later this year.

If surcharges are banned for some or all payment methods, businesses currently charging surcharges will need to either absorb the cost of merchant fees or increase prices. The issue for many businesses is not whether to charge a fee, but the costs of accepting what is now the most common payment method – cash is free to transact, cards are a facility to transact legal tender, not legal tender in and of themselves.

Small business pays 3 times more

While the average card payment fee in Australia is lower than the United States (which is close to double Australia’s rates), we pay a higher rate than in some other jurisdictions such as Europe. The RBA have flagged there might be room to improve this by capping interchange fees and/or introducing competition into how debit card payments are routed (allowing systems to default to the ‘least cost’ option available).

In Australia, it is not a level playing field when it comes to card transaction fees with a large disparity between fees paid by small and large merchants – small merchants pay around three times the average per transaction fee than larger merchants (large merchants are able to secure wholesale fees or utilise ‘strategic’ interchange rates). But even within the small business sector, fees vary dramatically with the cost of accepting card payments ranging from less than 1% to well over 2% of the transaction value.

How we use cards and digital transactions

The RBA are generally in favour of allowing surcharges, pointing out that they signal to consumers which payment methods offer better value and enable market forces to determine the dominant payment providers. And, this might be true for large purchases, but do we really notice when we’re tapping our phones or watches to grab that morning coffee?

Cards (including debit, prepaid, credit and charge cards) are the most frequently used payment method in Australia, accounting for three-quarters of all consumer payments in 2022.

According to the Australian Banking Association:

  • Contactless payments now account for 95% of in-person card transactions, compared to less than 8% in 2010.
  • Online payments, as a share of retail payments, have grown from 7% in 2010 to 18% in 2022.
  • Mobile wallet (Apple Pay, Google Pay, etc.,) usage has grown from 1% of point-of-sale payments in 2016 to 44% in October 2024.
  • Buy Now, Pay Later (BNPL) services, virtually unknown 8 years ago, are now used by nearly a third of Australians.

When are surcharges allowed

In the days before the RBA’s surcharge standard, it was not uncommon for businesses to apply a flat 3% surcharge.

The surcharge rules enable merchants to surcharge consumers for the “reasonable cost of accepting card payments”.

This means:

  • A business can only charge a surcharge for paying by card/digital wallet, but the surcharge must not be more than what it costs the business to use that payment type. These costs, measured over a 12 month period, can include gateway costs, terminal costs paid to a provider, and fraud prevention etc., if they relate directly to the card type being surcharged.
    • Payment suppliers must provide merchants with a statement at least every 12 months that includes the business’s average percentage cost of accepting each payment type.
  • If a business charges a payment surcharge, it must be able to justify how the surcharge fee was calculated.
  • If the surcharge applies to all payment types regardless of type, it must not be more than the lowest surcharge set for a single payment type.
  • If there is no way for a customer to pay without incurring a surcharge, the business must include the surcharge in the displayed price. That is, if your customer cannot use cash or another payment method that does not incur a surcharge, then the price displayed must include the surcharge.

The RBA estimates that, on average, card fees cost:

Card type

Fee

Eftpos

less than 0.5%

Visa and Mastercard debit

between 0.5% and 1%

Visa and Mastercard credit

between 1% and 1.5%.

Source: RBA

Excessive surcharging is banned on eftpos, Debit Mastercard, Mastercard Credit, Visa Debit and Visa Credit. The Australian Competition and Consumer Commission (ACCC) reportedly stated that excessive surcharge complaints increased to close to 2,500 in the 18 months from the start of 2023.

Tax on surcharges

If your business charges goods and services tax (GST) on goods or services, then GST should also apply to any surcharge payments made. 

Here’s some easy money management skills for children of different ages.

Teaching good financial habits, such as saving and budgeting, is one of the best ways to prepare children to have a secure financial future.

It’s never too early or late to start talking about money with your children — start as soon as you are comfortable to and make learning as relevant to their age and life stage as possible.

Below are some strategies that parents can use with their children when they’re at different ages.

Younger children (under age 11)

A great way to begin to teach younger children about money is to explain its value and its function in the world. Kids often focus on rewards-based systems, where they earn a reward for good behaviour or academic achievement. Use this time to teach them how to earn money as a reward and divide it into three categories: spend, save, and give. For example, spending may be related to buying a fun treat or toy, saving could be taught as a way to buy something they really want in the future, and giving is how you help those in need.

  1. Set up three separate containers for “bank accounts” and label them Spending, Saving, and Giving.
  2. Each week, offer opportunities to earn money by using real-life experiences, such as listening well, completing homework early, or doing simple chores.
  3. At the end of the week, count how much money they’ve earned in each category.

Tip: Sometimes when sharing the concept of saving with your child, it can be helpful to explain you’re “paying yourself for something fun in the future” and relating it back to an age-appropriate concept they can understand. You can make tweaks to this activity along the way. For example, if your child puts extra money into their Saving jar, you could provide a few additional dollars to help them understand compounding interest—how saving money can help them earn more over time. If they receive money as a gift for a holiday or celebration, bring out the money jars for a refresher. Repetition and reinforcement become important in learning any discipline, especially money management skills.

Activity: "Money Jars"

Preteens and young adults

Parents often associate the tweens and teens as the years their kids desire more independence and more options. In this case, tying money management and financial literacy to something relevant in their lives can help keep them engaged. For example, many young people are interested in gaming, so try to relate investing to playing a game. Before they start the investing game, provide them with an overview of the concepts of shares, bonds, and cash, and how they operate differently, like different players in a game. The different players in the game all act together to form an investment strategy. Depending on a child’s age, engagement, and appetite for these discussions, consider introducing the concept of building model portfolios. Review model portfolios that show different asset allocations, and then have each family member choose a portfolio. Once a family member chooses a portfolio, discuss what stood out to them about the portfolio. This will help reinforce the importance of asset allocation and diversification.
  1. Google the phrase investment simulators; many are available online.
  2. These simulators allow you to invest in different securities and monitor their performance over time.
  3. Have frequent conversations with your child about their portfolio’s performance. How would they feel if those were real funds in the market they “lost” or “gained”? This can help reinforce the concept of risk and reward in investing.
Activity: Investment Simulators

University graduates and beyond

At this stage, they may be ready to digest more advanced topics. Discuss the importance of goals-based investing by asking them to think about the next big purchase they want to make—are they saving for a car, a down payment for a home, or even setting aside money for future retirement? Ask: What is their time frame for that investment? When do they want to reach that goal? This helps teach the importance of time horizon as it relates to investing; the longer a person has to save and invest, the greater the likelihood for success in reaching their goals. Depending on their current situation, they may also have student loans to pay back. Budgeting may become a critical topic at this time, and sitting down with them to create that budget can be helpful. This is another important component of financial literacy and money management, and attaching it to an important life stage can make it all the more relevant.

Achieving your long-term financial goals doesn’t need to be overwhelming. If you can put in place some basic financial steps, you are on the road to a successful outcome.

It means keeping on top of your options and devising strategies for investment, debt reduction and risk protection. The start of the year is a perfect time to take a few proactive steps, that your future self will thank you for.

Building your nest egg

Adding to your superannuation is one of the most powerful and tax-effective ways to build your wealth over the long term. If you’re an employee, consider salary sacrifice to add to the mandatory contributions made by your employer. Even a small amount, paid regularly, will make a big difference over time. Don’t forget that there are some limits on how much you can invest before tax is affected, so it’s a good idea to keep track of any before-tax, or concessional, contributions. Small business owners, sometimes struggling with cash flow issues, may be tempted to neglect their own super contributions but you risk missing out on the benefits later in life. Finding ways to cut living expenses and reducing or eliminating debt, including paying off the mortgage as quickly as possible, are also obvious ways to attain financial security, although not always easy to implement with cost-of-living pressures. But, again, any small and regular steps towards your goal are a positive contribution.

Preparing for the unexpected

Apart from finding ways to build your wealth and reducing debt, being prepared for unexpected losses is another way to secure your future.

For example, losing your home, business premises or vehicle in a catastrophic event when you’re not adequately insured creates a significant financial burden.

As natural catastrophes increase in frequency and intensity so does the ‘protection gap’, the economic losses caused by underinsurance or no insurance. One study estimated these losses in Australia at more than $18 billion in the nine years to 2023.

The Insurance Council of Australia (ICA) says there are some common reasons for underinsurance.

  1. Making an incorrect guess about how much it would cost to repair, rebuild or replace property and contents. The ICA suggests using a building insurance calculator and a contents insurance calculator. Most insurers include both types of calculators on their websites.
  2. Forgetting to update your insurance after upgrades to your home and belongings. Renovations, new furniture, and upgraded appliances can all add to the value of your home. It’s a good idea to reconsider the value of replacement at least every time you renew your policy.
  3. Adding the extra costs such as demolition, clean-up, asbestos removal, council applications, architect, and surveyor services, and even the cost of temporary accommodation during a rebuild.
  4. Not accounting for all your assets – you probably own a lot more than you realise. Have you included the contents of your garden shed and you wardrobe?

Financial protection for personal events

Protecting yourself financially against unexpected personal events is also worth weighing up.

A survey of more than 5000 working Australians shows that, on average, almost 80 per cent have car insurance while just one-third have life insurance.

Life insurance is a valuable protection for your family if something happens to you. There is also income protection insurance and various other personal insurances that can ensure you continue to receive an income when you’re unable to work.

While cost-of-living pressures might make insurance or self-insurance seem like a luxury you can’t afford, making an informed choice is the best you can do. That means the financial risks associated with events that affect yourself or your property and carefully weighing your options.

We’d be happy to help you review your wealth building and risk strategies and solutions for a financially safer 2025 and beyond.

It’s a risky business being in business for yourself, so knowing how to identify and manage risk is an important part of running a thriving business.

Anything that impedes a company’s ability to achieve its financial goals is considered a risk, and there are many issues that have the potential to derail a successful business. Some of these can ruin a business, while others can cause serious damage that is difficult to recover from.

However, taking risks is an essential part of growing a business – it’s how you thrive and expand. The key to achieving the rewards that come with risk and avoiding the devastation that can occur, is identifying and actively managing your business risk.

Assessing your tolerance for risk

The first step is to think about what level of risk you are comfortable with. A range of factors influence your appetite for risk including your individual circumstances, financial resources, specific industry dynamics, economic conditions, and business goals.

It’s important to acknowledge the relationship between risk and reward. High-risk activities may provide the potential for significant returns when you are going for growth but are also associated with greater uncertainty and the potential for larger losses.

Not all risk is equal

Some types of risk are best managed through insurance while others can be managed through thoughtful decision making and risk mitigation.

Risk taking is often associated with innovation and entrepreneurship and there are countless examples of reckless business behaviour that paid off and as many examples that did not pay off. To expand, evolve and stay relevant in a changing marketplace, businesses may need to take calculated risks. This can encompass the development of new services or targeting a different client base, employing staff, developing new products, the adoption of emerging technologies, or exploring new markets.

Taking calculated risks involves some planning – conducting research, gathering supporting data and considering possible outcomes before making a decision. Informed, calculated decisions have a greater chance of success and doing your homework is a great way to mitigate risk in business.

Managing business risk

There are many ways to manage business risk, depending on the type of risk. Threats come in many shapes and forms and can include strategic, compliance, operational, environmental, and reputational, but one of the most fundamental risks is that of the business no longer being financially viable. All the above can impact a businesses’ bottom line so when considering your strategies, it’s a good idea to identify the risks that could affect your business’s ability to meet its financial obligations.

Setting up and maintaining a cash reserve is critical for small businesses, particularly ones with narrow margins. Half of all small businesses hold a cash buffer of less than one month which may not be adequate. A cash reserve is a great risk mitigation strategy as it can help you get back on your feet when faced with an adverse event.

Keep an eye on cashflow

Growing a business can put pressure on cashflow, and managing your cashflow is a powerful way of managing your business risk.

If you have not already done so, creating, and maintaining a cash flow forecast helps you anticipate and cash shortages. Monitoring your cash flow over time gives you visibility of your financial situation and an understanding of any seasonal ebbs and flows.

Some things you can do to manage your cashflow include being responsive with invoicing and chasing overdue payments. Negotiate payment terms that support your cashflow requirements and consider offering incentives for early payments or penalties for overdue invoices.

For many businesses, one of the leading causes of cash flow shortfalls is overstocking, which increases the amount of cash you have locked up in your stock. Effective inventory management and working with suppliers to reduce lead times can assist with cashflow.

We can help you develop solid cash flow management and provide expert advice to make growing your business less of a risky proposition.

Starting 13 November 2024, the Australian Government’s Digital ID app, myGovID, will be renamed myID.  The app will feature a new look and branding, aimed at minimising confusion with the myGov platform and enhancing user experience across government digital services. 

What To Expect: 

  • Same login details – You will continue using your existing email, password and identity strength settings without any need to set up a new account.
  • Access to services – You can still securely access government services as usual. If the app hasn’t updated automatically, you can update it via the  App Store or Google Play. 
  • Dual branding – As myGovID transitions to myID you might see both logos, but this won’t impact your access or the security of your Digital ID. 

Protect Yourself Against Scams: 

As myGovID becomes myID, it is important to remain vigilant against scams during this transition. 

To protect yourself, follow these tips: 

  • Don’t click on suspicious links: Avoid clicking on suspicious links or downloading files from unknown sources. The Australian Taxation Office (ATO) will never ask you to confirm your details via a link or SMS. 
  • Download from official sources only: The myID app should only be downloaded from trusted platforms like the App Store and Google Play. 
  • Use direct access: Access ATO services by typing “ato.gov.au” directly into your browser rather than clicking on links in messages.
Always be cautious, keep your personal information secure and reach out to official ATO channels if you have any concerns. 

For more information, we encourage you to contact your agent to discuss.

Starting November 13th 2023, all types of businesses with an Australian Business Number (ABN) must use the client-to-agent linking nomination process to make any of the following changes:

  1. Engage a new registered Tax or BAS agent, or payroll service provider to represent them.
  2. Adjust the authorizations you grant to an existing registered agent.

       Please Note: If your current arrangements remain unchanged, no action is required.

This new requirement does not currently apply to individual taxpayers or sole traders.

Only after completing the client-to-agent linking process will your registered agent be able to connect with you as their client.

Why the change? 

To help protect you from fraud and identify-related theft, the Australian Taxation Office are enhancing security to help ensure only your authorised tax agent, BAS agent or payroll service provider can access your information and act on your behalf for your tax and super affairs.

How to nominate an agent?

To securely nominate your chosen registered agent, you must follow these steps in Online Services for business. If you have not set up access to Online Services for business, you must do these 3 steps first:

  1. Set up your Digital Identify (myGovID)
  2. Link your myGovID to your ABN
  3. Authorise others to act on your behalf in Relationship Authorisation Manager (RAM)

Once you are set up, you can complete the nomination in Online Services by following these steps:

  1. Login to Online Services for Business, where the Agent Nomination feature is available.
  2. Nominate your authorised agent by providing the required information.

            a) Use the registered agent number (RAN) and practice name supplied to you to accurately identify your chosen agent.

            b) Submit the declaration.

       3. Notify your agent that you have completed the process, after which the agent has 7 days to action the nomination before it expires.

For detailed instructions on each of these steps, please refer to the ATO Website here  https://www.ato.gov.au/Tax-professionals/Digital-services/In-detail/Client-agent-linking-steps/

Notifying your agent

Once you have completed the nomination process, it is vital to inform your chosen agent as they will not receive a notification. The nomination is active for 7 days and must be actioned before the expiry.

Extending a nomination

If the agent nominated needs additional time to add you as a client, you can use the Extend feature which will become available on the next calendar day after submitting a nomination. It will remain available for 7 days, then it will expire.

To extend a nomination:

  • from agent nomination, select extend
  • at the extend agent nomination screen, check the details of the agent are correct
  • complete the declaration and select submit

If a nomination has expired, you will not be able to extend it. You’ll need to resubmit a new nomination.

For more information, we encourage you to contact your agent to discuss.

In March this year, a new category of domain name was made available to Australian businesses.

Instead of ending with .com.au, .net.au, asn.au, you can now also register .au related to your existing URLs.

Up until September 21, Australian businesses can register ‘xxx.au’ domains for existing .com.au domain names. Thereafter, anyone else can register the new, shorter URLs. This means competitors, or URL ‘campers’ or cybercriminals can register a domain name that’s very similar and possibly, mistakable for your own.

In order to protect URLs related to your existing .com.au domains, the Australian Small Business and Family Enterprise Ombudsman, Bruce Billson has urged small business to take urgent action by the September deadline to safeguard their identity.

“The consequences of not registering your existing business name by this deadline could be catastrophic for a business if a rival or someone else took their online name,” Billson warned.

“I implore all small business owners to take a few minutes to work out if they want the shortened .au domain or will be unhappy for someone else to have it,” Billson said.

“If you want it, small business owners, I urge you to take a few minutes and few dollars to register it or potentially face someone else grabbing it and using it to digitally ambush your business, to demand big dollars later to surrender it to you, or misuse it to masquerade as you or to help them engage in cyber-crime.”

The .au Domain Administration (auDA) is a non-government regulator, and recently rejected Billson’s letter requesting an extension to the deadline.

The following summary will hopefully shed some insights on why we are seeing such an extreme level of market volatility across all levels of investment at present.

Falling stock and bond markets, along with the rising volatility which has gripped global markets since the start of the year, has intensified in recent days. Last week’s announcement of annual US inflation of 8.6%, the highest in 40 years, was the primary cause.

The chart below illustrates both the recent increase of CPI as well as the composition of contributions to US inflation.

Picture1

Sourced : June 2022

Energy, food, and services have all contributed to the rise in US inflation. Reduced supply and increasing demand factors are pushing prices higher. Regarding energy, there has been significant supply constraints due to the conflict in Ukraine along with greater demand as the US holiday driving season ramps up. Food prices have also been affected by the costs of production (increased fertiliser costs) and transportation. Services costs have risen as demand increases as the economy reopens and consumers recommence travel and other related activities. In the last three months alone, airfares have risen 48%.

US Federal Reserve (Fed)

In response to the rising inflation the central bank, the Fed, has made it clear that they seek to return inflation to its target of 2% p.a. The Fed is also aware that if inflation continues to rise, workers will likely seek additional wage rises to compensate for the higher costs of living. The danger then becomes a wage price spiral. If wages increase too quickly then the producers of goods and services raise their prices to maintain their profit margin, which then feeds into further wage rises. This potentially results in higher inflation becoming entrenched.

The Fed has just made the decision to raise rates by a further 75 basis points or 0.75%

Reserve Bank of Australia (RBA)

At its June meeting the Australian central bank, The RBA, also responded to higher-than-expected domestic inflation, with an increase of 0.5% in the official cash rate target. It was the largest upward move since February 2000.  This brings the cash rate target to 0.85%. In its statement following the decision, the RBA also called out rising power and petrol prices, as contributing to inflation from the previous month.

Both the Fed and RBA, along with other central banks, have made it clear that they will continue to raise rates to tame inflation and bring it down to the targets they have set.

Market Reaction

Following these central bank’s statements, markets are increasingly concerned that the rate hikes required to tame inflation could depress economic growth, resulting in a recession. One indicator that has preceded recessions in the past is an inverted yield curve. This simply means that longer term interest rates fall below shorter term rates. This is illustrated by the blue line in the chart below, where the current 2-year government bond rate is above the 10-year rate. Historically, an inverted yield curve has been a good, albeit not infallible predictor of a recession 12-18 months later.

Picture2

Sourced : http://www.worldgovernmentbonds.com (June 2022)

International Equities

Markets that were already under stress prior to last week’s inflation rate, responded quickly and sold down further as the market reassessed company’s future earnings prospects in a higher inflation, higher interest rate environment. The following charts show both the Nasdaq and S&P 500, over 1 week and 6 months, with their corresponding drawdown.

S&P 500 – 1 week (to 14 June 2022)

Picture3

S&P 500 – 6 months (to 14 June 2022)

Picture4

Sourced : http://www.tradingeconomics.com (June 2022)

Falls in recent days have seen the S&P 500 move officially into a “bear market” (market falls of 20% or more). The NASDAQ, which comprises predominantly “growth” stocks, has been particularly hard-hit.  The main reason for this is that growth stocks are expected to deliver a higher proportion of future cashflows in the distant future and are therefore more sensitive to interest rate rises. The future cash flows are worth less in today’s terms as interest rates (discount rates) increase.

Australian Equities

Both global markets and domestic factors influence the Australian stock market. Whilst earlier in the year the market fared relatively better to its overseas counterparts, market sentiment began to change following the April RBA meeting. At this meeting, the RBA began to suggest that rates may have to move higher as inflationary pressures were building. These market concerns were realised in the May meeting, when the official cash rate rose by a quarter of a percent, and then in June with the half a percentage rise.

The following charts show the ASX 200, over 1 week and 6 months, with their corresponding drawdown. The one-week drawdown was compounded by the US market falls. Overall, the market has fallen around 12.5% from its peak 6 months ago.

ASX 200 – 1 week (to 14 June 2022)

Picture5

ASX 200 – 6 months (to 14 June 2022)

Picture6

Sourced : http://www.tradingeconomics.com (June 2022)

Fixed Income

Fixed income markets have also responded to rising inflation and interest rates. If yields rise rapidly (responding to higher interest rates), the value of a fixed interest investment falls. This is because the fixed yield on an existing investment, is now lower on a relative basis, and therefore considered less attractive, than a new investment which attracts a higher yield.

Australian and US yields have surged in 2022, with both 10-year Government Bond rates rising to well over 3%. In Australia the Ausbond Composite Index, which is the most common measure of the Australian Fixed Interest market, is down approximately 10.8% from the start of the year to 10 June, whilst the global equivalent, the Bloomberg Global Aggregate (AUD Hedged), is down approximately 11.5% from the start of the year until 10 June 2022. These are the largest corrections seen in this asset class in the last 40 years and eclipses the 1994 bond market sell-off.

The following charts illustrate the rise in Australian and US yields over the past year, and the drawdown in the Ausbond Composite Index since 1990.

US 10 Year Yield (1 Year) 

Picture7

Australian 10 Year Yield (1 Year) 
  Picture8
Sourced: http://www.tradingeconomics.com (June 2022)

Outlook

We appreciate that the current environment looks concerning given falls in markets and likely further interest rate rises. There have also been reports comparing the current period to previous episodes of rising inflation and interest rates. It is worth examining two previous periods of rising inflation and interest rates. These two periods are the 1970’s through to the early 1980’s, and 1994. Whilst it is difficult to make direct comparisons as the global economy and markets have evolved since these periods, it is still worthwhile to identify similarities and differences which can assist in thinking about the market outlook.

In the 1970’s, economies were impacted by oil price shocks, causing inflation to surge. Geopolitical issues in the 1970’s were mainly responsible. As a result, central banks at the time were much more strident in taming inflation, and rates moved well into the double digits. In the US interest rates reached 20% by late 1980. This resulted in the recession of 1981-1982, and US unemployment reached nearly 11% in late 1982. However, economies were much more rigid at that time and the rising inflation resulted in significant wage rises becoming much more entrenched. This is not the case today. As labour markets have become more flexible in recent decades the likelihood of wages increasing at the same rate is diminished.

The Fed also embarked on a series of interest rate increases primarily to ward off inflation in 1994. However, there are a few key differences with now. In 1994, whilst inflation was rising, it had not risen to the current levels. Policymakers, however, fretted that a strong economy would translate into much higher inflation. The Fed doubled interest rates over a 12-month period to 6% – at one point executing a three quarters of a percent hike. The speed and degree of the rate rises took markets by surprise and resulted in significant drawdown in fixed income markets.

Current economic conditions today are more sensitive to interest rate movements, given higher indebted levels, an ageing demographic, slower population growth, and lower economic growth. Central banks are aware of these conditions and as a result, whilst seeking to reduce inflation, will also likely be conscious of the market impacts.

Importantly, we do see inflation likely moderating over the next 12 months. A range of factors particularly around supply side constraints such as ongoing Covid impacts particularly in China and energy prices have been key drivers in the current inflation numbers. We expect these constraints to ease in coming months. This in turn would likely improve the outlook for rates, bond markets, and equities.

In addition to Geopolitical factors listed above, we see that the current inflation environment has been largely caused by massive increases in the money supply just after the Covid crisis. Two and a half years later, the lagged impacts of those money supply increases are showing up in rising prices for goods, services, real assets and commodities.

As the Covid crisis unfolded and the world controlled the situation, the growth rate in money supply was drastically reduced. This may mean that large increases in inflation this year may be followed by a moderation in prices in 2023 and beyond, as the lagged effect of those subsequent money supply decreases flow through next year.

What to do?

The volatility that we have seen over the last six months, while significant, is not an unusual occurrence for a normal and healthy functioning market. Despite being an uncomfortable experience in the short term, equity markets will continue to be an important contributor to overall long-term returns.

It is important to continue to stay invested and manage your portfolio in line with your long-term objectives, aligned to your risk tolerance. We would encourage investors to discuss their portfolio with their adviser to ensure that it meets their personal needs, objectives and is in line with their risk tolerance.

One of the important lessons in investing is that time in the market, is more important than timing the market. The following chart demonstrates that whilst short term movements in markets (in this case the ASX 200) can be extremely volatile (as we have witnessed in the past 6 months), investing for the longer term (the blue line) provides a much more stable outcome.  As we continue working through this period of heightened volatility, keeping the longer-term in mind remains important.

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Market commentary

Below is a summary and highlights from the movements this quarter and major changes to some of the key asset areas:

Australian equities

The Australian equity market (as measured by the S&P/ASX 200 TR) bounced back from a sluggish start to the quarter, to return (+2.75%) for the month of December and end the year on a positive note. The December quarter returned (+2.09%) to round out what was a tumultuous 2021 for equity markets. The calendar year returned a pleasing (+17.23%). Despite the growing fears of ongoing coronavirus and inflation concerns, the Australian market showed great resilience post the hard slog of 2020 as the market continued to focus on company fundamentals and assisted greatly by easing lockdowns in most states.

The strongest sector returns for the quarter were Materials (+12.7%), assisted by strong performance within metals & mining sub-sectors, Utilities (+11.4%) and Real Estate (+9.3%). Laggards included the Energy sector (-8.8%), which gave back the previous quarter gains, Information Technology (-6.1%) and Financials (-2.2%). Performance across the smaller-mid size market cap spectrum (company size) broadly followed the same path across the quarter, Mid-caps (+3.9%) and Small-companies (+2.0%).  And despite lagging Growth by 4% in the final quarter, Value completed its first year of outperformance in five and only its second year of outperformance in the past decade. The S&P/ASX Value Index (+20.9%) versus the S&P/ASX Growth Index (+13.3%)

International equities

Off the back of strong US earnings and signs of economic stabilisation in China, Global equity markets rallied in October and continued to post solid monthly gains despite increasing concerns over rising inflation, more hawkish central banks views and statements (commencement of asset tapering in 2022), and concerns over the new Omicron variant.  However, although equity volatility saw a dramatic spike in November as a result of the new variant, markets quickly recovered and by the year-end these concerns had largely subsided, whilst US data continued to indicate its economy overall remained stable and corporate earnings were robust; S&P500 (+36.0%) and NASDAQ (+29.7%) providing confirmation of a strong US led recovery. The broader global equity market (MSCI World NR AUD) returned (+7.1%) for the quarter, ending a strong calendar year (+29.3%). The index has now returned ten-years of positive-growth having last seen a negative year in 2011. The index has outperformed the S&P/ASX 200 TR index by an average of (+6.2%) – unhedged – over this period.

Unhedged indices outperformed their hedged equivalents as the Australian Dollar depreciated relative to the US Dollar over the quarter and year driven mainly to a sharp fall in the iron-ore price.

Emerging Markets (MSCI EM Index AUD) unfortunately continue to lag (-1.9%) as Chinese equities significantly underperformed global equities contributing approximately 25% of the underperformance of emerging market equities versus developed markets. Coupled with extreme inflationary pressures in Turkey, political upheaval in Chile and geopolitical tensions between Russia and the West, EM (+3.4%) for 2021, continues to be under pressure. Pockets of EM do however continue to provide some relief. Geopolitical uncertainty and continuing concerns over potential monetary policy tightening continue to remain major potential headwinds as does the prospect of higher US rates.  Europe (STOXX Europe 600 index) returned (+4.9%) for the quarter (+23.2%) for the year, with strong corporate earnings being the main catalyst; Asian markets (MSCI AC Asia Ex Japan) continues to struggle (-1.9%) for the quarter as broader markets sold off due to the emergence of Omicron and potential reinstatement of restrictions. The long-term growth and investment outlook for emerging markets however still looks compelling on a relative basis.

Property & Infrastructure

The Australian listed property sector (S&P/ASX 200 A-REIT) performed strongly, returning (+10.1%) for the quarter. The reopening trade now seems to be fully priced in although performance divergence across sub-sectors remains as repercussions of the pandemic and government responses are still being primarily felt in the hotel, office, and retail sectors. Performance across niche sectors such healthcare, childcare, self-storage, and logistics continue to perform strongly. The Domestic sector however continued to underperform its global counterpart, given the greater availability of these niche sectors offshore and a falling Australian dollar.

Global listed property also performed very strongly with (unhedged) returns (+11.7%) and hedged returns (+9.2%), with the former benefiting from a falling Australian dollar. M&A also continues to be rampant globally adding to further price appreciation and opportunity.

Global listed infrastructure (unhedged) returned (+7.1%) for the quarter versus currency hedged returns (+7.5%). The sector bounced back aggressively form the disasters of 2021 to record their highest yearly returns for over a decade. No doubt assisted by the bipartisan US infrastructure bill, the realisation globally that significant infrastructure spend is coming, and with cashed up pension and private equity vehicles chasing a dearth of available infrastructure assets available for sale.

Bonds and Cash

Central banks globally, including the RBA continue to remain accommodative in support of markets although fears of an overshoot in inflation gathered further momentum as rhetoric turned hawkish. Talk of an accelerated tapering process and fear of the Omicron variant did result in at times extreme volatility (U.S. yields traded between 1.7% and 1.4%), however yields on 10-year treasuries, both domestically and globally did not appreciate to the extent as most thought from the close of the previous quarter. The 10-year Australian Treasury yield increased from 1.488% to 1.631% whilst the 10-year US Treasury yield barely moved, increasing only 2 basis points from 1.487% to 1.512%. UK 10-year yield fell from 1.02% to 0.97% whilst German 10-year yields remain in negative territory, -0.17% to -0.19%.  Shorter dated bond yields did however increase substantially on a relative basis indicating increased short to medium-term inflationary and pricing pressures. For the quarter, Australian bonds (Bloomberg AusBond Govn 0+Yr) returned (-1.44%) whilst global bonds (BBgBarc Global Aggregate TR Hedged) returned a flat (+0.03%). Investment grade corporate bonds lagged Government bonds for the quarter whilst higher yielding bonds continue to remain well supported (spread contraction resulting in rising prices) as the hunt for yield continues in earnest. Cash yields remained untouched as the RBA left the official rate at 0.10% throughout the quarter.

Quarter in review

The December quarter was definitely an interesting one with virus fears subsiding and then re-escalating again, Chinese economic growth showing some signs of improvement, and growing fears of the impacts of rising inflation globally, particularly on investment markets, as central banks considered their next steps.

Inflation appears to be a particular problem for the US, the UK, and some emerging market countries, whilst being less of a concern for Europe, Japan, China, and Australia to a lesser extent. For now, anyway. However, US inflationary concerns and the likely US central bank reaction function primarily drove markets in the quarter with expectations rising that the bank may have to end their money printing efforts early which would kick off the earlier than forecast rate rise cycle, with calls from market participants for 4-5 rates rises versus the previously expected 2-3 rate rises for 2022.

Whilst its clear investors were fixated on the evolving inflation narrative in the quarter there were also ongoing concerns regarding the health of China’s economy, rising oil prices, and rising geopolitical tensions including Russia / Ukraine (involving the US and Europe) and China / Taiwan.

Covid restrictions appeared to ease in the quarter both locally and globally, but fears rose again as the new variant appeared to be significantly more transmissible. This impacted supply chains and the availability of labour yet again, with consumption patterns also appeared to have changed at the back end of the quarter. Governments locally and globally appeared to be more calm and less inclined to rush towards increased restrictions which helped settle investor concerns. Time will tell if this remains the case.

Looking Forward

Overall, our outlook remains positive in that:

  1. there is plenty of stimulus still in the system
  2. there remains relatively high household savings, further supported by rising wealth, meaning pent-up consumption
  3. corporate balance sheets are in good shape
  4. broad re-opening should see a swift pick-up in the services part of the economy (and subsequently less goods demanded)
  5. rates of return on defensive assets are still too low, which could further support growth asset flows

However, risks remain, and these are fairly sizable risks with the potential to unravel in a fairly messy fashion, including covid policy responses, the inflationary threat, and the weakened Chinese economy, with a watchful over geopolitical risks and election cycles.

Asset price returns and volatility in 2022 will be largely dependent on how and when these risks are resolved. As such, we expect a bumpier ride for markets in 2022, with asset selection likely to be key. Corporates and households appear in good shape, but how long they remain in good shape will largely depend on how quickly governments and central banks exit their emergency policy paths.

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