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HOW MUCH WILL YOUR CHILD’S EDUCATION COST?

INFORMING

GENERATIONS

Your child’s education is an important investment in their future. But getting it right takes careful planning, which means you need a true understanding of the costs involved.

As every parent knows, a quality education is one of the most important foundations you can provide for your child. But the costs of schooling can really add up over the years – and it’s not just fees; there are plenty of other extras you’ll need to cover as well. And of course, if you have more than one child, then all the expenses will be multiplied.

So how much can you expect to shell out for each child’s education – and are there ways to plan ahead so you can reduce the strain on your household finances?

What to expect

The cost of a child’s schooling in Australia varies widely between metropolitan and regional areas, and depends on whether you opt for a private or public education. But even if you send your child to a government school, there are still plenty of expenses that you’ll need to be ready for – like uniforms, books, supplies and after-school activities.

In a major capital like Melbourne or Sydney, the cost to educate a child born in 2016 from preschool to Year 12 could cost anywhere from around $73,000 to well over $500,000.1

That means a family with two children attending private school could end up spending above $1 million for their kids’ primary and secondary education. And while cities like Adelaide and Perth are substantially cheaper, the projected costs still range from around $55,000 up to almost $400,000.1

How to prepare

As with any investment, you should plan carefully for your child’s education. Everyone’s circumstances and choices are different, so take the time to research and calculate how much you’re likely to pay over the course of your child’s school years. That way you can start budgeting as soon as possible. If you’re lucky, you might have parents who are willing to chip in for their grandchildren’s education – but if not, don’t worry. Here are three things you can do now to help cover your family’s education costs without sacrificing your lifestyle.

1 Create a savings plan

By putting aside a little bit of money on a regular basis, you can grow your savings so you’ll have money to put towards your child’s schooling. A simple way to do this is to set up an automatic transfer from your pay cheque into an everyday cash savings account. Once you get started, you will notice the interest compounding over time. As you get into the habit of saving, you’ll find it becomes easier to manage your short term expenses like school fees and uniforms.

2 Invest your savings

While a savings plan is great, with education costs often rising faster than inflation, your cash savings may not grow over time by enough to meet your future education costs. Given education costs can be long term in nature (if you start saving early enough) this may allow you to consider non cash investments. By taking some risk with your capital via your regular savings plan and investing into a term deposit, investment bond or a managed fund, you can help fund longer term education costs, based on the anticipated growth and earnings from these investments. So it’s worth speaking to your financial adviser about the best investment vehicle for your situation.

 3 Pay down your mortgage

It can be tough keeping up with school fees and other costs when you still have a major financial burden hanging over you. That’s why it’s a good idea to start paying off as much of your home loan as possible before you child starts school, so you’re in a better financial position to manage their ongoing education costs when the time comes.

Even if your child is already in school, it’s never too late for your financial adviser to help you get your finances on track and plan for the remainder of their education.

1 Australian Scholarships Group, ASG Planning for Education Index, 2016.

Colonial First State Market Summary January 2019

Taken from the CBA Global Markets Research report, ‘January Month in Review’; first published on 1 February 2019

Summary: Financial Markets in January

  • Money markets showed elevated yields that have only contracted marginally in January.
  • Bonds have rallied (yields lower) in Australia as markets increased the chance rate cuts.
  • Global credit spreads retraced a good portion of the late 2018 widening, while A$ credit spreads remain on the sidelines and range bound.
  • Equities rose strongly in January after a battering in December. Materials and miners performed well as commodities rose.
  • The AUD was supported by higher commodity prices.

Money Markets (Cash)
The Australian data has been mixed over the past few months. And dwelling prices continue to fall. The bright spot is the labour market, where jobs growth remains strong and the unemployment rate is inching lower. The Australian OIS rates have moved to price in an even greater chance of a rate cut in the coming year. However, these expectations remain more of a late 2019 or early 2020 story.

Australian and Global Fixed Interest
Across the developed market rates world, yields have finished near their lows in January. Markets have pushed back on the bounce in equity markets and have been firmly forward looking on a view that the rate hike cycle in the US has come to an end. As January closed, the more dovish Fed meeting justified the market pricing. The expected inversion of US rate curves has stalled for now. Carry trades may well move back in vogue given the Fed position.

This is also important for other markets. Global macro type trades have favoured a paid US rates vs received other markets. Cross market traded might start to lose favour given this new backdrop.

The US 2Y yield closed the month at 2.46% which was a rally (yields higher) of 2bp, though the range was a high of 2.616% and a low of 2.38% The US 10Y closed the month at 2.63% which was a rally (yields higher) of 5.5bp. The US curve finished the month modestly flatter, much of the move was undone in the last day as the curve steepened post FOMC. Front curves, which have been watched closely stayed in negative territory.

USD swap spreads, which have largely been benign in recent months, narrowed in the 10Y sector, flattening the spread curve. In the Australian market, OIS pricing continued to lean against RBA views that the next move in policy rates will be higher. Further out of cycle rate hikes by the banks as funding cost increases were passed on as well as soft housing data are trumping the RBA’s optimism. Both labour force and CPI data did not provide a reason to consolidate pricing and indeed CPI reduced market pricing for cuts, albeit until the FOMC delivered its coup de grace.

Australian rates have also rallied (yields higher) and flattened once again. The 3Y physical bond has rallied (yields higher) 15bp to 1.7325%, while the 10Y physical has rallied 7.75bp to 2.2425%.

Global Credit Markets (Cash)
January was dominated by the continued impasse on the funding of Trump’s wall between the US and Mexico and consequently all bar the last couple of days, the US government was shut for the month. A problem that may resurface given the temporary nature of the re-opening. Brexit and trade headlines continued to occupy the narrative, but the tactical impact on A$ credit appeared negligible. At month’s end the Fed released its latest statement, which carried with it a noticeably more dovish tone than previous statements.

January saw 44% of the S&P 500 reported Q4 results, with aggregate sales of +6.2% on the pcp and aggregate earnings of +13% on the pcp. Optically reporting season so far has seen solid growth numbers, however there has been pockets of stress surface, mainly on the back of bell-weather names disappointing, which gave markets moments for pause. Despite the persistent headlines and lack of tangible progress in the prevailing risk points, markets (risk) continued to rally nonetheless. The S&P 500 and DOW closing the month up around +7.9%, the strongest monthly gain in three years.

After a horrendous month or two of spread widening, January saw offshore credit spreads partially retrace lost ground. USD credit spreads outperformed EUR credit spreads by a factor of 4:1. USD Non-Financials ended the month -28 bps tighter compared to -6 bps tighter in EUR Non-Financials. It was a similar story in Financials, -24 bps vs -6 bps across USD and EUR respectively. A$ spreads also lagged, but A$ materially outperformed on the way out. While USD Non-Financial spreads were +50 – 70 bps wider over Q4’18, A$ Non-Financials were just +10 bps wider. On the January retracement, we’re seeing USD Non-Financials half way back to their prior inflection point, around the beginning of October 18. EUR Non Financials have retraced perhaps a third of their widening.

Equity Markets
After slumping in December, global sharemarkets began recoveries from their lows in early January with gains extending over the month. Investors continued to be fixated on developments in the US-China trade dispute as well as UK Brexit, US bank earnings reports and the US Government shutdown. Higher oil prices provided support for companies in the energy sectors.

In the first week of January, global markets were mixed in volatile trade. The US Dow Jones slumped 660 points on January 3 after Apple’s first sales warning in 12 years. But the Dow rebounded 747 points on January 4 in response to data showing a 312,000 lift in US non-farm payrolls for December. US markets rose 0.5-1.6 per cent in the first week of January, and Europe also lifted (German Dax up 2 per cent) but the Australian ASX 200 fell 0.5 per cent.

In the second week, global sharemarkets posted healthy gains on optimism about US-China trade
negotiations. And on January 10, US Federal Reserve chief Jerome Powell reiterated that the Fed can be patient on future rate hikes. The Dow rose on four of the five days, lifting 2.4 per cent while the ASX 200 was up by 2.8 per cent.

In the third week of the month, global markets posted more gains, generally between 1.5-2.0 per cent. The Dow Jones again rose in four of the five days, lifting 3 per cent, while the ASX 200 rose 1.8 per cent and the German Dax lifted 2.9 per cent. On January 15, the UK Parliament rejected the Brexit deal but Australian and US markets rose. Over the week shares in US global investment banks were generally higher in response to earnings results.

In the fourth week of January global sharemarkets were generally flat, except the UK FTSE, down 2.3 per cent on uncertainty about Brexit. US shares fell by between 1-2 per cent on January 22 as investors digested a downgrade in IMF economic growth forecasts and weaker Chinese economic data. But US shares rebounded the next day on good earnings data.

In the final four days of the month, (January 28- 31) global sharemarkets were mixed. But on January 30, US sharemarkets posted solid gains in response to positive earnings results from Apple and Boeing and the rates decision from the Federal Reserve. The Fed left rates unchanged but pledged to be patient in deciding the next move in rates. The Dow rose 435 points or 1.8 per cent.

Over January, all major sharemarkets were higher. The US Dow Jones rose 7.2 per cent with the S&P 500 up 7.9 per cent and Nasdaq up 9.7 per cent. In Europe, the German Dax rose by 5.8 per cent and UK FTSE rose 3.6 per cent. And in Asia, Japan rose 3.8 per cent while the ASX 200 lifted 3.9 per cent – the best January gain in five years.

In January, all of Australia’s 22 sub-industry sectors posted gains except Banks (down 0.6 per cent). The Energy sector rose the most (up 11.5 per cent) from Software & services (up 9.3 per cent) and Consumer services (up 8.3 per cent). The Small Ordinaries out-performed, up 5.6 per cent, with big companies (ASX50) up 3.5 per cent and mid-cap stocks up 4.5 per cent.

Australian dollar

After the CAD, AUD was the strongest performing G10 currency in January seeing its tradeweighted index rise by 1.5%. Rising Australia commodity prices helped initiate the January move and would remain a consistent theme throughout. However the more important catalyst was a 4 January speech by the Fed Chairman Jerome Powell which appear to emphasise downside risks to US inflation.

AUD buying reached a peak on 11 January on growing optimism regarding US-China trade talks as US Treasury Secretary Mnuchin announced an official trade meeting for end-January. The AUD was also helped by a surprise improvement in December retail sales, and further comments from the Fed’s Clarida emphasising a more ‘patient’ policy approach.

AUD outperformance was not a one-way trade however. While played-down by the RBA monetary policy statement 8 January, investor concerns regarding the Australian property market were beginning to impact the policy rate outlook. Such concerns were confirmed by weaker investment and owner occupied house lending on 12 January undermining AUD. Tumbling consumer confidence, US-China trade tensions, and weaker China data all added to the more AUD gloomy tone seeing AUD/USD reach a 3 week low on 24 January.

Thereafter however, iron ore’s rally, and growing fears of a more dovish Fed seeming to outweigh RBA policy concerns. Indeed AUD/USD ignored soft Q4 inflation, preferring instead focus on still stronger Iron prices and confirmation at the 31 January FOMC meeting that US rates were effectively ‘on-hold’ for now.

Commodities
The CBA commodity price index decreased ~6.0% in January on the back of higher iron ore and oil prices.

CBA’s Terms of Trade (ToT) tracker indicates a ~3% increase in Australia’s ToT in QI, if spot AUD and commodity prices are maintained until the end of March. Given the tracker is using only one month of actual data, there are still notable risks associated with our forecast. Our tracker is pointing to a ~1-1.5% q/q lift in Australia’s ToT in QIV.

Commodity prices finished mostly higher in January, led by iron ore and oil. Easing US-China trade tensions helped commodity prices generally, but commodity specific factors were particularly positive for iron ore and oil prices. Iron ore prices rose sharply towards the end of last month following a tailings dam collapse at Vale’s Feijao mine in Brazil. While the mine only accounts for ~0.5% of the seaborne iron ore market, the ramifications could be larger. The company has already outlined plans to decommission 10 of its upstream tailings dams over three years, sidelining ~2.5% of the seaborne iron ore market in the process. However, Vale believes it has enough spare capacity to partially offset any lost output. Despite Vale’s guidance, markets are justifiably concerned that Vale’s iron ore production could remain lower for longer. Those concerns stem from the imminent response of Brazil’s regulators, who will take into consideration that the dam collapse at Feijao is the second such disaster Vale has been involved in since late 2015.

Oil prices outperformed other major commodities for most of January. Prices rose on demand hopes as US-China trade talks showed positive signs. However, oil prices also gained on evidence of ongoing compliance with the OPECled supply deal to sideline ~1.2% of global oil supply in 1H19. The most recent bullish data print was US oil imports from Saudi Arabia, which fell to the second lowest level since 2010 last week.

Coking coal was a notable underperformer last month. Subdued steel margins in China combined with weak buying and restocking demand before the Chinese New Year holiday (4-10 February) were the major drivers.

Gold also saw a late rise in January. Prices gained sharply following the FOMC removed its policy guidance of “some further gradual increases” and replaced it with a statement that they will be “patient” in assessing its next change to the Funds rate. The dovish tone increases the appeal of gold relative to US-interest bearing securities.

Australian house prices
The CoreLogic data showed that dwelling prices continued to fall in January, with a 1.2% fall across the eight capital cities. Prices fell in seven out of the eight capital cities in the month, with Canberra the only capital city where prices rose (see Table below). It’s worth noting that sales volumes are seasonally low in January, so the prices data is little less reliable than normal.

Sydney and Melbourne experienced the largest price falls in January. The rate of decline in Sydney and Melbourne dwelling prices have picked up over the past three months.

Dwelling prices in Sydney are now off 12.3% from their peak in mid-2017, taking prices back to mid 2016 levels. The current Sydney downturn is now one of the largest experienced, with the size of the price fall only larger for the 1982 downturn. In Melbourne, prices are off 8.7% from the peak, taking values back to early- 2017 levels.

The leading indicators of dwelling prices are pointing to further falls. Auction clearance rates are very low, the flow of credit has slowed to both owner-occupiers and investors, and foreign buyers have stepped back from the market. We expect further dwelling price falls this year, with prices in Sydney and Melbourne expected to drop by the most. We also expect small decline in Brisbane, Perth and Darwin in 2019.

Dwelling sales volumes are low which has implications for the broader economy. Firstly, low sales volumes and lower sales prices are reducing stamp duty revenues for the state governments. Secondly, lower sales volumes tend to reduce the amount that people spend on new furnishings, fittings and white goods. Growth in sales volumes has declined for these items and there is also heavy discounting in these goods as retailers try to keep their market share.

When we last heard from the RBA back in December they seemed fairly relaxed about how the dwelling price downturn was playing out, with the broader economy looking in good shape. Since then we have seen the labour market continue to improve but we are expecting only a modest rise in consumer spending in Q4 after a soft outcome the previous quarter. Our analysis here shows some tentative evidence of a negative wealth effect.

Next week’s RBA communication with provide an important update on their thinking related to the housing market. In particular, Wednesday’s speech by Governor Lowe and the Statement on Monetary on Friday will give the RBA chance to outline their views.

This document has been prepared by Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State). The information, opinions, and commentary contained in this document have been sourced from Global Markets Research, a division of Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945. Global Markets Research has given Colonial First State its permission to reproduce its information, opinions, and commentary contained in this document. This information was first made available to CBA clients on 1 February 2019 in a CBA Global Markets Research report publication titled, ‘January Month in Review’. Colonial First State is a wholly owned subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124, AFS Licence 234945 (the Bank). Colonial First State is the issuer of super, pension and investment products. The Bank and its subsidiaries do not guarantee the performance of Colonial First State’s products or the repayment of capital from any investments. While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), to the maximum extent permitted by law, no person including Colonial First State, Global Markets Research, or any member of the Bank group of companies, accepts responsibility for any loss suffered by any person arising from reliance on this information. This document provides information for the adviser only and is not to be handed on to any investor. This document has been prepared for general information purposes only and is intended to provide a summary of the subject matter covered. It does not purport to be comprehensive or to give advice. The views expressed are the views of Global Markets Research at the time of writing and may change over time. This document does not constitute an offer, invitation, investment recommendation or inducement to distribute or purchase securities, shares, units, other interests, or to enter into an investment agreement. Past performance is no indication of future performance. Stocks mentioned are for illustrative purposes only and are not recommendations to you to buy sell or hold these stocks. This document cannot be used or copied in whole or part without Colonial First State’s express written consent. Copyright © Commonwealth Bank of Australia 2019. Want more information? Please speak with your financial adviser Mark Giles Mark Giles of Complete Financial Solutions (WA) – Financial Planning (ABN26 050 157 938) is an authorised representative of Financial Wisdom Limited (ABN) 70 006 646 108 AFSL 231138). Alternatively visit our website at completefinsol.com.au or contact Colonial First State Investments Limited at colonialfirststate.com.au or phone 13 13 36. © Colonial First State Investments Limited ABN 98 002 348 352 AFS Licence 232468. This document has been prepared by Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State) based on its understanding of current regulatory requirements and laws as at 6 October 2016. This document is not advice and provides information only. It does not take into account your individual objectives, financial situation or needs. You should read the relevant Product Disclosure Statement available from the product issuer carefully and assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision.

 

Teaching Kids the Secrets of Financial Success

In an increasingly digital world, the value of money can be a difficult concept for children to grasp. Here are some tips for helping your kids and grandkids become wealthy and wise.

When you were young, do you remember standing next to mum or dad at the corner shop and watching them count out notes and coins to pay for the bread and milk? This was a valuable lesson about the purpose and value of money.

Fast forward to today – few corner shops exist and the days of counting change are almost over. When our children see us pay for something at the shopping centre, it’s likely to be with a piece of plastic – or even by mobile phone.

That’s why it’s now more crucial than ever to consciously teach your children and grandchildren about money: how to spend it and how to save it. Here are five ways to do it.

1 Help them budget and save
Many children believe parents have an endless supply of money – which is why it’s so important to talk to kids about money from an early age. You can start by discussing your own household budget and explaining how you manage costs like weekly grocery shopping and phone bills. If there’s something your child wants, like a new soccer ball or item of clothing, work out a budget so they can save up and buy it. Then reward them by taking them shopping.

2 Give them pocket money
Pocket money is one of the simplest and most powerful ways to teach children the value of cash – which is why it should be earned rather than given freely. Whether it’s payment for completing chores or a reward for behaving well, children will understand very quickly that money has value. You can also separate their pocket money into portions for spending and saving, so they’ll learn how to put money aside for the future.

3 Set up a bank account
By setting up a bank account for your child, you can teach them the basics of everyday banking. It’s worth discussing the statements with them when they arrive – not only so you can explain what each part means, but also so you can check their progress towards their savings goals and praise them as they reach each milestone. You might even open a separate savings account to help making saving fun and easy.

4 Make money fun
Learning about money doesn’t have to be another chore: there are plenty of games you can use to teach kids financial literacy. From a young age, you can play-act spending situations with your kids, like pretending to ‘shop’ with their toys or using food items in the kitchen. As your children get older, these games can become more advanced. In fact, one of the best ways may be through playing Monopoly – which you can use to teach more complex concepts like rent and taxes.

5 Surf the net
The internet is a treasure trove of information on all things financial. Here are some of our favourites:

  • MoneySmart – packed with online resources and activities for children of different ages
  • CommBank Youth App – teaches real-life money skills to under 14s
  • Kidspot – a popular online parenting magazine with games and ideas for finance education
  • Bankaroo – a fun virtual bank for kids to learn about saving, spending and budgeting.

Talk to us
To explore the financial strategies available to help your children or grandchildren, speak with your financial adviser.

 

IMPORTANT INFORMATION
This document contains general advice. It does not take account of your objectives, financial situation or needs. You should consider talking to a Financial Adviser before making a financial decision. This document has been prepared by Financial Wisdom Limited ABN 70 006 646 108, AFSL 231138, (Financial Wisdom) a wholly-owned, non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124. Financial Wisdom Advisers are authorised representatives of Financial Wisdom. Information in this document is based on current regulatory requirements and laws, as at 30 November 2017, which may be subject to change. While care has been taken in the preparation of this document, no liability is accepted by Financial Wisdom, its related entities, agents and employees for any loss arising from reliance on this document. This document has been prepared by Financial Wisdom Limited ABN 70 006 646 108, AFSL 231138, (Financial Wisdom) a wholly-owned, non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124. Mark Giles of Complete Financial Solutions (WA) – Financial Planning (ABN26 050 157 938) is an authorised representative of Financial Wisdom Limited (ABN) 70 006 646 108 AFSL 231138). Information in this document is based on current regulatory requirements and laws, which may be subject to change. While care has been taken in the preparation of this document, no liability is accepted by Financial Wisdom, its related entities, agents and employees for any loss arising from reliance on this document. This document contains general advice. It does not take account of your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision. Taxation considerations are general and based on present taxation laws and their interpretation and may be subject to change. You should seek independent, professional tax advice before making any decision based on this information.

12 Months And Counting

So, you’re one year out from retirement – congratulations! Here are five steps you can take now to ensure you’re ready.

The last year before retirement can be filled with excitement and expectation, and often a few nerves. While leaving the workforce for good may be a dream come true, it can also feel a little daunting.

According to Professor Lynne Parkinson, gerontologist and Editor-in-Chief of the Australasian Journal on Ageing, “Days are very long when you don’t work, so you don’t want to have nothing to do,” Parkinson says. “A successful retirement usually means you’re busier than ever.”

To start retirement confidently, it’s a good idea to use the final 12 months of work to make a detailed plan of what you might do in retirement – to ensure you stay mentally, physically and socially active on a daily basis.

“If a retiree has interests that can fill their day, that is what matters,” Lynne said. “A happy retirement means staying connected and active by having a plan.” Here’s how to do it in 5 simple steps.

1. Set your retirement goals
While one retiree wants to expand their social circle, another might want to nurture current friendships. Some might want to head overseas while others will be keen to stay as close as possible to their grandchildren.

“Success is about discovering what you want to do as an individual,” Lynne said. “For example, if you’re shy you can focus on an interest close to home such as gardening.”

The bottom line is – don’t make a plan around what others expect, but instead make it absolutely unique to you.

2. Expand your hobbies
What’s the one thing you’ve never had enough time to do but you’ve always been passionate about? It might be a hobby like golf, fishing or cooking – or maybe you want to discover more about your family tree.

Or perhaps, you wish to give back to the community through volunteer work or advocating for an environmental or social cause.

“There is plentiful evidence that if you’re an active, healthy person, then volunteering is very good for you,” Lynne said.

3. Make travel plans
Retirement is a wonderful opportunity to get out and explore the world. By planning ahead, you can look forward to new adventures.

“A lot of people travel once they retire – it’s the Australian dream,” Lynne said.

And the best part is, it doesn’t need to be expensive. There are plenty of options to suit your retirement budget.

“You can buy a little van and take a trip around Australia, if that’s what makes you happy,” Lynne commented.

4. Learn something new
“As you get older you tend to sleep less, so there are more hours to fill,” Lynne observed.

After leaving work, you may find yourself with endless time up your sleeve. So why not make the most of it by gaining new skills and knowledge?

Whether it’s an informal language course or a part-time series leading to a new qualification, there are plenty of choices available at local community colleges or with a private teacher.

5. Make a strong financial plan
Your financial adviser can help prepare you financially for your move to retirement – from understanding your superannuation options to making the most of your Centrelink benefits.

They can also help you work out a retirement budget that enables you to reach your lifestyle goals and enjoy the retirement you deserve. And, with the 12-month countdown to retirement ticking, now is the perfect time to start planning.

 

IMPORTANT INFORMATION
This document contains general advice. It does not take account of your objectives, financial situation or needs. You should consider talking to a Financial Adviser before making a financial decision. This document has been prepared by Financial Wisdom Limited ABN 70 006 646 108, AFSL 231138, (Financial Wisdom) a wholly-owned, nonguaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124. Financial Wisdom Advisers are authorised representatives of Financial Wisdom. Information in this document is based on current regulatory requirements and laws, as at 10 December 2017, which may be subject to change. While care has been taken in the preparation of this document, no liability is accepted by Financial Wisdom, its related entities, agents and employees for any loss arising from reliance on this document.

This document has been prepared by Financial Wisdom Limited ABN 70 006 646 108, AFSL 231138, (Financial Wisdom) a wholly-owned, non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124. Mark Giles of Complete Financial Solutions (WA) – Financial Planning (ABN26 050 157 938) is an authorised representative of Financial Wisdom Limited (ABN) 70 006 646 108 AFSL 231138). Information in this document is based on current regulatory requirements and laws, which may be subject to change. While care has been taken in the preparation of this document, no liability is accepted by Financial Wisdom, its related entities, agents and employees for any loss arising from reliance on this document. This document contains general advice. It does not take account of your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision. Taxation considerations are general and based on present taxation laws and their interpretation and may be subject to change. You should seek independent, professional tax advice before making any decision based on this information.

Colonial First State – Market Summary December 2018

Taken from the CBA Global Markets Research report, ‘December Month in Review’; first published on 2 January 2019.

Summary: Financial Markets in December

  • Money markets now pricing an RBA cut
  • A strong risk off tone saw large rallies (falls in yields) in US and Australian bonds. There was widening in credit spreads.
  • Falling underlying yields ensured credit finished the month with largely positive total returns.
  • The US Dow Jones fell by 8.7 percent and the S&P 500 was down 9.2 per cent in December– their worst December performances since 1931 and biggest monthly losses since February 2009.

The dominant story of markets in December was the significant risk-off move – most obvious was the collapse in US equity prices. The US S&P Accumulation index was down 9.03% in December and that was after a strong recovery late in the month. (The intra-month result was as bad as -15% on 27 December.)

The Australian equity market outperformed massively by only falling 0.12% (accumulation) or 0.37%.

US bond markets reflected the risk-off tone and rallied strongly with yields falling.

On the FX side the risk-off move resulted in a 3.44% fall in the AUD against both the USD and an even larger fall of 4.11% on a trade-weighted basis.

The overall performance of commodities was relatively good (one reason that the materials sector could rise 5.29%) but oil prices fell sharply. Oil closed December at $US45.41 a barrel, down 10.84% on the month (and 40.6% from the peak in October).

Money Markets (Cash)

Market pricing for a move in cash rates by the Reserve Bank of Australia shifted course in December, as measured by Overnight Indexed Swap (OIS) rate. It’s only small, but for most of December the OIS rates were pricing a small risk of a rate cut and by month end the priced expectation of a rate cut had risen to 40%. In November there was a 60% chance of a rate hike priced. At end-December there was a 40% chance of a rate cut.

The move was noteworthy that the market was pricing a risk of a rate cut despite the RBA insisting that they felt it was likely that the next move in rates was higher. The Australian data was on the weaker side in December, but not particularly poor. The weakest print was the GDP, which had been expected to rise 0.6% on the quarter but only managed 0.3%. That saw the annual rate fall to 2.8%. The labour force result was better, though not across the board. There were +37.0K jobs created but split as – 6.4K full time and +43.4K part time. The unemployment rate ticked up to 5.1% on the back of an increase in the participation rate to 65.7%.

Australian and Global Fixed Interest

December was again a volatile month in markets.

While underlying economic developments were fairly typical, the US equity markets had two appalling weeks and one solid recovery very late in the month. Volatility was the order of the day, but the deterioration in sentiment was marked too. US bonds rallied each time there was a wobble in equity markets but have not sold-off far (if at all) in the late equity recovery.

There has also been major flattening pressure at some points.

The US 2Y yield closed the month at 2.52% which was a rally (fall in yields) of 29bp. The US 10Y closed the month at 2.725% which was a rally (fall in yields) of 29.5bp. The US curve finished the month unchanged, but had flattened abruptly mid-month (from 20bp to 10bp), only to recover back late in the month as the 2Y rallied to steepen the curve.

The second of the two large risk-off weeks appeared to be triggered (or at least worsened) by the FOMC’s decision to raise interest rates on December 20.

The market behaved as if there were widespread fears the FOMC was making a policy mistake. The bond yields rallied (fell) on a rate rise that was only 75% priced.

The local market had to contend with a weak GDP result (only +0.3% compared to 0.6% expected) and a mixed labour force (+37K but a rise in unemployment to 5.1%). At the same time, the fall in house prices continues in multiple data series.

Australian rates have also rallied (yields fallen) and yield curve flattened. The 3Y physical bond has rallied 23.75bp to 1.8275%, while the 10Y physical has rallied 27.75bp to 2.3350%.

As well as the financial volatility there were still ongoing developments of a geopolitical nature that added to the movement in markets.

In Europe, UK Prime Minister May has failed to pass her Brexit legislation through parliament (yet). She survived a leadership challenge, but it seems very hard, at this point, to see how she can pass the deal she has made with the EU through the UK parliament. The other European story was the disagreement between the Italians and the EU about the Italian deficit. Negotiations were progressing well at month-end, but there was definite agreement yet.

In a side-meeting at the G20 Presidents Trump and Xi agreed a 90 day cease-fire in the US China trade war. The Chinese have also deemphasised some of the elements of the Made in China 2025 policy that were causing the most consternation in the US. However, the overall stability of the Trump Presidency remained in question throughout the month as the potential Government Shutdown dominated news. The potential became the actual and the Government shut on 21 December. At month-end, there was no clear sign of the Government re-opening.

The Democrats take control of the House on 3 January following last November’s election.

The Federal MYEFO on December 17 showed a significant fall in the budget deficit of $9bn and an improved trajectory across the forward estimates.

Chart 1: Australian vs US 10Y bond yield

Source: Bloomberg, CBA

Chart 2 – Main Australian Yields

Source: Bloomberg, CBA

Global Credit Markets (Cash)
The December G20 meeting ended on a positive note with China agreeing to purchase a substantial amount of products from the US in exchange for the US not to increase tariffs in January. Yet there is a general lack of confidence that a meaningful deal will be reached by the end of the agreed 90 day ceasefire period. The arrest of Huawei CEO on US criminal charges was seen by markets as a signal that the US will not back down easily from its campaign against Chinese tech firms seeking global dominance.

US non-farm payrolls expanded by only 155,000 in November vs consensus of 198,000, but growth in average hourly earnings met expectations of 3.1% YoY. Despite weak data and market jitters, the Fed hiked rates at the December FOMC meeting and signalled another two hikes in 2019. A deadlock over funding for the wall on the US/Mexico border led to a partial shutdown of the US Federal government with the second half of the month witnessing heightened market volatility with VIX spiking at 36%.

Offshore credit spreads continued to widen, although US$ spreads across Financials and Non- Financials were the standout underperformer, +18 bps wider on the month. EUR Financials and Non-Financials were +1 bps and +3 bps respectively wider. A$ credit spreads continued to feel widening pressure from offshore, +5 – 6 bps across Non-Financials and Financials. Liquidity was subdued because of the holiday season, which exacerbated widening pressures.

Equity Markets
In 2018, global sharemarkets recorded their worst annual performance since the Global Financial Crisis. The US Dow Jones (-5.6 per cent), S&P500 (-6.5 per cent) and Nasdaq (-3.9 per cent) indexes all fell. In Europe, Germany’s Dax (-18.3 per cent) and the UK FTSE (-12.5 per cent) bourses tumbled. In Asia, Japan’s Nikkei fell by 12.1 per cent and the Australian ASX200 index was down 6.9 per cent – its worst year since 2011 – led lower by Telecom (-17.4 per cent) and Banks (-15.5 per cent) shares.

Global equities commenced December positively after US President Donald Trump and Chinese President Xi Jinping agreed to a trade war truce at the G20 summit in Buenos Aires. However, investors quickly became pessimistic that a broader trade agreement would be secured in the 90-day period beginning January 1. Such a broader agreement is necessary to stop President Trump’s threat to raise tariffs on US$200 billion worth of Chinese goods from 10 per cent to 25 per cent. And the arrest of Huawei’s chief financial officer Meng Wanzhou in Canada on allegations that she violated US sanctions against Iran lowered market expectations for a trade deal even further. US sharemarkets were down by as much as 4.9 per cent in the first week of December, but the Aussie ASX200 index was up by 0.3 per cent.

In the second week of December concerns over the lingering US-China trade dispute, weaker Chinese economic activity data and continued flattening of the US Treasury yield curve (often considered a US recession indicator) dampened market sentiment. Reports that China was considering removing US car tariffs, watering down its ‘Made in China 2025’ plan and restarting US soybeans purchases, failed to sway sceptical investors. US sharemarkets fell by up to 1.3 per cent. However, the London FTSE lifted by 1.0 per cent as British Prime Minister Theresa May survived a leadership challenge over her proposed Brexit deal.

The sell-off in global shares intensified during the third week of December. US shares fell by up to 8.4 per cent, led lower by the technology-focused Nasdaq index. And the US S&P500 index posted its worst weekly performance since August 2011, down by 7.1 per cent. The US Federal Reserve’s interest rate hike, the looming US government shutdown over budget funding and weaker US company earnings forecasts dragged shares lower. The European Commission reached a deal with Italy over the 2019 budget. And China’s annual Economic Work Conference signalled additional fiscal and monetary stimulus in 2019. But Germany’s Dax (down 2.1 per cent), Japan’s Nikkei (down 5.7 per cent), the UK FTSE (down 1.8 per cent) and the ASX200 (down 2.4 per cent) all fell.

There were more declines for global sharemarkets ahead of the Christmas holiday period as the US government was partially shutdown. US shares fell on Christmas Eve as investors were rattled after US Treasury Secretary Steven Mnuchin announced that he had called US bank heads in attempt to shore up confidence in the US financial system. US President Trump also tweeted that the US Federal Reserve was “raising interest rates too fast”, increasing investor concerns that Federal Reserve chair Jerome Powell could potentially be fired. The S&P500 index fell by 2.7 per cent, dipping within a couple points of a bear-market correction. Japan’s Nikkei index fell by 5 per cent on Christmas Day.

US sharemarkets, however, posted their biggest post-Christmas Day rally ever and best day in nearly a decade with the Dow Jones up by 1,086 points on Boxing Day – its largest one-day gain in history. The S&P500 (up 5.0 per cent) and the Nasdaq (up 5.8 per cent) both lifted by the most since March 2009. The S&P500 retailing index rose by 7.4 per cent after data released by Mastercard showed that holiday sales were the best in six years. Amazon shares rose 9.5 per cent after it sold a record number of items. The Dow rose by 449 points in its final three trading sessions of the year.

In December, the US Dow Jones fell by 8.7 percent and the S&P 500 was down 9.2 per cent – their worst December performances since 1931 and biggest monthly losses since February 2009. The US Nasdaq Composite declined by 9.5 per cent. In Asia, Japan’s Nikkei fell by 10.5 per cent, but the Australian ASX200 fell by just 0.4 per cent. In Europe, both the German Dax (-6.2 per cent) and the London FTSE (-3.6 per cent) declined.

For the December quarter, the US S&P 500 and Nasdaq dropped 14.0 per cent and 17.5 per cent, respectively, their worst quarterly performances since the fourth quarter of 2008. The Dow Jones recorded its worst period since the first quarter of 2009, falling 11.8 percent. The ASX200 was down by 9.0 per cent.

In December, seven of Australia’s 22 subindustry sectors posted gains. The Materials sector rose most (up 5.3 per cent) from the Pharmaceutical & Biotech sector (up 3.9 per cent). But the Media sector fell by 10.9 per cent and Automobile & Components fell by 9.6 per cent. The ASX50 index was up by 0.3 per cent, while the Small Ordinaries fell by 4.5 per cent. Smaller companies were the worst performer in 2018, with the Small Ordinaries down by 11.3 per cent.

Chart 3- Smaller Companies underperformed: Rolling performance: percentage change, Annual 2018

Source: IRESS, CommSec

 

This document has been prepared by Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State).

The information, opinions, and commentary contained in this document have been sourced from Global Markets Research, a division of Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945. Global Markets Research has given Colonial First State its permission to reproduce its information, opinions, and commentary contained in this document.

This information was first made available to CBA clients on 2 January 2018 in a CBA Global Markets Research report publication titled, ‘December Month in Review’.

Colonial First State is a wholly owned subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124, AFS Licence 234945 (the Bank). Colonial First State is the issuer of super, pension and investment products. The Bank and its subsidiaries do not guarantee the performance of Colonial First State’s products or the repayment of capital from any investments.

While all care has been taken in the preparation of this document (using sources believed to be reliable and accurate), to the maximum extent permitted by law, no person including Colonial First State, Global Markets Research, or any member of the Bank group of companies, accepts responsibility for any loss suffered by any person arising from reliance on this information.

This document provides information for the adviser only and is not to be handed on to any investor. This document has been prepared for general information purposes only and is intended to provide a summary of the subject matter covered. It does not purport to be comprehensive or to give advice. The views expressed are the views of Global Markets Research at the time of writing and may change over time. This document does not constitute an offer, invitation, investment recommendation or inducement to distribute or purchase securities, shares, units, other interests, or to enter into an investment agreement.

Past performance is no indication of future performance. Stocks mentioned are for illustrative purposes only and are not recommendations to you to buy sell or hold these stocks.

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Copyright © Commonwealth Bank of Australia 2018.

Want more information?
Please speak with your financial adviser Mark Giles Mark Giles of Complete Financial Solutions (WA) – Financial Planning (ABN26 050 157 938) is an authorised representative of Financial Wisdom Limited (ABN) 70 006 646 108 AFSL 231138). Alternatively visit our website at completefinsol.com.au or contact Colonial First State Investments Limited at colonialfirststate.com.au or phone 13 13 36. © Colonial First State Investments Limited ABN 98 002 348 352 AFS Licence 232468. This document has been prepared by Colonial First State Investments Limited ABN 98 002 348 352, AFS Licence 232468 (Colonial First State) based on its understanding of current regulatory requirements and laws as at 6 October 2016. This document is not advice and provides information only. It does not take into account your individual objectives, financial situation or needs. You should read the relevant Product Disclosure Statement available from the product issuer carefully and assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision.

For Financial Success, Try to Avoid These Traps

Many aspects of financial success are about putting good habits in place early and avoiding traps that can damage your dollar value. Here are our top five traps to avoid.

1. Make minimum repayments
Whether we’re talking about high-interest debt such as credit cards or longer-term investment debt such as mortgages, making the minimum repayment is good, but not always great. On credit card debt you can end up paying interest of 20% or more, potentially adding thousands of dollars annually to your repayments. Even small increases in your regular mortgage repayments can cut years off the loan and save tens of thousands of dollars in interest along the way.

2. Leak money to businesses
Many businesses are now moving to a subscription or regular repayment model, whether it is for software, TV services or holiday packages, because it seems cheaper and causes less financial pain in the short term. Those businesses become wealthy over time and you do not. Being aware of these regular outgoings, living a leaner lifestyle and plugging these financial leaks can be the equivalent of adding several percentage points to your investment interest.

3. Spend your redraw/equity
Paying extra into your mortgage is an exceptionally good habit. Constantly redrawing the available funds, or borrowing on the equity for non-investment purposes, is not. Keeping all of your savings within your mortgage, or in an offset account, will likely save a considerable amount of interest over time. But be sure to set yourself a budget or savings goal to reap the full benefit of your discipline.

4. Lack familiarity with your finances
We are all guilty at some stage of being less familiar than we should be with the investment mix of our super fund, or the interest rate on our mortgage. But checking in with your finances on a regular basis – monthly, bi-annually or yearly – is a simple way to check things are moving in the right direction and to take action if they are not. This process should always involve all stakeholders, particularly both members of a couple.

5. Prioritise spending rather than investing
All great plans begin with a goal. Wealth planning usually begins with a retirement lifestyle goal. A strategy is then set to achieve that goal – perhaps the diversified investment of $100 every week for the next 20 years – and that becomes the absolute priority. Households often prioritise and plan for holidays, new cars, furniture updates and wide-screen TVs. The fact that a plan is in place means they will likely have those things. But such purchases should only be allowed after the real priority has been taken care of.

 

IMPORTANT INFORMATION
This document contains general advice. It does not take account of your objectives, financial situation or needs. You should consider talking to a Financial Adviser before making a financial decision. This document has been prepared by Financial Wisdom Limited ABN 70 006 646 108, AFSL 231138, (Financial Wisdom) a wholly-owned, non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124. Financial Wisdom Advisers are authorised representatives of Financial Wisdom. Information in this document is based on current regulatory requirements and laws, as at 17 January 2018, which may be subject to change. While care has been taken in the preparation of this document, no liability is accepted by Financial Wisdom, its related entities, agents and employees for any loss arising from reliance on this document. This document has been prepared by Financial Wisdom Limited ABN 70 006 646 108, AFSL 231138, (Financial Wisdom) a wholly-owned, non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124. Mark Giles of Complete Financial Solutions (WA) – Financial Planning (ABN26 050 157 938) is an authorised representative of Financial Wisdom Limited (ABN) 70 006 646 108 AFSL 231138). Information in this document is based on current regulatory requirements and laws, which may be subject to change. While care has been taken in the preparation of this document, no liability is accepted by Financial Wisdom, its related entities, agents and employees for any loss arising from reliance on this document. This document contains general advice. It does not take account of your individual objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision. Taxation considerations are general and based on present taxation laws and their interpretation and may be subject to change. You should seek independent, professional tax advice before making any decision based on this information.