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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.

Help Your Kids Avoid the Debt Spiral

If you’re a parent concerned about the spending habits of your son or daughter, you’re not alone. Here are some simple suggestions to help your loved ones take back control and stay out of debt.

When you’re young and living life to the full, it can be tempting to see your credit card as a bottomless well of money. And faced with higher living costs than previous generations – not to mention the lure of online shopping – many young people find themselves spending beyond their means on a regular basis.

This can leave them spiralling into debt before they even hit the age of 30. And once they’re caught in this trap, they might get stuck paying interest upon interest without even chipping away at the original debt.

But with some simple changes in their spending and saving habits, young people can move closer towards a debt-free future. Here are some top tips for the millennials in your life so they can avoid the debt spiral.

Tip 1. Spend wisely
It may sound obvious, but the easiest way to stay out of debt is to avoid spending beyond your means in the first place. For many people, the biggest threat is the impulse purchases they make on their credit cards.

Getting this habit under control can take some discipline. Your child might learn to avoid temptation if they leave their credit cards at home and only spend the cash they have on them when they go out.

Tip 2. Make a repayment plan
The more credit cards your kids have, the more they could end up paying in fees and interest. Instead, they might be better off consolidating their debts onto a single low-interest card so it’s easier to focus on paying it off.

The quickest way for credit card debt to get out of hand is by missing the repayments. That’s why it’s worth encouraging your kids to pay off their balance every month – or at the very least, to make sure they meet the minimum payment amount.

Tip 3. Draw up a budget
Young people (or anyone, really) can also avoid a debt spiral if they look closely at their regular income and expenses then make a realistic budget they can stick to. By adding up their outgoing costs, including things like rent, bills and student fees, they’ll know exactly how much they have left over each week or month to spend on themselves.

Writing down expenses is also a useful way to work out where the money is going – and finding ways to make small cutbacks. For example, buying a $4 takeaway coffee each day might not seem like much of a luxury, but it quickly adds up to more than a $1400-a-year habit.

Tip 4. Put money aside
For some people, the slide into debt can begin when unexpected costs crop up – like car repairs or medical expenses. Even if your child is managing their finances okay on a day-to-day basis, they should also try to have enough money set aside to cope with an emergency.

It’s never too early for your loved ones to put together a regular savings plan, so they’ll have extra funds they can tap into – just in case.

Tip 5. Talk about money issues
It can be tough to get your kids to open up about their financial situation, but it’s even harder watching them slide further into debt. Remember, money matters are often highly personal, so it’s important to approach the debt topic with sensitivity. If your child is having trouble managing their money, the best thing you can do is help them find a solution.

As a parent, your first instinct might be to step in and offer financial support – but this may not always be in your child’s best interests. Instead, you can always ask your financial adviser which course of action to take and their advice on helping your kids pay off their debts, including sticking to a budget and start
saving for the future.

 

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 8 February 2017which 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. Financial Wisdom is registered with the Tax Practitioners Board as a Registered Tax (Financial) Adviser. However your authorised representative may not be a Registered Tax Agent, consequently tax considerations are general in nature and do not include an assessment of your overall tax position. You should seek tax advice from a Registered Tax Agent. 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.

Healthy and Wealthy New Year

As the holiday season approaches, it’s easy to be distracted from your financial goals. But this is actually the perfect time to put a few simple plans in place for a positive start to the New Year.

New Year’s resolutions have a bad reputation, and for good reason. So let’s agree up front that we won’t think of financial preparations for the New Year as “resolutions”. Instead this is a great opportunity to set things in order, re-group and look back to ensure things are on track, and of course to re-balance and plan for the year ahead.

Best practice around reviewing your finances for the New Year begins with a calculation of your net worth. Save this somewhere so it’s easily accessible next year, and you’ll have a simple and effective way to measure your progress against a set goal. Include all of your assets (property, cash etc.) and liabilities to calculate a final figure.

Next, pick a couple of items from your financial portfolio, whether they be credit card or mortgage, superannuation accounts or insurance policies etc, and do some research to find out whether you’re getting the best possible deal. Interest rates, fees and risk profiles should be checked at least every few years for each of your accounts. Just as compound interest can be enormously effective over time, so too higher fees and costs can result in far less wealth at the end of your investment period.

Spend some time getting to know your investments. How much is in your super? How is it invested? Are you on target to achieve your final goal? What difference could you make by re-balancing certain investments? Ask questions and seek clear and relevant answers as if you’re looking after the world’s most important retirement nest egg … because you are!

Then, depending on your stage of life:

Up to 40 years old

  • Consider maximising the effects of compound interest and perhaps even saving a little tax by salary sacrificing a small amount – perhaps $20 to $50 a week – into your super. A little now adds up to a lot later. Be wary not to exceed contributions caps though.
  • Check that your investments are allocated correctly to match your risk profile and the fact that you have several decades to ride out any market turbulence.
  • Analyse your insurance needs and check you have the correct levels of cover. You possibly have people that rely on you to provide for them. Make sure you, and they, are suitably protected.

From 40 to 60 years old

  • It’s time to start knocking down that bad debt, so make that a priority for the next few years and track your success using your net worth document.
  • Insurance is vital at this stage of life as you’ll likely have dependants and major responsibilities, such as a mortgage. Check you are insured to the right level.
  • Consider what you can do at work, or outside of work, in order to improve your earning potential.
  • Analyse your superannuation and figure out whether you need to begin maximising contributions, but don’t exceed contributions caps as additional tax will then apply.
  • Depending on your comfort with risk and your time left in the market, your portfolio’s risk/growth exposure should be periodically fine-tuned.

Pre-retirees and retirees

  • How long will your retirement wealth last? How are your investments performing? This is perhaps the most important period of life to ensure your portfolio and retirement income stream are suited to your lifestyle.
  • Is your estate protected? Organise a will and enduring power of attorney if you haven’t already done so.
  • Put some money aside to enjoy yourself whether it be for travel, a hobby, a course or simply a night out to dinner every so often. You have earned it.

Planning for the best
To revisit your financial plan and ensure you’re on track to achieving your goals, or to put new plans in place for the year ahead, speak to 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 20 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.

 

How to be Financially Prepared this Christmas

With Christmas just around the corner, here are 5 tips to help plan ahead and avoid a financial hangover on New Year’s Day.

Think back to last Christmas and consider where the extra expenses came from. Was it petrol for the drive to the holiday destination? Gifts for new children in the extended family? Wine for the constant gatherings? And don’t forget the taxi fares for the journeys home from nights out.

However you look at it, Christmas is a pricey time of year. If the expense causes stress then the holiday period is ruined. Here are some tips to prepare for, and enjoy Christmas.

1. Figure out a budget
What exactly are you going to spend on gifts, food, drink, accommodation, airfares, fuel, cabs etc.? Be realistic and even pessimistic. If you over-prepare then you’ll end up with a surplus, which is a great result.

2. Christmas saver
Consider opening a new account which you can put a weekly amount into over the next few months in order to cover most, if not all, of your Christmas expenses. Even better, if you have a mortgage account, consider putting the extra money into the redraw section – that way you could save some mortgage interest during the final quarter of the year.

3. Gifts
Figure out what you are happy to spend on each person and ensure you stick to it. Give yourself time to think about gifts, working out exactly what each person will receive, to keep your shopping trips short and avoid extra purchases. And negotiate with family members to stick below a certain amount, or to do Secret Santa, in order to keep costs down.

4. Credit card spending
From now until Christmas, make additional weekly payments onto your credit card so you’re not caught out, as many people are, with an unmanageable credit card debt once you roll into January.

5. New year goal
Figure out what you wish for in the New Year and start taking steps towards that goal right now. Whether it is a fitness goal, a new skill, a bucket list item or something as simple as a reunion with an old friend, make sure at least a small part of the Christmas period is about you by planning for and achieving something special.

 

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 23October 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.

Making The Aged Care Journey Smoother

When you’re exploring aged care options for a loved one, the process can seem overwhelming. Here’s how to make it a bit easier.

Choosing when to place an elderly relative into a retirement home may be one of the toughest decisions you have to make. And while you want your loved one to be as comfortable as possible in their final years, it’s also important to be financially prepared.

With so many choices available and so many decisions to make, it helps to break down the process into a series of steps. And remember, when the time comes to begin your own aged care journey, you’ll want to be ready – so the sooner you start planning, the better.

Step 1. Finding the right place

The first step is to have your loved one’s needs assessed to determine the right level of care – from semi-independent living to round-the-clock nursing. Free assessments are conducted by community- or hospital-based Aged Care Assessment Teams. You should also consider any additional services your
relative might need in the future, so they won’t have to move again if their health declines.

If you can, visit different retirement facilities together to find an environment your loved one feels comfortable in. Be sure to investigate the social activities and meal options on offer, to ensure they’ll enjoy a happy and enriched life there.

Step 2. Calculating the costs

Although the federal government subsidises aged care costs, there are still various expenses that need be covered. For residential aged care, these include:

Accommodation fees. Prices are set by the facility but may also depend on your relative’s income and assets. Fees can be paid either as a lump sum or in regular instalments.

Basic daily care fee. This covers daily living costs and is fixed at 85% of the maximum single Age Pension – currently $50.66 per day.

Means-tested fee. This may be charged on top of your relative’s daily care fees, and is based on their assets and income. It’s currently capped at $27,232.33 a year.

Extra service fees. Additional fees may be charged for a more comfortable standard of accommodation, or special services like hairdressing or pay TV.

A financial adviser can help you calculate all these costs so you know exactly what to expect.

Step 3. Managing the paperwork

Because the fee amounts vary, you’ll need to lodge a Request for a combined assets and income assessment form with the Department of Human Services. This helps determine how much of a government subsidy your relative will receive towards the aged care costs.

Next, you can start applying directly to aged care facilities to find a suitable placement for your relative. A facility will contact you as soon as a slot becomes available, and they may also require you to enter into a Resident Agreement and Accommodation Agreement.

Step 4. What to do with the family home

Moving into aged care accommodation isn’t cheap, and many people who go into care need to sell their family home to cover the costs. This process can take many months, so you might also have to sort out a loan to manage the initial expenses while the property is on the market.

An alternative may be to rent out the property and use the rental income to help cover your aged care fees.

Your relative’s choice of whether to sell, or keep and rent out their former family home can have significant consequences for the aged care fees they pay, as well as any social security entitlements they receive, so speak to a financial adviser about the best option before taking any action.

Step 5. Making the move

Packing up an entire house or flat and moving into a single room of a retirement home requires a lot of work. As space will be limited, you’ll need to prioritise the most important or valuable items (including those with sentimental value) for your relative to take with them, and then sell or give away the rest.

There will also be other practicalities to deal with, such as changing their postal address and advising Centrelink about the move. Finally, make sure you include your loved one in as much of the decision-making as possible, to help make the transition as painless for them as you can.

 

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 20 September 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.

Gains in the US Push Global Shares up to Record Highs

Economics overview

  • US: The Federal Reserve tightened monetary policy again in September, raising official US interest rates by 0.25 percentage points, to between 2.00% and 2.25%. This was the eighth time borrowing costs have been raised in the past two years.
  • US interest rates are now at their highest level in more than a decade, but most observers suggest they will go higher still. Consensus expectations suggest the Fed Funds rate will be raised by a further 0.25 percentage points before the end of 2018 and by at least a further 0.75 percentage points in 2019.
  • The ongoing improvement in economic conditions is being reflected in the labour market; more than 200,000 new jobs were added in August. At 3.9%, unemployment is close to its lowest level since the early 1970s.
  • At the very end of the month, the US, Canada and Mexico agreed on a trade accord that will replace the former North American Free Trade Agreement.
  • The new trade pact was well-received by financial markets, which had been concerned about a potential slowdown in activity – particularly in the US – if a new deal was not agreed.
  • Australia: The latest data confirmed the Australian economy expanded by 0.9% in the June quarter, taking the annual pace of growth to 3.4%. This is the fastest rate since 2012.
  • Growth data for the March quarter was also upwardly revised.
  • These data releases provided some respite from recent currency weakness and helped push local bond yields higher.
  • In spite of the favourable economic backdrop, business confidence has fallen to its lowest level in more than two years.
  • This may reflect political uncertainty following the recent change of Prime Minster and in anticipation of a Federal Election within the next year.
  • Consumer confidence has also declined recently, perhaps owing to rising mortgage costs and moderating house price data.
  • Prices in Sydney and Melbourne have been falling for several months, but the national average has now dipped into negative territory too, following six years of unbroken growth.
  • New Zealand: The New Zealand economy grew by 1.0% in the June quarter, taking the annual pace of growth to 2.8%.
  • The improvement did not affect interest rate forecasts. Few observers are expecting borrowing costs to move before 2020.
  • In spite of ongoing house price growth, consumer confidence levels have dipped to their lowest level in six years.
  • Business confidence levels are also subdued, which could dampen activity levels in the medium term.
  • Europe: Ongoing Brexit-related headlines continued to attract a fair amount of scrutiny. UK and European lawmakers are still yet to reach agreement on the UK’s proposed withdrawal from the European Union.
  • The UK’s ruling Conservative Party and opposition Labour Party held their annual conferences during September, which helped keep Brexit and political considerations in the spotlight.
  • In economic news, strong UK retail sales data brought forward expectations of the next increase in borrowing costs. For now, official interest rates are 0.75%, but consensus expectations suggest they will be raised again in mid-2019.
  • UK inflation has come off the boil over the past few months, reducing the need for the Bank of England to consider more significant policy tightening.
  • Headline inflation in the Euro Area has risen to 2.1%; the highest level in five and a half years. This is partly attributable to sharp increases in energy prices – the Core CPI measure, which excludes energy, actually moderated to an annual pace of 0.9%.
  • The European Central Bank remains committed to withdrawing its Quantitative Easing program at the end of 2018. From there, investors will be keeping a close eye on inflation to gauge the likely timing of interest rate increases. For now, no movement is anticipated until the second half of 2019, at the earliest.
  • Asia/EM: News flow in China continued to be dominated by trade; specifically how the introduction of import tariffs by the US might affect demand for exports and, in turn, the global supply chain.
  • In September, the US introduced new tariffs on a broader range of goods imported from China – albeit at a rate of only 10%, versus the 25% feared. Semiconductors, chemicals, plastics and motorbikes are among cargoes that now face tariffs. China was also measured in its retaliation when imposing tariffs on goods such as steel and medical equipment imported from the US.
  • In Japan, there was an unexpectedly sharp increase in inflation. Headline CPI quickened to an annual pace of 1.3% in August, driven by increases in food and transport prices. More persistent inflation might be required for the Bank of Japan to withdraw its stimulus program and consider raising interest rates above zero.
  • Concerns about emerging markets receded in September, following extreme caution and widening credit spreads that had been seen in August.

Australian dollar

  • Favourable Australian economic data releases enabled the currency to arrest recent declines against the US dollar.
  • The Australian dollar gained 0.5% again the ‘greenback’, after falling in value by more than 10% between the end of January and the end of August.

Commodities

  • Commodity prices generally rose during September as concerns eased around the impact of US trade tariffs and the associated impact on global economic growth.
  • Zinc (+2.8%) and Copper (+2.7%) both rose, while nickel (-4.1%), aluminium (-4.8%) and lead (-2.9%) finished lower.
  • Oil rose 6.9% to four year highs on expectations of tightening supply ahead of US sanctions against Iran and major oil producers’ decision not to increase production.
  • Expectations of more stringent checks and controls on China’s coking coal production during the winter season supported coking coal prices (+9.2%). Thermal coal (+2.4%) also rose.
  • Iron ore (+6.5%) had another strong month amid elevated steel production levels and a rising Chinese steel rebar price.
  • Precious metals were mixed. Gold (-0.7%) was lower on continued strength in the US dollar, while silver (+1.3%) and platinum (+4.2%) both rose.

Australian equities

  • Australian equities declined for the first month since March 2018, with the S&P/ASX 200 Accumulation Index falling -1.3%.
  • Eight of the 11 GICS sectors delivered negative returns; the only positive performers were Energy (+4.3%), Materials (+4.2%) and Communication Services (+2.7%).
  • Most resources-related stocks rose; Whitehaven Coal (+14.3%) and Beach Energy (+10.3%) were among outperformers as energy prices rose.
  • Materials stocks were boosted by Northern Star Resources (+20.0%) after the company announced the acquisition of the Pogo Underground Gold Mine in Alaska, partially funded by a capital raising. The issue was heavily oversubscribed, indicating the market’s strong approval of the acquisition.
  • Health Care stocks (-7.7%) struggled, driven by sector heavyweights CSL (-11.0%) and Cochlear (-6.3%) and the announcement of a royal commission into the aged care sector. Investors appeared to focus on CSL’s and Cochlear’s high price-to-earnings ratios and whether elevated valuations were justified.
  • Small caps outperformed their large cap counterparts, but nonetheless lost ground (-0.3%). The Small Cap Health Care sector (+3.6%) performed well, driven by gains in Mesoblast (+31.1%) and Pro Medicus (+22.7%).
  • Small Financials (-3.1%) underperformed, with insurance and brokerage companies caught up in the negative sentiment associated with the royal commission into banking behaviour and the potential for increased regulation into the future.

Listed property

  • A-REITs had a weak month in September, returning -1.8%.Diversified A-REITs (+0.2%) was the best performing sub-sector, while Industrial A-REITs (-3.2%) was the weakest.
  • Outperformers included Growthpoint Properties (+4.0%) and Investa Office Fund (+3.6%). While Growthpoint did not release any material news, it benefitted from recent M&A activity among peers. Canada’s Oxford Properties is in a bidding duel with Blackstone for Investa Office Fund (IOF). The IOF Board is allowing Oxford Properties to begin due diligence on a potential takeover.
  • The weakest performers were Scentre Group (-3.4%) and Vicinity Centres (-5.4%). Scentre Group was one of only two REITs whose June 2018 results were viewed as “credit negative” by credit ratings agency Moody’s.
  • Many overseas property markets struggled too. The FTSE EPRA/NAREIT Developed Index returned -2.0% in USD terms. In local currency terms, Japan (+3.3%) was the best performing market, while the UK (-2.5%) was the worst.

Global equities

  • Global equity markets recovered from being more than -1% down on a deteriorating trade outlook at the start of the month, to end September in positive territory with the MSCI World Index up 0.6% in AUD terms.
  • Solid economic data in the US and more measured tariff increases than initially feared helped both the S&P 500 and the MSCI World (in both local currency and AUD terms) out of the red and to establish all-time highs later in the month.
  • The strongest performer, however, was the Nikkei 1000, which returned 4.7% in Japanese Yen. The improved trade outlook helped, as did Abe’s re-election as leader of the ruling LDP party. This effectively gave Abe another three years as Prime Minister and the chance to become Japan’s longest serving premier.
  • Among major developed markets, Australia was among the weakest performers.
  • Emerging market equities bounced back from being down as much as -3.5% mid-way through September, but not quite enough to get back into the black. The MSCI Emerging Markets Index ended the month down -0.5% in AUD terms.
  • Having been the strongest performing region last month, the MSCI EM Asia Index sold off in September, down -1.7% in AUD.
  • MSCI India was down -7.1% in local currency terms (and -9.1% in AUD) as a number of its financial stocks sold off heavily on concerns about further defaults in the sector and the Reserve Bank of India’s order for Yes Bank’s CEO to resign after finding that the bank had under-reported its bad loans.

Global and Australian Fixed Interest

  • Bond market investors appeared to refocus on economic drivers, after emerging market risks had dominated attention in August.
  • Global markets once again took a lead from the US, where the yield on 10-year Treasuries rose 20 basis points to 3.06%. The Fed Funds rate was increased by 0.25 percentage points to between 2.00% and 2.25%, as anticipated.
  • More importantly, investors appeared to reassess their longer-term expectations for US monetary policy.
  • There is some evidence that tightness in the labour market is being seen in wage growth, which is now running at a pace above Headline inflation; a trend the Federal Reserve will be watching.
  • Government bond yields rose in other major markets, too.
  • 10-year yields closed the month 15bps and 14bps higher in the UK and Germany respectively, for example, and by a more modest 2bps in Japan. As well as the upward move in US Treasury yields, there was optimism that UK and European lawmakers were making some progress in Brexit negotiations. Final details of the UK’s proposed withdrawal from the European Union are yet to be finalised, but investors were reassured that both parties appear willing to negotiate.

Global credit

  • Credit markets were supported by the general improvement in economic indicators and a healthy risk appetite among investors.
  • Issuance increased as anticipated following the seasonal lull during the summer holiday season in the northern hemisphere. Encouragingly, this increased supply was met with solid demand and did not result in any spread widening.
  • In fact, credit spreads narrowed in both the investment grade and high yield sectors. Energy-related sectors were among the best performers, buoyed by the rising oil price. It will be interesting to see how issuers in sectors are affected by persistently higher energy prices, specifically whether they are able to pass higher costs on to customers through higher prices, or whether they will be forced to accept narrower margins.

Chart of the Month – Which Equities to Hold as Inflation Increases?

In these bulletins, we aim to share interesting observations from global investment markets. This month we look at the relative merits of different equity sectors assuming inflationary forces remain entrenched.

At its September Open Market Committee meeting last week, the Federal Reserve decided to increase US interest rates for a third time this year. According to Fed chairman, Jerome Powell, “Inflation is low and stable”, but given that “growth is running at a healthy clip…and wages are up” the Fed is clearly anticipating rising inflation and is tightening monetary policy accordingly. So, how should equity investors respond to higher inflation?

The chart below shows the relative performance of various equity categories during discrete inflation regimes since September 2001. The so-called “listed real assets” of listed property, listed infrastructure and resource equities tend to perform in line with, even slightly ahead of, broader global equities during inflationary periods similar to what we’re seeing currently (2-3%). Over the past four months, the annual inflation rate in the US has crept up towards the upper end of this range. But as the chart demonstrates, listed real assets have more clearly outperformed the MSCI World Index when inflation exceeds 3%. Could this be a sign of things to come, and what drives this behaviour?

Source: FTSE Global Core Infrastructure Index, FTSE EPRA/NAREIT Developed Index, S&P Natural Resources Index, MSCI World Index, US CPI (Urban Consumers Non-Seasonally Adjusted). All in USD and sourced from Bloomberg. Sep 2001 to Sep 2018

Many infrastructure assets have explicit links to inflation through regulation, concession agreements or contracts. Toll roads provide a good example of this. Their concession terms typically reference the inflation rate, with scope to negotiate further compensation for additional capital expenditure. Australian toll road company, Transurban Group, for example, can increase prices on many of its roads by the greater of inflation or 4% pa. Similar concession agreements where tolls are linked to inflation exist throughout Europe, North America and even across emerging markets.

The regulated pricing of water, electricity and gas utilities across the US and Europe are also often connected to inflation rates. Even infrastructure assets without specific links to inflation can have the pricing power to deliver a similar (or better) outcome, reflecting a strong strategic position. The track networks of North America’s two main freight rail companies are examples of unique infrastructure assets that can’t be replicated. Significant numbers of captive customers, such as grain handlers and auto producers, give them strong pricing power over long haul routes.

The connection between rental growth on properties and the rate of inflation varies across property type and jurisdiction. For a purpose- built logistics asset, tenants could negotiate 12-15 year leases with annual rental increases based on inflation. For retail property in Australia, specialty tenants pay base rent with increases each year (either a set increment or linked to inflation) over a typical five year lease. In contrast, larger tenants in these assets usually pay flat contracted rents plus a percentage of their sales turnover, which is clearly related to rising prices.

Finally, the relative performance of resource equities is often influenced by commodity prices, which feed into headline price inflation. This is particularly relevant currently, with oil prices rising to four-year highs in September. If energy prices continue to rise, it is worth looking out for even higher, albeit less likely in our view, inflation environments when price growth moves above 4%. Resource equities perform particularly well in this scenario and listed infrastructure continues to deliver solid returns. Even listed property might be expected to outperform the MSCI World over these periods. However, during the Global Financial Crises, when US inflation was initially running above 4%, listed property uncharacteristically underperformed the MSCI World as broader share prices fell heavily. Property could offer a better inflation hedge during similar periods in future.

MARKET WATCH DATA SHEET

Source: FactSet, as at 31 September 2018

 

Disclaimer
This document is directed at persons of a professional, sophisticated or wholesale nature and not the retail market. 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 the writer at the time of issue and may change over time. This is not an offer document, and does not constitute an offer, invitation, investment recommendation or inducement to distribute or purchase securities, shares, units or other interests or to enter into an investment agreement. No person should rely on the content and/or act on the basis of any matter contained in this document. This document is confidential and must not be copied, reproduced, circulated or transmitted, in whole or in part, and in any form or by any means without our prior written consent. The information contained within this document has been obtained from sources that we believe to be reliable and accurate at the time of issue but no representation or warranty, express or implied, is made as to the fairness, accuracy or completeness of the information. We do not accept any liability for any loss arising whether directly or indirectly from any use of this document. References to “we” or “us” are references to Colonial First State Global Asset Management (CFSGAM) which is the consolidated asset management division of the Commonwealth Bank of Australia ABN 48 123 123 124. CFSGAM includes a number of entities in different jurisdictions, operating in Australia as CFSGAM and as First State Investments (FSI) elsewhere. Past performance is not a reliable indicator of future performance. Reference to specific securities (if any) is included for the purpose of illustration only and should not be construed as a recommendation to buy or sell. Reference to the names of any company is merely to explain the investment strategy and should not be construed as investment advice or a recommendation to invest in any of those companies. In Australia, this document is issued by Colonial First State Asset Management (Australia) Limited AFSL 289017 ABN 89 114 194311.

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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.

 

 

 

 

 

 

 

 

 

 

 

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