BLACKMORE AUTUMN 09 LOOK FORWARD Bulletin B L A C K M O R E I N V E S T M E N T S P T Y LT D Welcome to the Weathering the storm autumn edition by Paul Clitheroe of the blackmore First came the credit crunch. Then the sharemarket crash. Now, we’re left weathering the fallout of the global recession. bulletin It’s challenging stuff. But the trick is to stay calm and chart a careful course, using the opportunities provided by a 2008 was an unusually tough year slowdown to set yourself up for the next boom. for investors. The Global Financial Crisis and a massive cycle of debt You’d be hard pressed to find good Having a nest egg behind you will reduction or ‘de-leveraging’ around news on the economic front at provide a lifeline if you get slugged the world led to waves of market present. Headlines of recession, rising with redundancy, and looking at your unemployment and corporate profit household budget now will help identify volatility. Returns were among the crunches don’t inspire confidence. areas where you can cut back to build a worst on record. Frankly, things could get worse before pool of emergency savings. In this edition, we look at this they get better despite the best efforts In fact the current climate calls for a of the Reserve Bank in lowering interest challenging environment as well back-to-basics approach for all of us. rates, and the quick response of the as some opportunities emerging. Anyone who came into this slowdown Rudd government’s stimulus plans. We discuss why big switches debt free and with money in the bank The news isn’t all bad has a good opportunity to build their to cash now may cause bigger But let’s not overlook the positives. wealth ahead of the next boom. problems later, and explain recent Interest rates have come crashing down Shares may have tanked by over 40 government announcements and since last September, with the official per cent last calendar year, the worse what they mean for you. Paul cash rate at its lowest level since the single year in history, and property Clitheroe also shares his insights 1960s. It’s manna from heaven for has also performed sluggishly. But and offers ‘back to basics’ tips anyone with a variable rate home loan. that doesn’t mean these are poor and strategies. The extra cash provided by rate cuts is investments. Far from it. worth a lot more to mortgage holders than When we’re caught in the middle of The news headlines in government handouts, tax cuts or even a boom it’s easy to overlook warnings coming months will be ugly a pay rise (and I doubt there’ll be many that assets offering high returns also as companies report lower of those this year). On a variable loan come with high risk. Investors are a little earnings, the economy slows of say $400,000, you’re better off by wiser today, and it’s time to follow the and unemployment rises. around $16,000 each year, real money strategy of successful investors – buy Recent government efforts will for extra loan repayments or to build an when values are cheap - rather than help to reduce the impact, and investment portfolio. when they’re overpriced. as confidence returns markets Inflation – once a spectre to be feared, Shares and property could have further should stabilise – although this has slunk into the background, with to fall, but markets have already taken a could take time. falling fuel prices also putting extra flogging and priced in lots of bad news. money back in our wallets. Just as markets collapsed when we least Finally, you may have friends or Making good use of the opportunities expected it, history tells me they are likely family who are anxious about to jump back, equally dramatically, when Despite the pluses, the threat of job losses their financial position. Feel free we least expect it. The only way to profit is weighing on many workers’ minds. I to pass on our details to anyone from this turnaround is to be in the don’t have a crystal ball to pinpoint how market when it takes off. you know in this situation, as we far unemployment will rise but if your job’s looking a bit shaky it makes sense to start Paul Clitheroe is a founding director of are always happy to meet with financial planning firm ipac, Chairman someone on your referral. squirrelling cash away and trim back your of the Federal Government’s Financial personal debt. Literacy Foundation and chief We hope you enjoy reading commentator for Money Magazine. this edition. Investment outlook what now for markets? longer and it will be harder for companies ~ turning a paper loss into an actual loss to make a profit and deliver good returns when shares are cashed in. After making waves in 2007, the global to shareholders for a longer period. ~ being out of the market when the share financial crisis hit our shores with the force of a tidal wave last year. It translated market recovers. It’s important to note rapidly into the slump in the real economy cash or shares? that history shows recovery can come that we are seeing now – job losses, Given the scale of the crisis, it’s tempting without warning. drying up of credit and company closures. to think share markets will never come ~ missing out on dividend income. Even It even picked up its own acronym – GFC. good – and thus to consider switching all when share prices fall, many good investments to cash. This is where your quality companies still pay meaningful The questions everyone is asking are: timeframe for investment is most important. dividends. In Australia, falling share Can it get any worse? And what should I do with my investments? What we do know is that over the majority prices have pushed historic dividend of long periods in the past, a broadly yields on the All Ordinaries Index to Neither is easy to answer. But while there more than 6 per cent. At the same diversified global share portfolio has may still be dark days ahead, there are also time, the cash return is now 3.25 per done better than cash – in many cases glimmers of light at the end of a long tunnel. cent, and likely to go lower. Shares significantly better. However the timing and sequence of returns from both potentially provide a better income investment markets – shares and cash is unpredictable. return and potential for capital growth. where to from here? Eighteen months ago, for example, it ~ failing to achieve investment objectives The current crisis has seen an over the long term. Even if it takes the seemed that half of Australia was struggling unprecedented response from governments Australian share market as long as 10 to fix their mortgage interest rate at around around the world. Eager to avoid the years to recover to its 2008 high, this still 8 – 9 per cent. Now some are looking into mistakes of the past, particularly the 1930s equates to an average annual return of the break fees (how much they need to pay) and 1970s, economic policies have been 6.3 per cent. Add dividend reinvestments to move back to much lower variable rates. introduced to restore confidence and to this, and the return is likely to be There is no doubt that 2008 was an much higher, and a much healthier spending and stabilise markets. extraordinary year, and over the short-term figure than the current cash rate. In Australia these measures have included share markets are likely to remain volatile. huge injections of cash to buoy the retail However, this short-term relief may how are ipac portfolios sector and save and create jobs. It will take come at a high price over the long term. time for these measures to work – you don’t By settling for a certain, but very low, positioned to recover? spend $42 billion overnight – and there is a return investors risk: ipac will be constantly monitoring long way to go before business and investor conditions to look for opportunities confidence is restored. But it’s a start. The outlook for 2009 is for continued a tale of two investors slowing in economic growth, and rising unemployment in most economies with major industrialised countries pushed into recession. ipac compared two investors. Both have seen the value of their $100,000 investment in Australian shares fall to $75,000 following the market downturn. Investor A chooses Beyond 2009, our long-range view is for to move to cash while Investor B stays invested in Australian shares. The table below signs of recovery in the global economy uses ipac’s medium-term return forecasts for cash and Australian shares to estimate to emerge in 2010 under the influence the time frame for each investor to recoup their losses in real terms after taking inflation of the massive stimulus described above. and tax into account. The investor has a tax rate of 31.5 per cent (including Medicare) Investor confidence should begin to re- and inflation is estimated at 2.5 per cent per annum. emerge and investors, who are currently showing a preference for bonds and cash over shares, will return to equity markets. investor A investor B Volatility will eventually subside. More (invests in cash) (invests in Aust. Shares) resilient financial companies and banks real value after 5 yrs (A$) 77,412 100,878 will survive the current crisis and emerge real value after 20 yrs (A$) 85,124 245,475 stronger than before. assumptions: Cash return is 4.6 per cent (all income), Australian shares return is 8 per cent per annum If the global recession becomes more (income component is 3.5 per cent), franking level on income from shares is 70 per cent, inflation is protracted, however, recovery will take 2.5 per cent. source: IMF. Data as of January 2009. and ways to protect portfolios. Based Federal Government’s on current indicators our outlook for the major asset classes is: Economic Stimulus ~ bonds – ipac managers acted early to take advantage of mis-pricing opportunities in corporate bonds. Package Market distortions have caused In February 2009 the Federal in the 2008 Budget. The Education extraordinarily low prices to be set Government announced an Tax Refund provides a capped refund for good quality corporate bonds. Economic Stimulus Package of up to 50 per cent of eligible ~ shares – we expect Australian shares which includes lump sum cash expenses per school child. to show solid returns in the medium payments to low and middle term. We are invested in companies income Australian families. Some Single-Income with strong, fundamental qualities people will be eligible for more than one type of payment. None Family Bonus and which are likely to benefit from industry consolidation. Within of the payments will be taxable or $900 will be paid to families Australian shares the bulk of money be assessed as income for who are eligible for Family Tax is in assets with strong fundamental Centrelink benefits. Benefit Part B (FTB-B). qualities. Woolworths, for example, Payment of both FTB related is one of the major holdings. Tax Bonus for Bonuses is expected in the ~ listed property trusts – returns from Working Australians fortnight commencing 11 March listed property were severely dented 2009 for those who receive FTB Up to $900 will be paid to during 2008, however we believe in fortnightly instalments. Australian residents who paid tax in that property values are reasonably the 2007-08 tax year and who had well balanced with a fairly good income within the following bands: Farmer’s Hardship outlook over the medium to long ~ Taxable income up to $80,000 - Bonus and Training term. ipac’s property securities portfolios hold high-quality companies Bonus $900 and Learning Bonus that should recover and we believe our ~ Taxable income $80,000 to $950 is available to farmers securities managers will capitalise on $90,000 - Bonus $600 receiving specified income opportunities in the current market. support payments. A Training ~ Taxable income $90,000 to and Learning Bonus of $950 is $100,000 - Bonus $250 bottom line available to students receiving There is no requirement that the specified Centrelink benefits, or History shows that the recovery can taxpayer was employed, except for to those commencing approved come without warning and only those those under age 18. The Tax Bonus education courses who have invested will benefit. Before you make for Working Australians is also been receiving specified any investment decisions that may potentially available to pensioners, Centrelink benefits. have long-term implications on your retirees, investors, and students. financial situation, we are available Further information – speak to us to discuss your personal financial Payments are expected to be made and also see the following websites: circumstances, offer advice and help you commencing in April 2009. Taxpayers www.ato.gov.au - stay focused on achieving your long-term must lodge their tax return for 2007- for information about the Tax investment objectives. 08 by 30 June 2009 to be eligible. Bonus for Working Australians and Education Tax Refund While ipac securities limited ABN 30 008 587 595 Back to School Bonus www.centrelink.gov.au - (ipac) AFS Licence No. 234656 (ipac) has released this $950 per school age child (age information for guidance purposes only and is of a general for information about the nature only and does not take into account the particular 4 - 18 years) will be paid to other payments. needs, objectives and circumstances of any individual. families who are eligible for Family Investors should seek independent financial advice Tax Benefit Part A (FTB-A). before making an investment (or before implementing this strategy). ipac believes the information contained herein is correct, no warranty of accuracy, reliability or This bonus is in addition to the completeness is given and, except for liability under Education Tax Refund announced statute which cannot be excluded, no liability for errors or omissions is accepted. Surviving retrenchment With the business sector starting to look like a war zone, job security is no longer a sure thing and none of us are safe from the dreaded tap on the shoulder. Being retrenched can be one of life’s most be easy but if you don’t do it now, you traumatic events, but charting a clear could be forced to significantly tighten course is more effective than hitting the your belt further down the track. Tips panic button. ~ Avoid making hasty decisions Get in touch with Centrelink to register Most laid-off workers receive a redundancy for benefits as soon as possible. If you about how you’ll use a payout comprised largely of unused annual are under 21 you may be eligible for redundancy payment. leave plus severance pay - measured as a Youth Allowance. Those of us too ~ Parking your payout in a cash number of weeks’ wages. The golden rule young for the Age Pension can register management account or online with any such payment is to think first and for Newstart Allowance, though this saver lets you earn interest spend later - there’s no knowing how long is subject to both an income and of around 3 per cent to 5 per the money will need to last. assets test. The current rate is around cent while providing valuable $449 per fortnight for a single person breathing space. At this stage, every penny counts so park with no kids. the money in a cash management account ~ Be careful about using a large or online savings account, where it can With these steps taken care of you’re likely chunk of the payout to reduce earn between 3 per cent and 5 per cent. to know how much you have to live on debt. This could leave you This will also provide valuable breathing until you find work. Obviously, one of the strapped for cash if you don’t space to decide how to use the cash biggest headaches facing many retrenched land another job quickly. while considering job options. workers will be keeping up the monthly ~ Take stock of your overall mortgage repayments. savings and draft up a Be careful about using large chunks of budget to see you through a payout to reduce debts like your home If you’re ahead with your home loan to re-employment. loan. I’m all for paying off debt but unless you may be able to claw back some you have a new job lined up you need to of the funds through a redraw facility. ~ Get in touch with Centrelink remain as financially flexible as possible. Where that’s not the case, and meeting early – find out the benefits you the repayments is likely to be a struggle, may be entitled to and the With a clear idea of how much you speak to your bank to renegotiate the loan. waiting period that may apply. have in savings, you can plan your ~ If you are struggling to make finances to see you through to re- Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Federal interest repayments talk to employment. A budget is an essential your lender before they start Government’s Financial Literacy Foundation tool here. Be prepared to slash any and chief commentator for Money Magazine. calling you. non-essential spending – it may not Have we got To help us keep you informed of timely and relevant updates, please send us your email address by emailing your email firstname.lastname@example.org or let us know by phone by calling address? our office on 08 8221 6515. Blackmore Investments Pty Ltd Corporate Authorised Representative No. 258061 ABN 077 855 843 ABN 80 577 166 359 Level 3 117 King William Street Adelaide SA 5000 Phone 08 8221 6515 Fax 08 8221 6535 Email email@example.com Disclaimer: The information presented in this newsletter is of a general nature only and is not intended to be relied upon as a substitute for professional advice. Aon Wealth Management has not taken individual circumstances into consideration. You are advised to seek independent professional advice. While Aon Wealth Management believe the information contained in this publication to be accurate and reliable, but no warranty is given and no responsibility arising in any other way for errors or omissions including responsibility to any person by reason of negligence (except as required by law) is accepted. Aon Wealth Management Limited Australian Financial Services LOOK FORWARD Licence No. 239187 Life Insurance Broker.