Weathering the storm

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					                                      BLACKMORE                                                                        AUTUMN 09

                                      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.
  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
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
(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

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                     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
                     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.

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