Falconer Advisers Newsletter July 2020

Falconer Advisers Newsletter July 2020

Welcome to the latest edition of our newsletter.

Our articles cover a range of topics which we hope you will find interesting. We aim to keep you informed of changes as they happen, but we also want to provide ideas to help you live the life you want – now and in the future.

In this edition we discuss how to protect yourself from COVID-19 related scams and provide you with information on help future-proof your career in 2020 and the economic hangover of COVID-19.

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We hope you enjoy the read. If you would like to discuss any of the issues raised in this newsletter, please don’t hesitate to contact us. We will continue to provide ongoing service to you even though Melbourne office closed at the moment  due to the COVID19 shutdown, please contact Robert or Scott if you need any assistance.

All the best,
Falconer Advisers Team

We are experts in all aspects of financial planning including estate, legacy and family constitutional planning.

Falconer Advisers Winter Newsletter 2020

Falconer Advisers Winter Newsletter 2020

Welcome to the latest edition of our winter newsletter.

Our articles cover a range of topics which we hope you will find interesting. We aim to keep you informed of changes as they happen, but we also want to provide ideas to help you live the life you want – now and in the future.

In this edition we discuss Australian economy and recovery from COVID-19 and provide you with information on investment options, digital payments and online banking for older Aussies.

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We hope you enjoy the read. If you would like to discuss any of the issues raised in this newsletter, please don’t hesitate to contact us. We are relocating our Melbourne office on the 6th July to Level 3, 162 Collins Street, Melbourne VICTORIA 3000. Contact details remain the same. Robert and Scott look forward to meeting with you soon in The Hub.

All the best,
Falconer Advisers Team

We are experts in all aspects of financial planning including estate, legacy and family constitutional planning.

Newsletter June 2020

Newsletter June 2020

June 2020

Welcome to our June Newsletter.

Our articles cover a range of topics which we hope you will find interesting. We aim to keep you informed of changes as they happen, but we also want to provide ideas to help you live the life you want – now and in the future.

In this edition we discuss diversification and provide you with information on insurance ahead of retirement and low income super tax offset.

If you would like to discuss any of the issues raised in this newsletter, please don’t hesitate to contact us.
In the meantime we hope you enjoy the read.

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All the best,
Falconer Advisers Team

 

 

Newsletter April 2020

Newsletter April 2020

Welcome to our April newsletter which we bring to you at a time of enormous economic uncertainty. At times like these it’s important to have someone to talk to, so we urge you to contact us if you have concerns about your finances.

The health and economic impacts of the coronavirus increased exponentially in March, as did the response of national governments and central banks. As part of a suite of emergency measures, the Reserve Bank of Australia (RBA) cut the official cash rate twice – first to 0.5 per cent and then to 0.25 per cent – as official rates in the US and Europe were cut to near zero. The RBA also began buying government bonds to bring yields down in line with the cash rate, as well as offering a term facility to banks so they can supply credit to small and medium businesses.

It’s too soon to know if these emergency measures will stave off recession (technically two consecutive quarters of negative growth), but Australia was better placed than many countries heading into the crisis. The Australian economy grew 0.5 per cent in the December quarter, up 2.2 per cent over the year, while company profits rose 8.1 per cent in calendar 2019 to record highs.

Global markets remain extremely volatile. Australian shares fell around 17 per cent in March while US shares fell around 15 per cent. Crude oil prices fell more than 56 per cent as a production agreement between OPEC and other oil-producing nations broke down. Australian wholesale petrol prices fell to a 16-year low, while the national average price of unleaded petrol fell to a 13-month low of 127.6c a litre. The Aussie dollar fell about 5 per cent over the month to just below US62c, after briefly dipping below US56c.

Making peace with the unknown

Making peace with the unknown

Life constantly challenges us with unknowns, yet some of these hit closer to home and harder than others in their impact.

The coronavirus is unprecedented in our lifetimes, so we are charting new territory in the world’s response to this crisis. The uncertainty around its far-reaching impact is creating fear for many around the globe, as governments act to minimise the spread of the virus.

Due to the fast changing nature of the government response to this momentous challenge, there are significant unknowns. There are short term unknowns around the government’s evolving response to the crisis and you could be concerned about the stability of your work situation. And longer term about how will this impact you into the future? Perhaps you’re wondering when you will be able to retire as your super balance takes a dive? Will the economy and businesses survive the disruption? How will you be supported through this period?

You are not alone in experiencing these fears. As humans we like to deal with ‘knowns’ and plan accordingly, rather than be at the mercy of uncertainty and instability. Whether it’s something as big as the coronavirus or a smaller unknown, there are however ways we can become more comfortable with uncertainty.

Planning for the unknowns

Planning for the unknowns sounds like a contradiction. After all, if we don’t know how, when and if we will be impacted, how can we plan for it? Yet planning for potential outcomes can help us feel more in control and be one less worry to deal with.

You don’t need to think of every possible eventuality, but given the challenges society is facing, consider what the implications mean for you and your family. What can you do to minimise the impact?

Then the next, possibly more challenging thing to do, is to accept that you can’t plan for all eventualities and acknowledge that there may be some things out of your control. Focus your attention on what you are able to have some control over and then look at narrowing the list down to what really matters most to you, letting the rest of the ‘noise’ dissipate.

Stay positive and engender connection

The situation is changing rapidly and it’s tempting to constantly monitor news feeds, as it can feel more empowering to feel like you know what is going on. Just be mindful of taking breaks from the updates if they are fuelling feelings of uncertainty. Step outside and enjoy a little fresh air, call a friend or just do something small that gives you a bit of a breather and a little perspective.

The societal impact of the coronavirus is huge and is having a significant impact effect on many of our lives. It’s important to remember that these changes aren’t necessarily permanent and that we are all in this together.

Connection is important in helping us feel grounded and supported during a period of uncertainty. This crisis is first and foremost a health and human crisis, so we need to be respectful of not only our own health, but those of others. We can help those who are more vulnerable. There are many good news stories arising of people assisting and connecting with their neighbours and those in need.

Understanding the impact on the markets

Markets have experienced a significant downward trend as the impact of the coronavirus continues to develop across the globe. This has had a significant impact on investments and more broadly on superannuation account balances.

While it is understandable to feel unsettled, consider your long term financial goals. Avoid making rash decisions based on fear, as this can crystallise your losses and put you on the sidelines for when the market recovers and as history shows, it always does.

Especially during this period of uncertainty, I hope you are keeping well and looking after yourself. We are here for you every step of the way. Don’t hesitate to get in touch if you need assistance.

Are your insurance needs covered?

Are your insurance needs covered?

The start of a new year is always a good time to check whether your insurance policies are still serving your needs. But this year there is even more reason to review your cover.

If your super balance is less than $6000 or you are under 25 and are a new fund member, life insurance in your superannuation will no longer be automatic come April.i

Letters have already been sent out to those affected by the change which is part of the Putting Members First/Protect Your Super Package legislation.
If you don’t respond to the letter by advising your super fund that you want to maintain your cover, it will be cancelled.ii

Since last year, super accounts inactive for more than 16 months have been in a similar situation with automatic cancellation of life insurance if the member doesn’t opt in to continue their cover. There are a few exceptions, such as defined benefit funds, so contact your super fund if you’re unsure.

Of course, most Australians with super won’t be affected as their balances exceed $6,000 and they are aged over 25. Indeed, due to the existence of default life insurance offered through super, many more Australians have cover than in previous times.

Sometimes, however, this cover may be insufficient to cover your actual costs, should you need to make a claim.

Underinsurance still common

A 2017 survey by Rice Warner found the median death cover was only twice the median household income. Yet it’s estimated that people in their 30s with children would need replacement income equivalent to eight times their family income to continue their current lifestyle if one parent were to die.

Similarly, total and permanent disability (TPD) cover is generally only three times the median household income when four times is ideal. TPD pays you a benefit if you become seriously disabled and are unlikely to ever work again.

While life and TPD cover have grown thanks to super, only about 30 per cent of the working population has income protection insurance. Income protection pays you regular income for a specified period when you are unable to work due to temporary disability or illness.iii

Given the size of mortgages these days and the cost of raising a family, this low level of income protection cover is concerning.

You probably don’t think twice about insuring your car or your home, so why think twice about insuring your ability to earn an income should something unexpected happen?

Do regular check-ups

Insurance needs vary depending on your income, your age, your family situation and your working status.

Clearly if you have a young family and a mortgage, your financial commitments will be greater than if you have paid off your mortgage and your children have flown the nest.

That’s why it’s important to check your insurance when it comes up for renewal and/or when your personal circumstances change. For instance, if you have recently married, had a child or retired you may need to alter your level of protection.

Inside super or out?

For some, life insurance outside super may provide more tailored cover than insurance offered inside super, or you might decide to have a combination of the two.

Life insurance in super is often cheaper because super funds can negotiate group rates and your premiums are paid with pre-tax dollars. Generally, you will be covered without having to undergo a medical, but there are drawbacks.

Unlike insurance inside super, cover outside continues when you change jobs. And claims are likely to be faster as benefits are paid directly to the policy owner and not to the fund.

Also, outside super, you can insure “own” occupation rather than “any” occupation with a TPD policy. This means you will get a payout if you can’t continue working in a similar occupation to your current one. “Any” occupation is a much broader definition and can lead to a lower chance of making a successful claim.

Life insurance is a must for most people, but it will be of limited use if you don’t have adequate cover should you make a claim.

If you need help determining your current insurance needs, give us a call.

i https://www.apra.gov.au/putting-members%E2%80%99-interests-first-%E2%80%93-frequently-asked-questions

ii https://www.sunsuper.com.au/employer-news/legislation-update-oct-19

iii https://www.ricewarner.com/life-insurance-adequacy/

Hold on... volatility ahead

Hold on… volatility ahead

After period of optimism, global investment markets have hit the panic button on fears about the possible economic impact of the coronavirus (COVID-19). We are seeing significant falls as well as rallies as the markets react to what measures policy makers are taking to provide economic support and soften the impact of the coronavirus.

Markets move in cycles, at times like this it’s good to get some perspective.

Australian shares rose 24 per cent last year, touching record highs, and 10 per cent a year over the past seven years. Global shares rose 28 per cent last year and 17 per cent over the past seven years.i After such a good run, many observers have been saying shares were looking fully valued and that a correction was likely.

The thing with market corrections is that it is impossible to predict what will trigger them or how long and severe they will be.

Avoid knee-jerk reactions

At this point, markets are responding to uncertainty. Nobody knows what the extent of the economic fallout will be, so the temptation is to bail out of shares and put your cash in the bank. Or jump ship and switch to a ‘safer’, more conservative option in your superannuation fund.

While the urge to act and protect your savings is understandable, knee-jerk reactions can be a mistake.

It’s near impossible to time the market, particularly at the present moment with a volatile market that is responding to a situation that is changing on a daily basis. Not only do you risk selling when prices are near rock-bottom, but you also risk sitting on the sidelines as the market recovers. As history tells us it always does.

In an ever-changing world, the basics of investing stay the same. By sticking to some timeless rules it’s much easier to resist making fear-based decisions and focus on your investment horizon.

Have a plan

Investing is a lifelong journey and like all journeys you are more likely to reach your destination if you plan your route. Without a plan, it’s easy to knee-jerk into decisions that may not be the best in the longer term.

Your plan needs to take into consideration your unique situation, financial goals and your comfort with risk.

Low risk comes with lower returns

Many people are wary of investing in shares because of the risks of the kind of market event we are currently experiencing. Growth assets such as shares and property do entail higher risk but they also deliver higher returns in the long run than cash in the bank.

While domestic and international shares produced stellar returns last year, cash returned just 1.5 per cent which was below the level inflation. Cash returns were not much better over the past seven years, averaging 2.2 per cent a year.

Spread your risk

Shares, property, bonds and cash all have good years and bad. While shares and property tend to provide the highest growth over time, there will be years when prices fall or go sideways. In some years, bonds and even cash produce the best returns.

A good way to reduce volatility and enjoy smoother returns over time is to diversify your investments across and within asset classes. That way, one bad investment or difficult year won’t sink your ship.

The most appropriate mix will depend on your age, the timing of your goals and your risk tolerance.

A disciplined approach

Rather than sell shares in quality companies in a panic, continue to collect your share dividends which may be more attractive at present than the returns available from cash and some fixed interest investments. It may even be worth considering reinvesting dividends in more shares or other quality assets. This way, you avoid crystallising short-term paper losses and benefit from the inevitable market recovery.

When fear is driving markets, it’s important to get back to basics and think long term. If you would like to discuss or review your overall investment strategy, don’t hesitate to get in touch.

i https://www.chantwest.com.au/resources/2019-a-standout-year-for-super-funds

Falconer Advisers Pty Ltd ABN 48 068 857 741, trading as Falconer Advisers, is a Corporate Authorised Representative of Hillross Financial Services Limited ABN 77 003 323 055, AFSL No. 232705. General Advice Warning: This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information. Investment Performance: Past performance is not a reliable guide to future returns as future returns may differ from and be more or less volatile than past returns.

Be patient and stay the course.

Be patient and stay the course.

In our work for you this week we have put together a basic summary of the crisis so far and an update on what we are focused on for you.

Please note this commentary is about investments so we have refrained from writing about the unfortunate human impact.

That impact is hard to quantify just yet. But we would be amiss to say that if shutdowns of countries and states are imposed for too long the humanitarian side of the equation could soon become a much bigger economic, political and social one.

With regards to investments and markets, the following are our observations and thoughts based on our experience as well as open discussions we have had with businesses, colleagues, economists, fund managers and stockbrokers.

We have seen a historical replica of markets crashing. 

  1. Panic selling in stock markets at the start – this has been the quickest fall over 20% in history. Technology and various styles of traders have helped the exuberance.
  2. Cashing out of every other asset, even bonds and gold. Last week’s plight.
  3. Redemptions from (selling out of) hedged funds and other managed funds, forced by client’s panicking or needing cash because they were highly leveraged (in debt). An ongoing issue adding to market turbulence (volatility).

There are three clear actions to help everyone. 

  1. Governments providing cash or other policy measures to support consumers and businesses (called fiscal stimulus) so that there isn’t a deep economic crisis. This is generally reactive and slow to take off. Our own government has acted much quicker than most peers.
  2. Central banks like our Reserve Bank of Australia, providing liquidity (cash) to markets so that there isn’t a financial crisis.
  3. Governments and World health organisations working on containment measures to slow the spread rate and vaccines to help those infected.

 What has been done so far.

  • Governments have slowly released their stimulus packages to help consumers. The evidence of this creates some positivity for consumers and clarity investment markets;
  • Central banks are doing anything they can to keep companies and the economy afloat and liquid;
  • Because of regulation changes banks, especially US banks, have worked to be much healthier (with regards to cash backing) than in the Global Financial Crisis; and
  • Containment measure stages are really ramping up around the world and we probably haven’t seen the worst of that yet.

What we are aware of and watching out for.

We are bracing ourselves for substantial, but likely temporary, downgrades to companies’ earnings (circa 25%) as well as dividend cuts by at least 10%. We have eyes on corporate loan default rates over the next 6 months. However, the market looks to have mostly priced in that bad news.

This week has seen a little bit of joy for markets, stemming from the US Government finally agreeing on their stimulus and Europe taking further measures to add capital.

Looking ahead, we are mindful that stock markets tend to run ahead of time. Looking back on previous recoveries from a sizeable fall, markets start to head north before eventual company earnings upgrades by about 100 days on average.

However, saying all that, we don’t believe this is the clear bottom of the market.

There is too much imbalance in the global economy and no a clear sign yet of the virus spread rate slowing to call a definitive bottom for stock markets.

Therefore, we are not simply studying potential company earnings hits and economic data. We are looking for signs that the virus spread rates are slowing or have indeed peaked.  Indicators of this being watched very closely are in Italy and the US especially.

We believe markets will be bottoming around that time the virus spread rate starts to slow down, even though by then the general global population will likely be feeling pain from the strict containment measures.

This brings us to the factor of time and what we can learn from the past.

We will get over this.

Whilst we might change the way we live in some ways, the extreme measures we are seeing now to stop the virus spread will return to a more normal way of life.

This time next year this crisis will most likely be behind us. Vaccines will hopefully be produced.

Economies will have started to ramp up again, hopefully with much less damage than if governments and central banks had not have taken enough action.

We also know from history, that after big downturns, market returns have tended to be much larger than average. Investing and rebalancing at these times of higher volatility has mostly translated into great returns over the following years.

Therefore, we must continue to think beyond the worst of the virus as our time horizons as investors are much longer. We must look beyond the unknowns as they appear today, in order to position portfolios for far longer than the next few months. 

Our focus on your portfolio. 

1. Take advantage of currency differences.

We believe the Australian Dollar (AUD) has fallen far enough. Last week it fell to 55 cents (versus the USD) at one stage.

We have experienced that these low levels of the AUD are hard to sustain as, already mentioned, global economies need to rebalance.

A simple example of this might be China continuing to add stimulus to their economy and encourage another boom of infrastructure spending.

This of course bodes well for the demand for Australian commodities. That buying pushes our currency higher.

At the same time the United States economy is a big ship to turn around. They could be affected by the crisis for a much longer period. Much like what happened during the recovery phase immediately after the Global Financial Crisis, money searching for a new home with better returns could pour out of the US where their bonds were seen as a safehaven asset. Thus forcing the US Dollar lower and commodity currencies like the AUD higher.

International investments – international holdings have mostly been in unhedged funds. Meaning, that the fall in our AUD has really helped performance over the years as it sank from $1.00, and especially in curbing larger negative returns in this current downturn.

Now, considering our view that the AUD should rise, we regard the tactical advantage of moving unhedged international positions to their hedged versions (to make the most out of our potentially stronger AUD) as a longer term positive.

2. Time and patience. Investing for the long term.

We also expect that by rebalancing and adding more weight to the growth side at some stage soon will hold portfolios in good stead for the eventual rebound in markets.

That is not to say we will jump straight up and make extraordinary changes. Rather, given volatility should remain for a while, we feel that continuing to invest in high quality funds and stocks at stages over the next few months will be beneficial.

Conclusion.

No stock market crash is the same but they do have some similar characteristics.

On that basis we aren’t saying that the worst is over, but we are becoming more convinced that markets at least could be close to the bottom.

Whilst we realise this is largely an unprecedented crisis, we are closely watching events unfold to determine the right times to make changes.

We are firmly focused on adding the right value for the future because we have done this before.

 

Remain calm when the panic sets in.

Remain calm when the panic sets in.

The coronavirus impact on our investment decision making for you.

Prior to the recent coronavirus (COVID-19) outbreak we had expected global markets, led primarily by the US, to enjoy some economic benefits in the second half of this year.

Without going into the detail, we had expected the global investment and political environment to be easier to navigate and help us retain the confidence to continue to invest in growth assets deep into 2020.

This week we sit firmly in the reality that this won’t be the case.

The current pandemic combined with an oil price war has now posed a challenge to economies and markets for the remainder of the year. 

Markets around the world are declining on fear.

Now that have witnessed the different ways COVID-19 has been dealt with, markets are running ahead of the likely economic implications of world-wide containment.

Containment is how China reacted to the situation, by locking down provinces and the movement of people. Hong Kong, Singapore and South Korea also approached it similarly.

The western world has been much slower to react, choosing the path of mitigation by slowly shutting entry into their countries and dealing with cases as they appear. The peak of the crisis in Italy is compounding fears that other European countries and the US will follow in similar suit.

Quite simply, people staying home or being asked to stay home for long periods is the major problem. This effectively shuts down economies (e.g. Italy has now only allowed chemists and supermarkets to stay open whilst the healthcare system is in disarray) and can potentially lead to social unrest if it is carried out for too long. 

Adding to the fear is disappointment over the slower than expected reaction by governments, especially that of the US.

The initial thought was that developed world policy makers would be well in front of the situation, when now they seem caught behind.

In the last 24 hours we have seen a heightened response, especially by governments putting forward specific financial packages. Whether it surprises or not, Australia has been more proactive than many of our counterparts. 

Two notable things have really set the fear in markets these past few days:

1. The compounding rate of those being infected is basically tenfold every 16 or so days. Meaning 1 million people outside of China could be infected by the end of the month. Without complicating it, the end worry is that there will not be enough hospital beds and the health systems around the globe will be stretched past their limits.

2. Mr Trump/the USA – The president of the largest Western economy (USA) has been slow to communicate further fiscal stimulus for the general public and businesses this week. It would seem to us they were also slow to contain inbound travel, especially from Europe, hence raising the roof on the possible compound rate problem.

Therefore when in fear or panic, everything is thrown out of the cot. In an investment sense, all assets are converted to the perceived safety cash.

It is important to remember the world’s financial system is still functioning.

This selloff in markets is not about workers or companies having borrowed too much. As in the financial system being under stress.

It is about the known unknown – the real test – how deep the economic impact will be.

Of course we have seen this crisis’ effect on closely tied industry such as travel, airlines, shipping, and oil. We wait to see how it affects everything else – workers, companies and day to day living.

What we do expect is certainly help from central banks and governments.

We expect that governments and central banks around the world will not run out of ways to overcome the economic problems. They will supply a lot of money in different ways to protect employment status and underpin private enterprise, the backbone of most economies. Interest rates here will definitely drop to 0.25%, maybe even less.

Indeed as I write this our stock market this afternoon has turned from being down 7% to being up nearly 1%. The Australian government is rumoured to have stepped in and bought back $2.5bn of government bonds, which adds cash back into our monetary system.

As the US Fed Chairman described this week, there are many actions that are needed to help in the crisis.

Central banks can cut rates and governments can add liquidity, but it doesn’t solve the health or the global supply chain grinding to a halt because of business shut down.

What rate cuts can do though is to give the economy some time. It can shore up business, household and market confidence, ultimately to avoid any critical economic collapse. That leaves more time to deal with the humanitarian effort.

We also expect help from lower oil prices for a big part of this year. Pumps simply can’t shut down and there will be plenty of supply for a long time. This certainly helps the pockets of us, as consumers, and any rebound in economic health.

We will be looking for the real effect.

We will be watching the behaviour of governments, organisations and industry that is needed to support the health and economic stability in this current crisis, such as –

  • international collaboration,
  • easing central bank policy,
  • government action and economic stimulus,
  • industry leadership,
  • vaccine development,
  • treatment acceleration, and
  • social harmony.

These factors are our immediate focus. With today’s technology we are able to view indicators like traffic volumes and pollution levels for signs of countries returning to work. Unfortunately, today’s technology also allows for real time communication which can also breed hysteria, especially in the media.

Whilst we don’t totally ignore it we try to look through that noise to focus on the medium to longer term economic picture for investments.

Lastly and most importantly – Our focus for you.

We are well aware that the recent market moves provide good buying opportunities. However, while the quantifiable business and economic fallout is more unknown than known, we remain cautious but prepared to act.

Remember –

  1. Your portfolio is Diversified, with cash and liquid investments. We will continue to actively diversify your investments. Defensive assets help to offset short term losses on share markets. Even as we stand today, year on year returns on an average balanced portfolio are positive. Around 3%-4% positive returns!
  1. We stay calm. We’ve gone through this before. Where are we now? Think even way back to where markets were after the 1987 crash. History shows that equities especially bounce back quickly from sudden events like this.
  1. We are staying invested. We are long term investors. Aside from holding cash as liquidity, our growth investment time horizon is well over 10 years.
  1. We will continue to look for quality investments. Our role is to work for you and manoeuvre to take advantage of pricing. Whether that is by direct investment or through similar thinking fund managers.

This note is meant to build confidence to help navigate this uncertain period, and to remember after all why we are working together.