economic update Archives - CBI Financial Planning

CBI Financial Planning – Summer Update

December 16, 2021 by lisaholland

Welcome to the Summer Edition of CBI news, an update on economic factors impacting interest rate movements and why getting financial advice may be your best investment.

CBI Financial Planning News

The year has really flown by and Christmas is just around the corner, followed quickly by another New Year.

Our September team getaway to Fraser Island with our families was a huge success, with a good time had by all, with this photo taken at Eli Creek, for those familiar with the island.

Back at the office, it’s been a very busy year for us with the markets presenting a few financial challenges in 2021.

The Australian economy has recovered remarkably well throughout 2021 from the conditions presented by Covid-19, which is reassuring for clients, particularly those relying on their investments for retirement income. Based on current market indicators, we are confident that these conditions will continue into 2022, with all current information pointing to a likely rise in the interest rates in 2023.

After an extremely busy year our team are looking forward to a break over the Christmas holiday, with the office closing on Friday 17^th December and returning to work on Monday 10^th January, 2022. We would like to take this opportunity to wish you a safe, relaxing and enjoyable Christmas.

As always, if you would like to discuss any aspect of your financial strategy, please don’t hesitate to call.

Economic Update

Central banks – including the RBA and Fed – gradually removing monetary stimulus is more good news than bad

The shift towards monetary tightening signals slower more constrained share market returns – but the trend should remain up as the impact of monetary tightening is offset by economic recovery & higher profits, monetary policy is still easy and will be for a while & bull markets usually only end when monetary policy is tight.

Why Financial Advice May Be One Of Your Best Investments

It is commonly assumed that seeking financial advice is for the wealthy, and it only helps the rich become richer, yet financial advice can prove useful to anyone who wishes to better their financial future.

Financial advice is like getting a health check-up for your financial situation. Your financial adviser is like your personal trainer, assisting you in achieving your best possible financial health.

Seeking professional financial advice provides you with a clear path to achieve your financial goals, and that is an investment worth making.

Central banks – including the RBA and Fed – gradually removing monetary stimulus is more good news than bad

December 16, 2021 by lisaholland

Economic Update – Summer 2021

Globally, central banks have been moving towards tighter monetary policy over the last few months. Central banks in Norway, New Zealand and South Korea have raised interest rates, the Bank of Canada has ended quantitative easing and brought forward its expected first rate hike, the Bank of England looks likely to start raising interest rates soon, and several emerging market central banks have raised rates.

And in Australia, the RBA has now ended its 0.1% yield target for the April 2024 bond (which had helped keep 2 and 3-year fixed mortgage rates around 2%) and implicitly brought forward its guidance on the first rate hike to late 2023 (previously this was not expected to be “before 2024”).

Missing in this are the Bank of Japan and European Central Bank that both show little sign of moving towards monetary tightening reflecting their history of lower inflation rates.
What’s driving central banks to more hawkishness?

The move to the exits from easy money reflects three key developments:

First inflation has risen sharply in numerous countries.
Second, economies have been recovering with coronavirus outbreaks having smaller impacts on economic activity. And in Australia recovery now looks to be back on track after the recent east coast lockdowns.
Thirdly, there is increasing confidence that coronavirus is (gradually) coming under control

So, in short, the need for emergency ultra-easy monetary conditions is receding.

The removal of monetary stimulus is a sign of recovery

Central banks are reflecting the reality of economic recovery, so, it’s really a vote of confidence in recovery. And the reduction in monetary stimulus is being offset for share markets by stronger profits. This can be seen in the current US profit reporting season which has seen 82% of companies beat expectations by an average of around 10%.
Monetary policy remains ultra-easy and is a long way from being tight.
Even if the first rate hikes from the Fed and RBA are sooner than we anticipate, the experience of the last 30 years suggests an initial dip in shares around the first rate hike but then the bull market resumes – and continues until rates become onerously tight which weighs on economic activity and profits.

The main risk is supply constraints

Of course, the main risk is that this time is different due to supply constraints resulting in much higher for longer inflation necessitating aggressive monetary policy tightening over the next six to 12 months. The most likely scenario is that, as workers return to work with reopening (and backpackers and immigrants return to Australia) and consumer demand swings from goods back to services with reopening, goods supply bottlenecks will start to recede allowing the spike in inflation to recede later next year. Of course, this could take 6 to 12 months to work itself through, but it should ultimately delay the need for an aggressive tightening in monetary policy.

Concluding comments

The key implications for major asset classes are as follows:

For fixed income, monetary tightening initially means higher bond yields and so is negative for this asset class. Only when monetary policy becomes tight, seriously threatening economic growth, will long term bonds decline significantly.
For shares monetary tightening usually means slower more volatile returns but (absent external shocks) new bear markets usually only commence when monetary policies become tight and we are a long way from that.
Interest rates are shifting from a tailwind to a headwind for Australian housing demand. Property demand tends to be more geared than demand for shares leaving the property market sensitive to interest rate moves. And fixed rates have played a bigger role lately, so rising fixed rates combined with higher serviceability buffers are likely to slow price gains further into next year ahead of likely price falls in 2023 as the RBA starts hiking.

References: https://www.ampcapital.com/au/en/insights-hub/articles/2021/november/central-banks-including-the-rba-and-fed-gradually-removing-monetary-stimulus-is-more-good-news-than-bad?csid=984417229

CBI Financial Planning – Spring Update

October 19, 2021 by lisaholland

Welcome to the Spring Edition of news, updates and an example of the value of advice and how we have helped one of our clients.

CBI Financial Planning News

October is upon us and on the economic front, the battle against Covid and the uncertainty Covid presents has become part of our normal life. Globally, the US markets have focused on the looming threat of the debt ceiling as China struggles to manage the fallout from property developer Evergrande.

Our spring update looks at these Global challenges as well as markets closer to home.

The last few months have been very busy for me, and I wanted to thank all those clients who have referred their family members and friends to me. My business is built on the kind referrals I receive from clients, and I am very thankful for the support.

In October each year our business stops work for two days and we spend some time together reflecting on the year that has been and planning the year ahead. This year, on the 22^nd– 25^th October we head back to Fraser Island with our families and I’m sure we will enjoy all that the beautiful region has to offer. Should you need to contact either Tracey or myself on those days, you are welcome to either call our office and our temp staff will send us a message or you can email us directly. While phone reception is sporadic on the island, we will be checking our emails every evening.

As always, if you would like to discuss any aspect of your financial strategy don’t hesitate to call.

September Quarter Economic Update

This latest quarterly update covers the latest surge of Covid-19, news on the hot property market, share market updates and discusses the upcoming UN Climate Change Conference.

COVID here to stay

The third quarter of the calendar year brought with it the third and by far the biggest wave in COVID-19 infections. Largely restricted to NSW and Victoria the outbreak was driven by the highly infectious Delta variant. Such was its speed of spread it forced a change in strategy from one of elimination to learning to live with the virus, supported by a massive vaccination campaign. By quarter’s end vaccination rates were closing in on key targets that will allow a slow and selective lifting of the severe lockdown conditions that have prevailed for months. This may lead to a slower economic recovery than occurred after previous waves.

Time to chill

You know Australia has a housing problem when the head of one of the big banks, in this case Matt Comyn at CBA, calls for action “sooner rather than later” to stop the property market overheating. This was on the back of CoreLogic data showing house prices in Melbourne and Sydney rose 15.6% and 26% respectively over the 12 months to August. The International Monetary Fund (IMF) also called on Australian regulators to cool the market. Don’t expect this to happen through the usual instrument of increased interest rates. Rather, look for reduced lending in specific sectors, such as investors, higher deposit requirements, or testing loan serviceability at higher interest rates.

Pop goes iron ore

Iron ore’s price bubble eventually popped as China instructed its steelmakers to cut back on production. The main reason given was to reduce emissions, and perhaps to help clear the skies in the run up to the winter Olympics. Over the quarter the ore price fell 45%, with major miners taking an equivalent hit. BHP, Rio and Fortescue saw their shares tumble 33%, 26% and 44% respectively.

Hot topic

In August the Intergovernmental Panel on Climate Change (IPCC) released its latest report. It warned that “unless there are immediate, rapid and large-scale reductions in greenhouse gas emissions, limiting warming to close to 1.5°C or even 2°C will be beyond reach”. The report paints a grim picture of what that warmer world will look like and returned climate change to the front pages of the world’s newspapers.

The numbers

Equity markets experienced a bit of a rollercoaster ride over the quarter. All the major indices posted record highs, but most ended up within 1% of where they started.

The Aussie dollar also had a volatile quarter, trading between 71 and 75.4 US cents and finishing at 72 cents. It was a similar story against the other major currencies.

In both cases the late-quarter sell-offs were blamed on expectations of higher US interest rates.

On the radar

Many of the world’s leaders will come together in Glasgow at the end of October for the 26^th UN Climate Change Conference (COP26). If they heed the warning from the IPCC, and if they agree to take the necessary steps to limit warming to 2°C (and preferably 1.5°C), it will set the scene for a dramatic economic transformation, with huge opportunities for those who can sort the winners from the losers.

Of more immediate concern, Chinese property company China Evergrande appears to be on the brink of collapse. Heavily indebted to the tune of US$300 billion, if it is allowed to fail it is likely to have global ramifications, not the least for Australia. For one thing China’s construction boom has been a huge driver of demand for our iron ore.

The Value Of Advice: How We’ve Helped One Of Our Clients

This section on the value of advice contains the first, of a number of real life case study examples, of how financial advice from CBI Financial Planning has benefitted some of our clients.

Mick and Dianna: Retiring Small Business Owners

With our advice Mick and Dianna had a capital gains tax saving of over $125,000, and now own their own home.

View the full case study.

If you would like to discuss your financial situation and wish to seek professional advice, please contact our office.