Welcome to our May newsletter, and while the weather is cooling the economic and political landscape is heating up. All eyes are on interest rates as the federal election campaign shifts into top gear ahead of the May 21 polling day.
The economic event that overshadowed all others in April was the release of the March quarter Consumer Price Index (CPI), which showed inflation up 2.1% in the quarter and 5.1% on an annual basis. This was the biggest lift in prices since 2001 and well above the Reserve Bank’s target of 2-3%. The biggest increases were for fuel, housing construction, and food as the war in Ukraine pushes up global oil prices and the cost of transporting food and other goods. Most economists now agree that the Reserve will lift official interest rates on Tuesday from their current historic low of 0.1%. The question now is by how much. Any rate rise will be passed through to variable mortgage rates, putting more pressure on household budgets during an election campaign where cost of living is a major theme.
On a positive note, unemployment fell below 4% in March, its lowest since 1974 as the economy continues to recover from COVID-related disruptions. As a result, businesses are more confident, with the NAB business confidence index lifting to a five-month high of 15.8 points in March, well above its long-term average of 5.4 points. Consumers are less confident, with the Westpac-Melbourne Institute consumer sentiment rating down 0.9% in April to a 19-month low of 95.8 points.
The Aussie dollar fell from US75c to around US71c over the month, adding to cost pressures on imported goods. Oil prices eased slightly, with Brent crude down 6% in April but up 48% on the year.
The road ahead for shares
Trying to time investment markets is difficult if not impossible at the best of times, let alone now. The war in Ukraine, rising inflation and interest rates and an upcoming federal election have all added to market uncertainty and volatility.
At times like these investors may be tempted to retreat to the ‘’safety” of cash, but that can be costly. Not only is it difficult to time your exit, but you are also likely to miss out on any upswing that follows a dip.
Take Australian shares. Despite COVID and the recent wall of worries on global markets, Aussie shares soared 64 per cent in the two years from the pandemic low in March 2020 to the end of March 2022.i Who would have thought?
So what lies ahead for shares? The recent Federal Budget contained some clues.
The economic outlook
The Budget doesn’t only outline the government’s spending priorities, it provides a snapshot of where Treasury thinks the Australian economy is headed. While forecasts can be wide of the mark, they do influence market behaviour.
Australia’s economic growth is expected to peak at 4.25 per cent this financial year, underpinned by strong company profits, employment growth and surging commodity prices. Our economy is growing at a faster rate than the global average of 3.75 per cent, and ahead of the US and Europe, which helps explain why Australian shares have performed so strongly.ii
However, growth is expected to taper off to 2.5 per cent by 2023-24, as key commodity prices fall from their current giddy heights by the end of September this year.
Commodity prices have jumped on the back of supply chain disruptions during the pandemic and the war in Ukraine. While much depends on the situation in Ukraine, Treasury estimates that prices for iron ore, oil and coal will all drop sharply later this year.
Share market winners and losers
Rising commodity prices have been a boon for Australia’s resources sector and demand should continue while interest rates remain low and global economies recover from their pandemic lows.
Government spending commitments in the recent Budget will also put extra cash in the pockets of households and the market sectors that depend on them. This is good news for companies in the retail sector, from supermarkets to specialty stores selling discretionary items.
Elsewhere, building supplies, construction and property development companies should benefit from the pipeline of big infrastructure projects combined with support for first home buyers and a strong property market.
Increased Budget spending on defence, and a major investment to improve regional telecommunications, should also flow through to listed companies that supply those sectors as well as the big telcos and internet providers. But there are other influences on the horizon for investors to be aware of.
Rising inflation and interest rates
With inflation on the rise in Australia and the rest of the world, central banks are beginning to lift interest rates from their historic lows. Australia’s Reserve Bank is now expected to start raising rates this year.iii
Global bond markets are already anticipating higher rates, with yields on Australian and US 10-year government bonds jumping to 2.98 per cent and 2.67 per cent respectively.iv
Rising inflation and interest rates can slow economic growth and put a dampener on shares. At the same time, higher interest rates are a cause for celebration for retirees and anyone who depends on income from fixed interest securities and bank deposits. But it’s not that black and white.
While rising interest rates and volatile markets generally constrain returns from shares, some sectors still tend to outperform the market. This includes the banks, because they can charge borrowers more, suppliers and retailers of staples such as food and drink, and healthcare among others.
Putting it all together
In uncertain times when markets are volatile, it’s natural for investors to be a little nervous. But history shows there are investment winners and losers at every point in the economic cycle. At times like these, the best strategy is to have a well-diversified portfolio with a focus on quality.
For share investors, this means quality businesses with stable demand for their goods or services and those able to pass on increased costs to customers.
If you would like to discuss your overall investment strategy don’t hesitate to get in touch.
There is a saying ‘a fool and his money are often parted’ but with scammers becoming ever more devious and sophisticated in their methods, it pays for everyone to be aware of the latest tricks being employed.
According to Australian Competition and Consumer Commission (ACCC) data, last year was the worst year on record for the amount lost to scammers, with a record $323 million lost during 2021. This represents a concerning increase of 84% on the previous year.i
And with Australians spending more time online than ever before, predictably the area of most growth is cybercrime.
Cybercrime increased over 13% during the 2020-21 financial year, with data revealing one attack occurs every 8 minutes. ii
Police records indicate that as the number of house break-ins and burglaries decreased through COVID, the amount of digital scams increased as criminal activity found an alternative outlet and moved online.iii Scammers also exploited the pandemic environment by targeting an increasing reliance on online activity and digital information and services.
Most common scams
Phishing, where scammers try to get you to reveal information that enables them to access your money (or in some cases steal your identity), is one of the most common scams. Last year Scamwatch, a website run by the Australian Competition and Consumer Commission (ACCC), received more than 44,000 reports of phishing, costing Australians $1.6 million.iv While some phishing scams are obvious, like free give-aways, you can also be directed to sites that masquerade as financial providers or government departments and they can look pretty official.
The trick to not be taken in is to be very wary of clicking on a pop up or unknown site and do an independent google search or verify the site is secure. Before submitting any information, make sure the site’s URL begins with “https” and there should be a closed lock icon near the address bar. It’s also a good idea to keep your browser and antivirus software up to date.
Scams that cost us the most
Investment scams are becoming ever more sophisticated and the amounts associated with these scams are significant. Investment scams accounted for $177 million in 2021.v
In one of the most disturbing trends of the year, the Australian Securities and Investment Commission (ASIC) said some investment scammers were presenting impressive credentials, including their funds ‘association’ with highly regarded domestic and international financial services institutions.
Those doing their diligence on the funds were met with professional-looking prospectuses offering very high returns and claiming investor funds would be invested in triple A rated or government bonds, offering protection under the government’s financial claims scheme. Scammers even cleverly honed in on those most likely to be tempted by these investment products by gathering the personal and contact details potential ‘investors’ entered into fake investment comparison websites.
While the rise in, and increasingly compelling nature of investment scams is certainly of concern, we are here to help if you have any opportunities you’d like to explore that need thorough investigation.
Be alert, not alarmed – always consider the fact that the ‘opportunity’ you are being presented with or the fine or fee you are being asked to pay may be a scam. Don’t be swayed by the fact that it looks like it is coming from a well-known company or source.
Keep your personal details and passwords secure. Be careful how much information you share on social media and be wary of providing personal information.
Beware of unusual payment requests. Scammers will often ask for unusual methods of payment which are untraceable like iTunes cards, store gift card or debit cards, or even cryptocurrency like Bitcoin.
The best way to avoid scams, is to be aware of the tactics being employed and maintain a sceptical frame of mind. If something seems too good to be true, or if your alarm bells are ringing take your time and do your due diligence before taking any action.
Norman Sinclair – MFinPlan, AFP ASIC No. 249943.
Stephen Vigh – CFP, BBus (Acc & Man), Dip FP ASIC No. 239508
Kyle Medson – CFP, BCom (FinPlan & Inv) ASIC No. 328912 SFG Capital Holdings Pty Ltd trading as Sinclair Financial Group, ABN 42 609 798 469
Authorised Representative of Oreana Financial Services Limited
ABN 91 607 515 122, Australian Financial Services Licensee No. 482234
Registered Office Level 7, 484 St Kilda Road Melbourne, Victoria 3004 Australia
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.
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