A Finsec View – 1 July Reminders, Global Infrastructure and Market Movements

It has been a choppy month for equity markets in May. The broad Australian and US indices are on track to finish higher by about 1% and 0.6% respectively after recovering from mid-month lows induced by a sell-off in high valuation tech companies. The tech-heavy Nasdaq has not completely recovered and looks as though it will end the month slightly down.

In the past week, there has been a resurgence in GameStop and AMC Entertainment, the companies popular with retail traders and speculators, each stock having double-digit returns this week.

Australian shares touched their highest ever level today (Friday), eclipsing the intraday record achieved at the start of the month, with the major banks, technology and consumer discretionary stocks pushing the market to end on a record high.

The biggest movers in the last couple of weeks are – no surprises here – cryptocurrencies. To see just how crazy this market is, go to the website CoinMarketCap. It lists thousands of coins every man and his dog has jumped aboard (not only as a buyer but as issuers too).

The largest, Bitcoin, is down 50% since its mid-April peak and continues a pattern that shows this is no safe place to commit retirement savings.

Both the US and Australian regulators are cracking down on the loss of tax revenue from people not declaring their gains and there is fresh speculation that Chinese regulators may look to outright ban the mining of bitcoin – None of which will fare well for the wider crypto ecosystem.

Avid readers would be well aware of our view on cryptocurrency. A recap can be found below.

Bitcoin >

More on Cryptocurrencies >

Investment experts will have no shortage of issues to navigate over the next couple of years – and, as advisers, we are privy to the inner thoughts of many.

Compiled from recent fund manager updates, conversations and numerous investment and economic manifestos this missive provides some digestible insights into the ‘thought bubbles’ keeping our experts up at night.

• Inflation – Both too low and too high
• Geopolitical issues – With the US no longer its former dominant self, there is no one to play ‘global cop’. One only has to look at the likes of Hong Kong, Taiwan and the atrocities of the Israel Palestine conflict to see geopolitical risks are making a comeback. The main drivers are touted as the previously mentioned decline of US power, a swinging back of the political pendulum to the left and social media (a platform that allows groups to manifest their own reality, often leading to entrenched division).
• Populism – One of the longer-term consequences of this pandemic is going to be a further rise in populism and other forms of nationalism. Several governments (particularly in Europe) have not handled the pandemic well, lags in vaccine distribution and continued lockdowns lead to more and more unrest – all activity that will lead over the next few years to populist parties and/or the rise of populist candidates.
• An increase in wealth inequality – Financial markets have rallied massively in 2021, but not everyone gets a piece of the pie. Wealth inequality is one of the main underlying drivers of populism.
• Complacency – Investor’ accidents’ (think GameStop), fortunately, none have become systemic as yet, but some experts believe that if we continue to be complacent, ‘accidents’ will continue to happen, and the fallout will not be pretty.
• China’s soft power – Dubbed the dual-circulation strategy, it is a theory that foreign companies will bring technology and capital to China (to capitalise on the country’s huge consumer market) and that foreign consumers will keep buying Chinese products. China receives the know-how and money that will help bolster the domestic economy. The theory is that once multinationals are embedded in China their home-country governments will find it much harder to act against China’s interests.

In the near term, it is justifiable for markets to focus more on the economic recovery from the pandemic and the outlook for inflation. However, the market has a history of ignoring issues until they become unignorable and ‘other’ longer-term risk flareups could have an outsized impact when markets least expect it.

Buyback announcements fell off a cliff in the months following the COVID outbreak. But they have steadily recovered as business conditions have slowly improved.

The below chart depicts the number of companies announcing buybacks on US exchanges since early 2020. Buybacks can occur when a company (for lack of anything else to invest in) purchases their own stocks to bolster the share price; needless to say, the below data still points to a growing self-confidence within companies.

NABs buyback story also gets a mention.

Banking is so good now that NAB is contemplating a share buyback itself (in May 2020, NAB reduced its dividend and undertook a Share Purchase Plan (SPP) at $14.15 to build up its capital). Whilst there is no finance manual advising companies should issue at $14.15 and buy back at $26 within a year, NAB CEO Ross McEwan was showing a touch of remorse when he said this week:

“At the time I said we wanted to be a very safe bank, that’s the positioning I took. If I got it wrong, well I’m happy to be in a very strong position now going forward for customers and shareholders.”

Happy indeed, Ross! You’ve increased the size of the Share Purchase Plan from its original target of $500 million to $1.25 billion during the offer period.

Listed infrastructure!

Interesting we hear you say, particularly since this asset class has significantly underperformed global equities over the last 12 months! Not to mention its sensitivity to changes in interest rates and those that got caught out when airports became ghost towns overnight.

But, and it is a big but, where rising interest rates are a reflection of higher inflation, listed infrastructure fares relatively well due to its proven ability to pass through higher inflation to the customer. A toll road, for instance, has the ability to increase tolls by inflation or better via long term contracts with governments.

From a debt perspective this class does tend to be highly leveraged but the majority are also prudently managed and often hedged, muting some exposure to movements in interest rates.

Whilst, not all infrastructure is created equal (e.g. regulated assets, such as utilities, are more likely to have government agreements in place that dictate how costs are passed onto consumers), there is a compelling case for an investment class that can provide inflation-protected income and strong capital growth over the coming years. Particularly in a world where traditional commercial property investments (office towers and retail) are still struggling with their post covid relevance.

Listed infrastructure remains a strategic and integral pillar of our model portfolios.

1. The Government temporarily halved pension drawdown amounts during the pandemic, but they return to standard levels from 1 July 2021.
2. Superannuation thresholds from July 2021

3. If you haven’t already, please make the time to talk with us about tax planning opportunities, particularly concessional contributions catch-ups.

In our experience, the carry forward rule has opened the doors to some creative tax planning strategies. It is exceptionally valuable for those with an investment property, business asset sale or share portfolio with a large unrealised capital gain tax (CGT) liability. Essentially, if an investor knows that they will generate a large capital gain and consequently incur a large tax bill, the catch-up rule could be used to their advantage.

This story came across our inbox this week, and we had to share.

This old lady handed her bank card to the teller and said, “I would like to withdraw $10”. The teller told her, “for withdrawals less than $100, please use the ATM.”

The old lady wanted to know why… The teller returned her bank card and irritably told her, “these are the rules. Please leave if there is no further matter. There is a line of customers behind you.”

The old lady remained silent for a few seconds and handed her card back to the teller and said, “please help me withdraw all the money I have.” The teller was astonished when she checked the account balance. She nodded her head, leaned down and respectfully told her, “you have $1,300,000 in your bank account, but the bank doesn’t have that much cash currently. Could you make an appointment and come back again tomorrow?”

The old lady then asked how much she could withdraw immediately. The teller told her any amount up to $3,000. “Well please let me have $3,000 now.” The teller kindly handed $3,000 very friendly and with a smile to her.

The old lady put $10 in her purse and asked the teller to deposit $2,990 back into her account.

The moral of this story is…

Don’t be difficult with older people, they spent a lifetime learning the skill.

Fritz Gilbert retired in 2018 after more than three decades in corporate America. Today, he shares his retirement journey through his award-winning blog titled ‘The Retirement Manifesto’. A canvas for “helping people achieve a great retirement”.

In this post, Fritz shares his key learnings of the first two years of his retirement, including:

• Change is Constant
• Attitude is Everything
• Things that Matter, Matter
• Slowing Down is Good
• A Bucket List is Worthwhile
• Celebrate the Wins

Click here to read.

For those of you approaching that all important retirement day, he also shares his experiences on what the first week of retirement is really like as well as thoughts from his first 60 days of retirement for you to digest.