A FinSec View – Local & Global market updates, Writing a Will?, Exchange Rates 101 & much more….

Australian Market Update

Having started the month with a 6% market correction in reaction to a sharper than expected uptick in US unemployment we finish the month exactly where we finished July. Nothing to see here, onwards and upwards!!

After lukewarm if not cold predictions of a likely rate cut this side of Christmas, financial markets at the start of this week started confidently pricing in a cut by Christmas and another two by May 2025. Bond traders no longer believe Reserve Bank Governor Michele Bullock (we do) when she says that interest rate cuts are unlikely in coming months. Our Global Market Update below explains where this optimism stems from, however, just to show this all feels like ‘swings and roundabouts’, by midweek traders were modestly dialling back bets of interest rate cuts after monthly inflation cooled at a slower pace than anticipated.

While inflation fell to its lowest level since March, helped in some part by a 5% annual cut to electricity prices, as billions of dollars in government rebates kicked in, it was .1% less than anticipated. The monthly consumer price index indicator from the ABS released on Wednesday (August 28) showed the CPI slowing to 3.5%, down from 3.8% in July.

The most significant price rises were in housing (up 4%), food and non-alcoholic beverages (up 3.8%), alcohol and tobacco (up 7.2%) and transport (up 3.4%). Energy prices have fallen back to the level they were at a year ago thanks to significant government subsidies on electricity bills paid out in July. The housing market is showing some sign of slowing but the rental market will continue to put pressure on inflation. We expect energy costs to be back up the leader board soon as well, once the subsidies end.

August has been an interesting reporting season for the ASX. The weak earnings outlooks for miners, off the back of a struggling Chinese economy, and high prices from sectors such as the banks have forced investors to chase better growth prospects in an increasingly smaller pool of ASX-listed companies, further driving up share prices. According to new JP Morgan data, share prices of many ASX-listed companies have outpaced their earnings during this reporting season – approximately 40% of companies issued downgrades and earnings declined by 2% indicating a potential lag in earnings growth for the foreseeable future.

Yet stock prices on the ASX have soared with the price-to-earnings ratio reaching about 18 times the highest rate since the COVID pandemic. Consequently, share prices and earnings are moving in opposite directions, creating a rare market situation. This is surely a sign that markets have already priced in rate cuts.

Australia’s largest-listed companies are currently at their most expensive levels in history; Commonwealth Bank reset a record high earlier this month and is now the most expensive publicly listed bank in the world, with a price-to-earnings ratio of about 24 times. Investors are willing to pay a premium for companies with better growth prospects amidst the scarce growth opportunities on the ASX. As a result, share prices in the ASX’s mid-cap sector have surged ahead of earnings at some of the fastest rates globally, outpacing the S&P 500 since the start of the year. Logistics software giant WiseTech’s stock price jumped more than 20% after reporting results, despite missing the consensus revenue forecast.

The consensus is that investors should “hasten slowly” when entering the market at these levels.

Interest rates, industrial metal prices, weak Chinese growth and equity market volatility have kept the AUD between US$0.64-0.68 cents for some time. At the start of August, it was sitting around USD 0.6522 but after the US Federal Reserve Chair’s positive speech on August 23 our dollar jumped by more than 1% to USD0.6790, finding stability around 0.6725. After Wednesday’s inflation figure, it rose to 0.68. When the US Federal Reserve does cut rates, the AUD is likely to climb. Merely by continuing to cut their interest rates, the US and other countries will be helping to ease inflation in Australia. The more they do it, the more Australian inflation will ease, building up a stronger and stronger case for our Reserve Bank to cut rates. Having said this, RBA Governor, Michelle Bullock has been very clear that rates will not drop until the new year and (as referenced above) – we believe her!

Global Market Update

All eyes in August were on a small fly-fishing town in the US Midwest: Jackson Hole, Wyoming.

There, in a room full of the world’s central bankers including Andrew Hauser, the Reserve Bank of Australia’s deputy governor, US Reserve Bank chair Jerome Powell (pictured below at Jackson Hole) uttered an eagerly anticipated forecast that has been interpreted as the long-awaited US rate cuts were about to begin. “The time has come for policy to adjust,” Powell said, with clarity.

US inflation has eased (for the second month in a row), and its labour market has cooled, as have wages, and while Powell stopped short of promising a September rate cut he said: “The direction of the travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks,” he said.

On Wall Street, the speech was taken as effectively a guarantee that rates will be lowered next month. “Chair Powell’s Jackson Hole speech confirmed that the Fed is now at the point of paring,” wrote the Bank of Montreal. “ Indeed, we judge we’re also now at the point where the data no longer have to persuade  the Fed to cut policy rates.”

The US would join the UK, China, Canada, New Zealand, Switzerland, Denmark, the European Union, and a host of other jurisdictions in cutting rates – some of them repeatedly – to shore up their economies. Financial markets are pricing in the equivalent of four ordinary-size rate cuts in the US by the end of the year. Given the US Fed has only three meetings left this year, this implies they are expecting at least one cut to be a double.

The question is, will rate cuts by the US Fed and other central banks create near-irresistible pressure for Australia’s Reserve Bank to follow? Central banks tend to move rates together (but not always at the same time) we expect Australia will be 6 months behind other major global economies which have or are opting for cuts, and wait until 2025 before delivering 4 cuts which will see our cash rate bottom out at 3.35% by the end of next year.

There were markedly different moods and events between the US and the UK in the past month with the razzle-dazzle of the made-for-TV party conventions in the US presidential contest, now a more even race with Karmela Harris disrupting Trump and his MAGA campaign, contrasted with the shocking rioting across communities in England.

Meanwhile in the UK, Prime Minister Sir Keir Starmer has strongly flagged tax rises in his Government’s October budget, warning he will have to make “painful” decisions after finding what Labour says is a £22bn black hole in the public finances. While the extent of the tax rises is unknown, middle-class families are reportedly preparing for a capital gains tax raid after Starmer said those with “the broadest shoulders should bear the heaviest burden”.

Wealth managers claimed Starmer’s speech triggered phone calls from panicked clients; middle-class savers are rushing to sell shares and property to avoid paying higher rates if capital gains tax is increased. There is mounting speculation that Labour could align capital gains tax with income tax, potentially increasing the higher rate from 20 per cent to 45 per cent, given Starmer has repeated his election promise not to raise National Insurance, VAT or income tax. Many landlords are expected to sell their properties to avoid paying any increased levy, leading to an exodus from the buy-to-let sector.

Six Questions to ask your adult children before writing a will

Sometimes, a story heading just makes you want to read on, right? Same for us at The View. We couldn’t resist sharing this practical advice from the AFR.

1.  If you were to inherit money or other assets, what would you do with it?

Asking this straightforward question will give you valuable insight into your children’s financial values, literacy and long-term goals. It will reveal how they prioritise their spending, saving, investing or interest in charities and show their level of maturity when it comes to making significant financial decisions. The ideal answer: a balanced approach to saving and investing, a willingness to spend wisely and use the services of professional advisers and a desire to give back to the community.

2.  If you divorce your partner after my death, would you like your inheritance protected from a property settlement?

Regardless of their answer, protecting your child’s inheritance from their spouse is prudent, given there are more than 50,000 divorces in Australia annually and many more de facto separations. An experienced lawyer can give you advice, such as drafting a testamentary trust that can help protect an inheritance forming part of your child’ s property settlement.

3.  Would you like me to leave a family legacy asset, such as a farm or holiday home?

This will help you gauge whether your children can financially and emotionally enjoy and, in the case of siblings, share a real estate asset. Or, whether they would benefit more from receiving shares or cash. If there are multiple beneficiaries managing an asset, they may have different ideas and views. The answers should reflect a genuine appreciation of this family legacy rather than its financial benefit, a sincere interest in the asset and a commitment to maintaining it, and ideas for its future use.

4.  Would you like some financial coaching?

Receiving a significant inheritance can be life-changing for the beneficiaries, but not always in a positive way. It can remove the need to work or achieve, lead to relationship breakdowns, and negatively impact long-term happiness. Some people just do not have the financial literacy or emotional intelligence to handle such an inheritance. Your child’s response will show you how open they are to receiving advice or coaching and what importance they are giving your money over family, friends and experiences.

5.  Do you understand my values and choices?

How well have you communicated your own financial decisions and choices in the past? Do you want your children to follow in your footsteps or branch out on their own? This question is aimed at arriving at a mutual understanding of each other’s motives and values.

6.  What would you like to see happen with the family wealth over the next 50 years?

Given that wealth accumulated by the first generation is often lost by the third through mismanagement and imprudent spending, this is an important question. You need to provide a space for an honest conversation and where your children have the confidence to share their ideas. Parents usually want to hear their children demonstrate an understanding of being a custodian or trustee, of being a receiver, not just a spender, and of providing a positive future for their grandchildren and great-grandchildren.

This figure was surpassed in the last quarter by Australian superannuation balances, and with 3.6 million Baby Boomers preparing to retire in the next decade, it’s not surprising that there is intense regulator, government, and, importantly, customer scrutiny of not just performance but what our funds communicate and market to us.

A recent social media post by Andrew Inwood, global CEO of research giant CoreData, about 20 years of tracking trust in super funds caught our eye.

“When choosing a superfund, the strongest driver of choice is returns, but coming in second is trust, considered by Australians to be more important than low fees,” according to Inwood. “Smaller funds and faith-based funds are much more trusted than larger funds, while inferred trust — a recommendation from an adviser or a friend or a workplace — outweigh almost everything else.”

Bizarrely, though, the more interaction we have with a superfund, the more our trust in them starts to wane. Inwood: “The other thing worth understanding is that as members interact with their superfund, their trust starts to slide. The halo created by the building of the brand of superannuation has been substantial, but recently the data around less than perfect service means that as contact frequency goes up, trust starts to slide.”

Australia used to be the gold standard of super; we’re now seventh globally behind the Netherlands, Scandinavian countries and Germany.  Inwood told the Australian Financial Review recently that Australian superfunds’ poor communication record with their customers was causing churn in the sector.

“People are starting to move around a bit – they’re saying, ‘we’ re cheap’ (as in wanting low fees), but they’re not as cheap comparatively as they used to be,” he said. “There’s also a certain point in your life where you say, ‘well I want safe now, I don’t want just cheap. Cheap is fine between 18 and 50 years old, but after 50, when I’ve got real money, I want safe and high service’.”

Friday Funny

It a time when we all work so hard to protect our data from scammers, todays Friday Funny by Gary Larson’s Far Side series highlights that even 40 years ago it was too easy to forget basic security!