Property so far in 2020, and what’s still to come for the year

The local residential property market has held strong into the New Year, with solid gains eventuating through January across all capital cities. The best performing were Sydney and Melbourne, which appear to be recovering well following losses experienced from 2017 to the middle of 2019.

With Sydney approximately 4 or 5% below all-time market highs and Melbourne even closer, we should reach record prices in both cities at some stage over the next five months.

These gains are expected to remain solid for the first half of this year with the Reserve Bank keeping interest rates on hold at 0.75% and pent-up demand continuing to have strong influence on the property market. As we’ve seen before, in a rising market there are always a certain number of buyers who are driven by fear of missing out on the market’s upsurge and will jump on the opportunity to purchase.

As the year progresses, it is likely the gains will gradually dwindle for several reasons.

The first is affordability, which will start to become a significant issue again with the record prices expected in Sydney and Melbourne. This will be compounded by the continued slowing of the economy, which will hold some buyers back, particularly as the pent-up demand from previous years begins to taper off. And finally, regulators may step in and attempt to put the brakes on mortgage lending, which will become more of a concern once credit growth starts to pick-up.

Towards the end of 2020, the property market is likely to achieve price gains of around 8-10% on average around the country and leadership will probably shift from Sydney and Melbourne to Brisbane and Adelaide, as value seems to be prominent in these cities. The Perth market is also one to watch, as the mining investment cycle starts to kick in again and spur on the Western Australian economy.

In evaluating property market movements, keep a close eye on interest rate movements and other monetary easing from the Reserve Bank, as well as on the regulators and any potential interventions around lending. More imminently, the impact of the bushfires and coronavirus should also be monitored, as the aftermath may have an adverse effect on people’s purchase decisions.

The bottom line is to expect another year of solid gains out of the Australian property market but potentially some slowing as we move through the second half of the year.

 

Shane Oliver, Head of Investment Strategy & Economics and Chief Economist

From bushfires to Coronavirus – five ways to turn down the noise around investing

Key points:

  • The coronavirus outbreak is just another of a long list of worries. Our natural inclination to zoom in on negative news combined with a massive ramp-up in the availability of information is arguably making us worse investors: more fearful, more jittery, more short-term.
  • Five ways to help manage the noise and turn down the worry list are: put the latest worry in context: recognise that shares return more than cash in the long-term because they can lose more money in the short-term; find a process to help filter noise; make a conscious effort not to check your investment so much; look for opportunities that investor worries throw up.

Introduction

2020 has seen a very noisy start to the year with one major event with significant human and investment market implications after another. For Australia it started with an intensification of the bushfires but moved on to a significant ramping of US/ Iran tensions where, according to President Trump, war came “closer than you thought” and now the coronavirus outbreak is creating fears of a global pandemic and a big hit to global economic activity. These are scary in terms of their human consequences, but also in terms of the potential economic fallout and what it means for investors. The coronavirus outbreak in particular continues to pose significant uncertainty around the short-term economic outlook. In terms of the key things to watch there is some good news with signs of a reported slowing in new cases in China and still limited transmission outside China (which has 99% of cases).

And the mortality rate at just over 2% remains lower than with SARS. Against this there remains much debate about the true number of cases, it’s common in outbreaks to see periods of stabilisation only to be followed by a spike in cases and the disruption to economic activity in China and from global travel bans remain significant all of which makes it easy to imagine the worst in terms of economic consequences. Each week China remains say 2/3rds shut it knocks 1.3% off its GDP of 0.25% directly off global GDP.

The gain much of 2018 and 2019 saw endless talk about how much the trade war was going to knock off global growth. More fundamentally, the coronavirus is part of a seemingly never-ending worry list which is receiving and ever-higher prominence as the information enables the rapid dissemination of news, opinion and noise. But as Frank Zappa warned “information is not knowledge, knowledge is not wisdom”. The danger is that information overload is making us worse investors as we focus on one worry after another resulting in ever shorter investment horizons.

Are the worries more worrying than ever?

When I was a teenager in the 1970s I used to bemoan my grandmother for reading too much gloom into the nightly TV news and telling me that the world is much worse today that when she was young…when there was WW1, Spanish influenza that reportedly killed around 50 million people, the Great Depression and WW2 when her brother was killed. However, now it seems the worry list is even bigger. Yes, there is a fundamental element as global growth is slower, technological disruption is leading to worker anxiety and inflated expectations, and the world seems awash in geopolitical risks.

But there is a huge psychological aspect to this that is combining with the increasing availability of information and intensifying competition amongst various forms of media for clicks, that is magnifying perceptions around various worries.

We all suffer from a behavioral trait that in its financial manifestation is known as “loss aversion” in that a loss in financial wealth is felt much more distastefully than the beneficial impact of the same sized gain. This probably reflects the evolution of the human brain in the Pleistocene age when the trick was to avoid being eaten by a sabre-toothed tiger or squashed by a woolly mammoth. This makes us biased to be more risk averse and on the lookout for threats which leaves us more predisposed to bad news stories as opposed to good news stories. So bad news and gloom find a more ready market than good news or balanced commentary as it appeals to our instinct to look for threats. Hence “bad new sells”. Of course, this has always been the case so there is nothing new here.

The big change though is that we are now exposed to more information in relation to everything including our investments. This is great in the sense that we can check things, analyse them and sound informed easier than ever. But often we have no way of weighing such information and no time to do so. If we can’t filter it, it becomes information overload and noise. This can be bad for investors as when faced with more (and often bad) news we can freeze up and make the wrong decisions with our investment as our natural “loss aversion” combines with what is called the “recency bias” that sees people give more weight to recent events which can see investors project recent bad news into the future and so sell after a fall.

Finally, the problem is being compounded by an explosion in media outlets all competing for your attention. We are now bombarded with economic and financial news and opinions with 24/7 coverage by web sites, subscription services, finance updates, dedicated TV and online channels, etc. And in competing for your attention, bad news and gloom trumps good news and balanced commentary as “bad news sells.”

So naturally it seems that the bad news is ‘badder’ and the worries more worrying than ever. Google the words “the coming financial crisis” and you get 236 million search results – up from 115 million when I did it 18 months ago – with titles such as:

  • “World economy is sleepwalking into a new financial crisis”;
  • “4 early warning signs of the next financial crisis”;
  • “The coming economic crash”;
  • “Why the next global financial crisis may dwarf…2008”; and
  • “Financial crisis- Bible prophecy & current events.”

The trouble is that there is no evidence that all this noise is making us better investors. Average returns are no higher than in the past. A concern is that the combination of a massive ramp up in information combined with our natural inclination to zoom in on negative news is making us worse investors: more fearful, more jittery and more short term focused.

Five ways to manage the perpetual worry list

So here we take another look at five ways to manage the worry list and turn down the noise:

Firstly, put the latest worry list in context. Remember that there has always been an endless stream of worries. Here’s a list of the worries of the last five years that have weighed on markets at various points: deflation; commodity/oil crash; Grexit; China worries; Brazil and Russia in recession; manufacturing slump globally; Fed rate hikes; Brexit; South China Sea tensions; Trump; Eurozone elections; North Korea; Germany; Catalonia; Italy; US inflation and rates; Trade war; China slowdown; Aust Royal Commission; Aust housing downturn; US government shutdown; inverted yield curves; impeachment; Aust recession fears; and Iran tensions. Yet despite this extensive worry list investment returns have actually been okay with average balanced growth super funds returning 7.3% pa over the last five years after taxes and fees. In fact, the global economy has had plenty of worries over the last century, but it got over them with Australian shares returning 11.8% pa since 1900 and US shares 9.9%pa.

And while history doesn’t repeat it does rhyme and it’s often useful to look back at previous similar events to the latest worry to see how they panned out. This is where the experience around SARS is useful in relation to the latest coronavirus outbreak.

Secondly, recognise how markets work. A diverse portfolio of shares returns more than bonds and cash over the long-term because it can lose money in the short-term. While the share market is highly volatile in the short-term it has seen strong returns over rolling 20-year periods. So, volatility driven by worries and bad news is normal. It’s the price investors pay for higher long-term returns.

Thirdly, find a way to filter news so that it doesn’t distort your investment decisions. For example, this could involve building your own investment process or choosing 1-3 good investment subscription services and relying on them. Or simpler still, agreeing to a long-term strategy with a financial planner and sticking to it. Ultimately it all depends on how much you want to be involved in managing your investments.

Fourthly, don’t check your investments so much. If you track the daily movements in the Australian All Ords price index or the US S&P 500, it has been down almost as much as it has been up. So, day to day it’s pretty much a coin toss as to whether you will get good news or bad. By contrast if you only look at how the share market has gone each month and allow for dividends the historical experience tells us you will only get bad news 35% of the time. Looking only on a calendar year basis, data back to 1900 indicates that the probability of bad news in the form of a loss slides further to 20% for Australian shares and 27% for US shares. And if you can stretch it out to once a decade positive returns have been seen 100% of the time for Australian shares and 82% of the time for US shares.

The less frequently you look the less you will be disappointed and so the lower the chance that a bout of “loss aversion” triggered by a bad news event will lead you to sell at the wrong time. So, try to avoid looking at market updates so regularly.

Finally, look for opportunities that bad news throws up. Periods of share market turbulence after bad news throw up opportunities as such periods push shares into cheap territory.

Concluding comment

My long-term experience around investing tells me that its far more productive to into prognostications of financial gloom because most of the time they are wring and end up just distracting investors from their goals.

The Coronavirus and its impact on markets

The Coronavirus is slowly jumping international borders after its initial spread in China, and markets have not been immune to its impact.

Coronaviruses are a large family of viruses which have been known to create illnesses. There is currently a new coronavirus affecting people who have recently been in the city of Wuhan, China. From a public health perspective, this is a rapidly evolving situation and there remains “much to learn” about how it is spread, its severity, and best treatment.

The World Health Organisation (WHO) has now agreed that the outbreak meets the criteria for a public health emergency of international concern. This means that WHO can coordinate the global response by advising countries on public health measures and recommending travel bands.

The virus has spread outside China. At this stage there are a few cases globally including in Thailand, Japan, Singapore, Australia the US and France.

Authorities have been proactive in taking steps to contain the spread of the virus, including closing transport in Wuhan and cancelling celebrations for the lunar new year.

“The very strong measures [China] has taken include daily contact with WHO and comprehensive multi-sectoral approaches to prevent further spread. It has also taken public health measures in other cities and provinces; is conducting studies on the severity and transmissibility of the virus and sharing data and biological material. The country has also agreed to work with other countries who need their support. The measures China has taken are good not only for that country but also for the rest of the world,” the WHO said in a statement.

Its spread has impacted confidence, and is now showing signs of having a material impact on tourism, as travel to and from China is restricted.

Here, we take at some of the key market developments in relation to this feared pandemic. It’s important to note that this is a situation which is constantly evolving, and that the below is a point in time assessment.

 

What we know so far

  • This situation is evolving. At this stage, sharemarkets have been hit, especially in Asia on concerns around the impact of the virus. For now, Australian and US shares have been more resilient.
  • There have been numerous health scares in recent history (SARS, bird flu, swine flu, MERS, Ebola.) While the loss of life in these instances is tragic and the panic caused in affected regions impacts everyday life, the worst-case scenario of a global pandemic like the 1918 Spanish Flu (that killed up to 50 million people) has not come to pass.
  • For markets, investors should be alarmed but not panic just yet. While number of total Coronavirus cases has increased dramatically over the past week, the daily rate of change in new cases looks to be plateauing. While it’s impossible to know exactly how much more the virus can spread, most epidemics have taken 6-18 months to fully run their course and then the actions taken by authorities (hygiene, quarantine, banning gatherings, preventing travel) start having an impact. The 2003 impact of the SARs outbreak was shorter due to rapid action by authorities. The quick reaction by Chinese authorities this time round is reason for optimism.
  • Comparing the current episode to SARs is useful. The 2003 SARS outbreak infected 8000 people, mostly in Asia, in 30 countries over 5 months at a mortality rate of 10%. While the number infected was not that great, SARS had a big negative impact on countries economic activity. GDP in Hong Kong and Singapore in the June quarter 2003 fell by over 2% as people stayed home (lower retail sales), missed work and travel was cancelled. Growth then rebounded.

  • Asian shares fell in April 2003 even though global shares were rising. Usually the share market low coincides with a peak in the number of new cases (see chart below) so there is a risk that Asian equities fall further.

Disruptions to growth

  • This time round, the risk to disrupting economic growth is high because the spread of the virus coincides with the lunar new year, and the associated spending that goes with it (travel, eating out, retail sales).
  • It’s also happening around the same time that China and emerging markets economies are showing signs of stronger growth, with the virus having the ability to disrupt activity. The other point to note is that the mortality rate (so far) for the new Coronavirus is lower at 2-3% compared to SARS (10%) and much lower than Ebola (at 50% and higher).
  • We expect a fall in Chinese GDP around 2-3% over the March quarter as Coronavirus is more widespread than SARS (although it is less lethal and there have been faster actions by authorities). While this is a big hit to growth initially, GDP growth is likely to rebound in the June quarter, although the total losses from production are unlikely to be fully recouped.
  • In Australia, there will be a temporary disruption to tourism, education and exports (particularly commodities and to a lesser extent agriculture). Chinese tourist and education arrivals make up around 20% of total arrivals – a significant chunk. There could also be an impact if Australians start staying home. On our estimates the total detraction to growth is worth around 0.2-0.3% of GDP. But there are offsets – the $A depreciation from a risk-off global environment will boost broad export growth and lower travel to China is seen as a reduction in imports and it could even mean that Australians choose to holiday in Australia. Along with the bushfires, the total negative impact to March quarter GDP growth could be around 0.5% which is a decent amount.

Investors: keep watch, keep calm

Despite the rightly mounting concern about the spread of the Coronavirus, as mentioned above, there is reason to believe that the threat will be contained and managed, but it could take some time with epidemics usually taking 6-18 months to run their course The rapid and widespread response from the Chinese government, and mobilising of countries outside China to detect and contain cases of the virus which have crossed their borders are important steps in containing the virus. Markets have been impacted by similar situations before, like SARS, and have recovered but the concern about the spread of the Coronavirus will keep investors cautious and markets volatile in the near-term given the disruption to economic activity. Once it becomes more evident that the number of people infected has reached a peak, markets tend to take this as a positive signal.

 

Diana Mousina, Senior Economist

Five reasons 2019 turned out well for investors & key views on markets for 2020

2020 – a list of lists regarding the macro investment outlook

Key points:

  • Despite ongoing bouts of volatility, 2020 is likely to provide solid returns, albeit slower than seen in 2019.
  • Recession remains unlikely (it’s a bigger risk in Australia) & so too is a long deep bear market in shares
  • Watch US trade wars, the US election, the US/Iran conflict, global business conditions indicators, and monetary versus fiscal stimulus in Australia.

Introduction

After the poor returns for investors in 2018, 2019 turned out surprisingly well with average balanced growth superannuation funds looking like they have returned around 15%.

But can it continue this year? Particularly with an intensification of the US/ Iran conflict adding to global uncertainty and the drought and horrendous bushfires further weighing on the Australian economy. Here is a summary of key insights and views in the investment outlook in simple point form.

Five reasons 2019 turned out well for investors

2019 saw slowing growth and weak profits amidst an escalating US/China trade war and tensions with Iran and yet it turned out well for investors. Here are five reasons why:

  • Easy money – central banks eased monetary policy in response to the growth slowdown and various threats to growth reversing the tightening seen in 2018.
  • Cheap starting point for assets – after the falls of 2018 shares started 2019 cheap and they and other assets were made relatively cheaper as interest rates & bond yields fell.
  • The crowd was very gloomy at the start of 2019 with much fear about the outlook – when this is the case it’s always easier for assets to rise in value.
  • While geopolitical threats remained high there was some relief by year end – with the US & China reaching a Phase 1 trade deal; Iran tensions not seeing a major or lasting disruption to oil supplies; and a hard Brexit avoided for now.
  • Global growth was not as bad as feared – despite a mid-year recession obsession as yield curves inverted. In fact, global growth indicators looked to be stabilising by year end.

Seven lessons from 2019

  • Don’t fight the Fed, ECB, PBOC or RBA – as long as recession is avoided monetary easing is positive for investment returns from growth assets.
  • The starting point matters – when assets are cheap, and the crowd is negative as they were at the start of 2019 it’s relatively easier to get good returns.
  • Post GFC caution remains but can be both negative and positive – yes it periodically weighs on growth, but it is keeping economies from overheating and thereby is helping to extend the economic and investment cycle.
  • Geopolitics remains a significant driver of markets and economic conditions – but it can be positive whenever there is any relief and things don’t turn out as bad as feared.
  • Just because Australian housing is expensive & household debt is high does not mean house prices are going to crash.
  • Stick to an investment strategy – 2019 started in gloom and had its share of distractions but investors would have done well if they just stuck to a well-diversified portfolio.
  • Remember that while shares can be volatile and unlisted assets also come with risks, the income stream from a well-diversified mix of such assets can be relatively stable and higher than the income from bank deposits.

 Five big picture themes for 2020

  • A pause in the trade war, but geopolitical risk to remain high. President Trump is likely to want to keep the US/China trade war on the backburner but it could still flare up again and other issues include the escalation seen so far this year in the Iran conflict, a return to worries about a “hard Brexit” at year end if UK/EU free trade talks don’t go well and the US election if a hard left Democrat candidate gets up.
  • Global growth to stabilise & turn up thanks to policy stimulus with business surveys recently showing stabilisation.
  • Continuing low inflation and low interest rates. Growth won’t be strong enough to push underlying inflation up much and some central banks will still be easing (including the RBA).
  • The US dollar is expected to peak and head down as global uncertainty declines a bit and non-US growth picks up.
  • Australian growth is expected to remain weak given the housing construction downturn, weak consumer spending and the drought with bushfires not helping.

Key views on markets for 2020

Improving global growth & still easy monetary conditions should drive reasonable investment returns this year but they are likely to be more modest than the double-digit gains of 2019 as the starting point of valuations for shares & geopolitical risks are likely to constrain gains and create some volatility.

  • Global shares are expected to see total returns around 9.5% in 2020 helped by better growth and easy monetary policy.
  • Cyclical, non-US and emerging market shares are likely to outperform, if the US dollar declines as we expect.
  • Australian shares are likely to do okay this year but with total returns also constrained to around 9% given sub-par economic & profit growth.
  • Low starting point yields and a slight rise in yields through the year are likely to result in low returns from bonds.
  • Unlisted commercial property and infrastructure are likely to continue benefiting from the search for yield but the decline in retail property values will still weigh on property returns.
  • National capital city house prices are expected to see continued strong gains into early 2020. However, poor affordability, the weak economy and still tight lending standards are expected to see the pace of gains slow leaving property prices up 10% for the year as a whole.
  • Cash & bank deposits are likely to provide very poor returns, with the RBA expected to cut the cash rate to 0.25%.
  • The $A is likely to fall to $US0.65 as the RBA eases further, then drift up as global growth improves to end little changed.

Seven things to watch

  • The US trade wars – we are assuming the Phase 1 trade deal de-escalates the trade war, but Trump is Trump and often can’t help but throw grenades.
  • US politics: The Senate is unlikely to remove Trump from office if the House votes to impeach and another shutdown is also unlikely but both could cause volatility as could the US election if a hard-left Democrat gets up (albeit unlikely).
  • The US/Iran conflict – which could escalate further with Iran unlikely to negotiate and Trump wanting to sound tough, potentially disrupting oil supplies.
  • A hard Brexit looks like being avoided but watch UK/EU free trade negotiations through the year.
  • Global growth indicators (PMI’s)
  • Chinese growth – a continued slowing in China would be a major concern for global growth.
  • Monetary v fiscal stimulus in Australia – significant fiscal stimulus could head off further RBA easing.

 Four reasons global growth is likely to improve a bit

  • Global monetary conditions have eased significantly over the last year. China has also seen significant fiscal stimulus.
  • The stabilisation seen in business conditions PMIs in recent months suggests monetary easing is getting some traction.
  • We still have not seen the excesses – massive debt growth, overinvestment, capacity constraints or excessive inflation – that normally precede recessions.
  • The de-escalation of the US/China trade war should help reduce a drag on business confidence (at least for a while).

Five reasons Australia is likely to avoid a recession

The bushfires are estimated to knock around 0.4% mainly from March quarter GDP mainly due to the impact on agriculture, tourism and consumer confidence and spending. Coming at a time when Australian growth is already weak it risks knocking March quarter growth to near zero or below. However, while the risk of recession has increased, it remains unlikely:

 

  • Infrastructure spending is strong.
  • Mining investment is starting to rise again.
  • The bushfires will be followed by a boost to spending from the June quarter as rebuilding kicks in.
  • Already weak growth, made worse by the bushfires in the short term will likely force further fiscal stimulus.
  • The $A is likely to remain weak providing a boost to growth.

 Three reasons why the RBA will cut rates this year

 

  • Growth is likely to disappoint RBA expectations for 2.8% growth this year.
  • This will keep underemployment high, wages growth weak and inflation lower for longer.
  • Fiscal stimulus is unlikely to come early enough.

 

We expect the RBA to cut the cash rate to 0.5% in February & to 0.25% in March, with quantitative easing likely from mid-year.

Three reasons why a deep bear market is unlikely

Shares are vulnerable to a correction after the strong gains seen over the last year, but a deep bear market (where shares fall 20% and a year after are a lot lower again) is unlikely:

  • Global recession remains unlikely. Most deep bear markets are associated with recession.
  • Measures of investor sentiment suggest investors are cautious, which is positive from a contrarian perspective.
  • The liquidity backdrop for shares is still positive. For example, bank term deposit rates in Australia are around 1.3% (and likely to fall) compared to a grossed-up dividend yield of around 5.7% making shares relatively attractive.

Nine things investors should remember

  • Make the most of the power of compound interest. Saving regularly in growth assets can grow wealth substantially over long periods. Using the “rule of 72”, it will take 48 years to double an asset’s value if it returns 1.5% pa (ie 72/1.5) but only 9 years if the asset returns 8% pa.
  • Don’t get thrown off by the cycle. Falls in asset markets can throw investors out of a well thought out strategy at the wrong time – as some were at the end of 2018.
  • Invest for the long term. Given the difficulty in getting short term market moves right, for most it’s best to get a long-term plan that suits your wealth, age & risk tolerance & stick to it.
  • Don’t put all your eggs in one basket.
  • Turn down the noise. Increasing social media and the competition for your eyes and ears is creating a lot of noise around investing that is really just a distraction.
  • Buy low, sell high. The cheaper you buy an asset, the higher its prospective return will likely be and vice versa.
  • Beware the crowd at extremes. Don’t get sucked into the euphoria or doom and gloom around an asset.
  • Focus on investments that you understand and that offer sustainable cash flow. If it looks dodgy, hard to understand or has to be based on odd valuation measures or lots of debt to stack up then it’s best to stay away.
  • Accept that it’s a low nominal return world – when inflation is 1.5%, a 15% superannuation return is very pretty good (and not sustainable at that rate).

Dr. Shane Oliver, Head of Investment Strategy & Chief Economist

Five charts to watch regarding the global economy and markets this year

Key points:

  • Shares are at risk of a short-term correction or consolidation after a strong run over the last year and with sentiment now very bullish. However, this year should still see good returns for investors as global growth edges up and interest rates remain low.
  • Five key global charts to watch are: global business conditions PMIs; global inflation; the US yield curve; the US dollar; and global trade growth.
  • So far, so good with PMI’s improving a bit, inflation remaining low, the yield curve steepening, the $US showing signs of stopping and the US/China trade truce auguring well for some pick up in world trade growth.

Introduction:

Our high-level investment view for this year is that a combination of improving global growth boosting profits and still easy monetary conditions will help drive reasonable investment returns, albeit more modest than the very strong gains of 2019. This note revisits five charts we see as critical to the outlook.

Chart #1 – Global business conditions PMIs

Global Purchasing Managers Indexes (PMIs) – surveys of purchasing managers at businesses in most major countries – are an excellent and timely guide to the state of the global economy. Although services sector PMIs held up better than for manufacturers – which tend to be more cyclical – both softened through 2018 and into mid-2019. Since then they have shown signs of improvement suggesting that the global monetary easing seen through 2019 with interest rate cuts and renewed quantitative easing is working. Going forward they will need to improve further to be consistent with our view that growth will pick up this year.

But so far, the 2018-19 slowdown in business conditions PMIs (and hence global growth) looks like the slowdowns around 2012 and 2015-16 as opposed to the recession associated with the global financial crisis (GFC).

Chart 2 – Global Inflation

Major economic downturns are invariably preceded by a rise in inflation to above central bank targets causing central banks to slam the brakes on. At present, core inflation – ie inflation excluding the volatile items of food and energy – in major global economies remains benign. In the US, the Eurozone and Japan core inflation is well below their central bank targets of 2%. Inflation in China spiked to 4.5% through last year, but core inflation has been falling to 1.4% and is well below the Government’s 3% target/forecast. A clear upswing in core inflation would be a warning sign that spare capacity has been used up, that monetary easing has gone too far, and that the next move will be aggressive monetary tightening. But at present, we are a long way from that.

Chart 3 – The US yield curve

The yield curve is a guide to the stance of monetary policy. When short-term interest rates are low relative to long-term rates businesses can borrow short and lend (or invest) long and this grows the economy. But it’s not so good when short rates are above long rates. An inverted US yield curve has preceded past US recessions. So, when this happened last year there was much concern that a US recession was on the way.

However, in recent months various versions of the yield curve – with the gap between the US 10 year bond yield and the Fed Funds rate and the US 10 year bond yield and the 2 year bond yield shown in the next chart – have uninverted as the Fed cut rates and hence short-term yields fell, good economic data provided confidence that recession will be avoided and the US/China trade war de-escalated reducing the threat posed by the trade war.

While the US yield curve has uninverted in the past and yet a recession has still come along, the uninversion seen in recent months coming after such a shallow and short-lived inversion provides confidence that the inversion seen last year gave a false signal as occurred in the mid to late 1990s (as circled).

In addition, it’s also worth noting that other indicators suggest that US monetary policy was far from tight – the real Fed Fund rate was barely positive, and the nominal Fed Funds rate was well below nominal GDP growth and both are far from levels that in the past have preceded US recessions.

So it’s a good sign that the US yield curve has been steepening in recent months. A return to yield curve inversion – which became deeper than seen last year – would be a concern of course.

Chart 4 – The US dollar

Moves in the value of the US dollar against a range of currencies are of broad global significance. This is for two reasons. First, because of the relatively low exposure of the US economy to cyclical sectors like manufacturing and materials the $US tends to be a “risk-off” currency, ie it goes up when there are worries about global growth. Second, because of its reserve currency status and that a lot of global debt is denominated in US dollars particularly in emerging countries, when the $US goes up it makes it tough for emerging countries.

So when global uncertainty is rising this pushes the $US up which in turn makes it hard for emerging countries with $US denominated debt. If we are right though and global growth picks up a bit, trade war risk remains in abeyance and the Iran conflict does not become big enough to derail things then the $US is likely to decline further which would be positive for emerging countries.

 

Chart 5 – World trade growth

It’s reasonable to expect growth in world trade to slow over time as services become an ever-greater share of economic activity and manufacturing becomes less labour dependent. However, President Trump’s trade wars since 2018 combined with slower global growth saw global trade fall last year. This year should see some reversal if the trade wars remain in abeyance as Trump focuses on keeping the US economy strong to aid his re-election and global growth picks up a bit.

US recession still a way away

In recent years there has been much debate about whether a new major bear market in shares is approaching. Such concerns usually reach fever pitch after share markets have already fallen 20% or so (as they did into 2011, 2016 and 2018). The historical experience tells us that what happens in the US is critical to how deep share market falls get. Deep (“grizzly”) bear markets like the 50% plus fall seen in the GFC are invariably associated with US recession. So, whether a recession is imminent in the US, and more broadly globally, is critically important in terms of whether a major bear market is on the way. The next table summarises the key indicators we are still watching in this regard.

These indicators are still not foreshadowing an imminent recession in the US. The yield curve is most at risk if it inverts again. But other measures of monetary policy in the US are not tight and we have not seen the sort of excesses that normally precede recessions – discretionary or cyclical spending as a share of GDP is low, private debt growth has not been excessive, the US leading indicator is far from recessionary levels and inflation is benign.

Concluding comments

At present, most of these charts or indicators are moving in the right direction, with the PMIs improving a bit, inflation remaining low, the yield curve steepening, the $US showing signs of topping and the US/China trade truce auguring well for some pick up in world trade growth. But to be consistent with our view that this year will see good returns from shares we need to see further improvement and so these charts are worth keeping an eye on.

Dr. Shane Oliver, Head of Investment Strategy & Chief Economist

Review of 2019, outlook for 2020 – the beat goes on

Key points:

  • 2019 saw growth slow, recession fears increase and the US trade wars ramp up, but solid investment returns as monetary policy eased, bond yields fell and demand for unlisted assets remained strong.
  • 2020 is likely to see global growth pick up with monetary policy remaining easy. Expect the RBA to cut the cash rate to 0.25% and to undertake quantitative easing.
  • Against this backdrop, share markets are likely to see reasonable but more constrained & volatile returns, and bond yields are likely to back up resulting in good but more modest returns from a diversified mix of assets.
  • The main things to keep an eye on are: the trade wars; the US election; global growth; Chinese growth; and fiscal versus monetary stimulus in Australia.

2019 – growth down, returns up

Christmas 2018 was not a great one for many investors with an almost 20% slump in US shares from their high in September to their low on Christmas Eve, capping off a year of bad returns from share markets and leading to much trepidation as to what 2019 would hold. But 2019 has turned out to be a good year for investors, defying the gloom of a year ago. In fact, some might see it as perverse – given all the bad news around and the hand wringing about recession, high debt levels, inequality and the rise of the populist leaders.  Then again, that’s often the way markets work – bottoming when everyone is gloomy then climbing a wall of worry. The big global negatives of 2019 were:

  • The trade war and escalating US-China tensions generally. A trade truce and talks collapsed several times leading to a new ratcheting up of tariffs before new talks into year end.
  • Middle East Tensions flared periodically but without a lasting global impact & the Brexit saga dragged on although a near-term hard Brexit looks to have been avoided.
  • Slowing growth in China to 6%. This largely reflected an earlier credit tightening, but the trade war also impacted.
  • Slowing global growth as the trade war depressed investment & combined with an inventory downturn and tougher auto emissions to weigh on manufacturing & profits.
  • Recession obsession with “inverted yield curves” – many saw the growth slowdown as turning into a recession.

But it wasn’t all negative as the growth slowdown & low inflation saw central banks ease, with the Fed cutting three times and the ECB reinstating quantitative easing. This was the big difference with 2018 which saw monetary tightening.

Australia also saw growth slow – to below 2% – as the housing construction downturn, weak consumer spending and investment and the drought all weighed. This in turn saw unemployment and underemployment drift up, wages growth remain weak and inflation remain below target. As a result, the RBA was forced to change course and cut interest rates three times from June and to contemplate quantitative easing. The two big surprises in Australia were the re-election of the Coalition Government which provided policy continuity and the rebound in the housing market from mid-year.

While much of the news was bad, monetary easing and the prospect it provided for stronger growth ahead combined with the low starting point resulted in strong returns for investors.

  • Global shares saw strong gains as markets recovered from their 2018 slump, bond yields fell making shares very cheap and monetary conditions eased. This was despite several trade related setbacks along the way. Global share returns were boosted on an unhedged basis because the $A fell.
  • Emerging market shares did well but lagged given their greater exposure to trade and manufacturing and a still rising $US along with political problems in some countries.
  • Australian share prices finally surpassed their 2007 record high thanks to the strong global lead, monetary easing and support for yield sensitive sectors from low bond yields.
  • Government bonds had strong returns as bond yields fell as inflation and growth slowed, central banks cut rates and quantitative easing returned.
  • Real estate investment trusts were strong on the back of lower bonds yields and monetary easing.
  • Unlisted commercial property and infrastructure continued to do well as investors sought their still relatively high yields. However, Australian retail property suffered a correction.
  • Commodity prices rose with oil & iron up but metals down.
  • Australian house prices fell further into mid-year before rebounding as the Federal election removed the threat to negative gearing & the capital gains tax discount, the RBA cut interest rates and the 7% mortgage test was relaxed.
  • Cash and bank term deposit returns were poor reflecting new record low RBA interest rates.
  • The $A fell with a lower interest rates and a strong $US.
  • Reflecting strong gains in most assets, balanced superannuation funds look to have seen strong returns.

2020 vision – growth up, returns still good

The global slowdown still looks like the mini slowdowns around 2012 and 2015-16. Business conditions indicators have slowed but remain far from GFC levels. See next chart

While the slowdown has persisted for longer than we expected – mostly due to President Trump’s escalating trade wars – a global recession remains unlikely, barring a major external shock. The normal excesses that precede recessions like high inflation, rapid growth in debt or excessive investment have not been present in the US and globally. While global monetary conditions tightened in 2018, they remained far from tight and the associated “inversion” in yield curves has been very shallow and brief. And monetary conditions have now turned very easy again with a significant proportion of central banks easing this year. See chart. The big global themes for 2020 are likely to be:

  • A pause in the trade war but geopolitical risk to remain high.The risks remain high on the trade front – with President Trump still ramping up mini tariffs on various countries to sound tough to his base and uncertainty about a deal with China, but he is likely to tone it down through much of 2020 to reduce the risk to the US economy knowing that if he lets it slide into recession and/or unemployment rise he likely won’t get re-elected. A “hard Brexit” is also unlikely albeit risks remain. That said geopolitical risks will remain high given the rise of populism and continuing tensions between the US & China. In particular, the US election will be an increasing focus if a hard-left candidate wins the Democrat nomination.
  • Global growth to stabilise and turn up. Global business conditions PMIs have actually increased over the last few months suggesting that monetary easing may be getting traction. Global growth is likely to average around 3.3% in 2020, up from around 3% in 2019. Overall, this should support reasonable global profit growth.
  • Continuing low inflation and low interest rates. While global growth is likely to pick up it won’t be overly strong and so spare capacity will remain. Which means that inflationary pressure will remain low. In turn this points to continuing easy monetary conditions globally, with some risk that the Fed may have a fourth rate cut.
  • The US dollar is expected to peak and head down.During times of uncertainty and slowing global growth like over the last two years the $US tends to strengthen partly reflecting the lower exposure of the US economy to cyclical sectors like manufacturing and materials. This is likely to reverse in the year ahead as cyclical sectors improve.

In Australia, strength in infrastructure spending and exports will help keep the economy growing but it’s likely to remain constrained to around 2% by the housing construction downturn, subdued consumer spending and the drought. This is likely to see unemployment drift up, wages growth remain weak and underlying inflation remain below 2%. With the economy remaining well below full employment and the inflation target, the RBA is expected to cut the official cash rate to 0.25% by March, & undertake quantitative easing by mid-year, unless the May budget sees significant fiscal stimulus. Some uptick in growth is likely later in the year as housing construction bottoms, stimulus impacts and stronger global growth helps.

Implications for investors

Improved global growth and still easy monetary conditions should drive reasonable investment returns through 2020 but they are likely to be more modest than the double-digit gains of 2019 as the starting point of higher valuations and geopolitical risks are likely to constrain gains & create some volatility:

  • Global shares are expected to see returns around 9.5% helped by better growth and easy monetary policy.
  • Cyclical, non-US and emerging market shares are likely to outperform, particularly if the US dollar declines and trade threat recedes as we expect.
  • Australian shares are likely to do okay but with returns also constrained to around 9% given sub-par economic & profit growth. Expect the ASX 200 to reach 7000 by end 2019.
  • Low starting point yields and a slight rise in yields through the year are likely to result in low returns from bonds.
  • Unlisted commercial property and infrastructure are likely to continue benefiting from the search for yield but the decline in retail property values will still weigh on property returns.
  • National capital city house prices are expected to see continued strong gains into early 2020 on the back of pent up demand, rate cuts and the fear of missing out. However, poor affordability, the weak economy and still tight lending standards are expected to see the pace of gains slow leaving property prices up 10% for the year as a whole.
  • Cash & bank deposits are likely to provide very poor returns.
  • The $A is likely to fall to around $US0.65 as the RBA eases further but then drift up a bit as global growth improves to end 2019 little changed.

What to watch?

The main things to keep an eye on in 2020 are as follows:

  • The US trade wars – we are assuming some sort of de-escalation in the run up to the presidential election, but Trump is Trump and often can’t help but throw grenades.
  • US politics: The Senate is unlikely to remove Trump from office if the House votes to impeach and another shutdown is also unlikely but both could cause volatility as could the US election if a hard-left Democrat gets up (albeit unlikely).
  • A hard Brexit looks like being avoided but watch UK/EU free trade negotiations through the year.
  • Global growth indicators – like the PMI shown in the chart above need to keep rising.
  • Chinese growth – a continued slowing in China would be a major concern for global growth.
  • Monetary v fiscal stimulus in Australia – significant fiscal stimulus could head off further RBA rate cuts and quantitative easing.

 

Dr. Shane Oliver, Head of Investment Strategy & Chief Economist

Five reasons why the $A may be close to the bottom

Key Points

  • In the absence of significant fiscal stimulus soon, further RBA monetary easing both in the form of rate cuts and quantitative easing point to more downside for the $A. 
  • However, there is good reason to believe we may be close to the low in the $A (or have already seen it): it has already had a large fall; it is just below fair value; the global economic cycle is likely to turn up next year; sentiment towards the $A is very negative; and the current account is in surplus.
  • Our base case remains for the $A to fall to $USO.65 in the months ahead as the RBA eases further, but at the end of 2020 it’s likely to be stuck around $USO.65-70.

Introduction

For a long time, we have been bearish on the Australian dollar, seeing it fall into the high $USO.60s and revising this to around $USO.65 in May. In early October it fell to a low of $USO.6671. While negatives remain significant for the $A there is good reason to believe that we are close to the low or may have already seen it. This note looks at the main issues.

The negatives for the $A are well known

The big negative for the Australian dollar is that growth is weaker in Australia and spare capacity is much higher than in the US. For example, labour market underutilisation is 13.8% in Australia versus just 7% in the US, on the latest available data real growth in Australia is running at 1.4% year on year compared to 2% in the US and that translates to per capita GDP growth of -0.2% in Australia compared to 1.4% in the US. And the drag on growth from the housing downturn, weak consumer spending and the drought is likely to keep growth relatively weak in Australia for the next six months or so.

This will keep inflation lower in Australia than in the US. Ideally more fiscal stimulus is required, and the Government has brought forward infrastructure spending. But combined with extra drought assistance this only amounts to an extra 0.1% of GDP of fiscal stimulus over the next 18 months which is not enough to make a significant difference to the growth outlook. So in the absence of more significant fiscal stimulus soon, the RBA is likely to cut the cash rate further to 0.25% and undertake some quantitative easing (i.e using printed money to boost growth). By contrast the Fed is at or close to the low in US rates and is unlikely to return to quantitative easing. This will continue to make it relatively less attractive to park money in Australia. As can be seen in the next chart, periods of a low and falling interest rate differential between Australia and the US usually see a low and falling $A.

So the higher probability of further monetary easing in Australia points to more downside for the Australian dollar. Of course, a shift in the policy focus away from monetary easing and towards greater fiscal stimulus would be more positive for the Australian dollar but this looks unlikely in the short term with the Government more focused on delivering a budget surplus.

Five positives for the $A

However, it’s no longer an easy (in hindsight) one way bet for the $A. There are basically five positives. First, the $A has already had a big fall. To its recent low it’s fallen nearly 40% from a multi-decade high of $US1.11 in 2011 & it’s had a fall of 18% from a high in January last year of $US0.81.

Second, this decline has taken it to just below fair value. This contrasts to the situation back in 2011 when it was well above long-term fair value. The best guide to this is what is called purchasing power parity according to which exchange rates should equilibrate the price of a basket of goods and services across countries. Consistent with this the $A tends to move in line with relative price differentials over the long term.

And right now, it’s just below fair value. Of course, as can be seen in the last chart, the $A could fall sharply below fair value as it tends to swing from one extreme to another. But this depends on the cyclical outlook for global growth and commodity prices. Which brings us to the next positive.

Third, the global economic and commodity price cycle is likely to turn up next year in response to global monetary easing, a bottoming in the global inventory and manufacturing cycle and a pause in President Trump’s trade wars as he refocuses on winning the presidential election.

Based on historical experience, this should work against the US dollar as the US economy is less exposed to cyclical sectors than the rest of the world (which tends to see capital flow out of the US when global growth picks up and into the US when it slows). A weaker US dollar would in turn be positive for commodity prices & the $A, which is a “risk on” currency given its greater exposure to cyclical industries like raw materials.

Fourth, this comes at a time when global sentiment towards the $A remains very negative as reflected in short or underweight positions in the $A being at extremes – see the next chart. In other words, many of those who want to sell the $A have already done so and this leaves it vulnerable to a rally if there is good news.

Finally, the current account has returned to surplus in Australia. The high iron ore price has helped, but so too have strong resource export volumes, services exports and a rising net equity position in Australia’s favour on the back of rising superannuation assets offshore. So the improved current account may be a permanent feature. This means less dependence on foreign capital inflows which is $A positive.

So where to from here?

The prospects for weaker growth and more monetary easing in Australia relative to the US suggests short-term downside pressure for the $A remains. But with the $A having already had a big fall to just below long-term fair value, the global growth outlook likely to improve, short $A positions running high and the current account in surplus it’s likely that the $A may be close to, or may have already seen, its low. Our base remains for it to fall to around $US0.65 as the RBA continues to ease but at the end of 2020 it’s likely to be stuck around $US0.65-70 (or I’ll be honest & admit I don’t have a strong view either way!).

Of course, if the US/China trade war escalates badly again and the global economy falls apart, causing a surge in unemployment in Australia as export demand and confidence collapses and another big leg down in-house prices the Aussie will fall a lot more…but that’s looking less likely.

What does it mean for investors and the RBA?

With the risks skewed towards the $A bottoming soon the case to maintain a large exposure to offshore assets that are not hedged back to Australian dollars has weakened. Of course, maintaining a position in foreign exchange for Australian-based investors against the $A provides some protection should things go wrong globally (say in relation to trade) or in Australia (say in relation to household debt).

For the RBA a shift in global forces towards being more supportive of the Australian dollar over the year ahead would complicate the RBA’s desire to boost Australian economic growth. Stronger demand for Australian exports would be positive, but upwards pressure on the $A would suggest that further monetary easing may be needed to help keep it down.

Dr. Shane Oliver, Head of Investment Strategy & Chief Economist

Franklin Templeton Market Outlook 2020

It’s that time of year when Franklin Templeton’s investment leaders put pen to paper and share their insights into what lies ahead in 2020, both globally and closer to home. See below Franklin Templeton’s market outlooks across a range of asset classes and sectors. 

Global Fixed Income Outlook

“Abundant liquidity in the market fueled by unconventional monetary policy continues to be a source of financial market distortion, and keeps pushing investors toward riskier, less liquid assets.” Sonal Desai, PHD, Chief Investment Officer, Franklin Templeton Fixed Income Group.

Australian Fixed Income Outlook

“The RBA is likely to cut to 0.50% in early 2020 from where it will consider options for other forms of easing. We feel that the authorities are responding to the record levels of leverage across economies and recognising the dis-inflationary impetus that brings.” Andrew Canobi, Director, Australian Fixed Income.

Global Equity Outlook

“We think investors need not be anxious about global equity markets in 2020 even as markets have staged a strong advance throughout much of 2019 and economic data has softened.” Stephen Dover. CFA, EVP, Head of Equities, Franklin Templeton.

Australian Equity Outlook

“The capacity for fiscal stimulus differentiates Australia’s economic outlook from many global peers. Combined with the recent rate cuts from the Reserve Bank, the risk of recession in the domestic economy has moderated.” Alastair Hunter, Chief Investment Officer, Balances Equity Management, Franklin Templeton.

Global Growth Stocks Outlook

“Global Equity markets face an uncertain 2020, but if the consumer stays resilient and bond yields remain low, global stocks could remain attractive relative to other asset classes.” John Remmert, SVP, Senior Portfolio Manager, Franklin Equity Group.

Why super and growth assets like shares really are long term investments

Key Points

  • While growth assets like shares go through bouts of short-term under-performance versus bonds & cash, they provide superior long-term returns. It makes sense that superannuation has a high exposure to them.
  • The best approach is to simply recognize that super and investing in shares is a long-term investment.

Introduction

After sharp share market falls when headlines scream about the billions wiped off the market the usual questions are: what caused the fall? what’s the outlook? and what does it mean for superannuation? The correct answer to the latter should be something like “nothing really, as super is a long-term investment and share market volatility is normal.” But that often sounds like marketing spin. However, the reality is that – except for those who are into trading or are at, or close to, retirement – shares and super really are long-term investments. Here’s why.

Super funds and shares

Superannuation is aimed (within reason) at providing maximum (risk-adjusted) funds for use in retirement. So typical Australian super funds have a bias towards shares and other growth assets, particularly for younger members, and some exposure to defensive assets like bonds and cash in order to avoid excessive short-term volatility in returns.

The power of compound interest

These approaches seek to take maximum advantage of the power of compound interest. The next chart shows the value of a $100 investment in each of Australian cash, bonds, shares, and residential property from 1926 assuming any interest, dividends and rents are reinvested along the way. As return series for commercial property and infrastructure only go back a few decades I have used residential property as a proxy.

Because shares and property provide higher returns over long periods the value of an investment in them compounds to a much higher amount over long periods. So, it makes sense to have a decent exposure to them when saving for retirement. The higher return from shares and growth assets reflects compensation for the greater risk in investing in them – in terms of capital loss, volatility and illiquidity – relative to cash & bonds.

But investors don’t have 90 years?

Of course, we don’t have ninety odd years to save for retirement. In fact, our natural tendency is to think very short term. And this is where the problem starts. On a day to day basis shares are down almost as much as they are up. See the next chart. So, day to day, it’s pretty much a coin toss as to whether you will get good news or bad. So, it’s understandable that many are skeptical of them. But if you just look monthly and allow for dividends, the historical experience tells us you will only get bad news around a third of the time. If you go out to once a decade, positive returns have been seen 100% of the time for Australian shares and 82% for US shares.

This can also be demonstrated in the following charts. On a rolling 12 month ended basis the returns from shares bounce around all over the place relative to cash and bonds.

However, over rolling ten-year periods, shares have invariably done better, although there have been some periods where returns from bonds and cash have done better, albeit briefly.

Pushing the horizon out to rolling 20-year returns has almost always seen shares do even better, although a surge in cash and bond returns from the 1970s/1980s (after high inflation pushed interest rates up) has seen the gap narrow.

Over rolling 40-year periods – the working years of a typical person – shares have always done better.

This is all consistent with the basic proposition that higher short-term volatility from shares (often reflecting exposure to periods of falling profits and a risk that companies go bust) is rewarded over the long term with higher returns.

But why not try and short-term market moves?

The temptation to do this is immense. With the benefit of hindsight many swings in markets like the tech boom and bust and the GFC look inevitable and hence forecastable and so it’s natural to think “why not give it a go?” by switching between say cash and shares within your super to anticipate market moves. Fair enough if you have a process and put the effort in. But without a tried and tested market timing process, trying to time the market is difficult. A good way to demonstrate this is with a comparison of returns if an investor is fully invested in shares versus missing out on the best (or worst) days. The next chart shows that if you were fully invested in Australian shares from January 1995, you would have returned 9.7% pa (with dividends but not allowing for franking credits, tax and fees).

If by trying to time the market you avoided the 10 worst days (yellow bars), you would have boosted your return to 12.4% pa. And if you avoided the 40 worst days, it would have been boosted to 17.3% pa! But this is very hard, and many investors only get out after the bad returns have occurred, just in time to miss some of the best days. For example, if by trying to time the market you miss the 10 best days (blue bars), the return falls to 7.6% pa. If you miss the 40 best days, it drops to just 3.6% pa.

The following chart shows the difficulties of short-term timing in another way. It shows the cumulative return of two portfolios.

  • A fixed balanced mix of 70 per cent Australian equities, 25 per cent bonds and five per cent cash;
  • A “switching portfolio” which starts off with the above but moves 100 per cent into cash after any negative calendar year in the balanced portfolio and doesn’t move back until after the balanced portfolio has a calendar year of positive returns. We have assumed a two-month lag.

Over the long run the switching portfolio produces an average return of 8.8% pa versus 10.2% pa for the balanced mix. From a $100 investment in 1928 the switching portfolio would have grown to $218,040 compared to $705,497 for the constant mix.

Key Messages

First, while shares and other growth assets go through periods of short-term under-performance relative to bonds and cash, they provide superior returns over the long term. As such it makes sense that superannuation has a high exposure to them.

Second, switching to cash after a bad patch is not the best strategy for maximising wealth over time.

Third, the less you look at your investments the less you will be disappointed. This reduces the chance of selling at the wrong time or adopting an overly cautious stance.

The best approach is to simply recognize that super and investing in shares is a long-term investment. The exceptions to this are if you are really into putting in the effort to getting short-term trading right and/or you are close to, or in, retirement.

Dr. Shane Oliver, Head of Investment Strategy & Chief Economist

Planning for what’s next – Living in retirement

Living in retirement can last decades as life expectancies continue to increase. You will need to plan for different stages of retirement – starting with when you are relatively young and active through your later years when you may find yourself slowing down, both physically and mentally.

 

Lifestyle

  • Continue to reinvent yourself

Whether through physical activity, staying socially connected, or by learning something new, engaging in physical and mental activities encourages your health and well-being as you age.

  • Retirement can mean continuing to work

Find something you enjoy whether it is part-time, an encore career, or volunteering.

 

Financial

  • Keep and eye on your budget and your income

Stay fiscally flexible. Be prepared to make adjustments to your spending and your lifestyle. Financial conditions are seldom the same year after year.

  • Review your asset allocations

Be sure that your investment portfolio reflects your age and risk tolerance. Remember, generating retirement income from investments is not the same thing as growing your investments.

  • Monitor your situation regularly and adjust if conditions warrant

This is especially critical in terms of distributions and regular income payments from your accounts, so you can ensure your savings sustain you through your later years.

  • Be proactive in your tax planning

Plan ahead and understand the tax implications of your investment decisions. Consider getting money to your heirs of your financial situation allows.

  • Mange debt

Pay down your debt, including your mortgage.

  • Consider getting professional financial advice

An objective third-party review can be critical at this stage and may assist you in developing a sustainable withdrawal strategy.

 

Health

  • Make a plan for your future medical expenses

Healthcare expenses can be large or small, expected or unexpected. Think ahead to line up the income you need to meet these expenses.

  • Review your situation regularly

Evaluate your current and potential future healthcare needs, and determine whether private health insurance (or your current cover) is appropriate.

 

Protection

  • Review your estate plan
  • Who do you trust?

Establish powers of attorney in case you are incapacitated.

  • Have a family meeting

Openly discuss your finances in the event that you can no longer manage your own affairs. Educate adult children regarding treatment of your asset upon your death.

 

Pitfalls

  • Elder financial abuse is a growing problem

Take steps early to protect yourself. Consider confiding in relatives or a trusted friend regarding your financial situation.

  • Review and assess

Confirm that all beneficiary designations are in place and that you have a proper will, or other estate planning tool, to ensure your money goes where you want it to go.