An interesting article by Charlie Aitken of Bell Potter Securities looks
at the ramification of our low interest rates.
Whilst low interest rates are positive for the residential property
market there are currently a lot of people, since the GFC, hiding in cash
investments for perceived security.
About 30% of SMSF assets currently sit in cash and there is a total of $440
billion siting in bank term deposits.
Future term deposit rates in the “3’s” and maybe “2’s” would be
returning, after tax, less than inflation, or negative in real terms, so savers
will be forced to take a risk to achieve an acceptable after tax income stream.
Such a move from cash to productive investments such as shares could see
yields reduced, particularly on fully franked equities.
This may come about, not due to companies reducing there dividends, but
rather the price of stocks rising due to increased demand.
Charlie Aitken is tipping that yields could be compressed to 5% and the
ASX200 to rise to around 5,000 or 5,200 over the next 12 months.
Damned if you do, damned if you don't but I'd rather be damned for a don't than a do (re shares) with the volatile markets, "fiscal cliffs" taken to the brink, dodgy European economies etc, but when spare cash is actually in cash deposits, low interest rates are a bummer.
ReplyDeleteYes John, if you are a self funded retiree, low interest rates will make life difficult. This will also effect most Super Funds, as well as the self managed funds mentioned, as they also have a fair bit in cash deposits as well. Most people chose a balanced portfolio for their super fund which includes interest bearing deposits. The return to super funds is also calculated using the rise and fall in share price as well as the dividend yield. If you had held shares yourself (not with a super fund) during the GFC, their value would have dropped but the yield effectively rose in the short term as the dividend payments remained the same. Some of these share value losses have now been regained and some dividend yields are around 7% or more fully franked (tax paid)which is a real return of closer to 10% which is not too bad compared to low interest rates. When choosing which companies to invest in, check out where you and everyone else spends their money on a weekly basis and don't worry about retailers who supply discretionary spend items. Wander into the big food suppliers and any of the big 4 banks and also check out how many kids are getting I-Phones etc and who is the main network supplier. If any of these go bad - we will have more things to worry about than the state of the share market itself. Cheers Greg
ReplyDeleteTrue, Greg. We had super in balanced funds which all nose-dived during the GFC but they did eventually rise again. We waited till they had regained what they had lost then converted them all to cash options within the super fund. Since then they earned around five percent - will be lower now but there are no huge fluctuations depending on what the Yanks, the Greeks and the Spaniards say or do or whether China continues to expand.
ReplyDeleteInteresting article by Larry Pickering on interest rate cuts and the plight of self funded retirees and pensioers:-
ReplyDeletehttp://pickeringpost.com/article/rate-cuts-will-not-stimulate-this-economy/859
Westpac shareholder newsletter states share price up 22% for year ended 30th September 2012 and when allowing for dividends paid, the total return to shareholders during the year exceeded 30%. My thoughts have been if you want to put money in the bank on fixed deposits why not buy shares in the same bank instead?
ReplyDeleteNot sure I would join the Red S.A at any cost because I still respect Australia and havn't submitted to the Socialist International Movement, ILO, UNion, UN and their Carbon Trading scam yet. I may come around if they stop throwing thousands towards selected pensioners and if I can't bring my own productivity level & assets down to the required level whilst still working.
ReplyDeleteBugger me if they nudge me off the wait list for the new Lambo because the Chinese have ordered all the production & my new waterfront property with the life time rates beyond the pention & maintenance in the contract price. ;-) Oh yes, not counted in your assets for eligibility & with the Gov picking up the majority of the rest of your costs on percentage rates why shouldn't I screw all those hard working Australians & Farmers stupid enough to turn the blind eye, heh Greg.
Greens are all over this John, arn't you in on it ?
Personally I see nothing wrong with the concept of having paid taxes all one's working life, choosing to buy a comfortable home and qualifying for a part (or full) pension and the benefits that go along with that such as rates discounts. But no Anon I'm not onto it yet. There is also still provision for a deferred pension bonus if one was working the required number of hours (20 hrs a week I think) since the cut off date on reaching pension age a few years ago. Fair enough for those eligible. From memory the cut of date for eligibility was September 09.
ReplyDeleteThe Kiwis have the right idea IMO with pensions for all after age 65, with taxes paid on total incomes.
Anon makes a good point. The low interest rates could see productive funds and assets wasted just so people over 65 become eligible for the pension, or part thereof. Big new 6 bedroom mansions with media rooms for 2 people at Noosa Heads or indeed the new Lambo, 40' boat or equivalent caravan and series 200 Landcruiser. What advantage they see in this for just a pension is beyond me. I know of previously frugal people who are now on a spending spree selling assets down to get eligible! Had they alternatively taken the money from their financial advisers favorite fund many years ago and invested on their own behalf they may have been much better off and the pension insignificant.
ReplyDeleteThe new Lambo, 40' boat and new Landcruiser won't help, Greg, as they would be counted as assets. So are funds in super or bank fixed interest or shares, even part of private pension/ annuity funds. But the mansion at Noosa sounds good :0) Makes more sense than frittering it away on world cruises IMHO, where all you have left is the pictures which leave you hankering for another world cruise and of course one could always do a partial reverse mortgage ... not too keen on that idea but if a firm drawdown limit was set - down to three quarters or half the value of the house, that might work and it would be one's own money being used to supplement lifestyle demands.
ReplyDeleteBut I do hear what you say about the bank shares being better than term deposits. BTW, the Pickering article you linked to is very interesting I thought.
Well, as bro' john knows, I have been right into all this for a number of years, managing our own super fund, now well and truly in pension phase. IMHO, anyone serious about living from within their own (worked for, and accumulted) resources needs to devote quite a bit of time consistently trying to follow and understand just what IS going on, as well as having a very good accountant, and financial adviser(s). The rules pertaining to running your own super make this absolutely necessary at any rate, as they are (correctly) very tight.
ReplyDeleteI totally respect any and all who legitimately receive a full, or part public pension. I also understand that as has been discussed above, we (anyone) could simply sell down our income generating assets, go on a spendthrift splurge and look to go on the public pension. I don't admire that at all, but equally I understand that circumstances might force anyone to have to do something like that, but without the spendthrift splurge. I do however resent any suggestions along the lines that that is why people like to travel, 'splurging their dough' to go on the public purse. No doubt some do, just as others (including many living in rental properties in our immediate neighbourhood) have Mercs, Beemers and other uppity autos parked in their drives. My wife and I love to travel, we do it a lot, we budget for it, and within what I believe is a quite finite existence, we have built up some magic experiences which i would not have missed for quids. ie heaps of quids.
So, each to his own, let's not assume any high moral ground over issues like this.
Back to the central theme, I firmly believe that shares in consistently yielding 'safety stocks' (think Telstra, banks, major food and other vital commodities in every day demand retailers) have a lot going for them, including the potential value of imputation credits as raised by Greg above, alongside safe but relatively low - yielding fixed interest options.
At the end of the day, Caveat Emptor, horses for courses etc etc.
Cheers al
I agree with you 100% Al. Unfortunately I was in a one man business for about 37 years and I never recovered from Keatings "recession that we had to have" which stretched out to a 12 year struggle. Recessions usually last for at most 4 to 5 years but Keating set a new record with his effort. After the first 5 years or so things were a bit of a struggle and so the answer was to re-mortgage the house to keep going, because everybody knew that recessions only lasted about 4 or 5 years. 4 or 5 years on we had to have another go because Keating was maintaining the "Recession that we had to have" but by then interest rates for business use had risen to 22% but it was either take that or lose everything so we bit the bullet and carried on. I could not get the dole because I was self employed and could not meet the criteria of being made redundant or being dismissed.
DeleteWhen things eventually slowed down I had reached a stage where my health had suffered to the point where I could no longer work.
We managed to stay with our heads just above water until we had to sell to clear ourselves and when we closed the business and sold our house we were lucky enough to only owe a few thousand more that we received for the property.
Perhaps my mistake was to operate a business in the actual name of myself and my wife and not as an incorporated company which we probably could have gone bankrupt but it would have meant that we would never be able to finance anything again
I worked for 32 years from this property and so we could not just let it go and lose everything.
We came out in the clear ( a bit short of what we owed we managed to clear everything) but there was nothing left for retirement and for the first time in my life I had to apply for welfare (at that point in time it was a disability pension, later aged pension).
It gave me no joy to have to do what I did but what makes my blood boil now is the bludgers who emigrate to Australia just so that they can claim an Australian Pension and benefits when they return to their own country.
Recently there was a mob of Poms that were granted Australian Citizenship (report on channel 7 ) and less than a week later they returned to England because they did not like it here according to what they told Channel 7.
These bludgers are now eligible for an Australian Pension and all benefits even though they went back to England.
We also see a lot of Asians from several countries who come to Australia, get citizenship and then move back to their old country where they live in relative luxury on the Australian Welfare payments. They also receive the bonus payments that Gillard borrows money to give away to try and get the pensioners on side.
I at least contributed for the whole of my life but these bludgers are very adept at rorting our welfare system and we will never see them live here again.
Well said Peter and sad to hear of your struggles with "the system" also as Bro Al says too, horses for courses. I wasn't taking a shot at you about your love of travel Al but as you say, there are some who get down to pension eligibility by that means. There are also those who choose to keep working beyond pension age and many who are wary of shares after the GFC and with the present constant state of flux on the international scene and in the stock markets - one step forward, two steps back ...
ReplyDeleteLife can get complicated.
Peter, that sure is a tough story, and I realise that you are far from alone in having gone through such a rotten, harrowing experience. In fact it has occurred within our own family. I hope that 2013 brings you some good tidings!
ReplyDeleteI understand, and agree with your points above, John. As many will be aware, a 3rd investment option has become increasingly popular over the past couple of years, so - called 'hybrids' which are tradeable on the ASX, just like ordibnary shares, but which deliver a fixed interest return (in some cases, also with imputation credits attached), very usefully above fully safe term deposits. Like shares, they carry some risk as the tradeable value can rise and fall, but if for example they are bank - issued (as many are), in my own opinion (far from infallible! :-( that is a somewhat nominal (or for me, acceptable) risk. Other entities have also floated such issues as a means of generating new funds and reducing debt on their blance sheets, and some have been well supported. All of the major managed funds have moved a lot of investment into this area since the GFC.
As I said in a post above, if anyone is seriously managing investments as a means of financial survival / full or part independence, my view is that in addition to your own research, you need a good accountant, and financial adviser. In our case, the former charges us too much but they are very good, and we both like and trust the latter. But, I don't always agree with him / them, in fact we 'debate' quite regularly and history shows that I am sometimes right! But I would never discount their advice.
Cheers al
The Australian share market has increased by 20% since early June, but it is still cheap on a dividend yield basis compared to cash products and fixed interest investments.
ReplyDeleteThe average fiscal 2013 dividend yield is now around 4.7% (30% franked), which is equivalent to a grossed-up dividend yield of 6.3%. This grossed-up dividend yield is still well above the current 90-day Bank Bill rate of 3.0%, the 10-year bond yield of 3.3%, and bank 12-month term deposit rates of around 4.2%.
Private investors are overweight in cash and underweight in equities. Around 30% of self-managed superannuation funds under management is represented by cash/cash products versus 13% before the GFC and private investors now own less than 25% of the Australian share market versus the historical average of around 33%.
- from Bell Potter Securities
Greg, I would agree there are good buying opportunites aimed at producing long term income on the ASX. I am not talking about speculative buys in mining or anything else, which IMHO represent just another form of gambling. All participnts in superannuation have the ability to change their investment balance between equities and fixed interest within their fund, and no doubt many are hanging on to a high balance of cash investments, with sadly much diminished returns. Whatever, within the investment categories it is the Public (Industry, Retail)Funds themselves who decide where to invest your money, with you having no say - viz whether that be with ANZ or CBA, Wesfarmers or Woolies, BHP or Rio, Resmed or Ramsay, Origin or AGL and so on, unless you really do manage your own self managed fund, yourself. Of course if a retiree has income generating assets totally outside the Super system then he / she is a free agent, but the legitimate tax advantages of super are no longer available.
DeleteSo indeed, it still all comes back to Caveat Emptor, Horses for Courses, doesn't it?
Cheers al
Hi everyone, Very nice post I found here, basically am just searching for god information about annuity rates so can not participate in this conversation but all the comments and post are definitely helpful to me.
ReplyDelete