Aspirations Insights: March 2024

AW constantly monitors the investment markets and aims to keep our valued clients regularly informed and updated. We aim to help investors cut through all the media noise and hype and understand what is really driving investment markets and portfolio returns.

In this edition, Michael Barker from Aspirations Wealth and Leigh Cronin from Evidentia Group discuss:

  • Evidentia Group and how they help Aspirations Wealth.
  • Leigh’s role at Evidentia Group.
  • Investment process and how we select stocks for our clients.
  • View on Australian markets: 2023 summary & 2024 outlook.
  • View on interest rates.
  • Should we be worried about markets hitting all-time highs?

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Any advice contained in this insight/update is general advice only and does not take into consideration the reader’s personal circumstances. To avoid making a decision not appropriate to you, the content should not be relied upon or act as a substitute for receiving financial advice suitable to your circumstances. When considering a financial product please consider the Product Disclosure Statement. Aspirations Wealth Group is a Corporate Authorised Representative of Aspirations Private Wealth Pty Limited. ABN 57 622 182 076 – AFSL 503889.

Aspirations Insights: February 2024

AW constantly monitors the investment markets and aims to keep our valued clients regularly informed and updated. We aim to help investors cut through all the media noise and hype and understand what is really driving investment markets and portfolio returns.

In this edition we cover: 

  • Interest rates cuts for 2024?
  • The pitfalls of term deposits!
  • What will happen to share markets if Trump wins USA election?

Interest rates cuts for 2024?

It’s likely that 2024 will mark the commencement of interest rate reductions across most parts of the world. Inflation is moving back towards the target and unemployment is showing signs of easing. We believe that it is now the right time for diversified investors to plan their portfolios for a declining interest rate cycle.

For context, in the United States, the markets have factored in an approximate 1.5% reduction in interest rates over a span of a few years, with Australia anticipating about half of that. This poses a challenge for investors holding substantial amounts in cash or term deposits. On a positive note, interest rate cuts are expected to benefit the economy, influencing both the stock market and providing favourable conditions for bond investors.  

The pitfalls of term deposits!

Consider two couples with a $1 Million nest egg each at the start of retirement. Their goal is to sustain an annual income of $50,000 throughout a 30-year retirement.

Option 1: Investing in a term deposit, with the bank offering a 5% term deposit for a 1-year term, anticipating a decline in rates in the coming years. This choice ensures a steady $50,000 income with no market volatility.

Option 2: A diversified, 75% growth portfolio, comprising of both bonds and shares, with the objective of achieving a 7% long-term return after factoring in costs.

Option 2 is the winner and superior choice! With its’ strategic approach, it emerges as the key to a truly great retirement, providing not only flexibility and enhanced outcomes but also the potential for leaving an inheritance for the next generation.

What will happen to share markets if trump wins USA election?

Investors are already planning out for the potential impacts of the upcoming 2024 USA presidential election, scheduled for November, on the share markets.

The competition between former President Donald Trump and Democratic President Joe Biden is anticipated to be closely contested, likely hinging on narrow margins in key battleground states.

Both ageing candidates, however, come with their challenges. Notable policy distinctions exist, particularly in key areas:

Taxes: Biden aims to increase taxes on wealthy individuals and certain corporations, framing it as an effort to introduce fairness to the tax code. In contrast, Trump is positioned to maintain or deepen tax cuts, viewing them as catalysts for economic growth.

Trade: While Biden’s campaign has not explicitly outlined a second-term trade policy, his administration has taken an assertive stance against some adversarial countries, such as China, while securing trade deals with others. Trump, on the other hand, intends to intensify the confrontational trade policy from his initial term, proposing to impose tariffs on a majority of imported goods.

Jobs: Trump’s campaign portrays its tariff policy as a safeguard for U.S. businesses, fostering a robust job market and reinforcing the domestic supply chain. In contrast, the Biden administration has implemented federal legislation designed to attract investment to U.S. companies, consequently increasing the demand for workers.

The chart below shows the returns from the USA share market (S&P500) over the past 4 presidents.

Aspirations Wealth remains undeterred by external distractions and noise, instead we choose to stay focused on the primary objectives.  We firmly believe factors such as the Federal Reserve interest rate policy, the economic cycle and corporate earnings will ultimately hold greater significance in shaping the share markets.

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Any advice contained in this insight/update is general advice only and does not take into consideration the reader’s personal circumstances. To avoid making a decision not appropriate to you, the content should not be relied upon or act as a substitute for receiving financial advice suitable to your circumstances. When considering a financial product please consider the Product Disclosure Statement. Aspirations Wealth Group is a Corporate Authorised Representative of Aspirations Private Wealth Pty Limited. ABN 57 622 182 076 – AFSL 503889.

Aspirations Insights: January 2024

AW constantly monitors the investment markets and aims to keep our valued clients regularly informed and updated. We aim to help investors cut through all the media noise and hype and understand what is really driving investment markets and portfolio returns.

In this edition we cover: 

  • 2023 Market Returns  
  • Investment Themes to Watch
  • The Year of Elections  

2022 VS 2023 Market Returns

The table below shows the returns comparing calendar year 2022 to 2023. The good news was spread across all major asset classes in the 2023 year.

Markets rallied in December to finish the year off strongly. Whilst last year we faced fears of rising inflation and rising interest rates leading to expectations of a recession, the markets are now eyeing the prospects moderating inflation, falling rates and moderate growth. The S&P500 has recovered back close to its’ all-time record highs.

We still face a scenario that inflation around the world remains higher for longer which may put the “Soft Landing” outcome at risk. If this occurs, shares could experience a pullback.

Investment Themes to Watch

Ongoing themes for investors are likely to include:

  • The rapid development of AI and other transformative technologies
  • Innovations in healthcare and pharmaceuticals
  • Renewable energy to support global emission targets
  • Lithium and other components in batteries to power EV’s
  • Increased awareness of the need for cybersecurity technology

If the last few years have taught us anything, it’s to expect the unexpected. One thing we can predict with some certainty is that market volatility and uncertainty are likely to persist in 2024, and that investors with a diversified portfolio tailored to their needs, who maintain a long-term focus and stay the course, are likely to weather whatever conditions come their way.

The Year of Elections (Biggest in History)

In 2024, we will see more than 70 elections in countries covering 4.2 billion people (approximately 50% of the world’s population). While many of these elections will be routine, we have seen the rise of fringe parties cause upsets or instability in power, and therefore some of the elections will have an effect on investment markets.

Here are the major elections to watch this year:  

Taiwan: The incumbent Democratic Progressive Party was re-elected last week defeating the pro Chinese opposition Kuomintang party. China has already voiced its displeasure at the US congratulating the elected President and the world awaits for more retaliatory actions from Beijing.

India: In the spring of 2014, Bharatiya Janata Party (BJP) leader Narendra Modi was sworn in as India’s 14th prime minister. A decade later, he appears poised to win a third straight term in office in what will be history’s largest-ever democratic exercise: 900 million people voters will choose their next government.

Mexico: They are gearing up for its’ largest-ever election on June 2 that could see it elect a woman as its president for the first time. Mexico has a population of about 129 million and approximately 96 million registered voters.

USA: On November 5, the USA will vote for its’ president, all seats in the House of Representatives and a third of the seats in the Senate. The presidential race this year seems to be reminiscent of 2020, where Democrat Joe Biden, who is the current president, faced off against Republican Donald Trump, whom he defeated four years ago.

Indonesia and Pakistan: The world’s fourth and fifth-most populous countries, respectively, will hold general elections in February with Jakarta looking for a new leader as President Joko Widodo is ineligible for a third term, while Islamabad hopes to emerge from a constitutional crisis that led to the ouster and imprisonment of former Prime Minister Imran Khan.

FYI: Australia does not hold a Federal election until May 2025.

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Any advice contained in this insight/update is general advice only and does not take into consideration the reader’s personal circumstances. To avoid making a decision not appropriate to you, the content should not be relied upon or act as a substitute for receiving financial advice suitable to your circumstances. When considering a financial product please consider the Product Disclosure Statement. Aspirations Wealth Group is a Corporate Authorised Representative of Aspirations Private Wealth Pty Limited. ABN 57 622 182 076 – AFSL 503889.

Aspirations Insights: December 2023

Welcome to the last edition of the Aspirations Wealth (AW) Insights for 2023. AW constantly monitors the investment markets and aims to keep our valued clients regularly informed and updated. We aim to help investors cut through all the media noise and hype and understand what is really driving investment markets and portfolio returns.

In this edition we cover: 

  • Outlook for 2024
  • The cash conundrum
  • The risk trade off

Outlook for 2024

Looking ahead to 2024, global growth has been more resilient than anticipated over 2023, with inflation falling in most major economies. While the risk of a global recession has moderated this year, we do still expect economic growth to slow in early 2024 as the full impact of the rising interest rates is felt around the world. However, falling inflation could allow USA central bank to ease rates as the year progresses, setting the global economy up for a good recovery mid to late 2024. Shares and property would benefit from rate cuts.

As we head into 2024, AW see good options for portfolios: bond yields are high, equity valuations are fair, private markets continue to offer good results, while also becoming more accessible to investors. Even cash doesn’t look so bad. After negative share market returns in 2022, sideways moving share markets in 2023, we look forward to rising share markets in 2024 and 2025.  

Cash conundrum

At a 5% yield, cash can’t be ignored. But, it doesn’t tend to work best in the environment we see moving forward. Cash works pretty well when central banks have to hike more than expected and when inflation expectations are moving higher – as we saw over the last two years. But today, few are still debating whether the USA Federal Reserve will hike another time. The focus, rather, has decidedly shifted to when – and by how much – the USA Fed will cut rates next year.

Consider this, the market is pricing in a 60% chance of the USA Fed cutting rates by March…and a 100% chance that it does so by May. In all, investors think we’ll see 1.25% worth of cuts by December. This might be a bit too optimistic, but one thing is still clear: rates are headed lower. At the same time, earnings growth expectations on shares are improving and risk sentiment is recovering. This means cash comes at a greater cost in this next stage of the cycle. Be clear on how cash fits into your goal-aligned wealth plan.

Risk Return

The amount of risk you take in your portfolio will determine your return. Cash is a less volatile investment vs shares, on the other hand, will have periods of above average returns and periods when they fall in value. This trade-off between risk and return is not just theoretical, it is possible to observe it in real life. 

Let’s consider 3 different portfolios:

A) 100% cash

B) 50% cash and 50% shares (a balanced-style portfolio)

C) 100% shares

By looking at these 3 portfolios where the cash rate is 4%, and the return from shares varies from 12% (good year) to 8% (average year) and -10% (poor year), we can see the way returns are linked to the amount of risk, in this case exposure to shares, taken on by the portfolio.

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Any advice contained in this insight/update is general advice only and does not take into consideration the reader’s personal circumstances. To avoid making a decision not appropriate to you, the content should not be relied upon or act as a substitute for receiving financial advice suitable to your circumstances. When considering a financial product please consider the Product Disclosure Statement. Aspirations Wealth Group is a Corporate Authorised Representative of Aspirations Private Wealth Pty Limited. ABN 57 622 182 076 – AFSL 503889.

Aspirations Insights: November 2023

Welcome to the November edition of the Aspirations Wealth (AW) Insights. AW constantly monitors the investment markets and aims to keep our valued clients regularly informed and updated.

In this AW Insights edition we cover:

  • Interest rate increase 
  • Investment market returns 
  • GLP-1 weight loss drugs

RBA increases cash rate from 4.10% to 4.35% 

The pause in interest rates over the last four months came to an end on Melbourne Cup Day with the RBA raising rates by 0.25% (the 13th increase in 18 months). 

Inflation remains stubbornly high at around 5.5% and is still well above what the RBA targets (which is an inflation rate of between 2-3%).

Following comments from the RBA Governor about the risk of inflation staying higher for longer, the markets are now pricing in the possibility of a further rate hike in February 2024. Any expected cuts to interest rates have now been pushed back to late 2024.

So why is high inflation so much of a concern? These comments from the Governor sums up the situation well…“High inflation makes life difficult for everyone and damages the functioning of the economy. It erodes the value of savings, hurts household budgets, makes it harder for businesses to plan and invest, and worsens income inequality.”

Investment market returns 

In stark contrast to the past three months, where shares were negative, November started with its’ best week of the year for shares (up 5%). November and December have historically been two of the better months for shares.

The US central bank held their interest rates steady earlier this month and didn’t raise rates. The markets saw this as a signal that the interest rate raising cycle in the US was near the peak which is positive for shares.

GLP-1 weight loss drug

Glucagon Like Peptide 1 (or more commonly called GLP-1) drugs were initially approved to treat diabetes. A side effect of the drug was it made people feel full and not want to eat. These drugs are now being hailed as a miracle treatment for weight loss. Hollywood celebrities promoted it and now countries are running out of it.

Popular GLP-1 drugs include Eli Lilly’s Mounjaro and Novo Nordisk’s Ozempic and Wegovy, the latter of which has been approved by the Food and Drug Administration for weight loss management.

The potential growth in this drug segment is phenomenal.

Currently only 40 million people in the U.S. have access to these medicines through their insurance plans (reimbursements) however there is an estimated 110 million people in the US living with obesity. According to the World Health Organization estimates, more than 750 million people in the world are living with obesity, which causes 5% of deaths globally.

Analysts estimate sales of these medicines will exceed $56 billion in 2030.

FYI: Eli Lilly is a share holding in your portfolio.

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Any advice contained in this insight/update is general advice only and does not take into consideration the reader’s personal circumstances. To avoid making a decision not appropriate to you, the content should not be relied upon or act as a substitute for receiving financial advice suitable to your circumstances. When considering a financial product please consider the Product Disclosure Statement. Aspirations Wealth Group is a Corporate Authorised Representative of Aspirations Private Wealth Pty Limited. ABN 57 622 182 076 – AFSL 503889.

Aspirations Insights: October 2023

Welcome to the ninth edition of the Aspirations Wealth (AW) Insights for 2023. AW constantly monitors the investment markets and aims to keep our valued clients regularly informed and updated.

In this AW Insights edition we cover:

  • Interest rate outlook
  • Third quarter (Q3) share market update

RBA leaves cash rate on hold at 4.10% for the fourth month in a row

The pause in interest rates over the last four months comes after the biggest interest rate hiking cycle (4% over 14 months) since the late 1980s which preceded the early 1990s recession. The rise in interest rates has taken mortgage rates back to levels last seen in 2011.

The possibility of one more interest rate hike is still high particularly with sticky inflation. Economists seem to be split roughly 50/50 as to whether there will be another rate hike or not and our assessment is that the probability is around 50%. Continuing to raise interest rates will only add to the already very high risk of unnecessarily knocking the economy into recession. At the very least the economy is likely to have slowed substantially by early next year with unemployment starting to rise faster than the RBA is allowing for. Based on a cash rate of 4.10%, we would say rates are very close to the high we will see during this part of the economic cycle, however we also don’t see rate cuts coming any time soon.

Q3 Share market update

After rising in July, shares fell in value during August and September – see chart below showing world share market returns for past quarter.

With the trajectory of the world economy hanging in the balance, shares fell in value during this quarter. Many investors have concerns about the current economic environment. While inflation is falling, investors understand that interest rates are likely to stay higher for longer than expected, which usually puts pressure on shares. AW think there are good reasons to stay actively invested in quality shares however with one eye on the lingering risks.

Over much of this year, fears about recession have gradually faded, at least in the US, and rising confidence that inflation has peaked has supported a reasonable rally in shares (until recently). 

The performance of share markets this year has been better than in most economic downturns. Markets have been pricing in a soft landing, a peak in interest rates and the re-emergence of technology deflationary forces on the back of the Artificial Intelligence phenomena. However, a resurgence in oil prices, stickier inflation, and stronger economic data, predominantly in the US, has raised the risk that interest rates will need to stay higher for longer. High interest rates should result in weaker growth and lower inflation, this will likely lead to higher share market volatility and shorter sharper market cycles.

AW are ready to buy more quality shares if the market weakens further and happy to own bonds paying high interest as well (i.e. hold a good diversified portfolio).  In this current environment, we believe it is important to dial down the noise, take a medium to longer-term perspective, and remain focused on quality.  

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Any advice contained in this insight/update is general advice only and does not take into consideration the reader’s personal circumstances. To avoid making a decision not appropriate to you, the content should not be relied upon or act as a substitute for receiving financial advice suitable to your circumstances. When considering a financial product please consider the Product Disclosure Statement. Aspirations Wealth Group is a Corporate Authorised Representative of Aspirations Private Wealth Pty Limited. ABN 57 622 182 076 – AFSL 503889.

Aspirations Insights: September 2023

Welcome to the eighth edition of the Aspirations Wealth (AW) Insights for 2023. AW constantly monitors the investment markets and aims to keep our valued clients regularly informed and updated.

In this Insights edition we cover:

  • Why bonds could make more sense than cash / term deposits
  • China, the good and the bad  

Why bonds could make more sense than cash / term deposits

With the highest USA interest rates in 22 years (5.5%), bonds have an important role to play in your portfolio, offering potential income, diversification and capital preservation. They are a form of investment securities where an investor lends money to a company or a government for a set period of time, in exchange for regular interest payments.

As bond fixed income assets now offer a generational opportunity for investors, AW has included these bond assets in all client portfolios.

The chart below shows the increase in bond yields from 2021 (green) to 2023 (pink).

Historically, bond portfolios start to outperform cash and term deposits (see chart below) as the USA Federal Reserve reaches its’ peak interest policy rate.

AW now believe that interest rates are close to its’ peak.

China, the good and the bad

The very strict COVID lock-down policy in China led economic growth to undershoot expectations and as a result, throughout 2021 and 2022 the Chinese equity market significantly underperformed global equities (see chart below). The re-opening of the Chinese economy occurred in late 2022 which led to a bounce in Chinese equities and optimism. However, in recent months, there are signs that economic growth is deteriorating.

The chart below shows the performance of the Chinese equity market (white) vs the global equity market (yellow).

The good news:

  • In 2000, the Fortune Global 500 was led by the U.S. with 179 companies while China was represented by only 10 businesses. China surpassed the U.S. as the leader on the Fortune List in 2020 and currently represents around 30% of the list’s total revenue.
  • The $1.5trn of excess savings accumulated by Chinese households during prolonged lock down periods can help to bolster spending.
  • China’s impressive pace of innovation, coupled with automation opportunities driven by an aging population and the energy transition, continues to create interesting investment opportunities.
  • The 1 year forward price to earnings (PE) ratio for MSCI China is 10 times versus its’ 10-year average of 11.4 times. That is close to the largest discount to the rest of Asia for the past 20 years.

The bad news:

  • Regulatory crackdowns by government on some of China’s most dynamic industries including property developers, internet platforms and education companies.
  • As China’s re-opening bounce is fading, the nature of the recovery remains uneven, and sentiment is fragile.
  • The household sector is yet to see fundamental improvement in income and employment prospects.
  • Policy easing and targeted measures across sectors are fueling expectations of more policy stimulus ahead, but it is unlikely to be large enough to lead significant growth acceleration in the second half of 2023.

AW perceive the bad news above being offset by the good news on offer as markets price in these risk factors. We observe very high potential returns, given low valuations combined with high potential earnings growth.

We retain our recommendation for exposure to Emerging Markets given valuation and growth metrics, but acknowledge elevated risks at this time.

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Any advice contained in this insight/update is general advice only and does not take into consideration the reader’s personal circumstances. To avoid making a decision not appropriate to you, the content should not be relied upon or act as a substitute for receiving financial advice suitable to your circumstances. When considering a financial product please consider the Product Disclosure Statement. Aspirations Wealth Group is a Corporate Authorised Representative of Aspirations Private Wealth Pty Limited. ABN 57 622 182 076 – AFSL 503889.

Aspirations Insights : August 2023

Welcome to the seventh edition of the Aspirations Wealth (AW) Insights for 2023. AW constantly monitors the investment markets and aims to keep our valued clients regularly informed and updated.

In this Insights edition we cover:

  • The Women’s Football World Cup
  • The Value of Financial Advice

The Women’s Football World Cup

Like many, we have been captivated by the performance of the Matildas at the Football world cup. They’ve made Australia proud! 

Facts you may not know:

  • LONGEST SHOOTOUT

The Australia v France quarter final game had the longest shootout in World Cup history — men’s or women’s — with 10 rounds and Australia winning 7-6.

  • MOST ATTENDED WOMEN’S SPORTING EVENT IN HISTORY

The FIFA Women’s World Cup 2023 is poised to become one of the most attended women’s sporting events in history.

  • MATILDAS HAVE BROKEN TV RATINGS RECORDS, BEATING AFL GRAND FINAL AND ORIGIN

The Matildas have broken TV ratings records, beating the AFL grand final and Origin.

  • 2023 IS THE 9TH EDITION OF WOMENS WORLD CUP

First played in 1991 in China, won by USA (who have won 5/9). Other winners are Norway, Germany x 2 and Japan.  

  • PRIZE MONEY

This edition’s total prize pool is US $110 million:

The Value of Financial Advice

Financial advice remains critically important in today’s dynamic and complex economic landscape. As individuals navigate a multitude of financial decisions, the guidance of experts in the field can make a significant difference in their long-term financial well-being. Here’s why seeking financial advice remains a wise choice:

  1. Tailored Guidance: Each individual’s financial situation is unique. Financial advisers assess your specific circumstances, goals, risk tolerance and timelines to provide personalised recommendations that align with your objectives.
  2. Complexity of Choices: The financial world is constantly evolving, with new investment opportunities, tax regulations and retirement strategies emerging regularly. A financial adviser stays up-to-date on these changes and can help you navigate through the complexity of making informed choices.
  3. Objective Perspective: Emotions can cloud financial decision-making. An adviser provides an impartial viewpoint, helping you to make rational choices even during market volatility or major life changes.
  4. Holistic Planning: Financial advisers don’t just focus on a single aspect of your finances. They consider the bigger picture, incorporating investment planning, retirement planning, tax strategies, estate planning and more into a comprehensive financial roadmap.
  5. Risk Management: Investing always carries risks. A financial adviser helps you understand and manage these risks by diversifying your portfolio and recommending strategies that align with your risk tolerance.
  6. Long-Term Goals: A financial adviser assists in setting and achieving long-term financial goals. Whether it’s saving for retirement, purchasing a home, or funding education, they help you create a realistic plan to achieve your aspirations.
  7. Maximising Returns: Advisers provide insight into investment opportunities that you might not be aware of. Their expertise can help you maximise returns while managing risks.
  8. Peace of Mind: Knowing that your financial affairs are in capable hands brings peace of mind. This confidence allows you to focus on other aspects of your life without constant financial worry.

In a world of ever-changing financial markets and economic uncertainties, seeking professional financial advice remains a prudent step to secure your financial future and achieve your goals.

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Any advice contained in this insight/update is general advice only and does not take into consideration the reader’s personal circumstances. To avoid making a decision not appropriate to you, the content should not be relied upon or act as a substitute for receiving financial advice suitable to your circumstances. When considering a financial product please consider the Product Disclosure Statement. Aspirations Wealth Group is a Corporate Authorised Representative of Aspirations Private Wealth Pty Limited. ABN 57 622 182 076 – AFSL 503889.

Aspirations Insights : July 2023

Welcome to the sixth edition of the Aspirations Wealth (AW) Insights for 2023. AW constantly monitors the investment markets and aims to keep our valued clients regularly informed and updated.

In this Insights edition we cover:

  • Market returns for the 2023 financial year
  • Rik and Don chat about their outlook for next year

Market Returns for the 2023 financial year

The 2023 financial year presented a diverse range of market returns across various asset classes per the table below. This information aims to assist you in making informed decisions about your investments and setting realistic financial goals. Understanding these returns can provide you with a clearer perspective on how different asset classes have performed over 1 year. However, it is important to remember that past performance does not guarantee future results.

Main highlights:

  • Australian Shares: Australian shares performed strongly with a return of 14.8% for the 2023 financial year. This positive performance is a good recovery from the low points this time last year. However, it is really just continuing the longer-term sideways performance of the Australian market while we wait to see if the economy copes with restrictive interest rates.
  • Global Shares (Unhedged): Global shares (hedged) performed well, and Global shares (unhedged) performed better, generating an impressive return of 20.4%. Thankfully more than half of our international investments are unhedged. [Unhedged funds are affected by foreign exchange rates and hedged funds are not affected]. The solid return also reflects improvements from low points this time last year and market confidence that inflation is hopefully decreasing which will lead to lower interest rates and a better time for the stock market soon.
  • Global Listed Property (Hedged): Hedged global listed property investments faced challenges, resulting in a negative return of -5.9%. Increasing interest rates usually have a negative impact on commercial property funds because they usually carry larger debt levels and can be impacted by fear of economic downturns. We have been underweight in this area but are now looking to increase our weighting.

Outlook for Next year

Rik and Don recently had a chat about our market outlook while Mike is taking a well-earned break overseas. Here’s what we discussed:

Interest rates are increasing, recessions are looming. So why aren’t markets falling?

The first half of 2023 provided further evidence that investment markets have actually been building comfort around the ideas of persistent inflation and higher-for-longer interest rates. Global shares, led by the United States (US) and Europe, shrugged off the US regional banking turmoil to mostly move higher. The Global Share Market Index is up 16% this year, with close to half of those gains coming in during the June quarter.

A key driver of these strong returns has been the surprising toughness in global economic activity, consumer demand, and labour markets. This has been positive for the economy and shares in recent months. This resilience in the economy despite rising interest rates has pushed the potential recession further into the future.

Another aspect of the recent increase in shares has been the concentration in only a handful of mega-tech companies — the so-called ‘Magnificent Seven’ of Apple, Microsoft, Amazon, Alphabet, Meta, Nvidia and Tesla. These companies have benefited from the current artificial intelligence (AI) boom and have bounced back strongly following the large declines in the technology sector in 2022.

A mild US recession seems probable over the coming six to 12 months, and while Australia and Europe may avoid a recession, they will still likely face a significant slowdown. 

Remembering that markets are forward-looking, is the current economic outlook already reflected in stock prices?

Historically, bear markets (a continuous period of downward trending share prices – around 20% decline) have occurred as an economy approaches a recession, providing opportunities to enter the market at attractive valuations or when an economy enters a recession. So, if we are six months out from a US recession, this would normally be a reasonable entry point if it was not for the fact that we have not seen a devaluation of shares yet. Investors appear to be pricing in a very ‘soft landing’ where is when a recession is avoided, or where no slowdown occurs at all.

While overall market valuations look expensive, we are seeing pockets of value emerge, like in global small and mid-sized sectors, banks, energy, and property. While some of these areas offer genuine buying opportunities, others are cheap simply because they are poor quality. An active approach when seeking these opportunities is therefore critical.

So, what is our outlook?

Despite our primary case being a favourable soft landing, stocks have already priced this in (hence the market going up recently). However, now that company earnings are under pressure, we see limited upside for shares in a soft-landing scenario. 

In the other likely scenario (‘persistent inflation’) there could be a continued level of higher inflation that requires even higher interest rates to break the back of rising prices and wages. This will result in a deeper recession than expected. We simply need to wait to find out which scenario unfolds. 

Until the picture of inflation and interest rates becomes clearer, we remain cautious about the outlook for investment markets. Regarding portfolio positioning, we continue to be defensive across and within asset classes. We are considering taking some profits from the megatech companies and reinvesting this into selective quality small and mid-cap stocks which are really good value currently. In fixed interest, we prefer government bonds over corporate bonds. While cautious, we are also mindful markets are very difficult to time. This is why retaining exposure to growth assets remains essential and why we believe only a slightly defensive weighting is appropriate in the current environment.

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Any advice contained in this insight/update is general advice only and does not take into consideration the reader’s personal circumstances. To avoid making a decision not appropriate to you, the content should not be relied upon or act as a substitute for receiving financial advice suitable to your circumstances. When considering a financial product please consider the Product Disclosure Statement. Aspirations Wealth Group is a Corporate Authorised Representative of Aspirations Private Wealth Pty Limited. ABN 57 622 182 076 – AFSL 503889.

Aspirations Insights : June 2023

Welcome to the fifth edition of the Aspirations Wealth (AW) Insights for 2023. AW constantly monitors the investment markets and aims to keep our valued clients regularly informed and updated.

In this Insights edition we cover:

  • USA Debt Ceiling
  • Protecting your finances from cyber fraud
  • Year-End Tax Planning

USA Debt Ceiling

The U.S. debt ceiling is a statutory limit set by Congress on the total amount of debt that the federal government can legally borrow to finance its’ obligations. It serves as a mechanism to control government spending and borrowing. When the U.S. government hits the debt ceiling, it is unable to borrow more money to meet its financial obligations, such as paying bills, funding programs, or servicing existing debt. This situation can lead to significant economic consequences, including potential disruptions in financial markets, increased borrowing costs and potential delays in receiving government payments. The current USA government debt is at a staggering $31 trillion.

Heightened uncertainty surrounding the debt ceiling may cause increased volatility in financial markets. It’s important to stay focused on your long-term investment goals and not be swayed by short-term market fluctuations. If the debt ceiling is not raised in a timely manner, it can lead to a downgrade in the U.S. credit rating. This, in turn, can result in higher borrowing costs for the government, which may have implications for interest rates in the broader economy.

Historically, Congress has raised or suspended the debt ceiling when necessary to avoid defaulting on its’ obligations. However, political negotiations and debates around the debt ceiling can sometimes be contentious and lead to temporary uncertainties. While the debt ceiling is a complex issue, understanding its significance is essential for financial planning clients. By staying informed, monitoring market developments and consulting with financial professionals, you can make informed decisions and adapt your financial plan to mitigate any potential impacts that may arise from debates and discussions surrounding the debt ceiling. Remember, a well-informed and adaptable approach is crucial for maintaining financial resilience in a dynamic economic landscape.

 

Protecting your finances from cyber fraud

In today’s interconnected world, where technology plays a vital role in managing our finances, it is crucial to be aware of the risks associated with cyber fraud. Cyber criminals are constantly evolving their tactics, making it imperative for individuals to stay informed and take proactive measures to safeguard their financial well-being. This insight aims to provide you with practical tips to protect yourself from cyber fraud and keep your hard-earned assets secure.

  1. Using strong and unique passwords for all your financial accounts is a fundamental step in cyber protection. Avoid common or easily guessable passwords and consider employing a password manager to help generate and store complex passwords securely. Enable two-factor authentication whenever possible to add an extra layer of security.
  2. Cyber criminals often use phishing techniques to trick unsuspecting individuals into revealing sensitive information. Exercise caution when receiving unsolicited emails, messages or phone calls requesting personal or financial details. Verify the authenticity of the source independently before sharing any information and never click on suspicious links or download attachments from unknown senders.
  3. Keep your devices, including computers, smartphones, and tablets up to date with the latest operating systems, antivirus software, and security patches. Regularly install updates and use reputable security software to protect against malware, ransomware and other cyber threats.
  4. Avoid conducting financial transactions or accessing sensitive information using public Wi-Fi networks as they may be unsecured and susceptible to interception by cyber criminals. Instead, use password-protected, encrypted networks or consider employing a virtual private network (VPN) for enhanced security when accessing financial accounts remotely.
  5. Stay vigilant by monitoring your financial accounts regularly. Keep track of your transactions and review your bank and credit card statements carefully for any unauthorized or suspicious activity. Report any discrepancies to your financial institution immediately.
  6. Exercise caution when sharing personal or financial information online. Be mindful of the information you provide on social media platforms as cyber criminals can gather data to facilitate identity theft or target you with personalized scams. Limit the visibility of your personal information and consider adjusting privacy settings on social media accounts.

Protecting yourself from cyber fraud is a critical component of your overall financial plan. By implementing these proactive measures, such as using strong passwords, being cautious with personal information, and staying informed about the latest threats, you can significantly reduce the risk of falling victim to cyber criminals. Remember, a proactive approach to cybersecurity is a key pillar of financial well-being in the digital age.

 

Year-End Tax Planning

With the end of financial year fast approaching, it’s time to think about tax planning. Below are things to consider:

  • Maximise your concessional super contributions, current limit is $27,500.
  • Consider tax deductible charitable donations.
  • Where you are claiming deductions for work related expenditure (such as laundry, travel expenses, car expenses and phone or internet expenses), you must comply with the substantiation provisions. These rules may require you to maintain logbooks and diaries, and to retain invoices and documentation.
  • The ATO has announced changes to the method for individuals who claim working from home deductions under the simplified method. While the actual cost method remains unchanged, the fixed rate method has been changed to exclude the 80 cents per hour shortcut method but increased the Fixed Rate method from 52 cents per hour to 67 cents per hour, which applies from 1 July 2022. To claim under the new rules, taxpayers are required to keep significantly more detailed records.
  • If you are planning on paying any dividends in your private company prior to year-end, it is important to ensure that you have met the documentation/notification requirements.
  • Timing and planning are everything when it comes to assessing your capital gains tax. Maybe sell assets to trigger gains or losses (detailed advice needed here).
  • Trustees of discretionary and family trusts must make valid distribution resolutions before 30 June to effectively distribute trust income to eligible beneficiaries.

Also, just a reminder that the superannuation guarantee rate will rise from 10.5% to 11% from 1 July 2023. The rate will subsequently rise by 0.5% each year until it reaches 12% by the 2024-25 income year.

 

 

 

 

 

 

 

 

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Any advice contained in this insight/update is general advice only and does not take into consideration the reader’s personal circumstances. To avoid making a decision not appropriate to you, the content should not be relied upon or act as a substitute for receiving financial advice suitable to your circumstances. When considering a financial product please consider the Product Disclosure Statement. Aspirations Wealth Group is a Corporate Authorised Representative of Aspirations Private Wealth Pty Limited. ABN 57 622 182 076 – AFSL 503889.