Dennis

Research Insights – Market Commentary November 2021

· ·

November’s investment market returns were significantly shaped by questions over the future path of inflation, and emergence of the new COVID variant Omicron.

Continuing a theme which commenced in October, a number of global central banks (notably US Fed Chairman Powell) have noted that currently-high inflation has been longer-lived than originally expected, with policymakers winding-back fiscal stimulus (and a number beginning to raise official rates) to bring inflation under control.  The US has indicated an earlier finish to its asset purchases, which would indicate the Fed is now more open to potentially raising interest rates in the short-to-medium term.  Long-dated bond yields have declined modestly around much of the world; conversely, short-dated yields have risen in many nations, reflecting the potential normalization of interest rate policy away from the current emergency settings.

Omicron could potentially cause further economic slowdowns and further supply chain constraints as many nations move into lockdowns and reintroduce travel bans and quarantining. It’s too early to tell how much of an impact Omicron will have on markets but certainly the reopening trade that had driven markets recently is fading, travel stocks, energy stocks, and service companies all selling off into month-end.

Australian equities were slightly negative and International equities on a currency hedged basis fell 1.6%.  The AUD fell by 4 cents or 5.5% versus the US Dollar to US$0.7102, helping unhedged equites rise by 3.7%.  Australian REITs performed particularly strongly in the month +4.5%, buoyed by lower bond yields.

Australian government bond yields fell which was both a reversal of the erratic moves witnessed in the last few days of October coupled with the news of the Omicron variant and increased risks to the economic recovery. The Australian 10-year government bond yield decreased by 40bps to 1.69% and the 2-year government bond fell 14bps to 0.64%. In the US the 10-year government bond fell by 10bps to close at 1.44% and the 2-year government bond yield rose by 7bps to 0.57%.

Benchmark Returns 

Important information
RESEARCH INSIGHTS IS A PUBLICATION OF AUSTRALIAN UNITY PERSONAL FINANCIAL SERVICES LIMITED ABN 26 098 725 145 (AUPFS). ANY ADVICE IN THIS ARTICLE IS GENERAL ADVICE ONLY AND DOES NOT TAKE INTO ACCOUNT THE OBJECTIVES, FINANCIAL SITUATION OR NEEDS OF ANY PARTICULAR PERSON. IT DOES NOT REPRESENT LEGAL, TAX OR PERSONAL ADVICE AND SHOULD NOT BE RELIED ON AS SUCH. YOU SHOULD OBTAIN FINANCIAL ADVICE RELEVANT TO YOUR CIRCUMSTANCES BEFORE MAKING PRODUCT DECISIONS. WHERE APPROPRIATE, SEEK PROFESSIONAL ADVICE FROM A FINANCIAL ADVISER. WHERE A PARTICULAR FINANCIAL PRODUCT IS MENTIONED, YOU SHOULD CONSIDER THE PRODUCT DISCLOSURE STATEMENT BEFORE MAKING ANY DECISIONS IN RELATION TO THE PRODUCT AND WE MAKE NO GUARANTEES REGARDING FUTURE PERFORMANCE OR IN RELATION TO ANY PARTICULAR OUTCOME. WHILST EVERY CARE HAS BEEN TAKEN IN THE PREPARATION OF THIS INFORMATION, IT MAY NOT REMAIN CURRENT AFTER THE DATE OF PUBLICATION AND AUSTRALIAN UNITY PERSONAL FINANCIAL SERVICES LTD (AUPFS) AND ITS RELATED BODIES CORPORATE MAKE NO REPRESENTATION AS TO ITS ACCURACY OR COMPLETENESS.

 

Everything you need to know about emergency funds

· ·

An emergency fund can help you manage your finances when life’s unexpected surprises occur

 

“I see saving as investing in yourself and your future. Think about how confident and financially strong you’ll feel once you have an emergency fund.”

 

Key points

  • Having an emergency fund will give you some financial peace of mind should something unfortunate happen.
  • Tracking your expenses over a period of time should give you a clearer indication of how much you might need to save.
  • In all instances, an emergency should be unexpected, and a “need”, not a “want”.

Life can throw all sorts of curve balls your way, but having an emergency pool of funds gives you peace of mind if something unfortunate were to happen, such as losing your job or getting sick.

While emergency funds, or rainy-day accounts, have been growing in popularity over the last few years, the financial impact of COVID-19 and lockdown has meant they have now become more relevant than ever. Here’s what you need to know about emergency funds.

What’s the “right” amount for an emergency fund?

If you’ve decided to create an emergency fund, your first question will almost certainly be: “But how much do I actually need?”

“Most people need at least three month’s income in an emergency fund,” says Australian Unity’s acting Head of Credit and Risk, Mi-Lin Finnie.

“If you’re single, the amount might be between $2,000 to $6,000 a month. Families may need between $12,000 to $15,000, depending on their living expenses and the size of their mortgage,” she adds.

Tracking your expenses over a period of time should give you a clearer indication of your lifestyle, and what you might need to save to maintain it at a decent level if an unexpected event such as job loss or illness struck.

Income protection insurance also plays a part in a household’s financial support system, says Mi-Lin. But this should sit alongside the emergency fund.

“Depending on your policy’s terms, payments from a claim on an income protection policy won’t start for between four weeks and three months. So you need an amount set aside to live on before your insurance payout starts—and that’s assuming it’s approved. Also remember income protection only covers you for up to 75 percent of what you earn,” she adds.

Once you know how much you’ll need, it’s time to start saving. If you’re not lucky enough to have the amount you need already (and few of us are!), it’s time to start building a realistic budget that allows you to start putting money aside for your emergency fund. If you’re someone that struggles to save for big goals, consider setting mini goals along the way too—say, by aiming for $1000, then $2000 and so on.

Where should I stash my emergency fund savings?

The next thing to think about is where to put those funds.

If you have a mortgage, your offset account or redraw facility may be an appropriate place to hold this money. It may be more difficult to access your funds than in an everyday savings account and, importantly, your money can work harder by reducing the interest you pay on your mortgage.

Otherwise, the best option may be to hold the money in a designated high-interest savings account. This approach will allow you to earn interest on your nest egg, and you can quickly access the funds in the case of an emergency.

And the one place you shouldn’t stash your savings? The stock market. Shares and managed funds have their place in any investment portfolio, but market volatility means they require a longer-term approach.

When should I use my emergency fund?

What constitutes a financial “emergency” will be different for different people—although some are more obvious than others.

For almost everyone, losing your job is a clear reason to dip into your fund. The money can be used to meet basic living expenses such as mortgage payments or rent, food, transport and bills until you get back on your feet.

Other “emergencies” will be less clear-cut, and will depend on your financial situation or priorities. For some people, it may be car repairs, or even replacing your car altogether. For others, it may be having dental work or a helpful—but not medically necessary—health procedure.

In all instances, though, an emergency should be unexpected, and a “need”, not a “want”. There’s no point having an emergency fund if you spend it indiscriminately on holidays, handbags or spur-of-the moment entertainment. Set aside another slush fund for these purchases—a budget or structuring your bank accounts can help.

“They are called emergency funds for a reason. Save up to get that new television. Don’t dip into your emergency fund just because you want something,” Mi-Lin advises.

And if you’ve already used your fund for something that wasn’t really an emergency? Says Mi-Lin: “Acknowledge that you’ve dipped into your emergency funds when you probably didn’t need to. Talk to someone—they may have some great ideas you haven’t thought to cover the unexpected expense. Don’t beat yourself up and don’t give up on the process of an emergency fund, just because you make one mistake.”

Firing up your savings to invest in your future

Jodie and her husband are textbook examples of how to create a sizeable emergency fund. They built up a savings pool of $10,000 in six months by following a strict budget, saving more than 30 percent of their income during this time.

“For us, putting aside this money was part of a bigger plan shaped by the FIRE (financial independence, retire early) philosophy,” says Jodie. “So far, we haven’t needed to dip into the money. But it helps knowing we have cash there if we need it,” she says.”

Jodie’s key tip for saving for an emergency fund? “Track your spending using an app like Pocketbook so you know exactly where your money is going,” she says. “That way you can make empowered decisions about how you want to spend or save your money.”

For Jodie, it was also about shifting her mindset—she doesn’t think of her savings as money she can spend. “I see saving as investing in yourself and your future. Think about how confident and financially strong you’ll feel once you have an emergency fund. You need to realise that’s what you’re choosing every time you make a frugal decision.”

Of course, everyone’s situation is different and what constitutes an emergency for one person is normal daily life for someone else. The biggest benefit of having an emergency fund? The sense of relief you’ll feel knowing you have money in the bank to cover life’s curveballs.

 

Disclaimer: Information provided in this article is of a general nature. Australian Unity accepts no responsibility for the accuracy of any of the opinions, advice, representations or information contained in this publication. Readers should rely on their own advice and enquiries in making decisions affecting their own health, wellbeing or interest.

Research Insights – Market Commentary October 2021

· ·

There were heavy losses for passive bond holders in October as bond yields rose significantly, particularly in Australia.  Bond investors are testing central banks’ twin contentions that currently-elevated inflation will prove transitory (and therefore that very low cash rates remain appropriate), and that ongoing bond purchases are necessary to keep medium-term bond yields anchored near zero (an action known as “yield curve control”).

Australian inflation (CPI) rose 3.0% over the 12 months to end-September (i.e. at the top end of the RBA’s 2 – 3% target band). Whilst this outcome was largely anticipated (due to the well-known supply side constraints including a large increase in energy costs and petrol prices), it does call into question the RBA’s prediction of no interest rate rises until 2024.

The RBA have undertaken yield curve control since March 2020, purchasing billions of dollars of shorter-maturity government bonds to keep high-grade yields low.  The most recent inflation print has seen the RBA abandon this practice. The knock-on effect has seen bond prices fall sharply and fixed term home loans start to rise. Economists now predict that the RBA will have to raise rates much earlier than 2024, with market pricing-in around 1% of official rate rises by late 2022. However, the RBA “will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range” which “will require the labour market to be tight enough to generate wages growth that is materially higher than it is currently. This is likely to take some time.”

Growth assets were generally positive as market participants looked through the surging bond yields and focused on the reopening of economies and the positive impact to company earnings.  US equities were the main driver of the international equities’ performance, led by the well-known Electric Vehicle manufacturer that was up almost 50% in the month.  The FAANG stocks also contributed to performance. International equities rose 5.4% on a currency-hedged basis. With the AUD rising by 3 cents versus the US Dollar to US$0.7518, unhedged equites rose by 1.7%.

The Australian share market was broadly flat. The Energy sector was amongst the worst performers, falling 2.7%, despite West Texas Intermediate oil prices rising 11.4%. Similarly, major iron ore producers languished despite the iron ore price being flat for the month.

Property prices globally have continued to rise thanks to the low interest rate environment and accommodative lending policies, however this is now becoming stressed. In October the Reserve Bank of New Zealand raised rates for the first time in 7 years, in order to curb household debt and moderate property price appreciation. Similar rate hikes have been seen in South Korea, Norway and the Czech Republic. In Australia macroprudential measures are being enhanced with a borrower’s mortgage serviceability being tested with rates at 3% above current debt costs.  This should see less loans being granted and an ensuing stabilisation of house prices.

As mentioned previously the changing inflation and interest rate landscape coupled with the attempt to unwind accommodative economic policies has seen bond markets reprice with the Australian 10-year government bond yield increasing by 60bps to 2.09% and the 2-year government bond rising by a significant 73bps to 0.77%. In the US the 10-year government bond rose by 6bps to close at 1.55% and the 2-year government bond yield rose by 22bps to 0.50%.

Benchmark Returns 

Important information
RESEARCH INSIGHTS IS A PUBLICATION OF AUSTRALIAN UNITY PERSONAL FINANCIAL SERVICES LIMITED ABN 26 098 725 145 (AUPFS). ANY ADVICE IN THIS ARTICLE IS GENERAL ADVICE ONLY AND DOES NOT TAKE INTO ACCOUNT THE OBJECTIVES, FINANCIAL SITUATION OR NEEDS OF ANY PARTICULAR PERSON. IT DOES NOT REPRESENT LEGAL, TAX OR PERSONAL ADVICE AND SHOULD NOT BE RELIED ON AS SUCH. YOU SHOULD OBTAIN FINANCIAL ADVICE RELEVANT TO YOUR CIRCUMSTANCES BEFORE MAKING PRODUCT DECISIONS. WHERE APPROPRIATE, SEEK PROFESSIONAL ADVICE FROM A FINANCIAL ADVISER. WHERE A PARTICULAR FINANCIAL PRODUCT IS MENTIONED, YOU SHOULD CONSIDER THE PRODUCT DISCLOSURE STATEMENT BEFORE MAKING ANY DECISIONS IN RELATION TO THE PRODUCT AND WE MAKE NO GUARANTEES REGARDING FUTURE PERFORMANCE OR IN RELATION TO ANY PARTICULAR OUTCOME. WHILST EVERY CARE HAS BEEN TAKEN IN THE PREPARATION OF THIS INFORMATION, IT MAY NOT REMAIN CURRENT AFTER THE DATE OF PUBLICATION AND AUSTRALIAN UNITY PERSONAL FINANCIAL SERVICES LTD (AUPFS) AND ITS RELATED BODIES CORPORATE MAKE NO REPRESENTATION AS TO ITS ACCURACY OR COMPLETENESS.

Sure-fire ways to wipe your debt sooner

· ·

Paying off debts takes dedication and discipline, but doing so can help you stress less

 

“For most people, it’s a good idea to pay off your credit cards first, as this debt usually has the highest interest rate”—Mi-Lin Finnie, Australian Unity’s acting Head of Credit and Risk.

 

Key points

  • Becoming debt-free isn’t always easy, but there are strategies you can put in place to get out of debt sooner.
  • Debt consolidation is another way to substantially reduce the amount of interest you pay on your debts.
  • Whichever strategy you choose, the important thing is that you’re getting rid of those debts, one by one, and reducing your stress as you go.

If debt is keeping you up at night, you’re not alone. Lots of us are worried about how much debt we have and how we are going to pay it off. According to the ABC’s 2019 survey, Australia Talks, 90 percent of the 55,000 people who responded said debt was a problem for them—and with Deakin University identifying that financial control is part of the “golden triangle of happiness”, it’s clearly an issue that’s affecting our wellbeing.

The good news is—with the Reserve Bank of Australia’s cash rate now sitting at a historic low—there’s never been a better time to pay off your debts.

Becoming debt-free isn’t always easy, but thankfully there are some strategies you can put in place to get you out of debt sooner.

How one woman cleared her debts

Iona, 24, is typical of many young women her age when it comes to debt. “I love shopping—okay, I’ll admit, I was a totally addicted to Afterpay!” she says. Having just entered the workforce after finishing university, she’d racked up thousands in consumer debt, including credit cards, shop-now pay-later schemes, and a car loan. Her approach to getting rid of it? A debt detox.

“I was drowning in payments, and couldn’t edge forward—every time I managed to pay something off, I’d find myself building my debt right up again.”

Iona’s first action was to list her loans on paper, a process that proved to be a shock to the system. “I realised the car payments were killing me, so I made the very painful decision to sell my car. I simply couldn’t afford it.”

With a large chunk of money now freed up each month, Iona drew up a budget to work out where she could allocate funds to the debt. She also structured her bank accounts to align with her daily expenses—and any money that was left over at the end of each pay cycle went straight to paying off debt. “It was hard, but as I started to see progress, I became ruthless.”

Iona’s biggest tip to people looking to get out of debt? “Stop thinking about it. Just jump in, start small if you have to, and sell some stuff to get quick wins on the board. You’ll feel so much better when you don’t owe anyone any money. It’s like a work-out—worth the pain.”

Not everyone will be as gung-ho as Iona in eliminating their debt, but if you do decide to take stock of your financial situation, these strategies might help you to get on top of your obligations.

Strategy one: pay off high-interest debts first

One approach getting debt-free is to pay off the debt with the highest interest rate first, regardless of the size of the balance. You then move on to the debt with the next-highest interest rate—and then follow this process until you reach the debt with the lowest interest rate . Often referred to as the “debt avalanche” method, this approach seeks to minimise the amount of interest you pay, which might mean you pay off your debts quicker.

This approach typically starts with your credit cards, followed by personal loans—but remember to keep making the minimum payments on all your debts, so you don’t get hit with late-payment fees.

Paying down the plastic

Credit cards can be an extremely useful tool, especially if you can pay off the balance in full each month. But it’s important to manage them properly, as debt can quickly balloon.

“For most people, it’s a good idea to pay off your credit cards first, as this debt usually has the highest interest rate,” says Australian Unity’s acting Head of Credit and Risk, Mi-Lin Finnie.

If you have multiple credit cards, consider focusing on the card with the highest rate first, as this can save you the most money on interest. Once that’s paid off, tackle the card the next-highest interest rate, and so on.

Another option is to transfer the balance of high-interest rate cards to a zero- or low-rate card and pay down as much of the balance as you can before the no-interest or low-rate period ends. Do check the interest rate of the card you’re switching to, though—once the introductory-rate period ends, you don’t want to end up paying a higher rate than before.

Managing personal loans

After credit cards, car loans and personal unsecured loans often attract the next-highest interest rates. So once you have your credit card under control, it’s time to get a handle on these borrowings.

Says Mi-Lin: “These are debts that that are not creating value. Let’s take a car loan: a car is certainly a useful asset, because it gives people a means to get to work and go about their lives. But it’s also a depreciating asset, especially for vehicles that are only used for personal reasons. A car used for business purposes can be depreciated for tax purposes and its costs can be claimed as a tax deduction. But this is not the case for cars used only for personal reasons.”

If you do need a loan, actively plan ahead to make it easier to pay off the debt. “Look for a car loan with the cheapest interest rate you can find and try to pay off as much as possible during its depreciating life,” Mi-Lin says. “This means you’ll only have a small balloon or no residual value at the end of the lease term.”

Strategy two: consolidate your debts

Debt consolidation is another way to substantially reduce the amount of interest you pay on your debts.

Using this strategy, borrowers take out a personal loan and transfer higher-interest debts, such as credit cards and Afterpay, to this lower-rate loan. The benefit is that you only have one loan to manage, which can take the stress out of juggling multiple debts with various interest rates.

Let’s take a look at how much interest you could save if you consolidated your credit cards into a personal loan. According to Canstar research, released in April 2020, the highest credit card rate has an interest rate of 24.98 percent. But the average rate for a personal loan is just 10.30 percent, saving you substantial interest and potentially hundreds or thousands of dollars over time, depending on your debt.

As with the debt avalanche method, minimising your interest means you can funnel more money into paying off the debt itself—which potentially means you can pay off your debts sooner.

Strategy three: pay off your debts from smallest to largest

A tried-and-true way to fight debt is the “debt snowball” method, where debts are paid off from smallest to largest, regardless of the interest fees.

To work this strategy, you continue to make the minimum payments on all your debts, but any other cash you can find—left over from your grocery budget, or from a side hustle or eBay sale—gets thrown towards the smallest debt. Once you knock that out, you use the payment you were putting on the smallest debt to the next debt on the list, and so on up the chain, until your debts are paid in full.

The beauty of this method is that you can quickly gain momentum— seeing those smaller debts get paid off quickly helps motivates you towards the larger ones.

What about student loans?

If you’re worrying about your HECS debt, the short answer is: don’t. Your HECS repayments are based on your income, which means your ability to afford the payments is taken into consideration. What’s more, your HECS debt is interest-free. So while you can certainly make voluntary repayments, consider tackling other debts—like your credit card—first.

The right debt-reduction strategy depends on your individual circumstances, how much debt you have and how keen you are to get rid of it. But whichever strategy you choose, the important thing is that you’re getting rid of those debts, one by one, and reducing your stress as you go.

 

Disclaimer: Information provided in this article is of a general nature. Australian Unity accepts no responsibility for the accuracy of any of the opinions, advice, representations or information contained in this publication. Readers should rely on their own advice and enquiries in making decisions affecting their own health, wellbeing or interest.

Research Insights – Market Commentary September 2021

· ·

September saw equities have a pullback which has halted what felt like a never-ending rise. Bond yields rose as inflation pressures mounted, creating negative returns for passive defensive assets, which in turn negatively impacted valuations of equities. Additionally, concerns over a debt-default by Evergrande, a Chinese debt ladened property developer has spooked not only Chinese investors but global investors more broadly.

Who is Evergrande? Evergrande is one of China’s largest property developers and they own development land in many of the large cities which they then develop and sell the resulting apartments to make a profit.  They also have interests outside of property development including automobiles, health, wealth management products etc.

What has occurred? Evergrande have expanded aggressively and as such have a debt burden of US$300bn and are at risk of not being able to pay interest and return capital to its bond holders i.e. a potential default. With domestic banks unable to extend debt facilities due to the company breaching the so-called “three red lines” metrics imposed by the People’s Bank of China (PBOC) and Ministry of Housing the company will need to divest assets, find additional equity or restructure combining asset sales with additional equity possibly by being acquired by another entity.  Many properties under construction are at risk of not completing and the properties being sold are being priced at a heavy discount to the original valuations which is impacting home buyers that have paid a deposit and also impacting current home owners’ equity as property prices have fallen by around 20% in some instances. The contagion effect to Chinese property values and the economy is real.

What’s next? A restructure of Evergrande is most likely with any agreed terms having to meet the approval of the PBOC and Ministry of Housing to ensure refinancing of the company’s domestic debt obligations can occur. Non-core assets will be divested and a partnership with one or more Chinese property developers is likely to ensure customers receive apartments they have paid for.  This doesn’t necessarily mean all debt obligations will be honoured with international investors/lenders appearing most at risk. The Chinese government will be keen to “ring fence” Evergrande’s problems and instill confidence in the population given the property sector accounts for over 25% of the country’s GDP.

The Australian share market was negative in September with large caps down 1.9%, International equities fell 3.7% on a currency-hedged basis. With  the AUD falling by one cent versus the US Dollar to US$0.7213 unhedged equites fell by 3.0%.  US equities were the main driver for the sell-off as US Technology “Growth” stocks sold off in response to bond yields rising and the negative impact on valuations.

Bond yields ended the month higher led by a surging oil price as demand improved, indicating an uptick in economic activity. Bottlenecks in the supply chain for many products have seen inflation expectations rise and therefore being priced into longer bond yields. The fuel shortage in the UK with petrol rationing occurring can be linked to the panic toilet roll buying that we have all witnessed, there is supply but there is a lack of delivery drivers.  Additionally, bond markets reacted to an expected reduction in central bank liquidity provisions possibly starting by year’s end. These provisions have been in place post the pandemic to suppress cash rates, bolster liquidity and encourage borrowing.

The Australian 10-year government bond yield increased by 34bps to 1.49% and the 2-year government bond rose 3bps to 0.04%. In the US the 10-year government bond rose by 18bps to close at 1.49% and the 2-year government bond yield rose by 7bps to 0.28%.

Benchmark Returns 

Important information
RESEARCH INSIGHTS IS A PUBLICATION OF AUSTRALIAN UNITY PERSONAL FINANCIAL SERVICES LIMITED ABN 26 098 725 145 (AUPFS). ANY ADVICE IN THIS ARTICLE IS GENERAL ADVICE ONLY AND DOES NOT TAKE INTO ACCOUNT THE OBJECTIVES, FINANCIAL SITUATION OR NEEDS OF ANY PARTICULAR PERSON. IT DOES NOT REPRESENT LEGAL, TAX OR PERSONAL ADVICE AND SHOULD NOT BE RELIED ON AS SUCH. YOU SHOULD OBTAIN FINANCIAL ADVICE RELEVANT TO YOUR CIRCUMSTANCES BEFORE MAKING PRODUCT DECISIONS. WHERE APPROPRIATE, SEEK PROFESSIONAL ADVICE FROM A FINANCIAL ADVISER. WHERE A PARTICULAR FINANCIAL PRODUCT IS MENTIONED, YOU SHOULD CONSIDER THE PRODUCT DISCLOSURE STATEMENT BEFORE MAKING ANY DECISIONS IN RELATION TO THE PRODUCT AND WE MAKE NO GUARANTEES REGARDING FUTURE PERFORMANCE OR IN RELATION TO ANY PARTICULAR OUTCOME. WHILST EVERY CARE HAS BEEN TAKEN IN THE PREPARATION OF THIS INFORMATION, IT MAY NOT REMAIN CURRENT AFTER THE DATE OF PUBLICATION AND AUSTRALIAN UNITY PERSONAL FINANCIAL SERVICES LTD (AUPFS) AND ITS RELATED BODIES CORPORATE MAKE NO REPRESENTATION AS TO ITS ACCURACY OR COMPLETENESS.