September 2023 Newsletter
Welcome to Longreach Private Wealth
Welcome to the latest edition of Longreach Private Wealth's Newsletter.
It has been a busy and productive period transitioning Black Swan Event Financial Planning clients. You can rest assured the transition was carefully planned and executed to ensure a seamless continuation of the services and support you expect.
At Longreach Private Wealth our key focus continues to be the provision of high-quality financial advice and personal service. In a world of outsourced call centres, online chats, messenger apps, and robo advice, dealing with real people in a local office makes a real difference.
We understand your financial well-being is a journey, and we are here to help guide you every step of the way.
At any time, if you have any questions or concerns or if there are any specific matters you want to address, please contact us.
We also always welcome the opportunity to help or speak to your family, friends, or acquaintances should they be seeking financial advice.
Thank you for entrusting us with your financial advice needs, and we look forward to continuing our relationship and working together to help you achieve your financial objectives.
Peter, John, Sharon, Kirstin & Wendy
September 2023
September is upon us, and spring is in the air. It's time to shake off the winter cobwebs, get out into the garden or the great outdoors. Meanwhile, sports fans (apologies to Eagles and Dockers supporters) will be hoping the sun shines on their team this finals season.
After endless gloomy forecasts, there was a glimmer of hope last month that the cost of living might be easing. Inflation fell in July to 4.9% from 5.4% in June, despite predictions by economists of a rise.
While housing prices are still rising, up by 7.3% for the 12 months, and total dwelling approvals recorded a sharp decline in July, the next Reserve Bank Governor, Michele Bullock believes prices in some areas will fall by 5% or more by 2050 because of climate change.
Consumer confidence is continuing to slowly improve. The ANZ-Roy Morgan Consumer Confidence has now increased for a record 26 weeks in a row. Unemployment was up slightly by 0.2% to 3.7%, meaning an extra 36,000 people are now looking for jobs.
China looms large as a threat to Australia's economy. As our largest two-way trading partner, China's worsening economic conditions are concerning for Australian investors although stronger demand from steel producers led to a small increase in iron ore prices. The ASX200 ended the month down, gains in financial stocks were offset by losses in mining and energy shares because of their dependency on China. The Australian dollar rebounded slightly based on improved confidence in the US.
Destinations to Fire Up Your Passions
The world is an amazing place, with so much to see and do. In fact, sometimes it can feel as though there is so much to experience it can be quite a challenge selecting a destination, but if you follow your heart and explore your passions when planning a trip you can't go wrong.
Considering the plethora of amazing places and experiences our world has to offer, it's a shame that many people, overwhelmed by choice, stick to going back to places they have visited before. In fact, a poll conducted in the US confirmed that three out of four people always go back to the same places.
If you are keen to avoid the 'same old, same old' but short on ideas, it can help to think not of where you want to go, but what you want to do. One travel trend that's not going away any time soon is the desire for genuine experiences. Just look at Airbnb - in addition to being an accommodation platform it now offers a massive range of around 41,000 'experiences' across 93 countries and more than 2000 cities.
So, what do you look for when there is a big wide world out there with so much to see and do? Think about what you and your travelling companions love.
If you have a 'Need for Speed'
The Tour de France is known as the greatest race on Earth. The endurance needed to ride over 100kms a day for three weeks across some of the world's most physically challenging terrain, is incredible. Every year spectators line the routes to be part of the atmosphere and it's even possible to hop on a bike and experience some of the stages for yourself.
If you prefer the roar of engines and the smell of burning rubber and high-octane fuel, maybe the Monaco Grand Prix is for you. With a course that is the most difficult on the F1 circuit winding through the streets of the city, it's certainly a race like no other.
Closer to home, another race like no other is the Alice Springs Camel Cup. The antics of the notoriously unpredictable dromedaries and their riders makes for a hilarious day out.
If you want to Marvel at our Natural World
The famous Bandhavgarh National Park in central India is a stunning wildlife destination where you have the best chance out of anywhere in the world to spot a wild Bengal Tiger.
And if you want to stay in Australia, head to Ningaloo Reef in WA where you can snorkel with the gentle giants of the shark world, whale sharks, which can measure up to a massive 10 metres.
If you're an Adrenaline Junkie
Get your pulse racing with white river rafting on the Colorado River, passing through the iconic Grand Canyon or fly down the fastest zip line in the world in Wales at an eye-watering 200 km/h.
Or for an amazing local experience, walk along the harbour bridge in Sydney on one of the world's longest bridge climbs and gaze out on an unparalleled view of the iconic harbour.
If you like to Sample Fine Wine
For the wine buffs - not for nothing is Bordeaux France, is considered by many to be the world's foremost region for wine. If you need to narrow the field a little further, the vineyards of Saint Emilion were the first to be listed as a UNESCO World Heritage Site.
And Australia is no slouch in the wine stakes either, with the Barossa Valley in SA widely considered Australia's preeminent wine region, famous for its Shiraz.
If you were Born to Shop
In terms of sheer variety and abundance of styles and shops, New York City is the shopping Mecca that dreams are made of. Or fossick for exotic treasure in Istanbul's Grand Bazaar, the world's oldest and largest undercover market.
On a smaller scale, but closer to home, Salamanca Market in Tasmania is a vibrant streetscape of the state's finest artisan products.
With so many amazing experiences to be had, think about how you like to spend your time to come up with an itinerary that will tick all your boxes whether you want to race, explore, sip, or shop.
How Important are Interest Rates - Among Other Things
By John Cameron B.Ec.B.Comm, Dip.Bus, MBA (Exec)
At the time of writing, the latest CPI figures have just been released and a very attractive set of numbers they are.
According to the Australian Bureau of Statistics, prices rose by 4.9%, over the 12 months to the end of July. This shows further slowing of inflation and gives us more reason to believe that the current period of rising official interest rates may be behind us. The share market certainly liked the news, and it rose nicely.
Although it was not mentioned in the press release, the seasonally adjusted CPI for the month of July, came in at just 0.3% - which is equivalent to an annual rate of 3.6%. This provides further grounds for optimism that there should be more good news on the inflation front over the next few months.
Falling inflation is not limited to Australia, and China has even reported negative inflation (i.e. deflation). Commentator Jonathan Pain has noted that China is now "exporting deflation". On one hand this is a positive as it will produce downward pressure on prices here due to cheaper imported goods. On the other hand (remember the old joke about "give me a one-handed economist"), slower growth in China will be a drag on the global economy.
Whether China's deflation will persist over the medium and long term has commentators divided - some see it as only a short-term blip, others see it as ongoing. Those in the ongoing camp point to the reluctance of Chinese consumers to spend, and the serious problems in housing construction. There has been a massive overbuilding of apartments, and whole blocks of unsold, empty apartments are being imploded. There has been some massive bankruptcies of property developers.
QUESTION: Where have we heard this story of massive overbuilding of residential apartments before?
ANSWER: The GFC in 2008. Multiple banks and multiple developers came crashing down when there was a huge oversupply of residential properties, which could not be sold. Spain was one of the worst offenders.
It seems that some lessons are not universally learned.
More on Interest Rates
It is short term interest rates that central banks directly influence, and that is where most attention has been focused.
However, while everybody has been focusing on short term rates, there have been interesting developments in long term rates, and these may have even greater significance in the years ahead. In Australia, the flagship for long term rates is the 10 year government bond.
Over the last couple of years, 10 year bond rates have risen from under 1% to 4.25%.
Government bonds offer something unique in financial markets - a totally secure investment with a known return. Because of their safety, government bonds provide the base reference for other investments. Anything else will, by definition, be riskier than a government bond, and hence should need to produce a higher return before somebody will invest in it.
However, risk comes in many different forms. If you buy a government bond, you will get your capital back on maturity (10 years in this case), and you will receive interest payments along the way.
However, (a) there is no protection against inflation, and the capital you get back on maturity will have less purchasing power than your original investment. (There are indexed bonds, but they are in short supply and subject to their own issues). (b) If you need to get your money back before the 10 years is up, then the price you get will depend on interest rates at the time. If interest rates have fallen, you get back more than your capital, whereas if rates have risen, you will suffer a capital loss.
In this context, spare a thought for anybody who in 2020 invested $100,000 in a 10 year bond, earning 1% pa.
Now, with interest rates at 4.25% pa, and 7 years to run, the bond would be worth only $77,250.
And you thought the share market was risky !!
(Note: the rule of thumb for valuing bonds is: For every 1% rise or fall in interest rates, the capital value will move in the opposite direction by 1% for each year left).
When it comes to investing, in order to manage risk, we always recommend a "portfolio" approach - with money spread across different asset classes such as shares (Australian and overseas), and interest bearing investments, where the weightings of each asset class depends on somebody's goals and risk profile.
In order to prevent the kind of experience our bond investor had, we much prefer to see the long term interest bearing part of the portfolio invested in "variable rate" funds. Then, the return received by investors will move in sync with changes in overall rates, and the chance of capital losses will be minimised.
Going Forward
As you can see in the graph below, rates have been falling since the 1980's.
Interest Rates: Long-Term Government Bond Yields: 10-Year: Main (Including Benchmark) for Australia
They cannot go on falling forever, and the implications of steady, or rising bond rates are far reaching. Constantly falling rates have been a big driver (but not the only driver) of ever rising real estate and share prices. Maybe in future the income received from investments (interest, rent or dividends) will come more into focus, rather than relying heavily on capital gains.
For Investors
While much of the commentary around interest rates has been negative, the reverse has been the experience of our clients Secure interest rates in excess of 5% are readily available. The fact that the defensive part of the portfolio can produce this return, makes the job of achieving an acceptable overall return, much easier.
Share Market
I can't leave without mentioning the share market. After all, it appears on the television news every night.
The behaviour of the share market always receives close attention after all most of us have a big chunk of our wealth invested there. The market reaction since covid has been a case study in many intriguing ways, not least against the background of changing interest rates.
Official interest rates (the ones governed by the RBA) were set at 0.1%pa, from November 2020 until May 2022.
Between May 2022 and June 2023, official rates rose from 0.1% p.a. to 4.1% p.a. in June 2023. In other words, rates in June 2023 were forty-one (41) times the level they were at just 16 months earlier. Remember that this was after the RBA Governor said interest rates were unlikely to rise.
Many (most?) fund managers were caught out by the speed of the rise. In early 2022, most managers expected rates to rise, but they were totally caught out by the speed and extent of the rise. Add to this the uncertainty caused by the invasion of Ukraine, and all the knock-on effects of this.
In recent months markets have begun to stabilise, and there have been hefty gains in some areas, especially "tech" companies (think computerisation, digitisation, supercomputers, quantum computing, artificial intelligence etc.).
The fact that share market gains (especially in America) have been concentrated in a handful of companies has excited some commentators.
However, if we look back in history, there is nothing new here. When the world has gone through periods of deep-rooted change, those at the forefront of the change have prospered most. This is reflected in the changing composition of share markets over time. In 1900, for example, railway companies accounted for 63% of the American share market. In 2015, this was down to 1%. Over the same time, the tech sector has grown from zero, to around 20%. Remember, the 20% was in 2015, and by now it is even higher. (Source: Financial Market History, University of Cambridge, Judge Business, School; 2016)
Please Note:
The views expressed in this newsletter does not constitute advice in any way. If you would like advice on your current situation please contact us.