The May meeting of the RBA surprised everyone with the decision to reduce the cash rate by 0.25%. This time the major Banks moved very quickly, with all passing on the rate cut in full. ANZ cutting even further by reducing their variable rate by 0.27%. What will happen over the coming months, given the surprise this month some economists are predicting further cuts, whilst others are suggesting the Reserve Bank will watch what happens with the economy over the next few months. On the fixed rate front, 2 and 3 year fixed rates are available below 5% with a number of lenders. These are still very attractive compared to variable rates with most lenders’ standard variable rates above 6%.

Even with the reduction in rates we are still seeing the Banks offer very attractive discounting on their variable rate products. We continue to see discounts of between 0.70% and 1.06% off the Standard Variable Rates shown in the table below. All discounts negotiated by Oxygen are discounts below the rates shown in this table.

The Oxygen 2 Year Fixed Special remains the best advertised rate at 4.89%. Terms and conditions apply, so please contact us if this deal is suitable for you.

The past month has seen some positive economic signs with Glenn Stevens and the Reserve Bank deciding to lower the cash rate by 25 basis points to 2.75 as well as continued positive signs both locally and offshore. But the focus right now is on the budget.

First, the cash rate being reduced may be considered at emergency levels in response to the global financial crisis in April 2009. However, the simple conclusion that the economy must therefore again be in trouble, is one that should be avoided. Rather, we should consider the 2.75% rate in a global context where many major developed economies have much lower rates, and in some cases have gone to effectively 0% and even beyond to provide extraordinary additional support.

In Australia, we have an economy that is growing at close to the long term trend rate, we have a benign inflation outlook and we have relatively low unemployment levels. Sectors of our economy have struggled with the strong currency, and will benefit from the Australian dollar coming back towards parity with the United States dollar.

So to the commentators that are saying the reserve got it wrong, please ignore them. The RBA is too careful and has highlighted three key reasons for the cut. They were; sub-trend economic growth which creates unemployment, the elevated dollar which creates unemployment and subdued credit growth, which creates unemployment!

Unemployment is rising and the jobs created in the 5.6 per cent unemployment rate have increasingly been part-time work — only ivory tower commentators could ignore this. They look at 5.6 per cent and see a number that looks better compared to the USA or the UK, but I see 634,000 Aussies out of work. When Labour took power in 2007, unemployment was 4.4 per cent, so this jobless trend cannot be ignored and that’s why the RBA is right in cutting rates.

For our investment portfolios we remain underweight for income oriented investors. We maintain an indexweight on consumer staples for both income and growth oriented investors.  However, we have shifted from underweight to indexweight in consumer discretionary for income oriented investors. We remain overweight in the financials and healthcare sectors.

State of the Market

The markets at home and in the US are perhaps in the best shape they have been in the last year when looking at its trend and momentum. Perhaps the biggest development in recent weeks is the clear rotation away from defensive sectors and into cyclical sectors. Offshore, this development is likely to propel the market even higher given 70% of the S&P 500 is made up of cyclical sectors. There is no erosion in either the market’s trend or momentum, and until we see erosion in the markets breadth and momentum the path of least resistance is clearly higher.

The great news for the Government is that stock prices are heading up, which I think is a precursor to better global economic times ahead and it means there will be better levels of consumer and business confidence. Also, the Australian dollar looks to be softening a bit, but you can never get too confident that it will last. One better than expected number out of China and away it will go.

Over the weekend the Dow and S&P500 hit record highs, again. The Dow was up 35.87 points or 0.24 per cent to 15,118.49 and is now a whopping 15.37 per cent higher for the calendar year. Meanwhile the S&P 500 put on 7.03 points or 0.43 per cent to finish at 1633.7 and is up 14.55 per cent for the year.

Federal Budget 2013

Treasurer Wayne Swan delivered his sixth Federal Budget on 14 May 2013, claiming it “sets out a responsible path to surplus on a timetable that supports jobs and growth, despite lower than expected revenue.”

There are a number of announcements of which you should be aware, including:

The following link is a video produced by MLC detailing the key points of the budget.

Federal Budget client video

In closing, no real surprises in this budget. I am still digesting the proposed changes and I must say I am not overly excited. With an election drawing closer, we will have to wait and see what will get legislated.

People often ask me what’s going to happen in the property market next. I’m happy to share my thoughts and observations, but another way is to simply take a look at the key indicators of the economy.

Of course, the economy isn’t the only thing affecting the market. For example, the market is also affected by social trends, such as the aging population and more people living alone creating higher demand for apartments. Government incentives such as the First Home Owners Grant can also have a big impact. But the fundamental driver of the property market is the economy.

Why is this the case? Because property is an expensive item and people are not about to make major financial commitments when they’re worried about the economy. So here’s a list of economic indicators to watch.

1. GDP – GDP indicates our economic production as a nation, and on a per capita basis, it’s a useful indicator of our standard of living. A growing GDP creates a flow on effect to property because people will generally look to improve their standard of living as their incomes grow.
    
2. Confidence – Demand for property always drops when people are lacking confidence. Check out the monthly Westpac-Melbourne Institute Consumer Index to get a snapshot of market mood. (The equilibrium is 100.) Business confidence is equally important.  When business is suffering, they stop hiring, reduce costs and even reduce prices, thereby resulting in lesser profits. They focus on the bottom line rather than further investment or expansion. When business contracts, so does the broader economy, affecting job stability and incomes.
    
3. Inflation/cost of living – Inflation or CPI gives us an idea of demand and cost of living. The Reserve Bank has a target of 2-3 per cent and factors any movements either side of this into its monthly decision on interest rates. When inflation and cost of living pressures are high, people batten down the hatches and put off all kind of spending decisions, instead choosing to save. Real estate takes a direct hit because without buyers, properties don’t sell!  
    
4. Employment – Jobs are crucial to a stable property market. Nothing will disturb the market more than high or rising unemployment. Without jobs, people can’t pay their rents or mortgages and this can result in increased mortgagee sales and falling prices.
    
5. Interest rates – Nothing will stimulate a property market more than falling interest rates. This is because mortgages tend to be the biggest expense of a household, so when rates go down, households can save significant dollars or buy more property with cheaper finance. 
    
6. Household wealth – Strong or increasing household wealth usually makes people want to upgrade their lifestyles with a bigger house or a better location. There are three main ways to increase wealth – get a pay rise, save or invest.  Following the GFC, saving was the preferred avenue to wealth and debt reduction was the primary aim of most households. By the end of 2012, we were saving about 10 per cent of our incomes and our average loan-to-value ratio was just 50 per cent.  Now people are starting to invest again, with almost 1 in 2 new loans in NSW going to investors at the start of 2013.

By no means is this an exhaustive list.  But if you want to do a health check on the Australian property market, at any given time, then these are the economic indicators to watch.

- JOHN MCGRATH

The April meeting of the RBA decided to leave the cash rate unchanged, the third meeting in a row with rates unchanged. With improved economic data the market is becoming less certain about future interest rate cuts, with some even speculating the next cash rate move may be upwards. Given the RBA did not move, Banks have continued to follow suit with no major moving their variable rates. On the fixed rate front, one major has started increasing their fixed rate offers. However, you can still lock in a two year fixed rate at 4.99%. Given the speculation regarding variable rates, there is never a better time to talk to us about ”fixing” a portion of your loan, to protect against possible interest rate increases.

We are still seeing the Banks offer very attractive discounting on their variable rate products. We continue to see discounts of between 0.70% and 1.06% off the Standard Variable Rates shown in the table below. All discounts negotiated by Oxygen are discounts below the rates shown in this table.

The Oxygen 2 Year Fixed Special remains the best advertised rate at 4.98%. Terms and conditions apply, so please contact us if this deal is suitable for you.

This month has seen some key and interesting movements in both the investment markets and closer to home, the superannuation environment.

Global equity markets continues the upward trend, however recent North Korean worries and a disappointing jobs number have recently put the rally on hold. Employment went up by only 88,000 in March instead of the expected 200,000. I believe this to be a short term bump with a continued upward trend.

The investment committee expects the ASX will reach as high as 5500 this calendar year. Although there might be challenges that bring the market down, any pull backs will be offset by investors taking advantage of buying opportunities. As long as Bernanke continues to inject money into the American economy, we expect positive outcomes to filter through to our equity markets.

The general consensus is that the RBA will continue to hold interest rates unchanged next month and the Australian dollar will remain stable until US interest rates start to change.

Due to continuing disappointment in the Materials sector, we remain underweight for income oriented investors. We maintain an indexweight on Consumer staples for both income and growth oriented investors. However, we have shifted from underweight to indexweight in Consumer discretionary for income oriented investors. We remain overweight in the Financials and Healthcare sectors.

State of the Market

The two key areas to focus on this month are, “has the bond market seen a top”, spelling the end of the 31 year cycle and the recent changes to the superannuation environment buy the labour government.

First, I believe the bond market has seen a top and is now heading down, meaning interest rates are on the up. History shows us that the typical market cycle for the bond market is 30 years, our current rally has now seen a glorious 31 year run. So if the end on the bond market is hear, what does this mean for the equity markets.

Even with the current underlying macro issues globally, I believe this is positive for equity markets. What we currently have is an abundance of money sitting in cash and bonds looking for a place to call home. Investors are looking for good yield and growth on investment, particularly those in retirement. With cash yields being held low and a turnaround in bond yields, where is a good place to invest your money. We are seeing a shift now to good quality companies with slow dividend yields. Investors now appear to be putting up with the volatility to receive strong yields.

Second, the most interesting turn on events is the recent changes to superannuation. I am going to hand this one over to Peter Switzer. Who sums it up in his daily newsletter. The following is a piece written by Peter, published on the 8th of April 2013.

Wayne Swan has to go down as one of the best super ‘dupers’ of all time with the deceptive curve balls he threw at the country on Friday.

And it’s because of this I say, don’t believe some of the most respected political commentators in the country when they say only 16,000 of the “fabulously rich” will be affected by the Gillard Government’s proposed changes to superannuation. There will be more, and the only reason why most of our great commentators swallowed the Treasurer’s bait hook, line and sinker is they simply don’t understand super — being a financial adviser with real clients and doing a radio segment talking about super and finance four nights a week on 2GB are the reasons why I know they have been duped.

While the press release said 16,000 will be affected, I’m sure the Treasurer actually said 20,000, but even this number could be way off the mark!

Do the maths

So what’s the reason behind the 16,000 number and the $100,000 threshold? The Treasury calculation is as follows: using five per cent as the expected return, five per cent of $2 million is $100,000. If you do better than five per cent, then the additional amount over $100,000 will be taxed at 15 per cent.

However, as one caller to 2GB told me: “I’ve got $750,000 in my super fund and made 14 per cent last year, which would put me over the $100,000-mark!”
When I saw the details, I made the point on the Sky News Business channel that if someone had $1 million in super and made 20 per cent, which some of our sbscribers might have, then you would be up $200,000, and so you would be taxed 15 per cent on the $100,000 over the $100,000 threshold.

If the stock market went up by 20 per cent for a few years, then there would be a Treasury windfall, and this super tax on those who have saved a lot through super will be the ones kicking into the can.

These changes will be lucky to get through, but I think over time we will see super changes, and the wealthier you are, the more likely you will be the cow that will be milked.
History also shows that promises to adjust the threshold to inflation have often been forgotten, and so if Labor gets this through and wins the election, we will see a thorough testing of the cynicism — pigs might fly!

In closing, this is a significant impact on the superannuation environment. I would suggest that if you have any question, please contact you advisor to discuss further.

It’s such a shame to see first home buying slump to such low levels in NSW and QLD since the scrapping of the $7000 grants for established properties last October. As you know, these grants were replaced by incentives for purchasing new or off-the-plan in an effort to generate activity in the housing construction sector.

It’s not a bad plan because in theory, the grants should stimulate the housing sector and create jobs, which is great for the economy; and an increase in new housing would go some way to addressing the major undersupply we have in this country.

Problem is, most people want to buy existing or ‘established’ properties because in most cases they are closer to the cities and beaches, which is where most people want to live – especially Gen Yers. So the response to the loss of the $7000 grant has been a significant exit of first home buyers in the NSW and QLD markets.

Just look at the latest stats. According to Australia’s largest mortgage broker, AFG, first home purchasing has dropped dramatically to 4.5 per cent in NSW and 6.4 per cent in QLD, well off the long term average of 15 per cent. 

This was fairly predictable. First home buyers were used to having that $7000 grant – after all, it had been around for almost 13 years, and now they don’t have that incentive pushing them to buy. And due to a lack of new developments in the market right now, they have fewer opportunities to take advantage of the new grants anyway.

But it’s time for a reality check. Forget about the $7000 you could have had this time last year. With today’s interest rates so low, and rents continually rising, it’s actually more affordable to buy today than it was 12 months ago when you could have had the grant.

Let’s do the maths. Say you want to buy a $500,000 established apartment. Let’s keep it simple and use an interest-only three-year fixed loan at today’s incredibly low rate of 4.99 per cent. This time last year, the same loan was 5.99 per cent. 

Okay, so because the property you want to buy is established, you’re not eligible for today’s grant, but you would have been eligible last year.

Last year, you would have received the $7000 grant, so your loan would have been $493,000 instead of $500,000. On 5.99 per cent, that equates to monthly repayments of $2,460 or $568 per week. Today, on 4.99 per cent at the full $500,000, you’re paying $2,079 per month or $480 per week.

So today, you’re going to be about $90 per week better off despite not having the grant.

Rising rents is the other factor to consider. This time last year you were probably paying $5 or $10 per week less, so this also makes a difference. Consider this too – an RP Data report released late last year showed there were 2,622 suburbs nationwide where it was cheaper to buy than rent (based on a three-year fixed rate interest-only loan of 5.55 per cent). Would you be surprised to learn that 350 of those suburbs were in Sydney, the most expensive market in the country?

Check out the other states and territories – 311 suburbs in Brisbane were cheaper to buy in than rent, 97 in Melbourne, 119 in Perth, 64 in Canberra, 240 in Adelaide, 66 in Hobart and 48 in Darwin.

In short, there’s no reason why first home buyers should stop buying in NSW and QLD but clearly, that’s what’s happening. The reality is, today’s low interest rates coupled with great value in the marketplace (perhaps not for long as the market is showing signs of growth in 2013) present a far more compelling case to own rather than rent today. 

So, forget about the loss of the grant and focus on the good buying opportunities in today’s market.

- JOHN MCGRATH

The RBA decided to leave the cash rate unchanged for March, as they continue to watch the economy. Whilst the Banks followed suit and left their variable rates untouched, fixed interest rates, particularly for two and three year terms remain very attractive. Some lenders continue to offer rates below 5%. Now may be the time to discuss “fixing” a portion of your loan whilst keeping the remainder variable. This allows you to have certainty with your repayments for the fixed portion and also allow you to pay your loan off sooner for the variable portion.

Banks also continue to offer attractive discounts on their variable rate products in an effort to win new business. On average, we are seeing discounts of between 0.70% and 1.06% off the Standard Variable Rates shown in the table below. All discounts negotiated by Oxygen are discounts below the rates shown in this table.

The Oxygen 2 Year Fixed Special remains the best advertised rate at 4.98%. Terms and conditions apply, so please contact us if this deal is suitable for you.

Global equity markets rallied last month following a temporary delay in the US Debt ceiling, upbeat earnings and improved economic data. We saw a new all-time high for the DOW and this week we expect the S&P 500 to break through its all-time high close wiping out the statistical memories of the Crash of 2007-2009. Of course, the real life recollections are harder to wipe out, but it’s starting with investors getting out of safer investments and now willing to give stocks another chance. We remain optimistic about both domestic and international markets, particularly Japan. Although there are speculations that the RBA will cut the cash rate to offset the overpriced Australian dollar, our view is that the RBA will hold interest rates unchanged in March.

We hold in our growth portfolio an underweight position in materials, energy and consumer discretionary and overweight on financials, consumer staples and telecommunications.

State of the Market

Fortunately what we’re seeing now is that US policies of loose money are working. Friday’s payroll report in US showed 236,000 jobs turned up when economists were only expecting 160,000. That’s a great sign.

The Dow rose 67.58 points or 0.47 per cent to close at 14,397.07, finishing higher for the tenth consecutive Friday. Meanwhile the S&P 500 was up 6.92 points or 0.45 per cent to wind up at 1551.18. This is a sign of investor confidence, and while a pullback is likely, it shows there is plenty of momentum for this year to drive stocks higher. Helping is the better run of economic data such as the Yanks’ great jobs survey, which also showed that unemployment fell to 7.7 per cent when the experts were tipping 7.9 per cent.

But it’s not only in the USA where the economic news is positive. China’s exports were up 22 per cent in February, and even Japan got a better economic growth result with a 0.2 per cent annualised figure for the final quarter after two quarters of negative growth.

We are also seeing green shoots sprouting in Europe, especially in Germany. The downgrade by Fitch for Italy’s credit rating from A-minus to a BBB-plus (which will cost future governments when they borrow) was not a positive sign, however European stock markets, especially Germany’s, are still heading up. As we say a stock market is usually guessing where the economy will be in six to nine months’ time, “all’s good” (as they say nowadays), at least for now!

While we are seeing investors rediscover equities, we don’t believe we are at the beginning of an imminent shift given the significant headwinds still facing the market. This week we will be watching US retail sales, inflation and industrial production, while locally we get the NAB business survey, the Westpac/Melbourne Institute consumer sentiment reading and our latest jobs report. For us, the data could keep the door open or firmly shut on another rate cut.

In closing, we see a benefit of investing in equities given a slow but still positive economic growth, low inflation and reasonable valuations. There is expected volatility ahead, however, this is worth accepting for potentially higher returns.

Home loan affordability continues to be below historical averages. The banks’ Standard Variable Rates (SVR) all reduced following the Reserve Bank reduction in December, although not by quite as much as the 0.25% cash rate reduction. On average, we are seeing discounts of between 0.70% and 1.06% off the SVRs shown in the table below. All discounts negotiated by Oxygen are discounts below the rates shown in this table.

Where the market continues to be strong is in the fixed rates space. All banks continue to review their 1–3 year fixed rates, with many now having offers lower than their SVR, even after discounting. These reductions are improving affordability even further.

The Oxygen 2 Year Fixed Special remains the best advertised rate at 4.98%. Terms and conditions apply, so please contact us if this deal is suitable for you.

What an extremely interesting start to the year. With S&P500 (US) up over 6 per cent for the year and our very own ASX200 up over 5 per cent, we are in for what I believe to be a positive year for investing. Overall, we remain optimistic about both domestic and international markets. Domestic economic growth is expected to be relatively slow in the first half of 2013 and is expected to pick up in the second half of the year.

In reference to the cash rate in Australia, the general consensus is that the RBA will hold interest rates unchanged in February, but a further one or two interest rate cuts are foreseeable in 2013. We expect the Australian Dollar to fluctuate between AUD0.95 to AUD1.05 and the unemployment rate to reach no higher than 6 per cent this year.

We hold in our growth portfolio an underweight position in materials, energy and consumer discretionary and overweight on financials, consumer staples and telecommunications.

State of the Market

This is a year that is looking positive for equity markets globally. Here at home we have a federal election later in the year and current consensus shows at this stage that this will be a landslide victory for the Liberal Party of Australia. Should this be the outcome, I expect a turnaround in business sentiment which in turn is a positive for our economy and unemployment.

Offshore, China got some great data with exports up 25 per cent in January, but their exports to ASEAN countries were up 42.9 per cent, which is a great sign not only for China but the rest of the world. From Australia’s point of view, and material stocks, their coal imports were up 56.3 per cent and iron ore up 11 per cent.

The S&P 500 put together a sixth straight week of gains at the start of the year, which hasn’t happened in the first six weeks of a year since 1971. The Dow missed a positive finish for the week and so it has only done five in a row, but the Nasdaq finished at a high not seen since 2000.

But it’s not just economic data, the company news story is also good with CNBC/ Thomson Reuters saying “almost 60 percent of S&P 500 companies have posted quarterly results, with 70 percent of firms topping earnings expectations and 66 percent exceeding revenue estimates.”

So in all this positive news, I am expecting a pullback which is a buying opportunity. So what can cause this?

The EU are meeting this week and the US Congress will be looking at the automatic spending cuts that start on March 1. These pow-wows could hurt markets, but I can’t see too much blood on the streets until a left-field spook event comes along.

Ahead this week, there are more US earnings, as well as more economic data on manufacturing and retail sales out of the USA, while here we will have important lending news as well as key business and consumer confidence readings. These could have a big bearing on what the RBA does in March with interest rates. Let’s hope they are smart and cut.

In closing, with current market conditions and a recovering global economy, we believe that the ASX will reach as high as 5200, if not higher, by the end of 2013.

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