informed investor

informed investorAugust 2020

FURTHER INFORMATION

Economic update and Market overview

Managing your Financial Health during

the COVID-19 Pandemic

A guide to Active and Passive Investing

Insurance and Millenials: Why it

matters

Make your Super

Investing during a Recession

Am I eligible for the HomeBuilder

Grant?

How has COVID-19 changed

Australian Consumer spending habits?

Article sevenEConomic updateintroductionCovid-19 developments continued to dominate attention. There were spikes in the number of new infections in both Australia and overseas, suggesting an economic recovery may be delayed.

Share markets powered ahead, however, as investors remained convinced that governments and central banks will provide sufficient financial assistance through the crisis.

Fixed income markets also registered gains; government bond yields moved lower and credit spreads continued to tighten.

australiaSpiking virus numbers in Victoria, in particular, are a concern for the shape of the anticipated economic rebound. Border restrictions are expected to remain in place for an extended period, halting tourism and affecting the normal movement of goods and services.

Unemployment rose to 7.4% in June, a jump of more than 2% from pre-crisis levels. This has significant implications for the Treasury; the Jobkeeper program is costing more than $10 billion per month.

Veronica BruceBBV Wealth Management

226a Harbour Drive

Coffs Harbour NSW 2450

P: 02 6652 3160

E: [email protected]

CONTENTS

Continued over...

BBV Wealth Management Pty Ltd is a Corporate Authorised Representative (No. 315982) of Capstone Financial Planning Pty Ltd. ABN 24 093 733 969. Australian Financial Services Licence No. 22313. Information contained in this document is of a general nature only. It does not constitute financial or taxation advice. The information does not take into account your objectives, needs and circumstances. We recommend that you obtain investment and taxation advice specific to your investment objectives, financial situation and particular needs before making any investment decision or acting on any of the information contained in this document. Subject to law, Capstone Financial Planning nor their directors, employees or authorised representatives, do not give any representation or warranty as to the reliability, accuracy or completeness of the information; or accepts any responsibility for any person acting, or refraining from acting, on the basis of the information contained in this document.

ECONOMIC UPDATE Continued

Informed Investor - August 2020

Proposed changes to the scheme mean additional unemployment benefits could be paid until March 2021, although plans remain under review and subject to change.

At -0.3%, inflation turned negative in the June quarter; the first negative print since the late 1990s. Even if there is a rebound in the next few months, disinflationary forces are expected to persist.

It is extremely unlikely that inflation will return to the 2% to 3% target band any time soon, suggesting there is almost no chance of any interest rate increases for the foreseeable future.

UNITED STATESFederal Reserve officials reiterated that the central bank will do ‘whatever it takes’’ to support the world’s largest economy through the coronavirus pandemic. Fed Chair Powell described the economic downturn as the most severe “in our lifetime”.

Politically, there was growing pressure on Congress to approve another stimulus plan, which would likely see unemployment assistance payments extended.

This was particularly topical, as the number of Americans filing for unemployment benefits started to rise again. This suggested the rebound in the world’s largest economy is not progressing as rapidly as had been anticipated.

The latest data showed US GDP plunged –32.9% in the June quarter; comfortably the biggest decline on record. Consumer spending was very subdued as expected, which acted as a drag.

With factories closed, companies met demand by running down inventory levels. Economists suggested this could result in a sharp rebound in activity levels in the September quarter and beyond as firms look to restock inventories.

Business investment was also understandably low – many firms remain focused on staying in business, rather than committing to capital expenditure on new machinery and equipment.

New ZealandThe recovery in the economy continued to gather pace. Card spending in June was 19% above May’s level, which itself was an 80% improvement from April.

Higher spending means inflationary pressures are persisting. Inflation has come down sharply from earlier in the year, but remains positive. CPI printed at 1.5% for the June quarter.

Despite these encouraging indicators, both consumer and business confidence dipped in July.

EUROPE June quarter GDP data were dismal in Europe – the German and French economies contracted at an annual pace of -11% and -19% respectively, while Spanish data were worse still.

Unemployment numbers have increased across Europe, though

not quite as substantially as in other regions. In fact, the most recent indicators were more encouraging, with German employment data not deteriorating in July from June.

In the UK, there was increasing speculation that the Bank of England was considering moving interest rates into negative territory. The Bank’s Governor suggested the policy is under “active review”, prompting economists to call for more clarity on policymakers’ current thinking.

ASIAThe Chinese economy grew at an annual pace of 3.2% in the June quarter, rebounding from a -6.8% year-on-year contraction in the March quarter.

While consumer spending remains subdued, exports are currently running above 2019 levels. This is expected to contribute to an acceleration in growth in the second half of 2020.

The Hong Kong economy shrank by -9.0% in the year ending 30 June 2020. This reflected the impact of civil protests as well as disruptions associated with Covid-19.


The longer-term outlook for Hong Kong remains concerning too; western companies are increasingly withdrawing from the region and there is a concern that a ‘brain drain’ could be seen as skilled locals and expatriates consider relocating.

australian dollarThe ongoing rally in risk assets continued to support the Australian dollar. The currency added more than 4% against the US dollar in July, closing the month at 71.7 US cents.

The ‘Aussie’ was similarly strong in other major foreign exchange markets, appreciating by more than 3% against a trade weighted basket of international currencies.

Australian equitiesEncouraging results for possible coronavirus vaccines, combined with commitments from Australian government and central bank officials to extend respective support packages, helped push the S&P/ASX 100 Accumulation Index more than 4% higher into the middle of July.

Ongoing volatility saw gold prices hit all-time highs in both USD and AUD terms. Major iron ore miners were also among the top performers in the Materials sector (+5.9%) as the price of iron ore rose 12%

through July. The Energy sector (-6.6%) was the worst performer.

The S&P/ASX Small Ordinaries Index outperformed the large cap index, rallying 1.4% through the month.

Listed propertyListed property markets were relatively subdued in July. The best performing markets were Singapore (+3.9%), the US (+3.5%) and Germany (+3.2%). Laggards included Hong Kong (-6.3%), France (-4.8%) and Japan (-2.8%).

Locally, A-REITs gained +0.6%, marginally outperforming the broader local equity market.

The relatively insulated Industrial sub-sector (+13.6%) led the charge, while Office (-6.7%) and Retail (-5.5%) landlords weighed on the group.

Global equitiesDespite the gloom and uncertainty from the continued pandemic, global equities continued to generate favourable returns for investors.

The vast amount of liquidity being pumped into financial markets by central banks worldwide continues to support sentiment towards risk assets. US equities fared particularly well, with the S&P 500 Index adding 5.6%.

Returns from European markets were more modest. The Spanish IBEX, French CAC and Italian MIB indices all closed the month lower, while the German DAX Index was little changed. In the UK, the FTSE 100 Index fell by 4.4% in local currency terms.

Asian markets were mixed. China’s CSI 300 added 12.8%, while the Japanese Nikkei closed -2.6% lower, both in local currency.

Buoyant risk sentiment continued to support emerging markets. The MSCI Emerging Markets Index rose 8.4%. Developed markets were well behind, with the MSCI World Index rising ‘only’ 3.4% in local currency terms.

Global and Australian Fixed IncomeDownbeat economic indicators and central bank policy measures continued to exert downward pressure on government bond yields. In the US, 10-year Treasury yields dropped 13 bps to a new all-time low of 0.53%.

German yields plunged further into negative territory, closing the month 7 bps lower, at -0.52%. In the UK, 10-year gilt yields closed 7 bps lower, at 0.10%. Australian 10-year Commonwealth Government Bond yields closed July 6 bps lower, at 0.82%.

Global creditCorporate bonds continued to recover from March’s sell-off, with credit spreads narrowing for a fourth consecutive month.

Investment grade spreads closed the month of July 19 bps lower, at 1.37%. High yield credit performed even better, with spreads 118 bps lower by month end.

Source: Colonial First State

Managing your financial health during the COVID-19 pandemic


The COVID-19 pandemic has certainly disrupted our daily lives, forcing us to close entire industries and change our behaviour overnight.

With the lockdown directly affecting jobs and the economy, many people’s thoughts quickly turned to their finances. Whether or not your income has been affected, now is a good time to get your finances in order.

Create a spending plan

The first step to good financial health is understanding your spending. That’s where a spending plan, or budget, comes in. Start by identifying how much you need or want to spend in different areas of your life, like household expenses, leisure, travel and savings.

If you already have a spending plan in place, review it now and check that your expenses actually match what’s in your plan.

Make use of savings

Gym memberships, haircuts, travel, takeaway coffee and lunches - the list of expenses we’ve been asked to put ‘on hold’ is almost endless.With social distancing measures limiting our discretionary spending, many people will find a little more cash than usual building up in their accounts.

While there’s not much we can do about the lockdown, it does create an opportunity to re-evaluate your spending habits.

So if you have to go without your daily flat white, think about ways you can redirect those savings to improve your financial health. Below are three areas to consider.

Build up your cash reserves

If there’s one thing the pandemic has shown us, it’s the importance of having an emergency fund to protect against the unexpected. If you don’t have one already, set up a high-interest account or use an offset account to reduce the interest on your mortgage if you have one

You should aim to build up enough cash in your emergency account to cover six months of living expenses, including housing, to protect you in the event you lose your job, fall ill or can’t work. Ideally the funds will be in cash, so that they’re easily accessible and aren’t subject to market fluctuations.

Pay down debt

We’re pretty big on debt in Australia, using it to fund everything from housing to cars to travel. But falling behind on your loan repayments, or struggling to juggle debt and living expenses, can lead to serious financial stress.

So take anything extra you’re saving and use it to pay off your credit card, personal, home or car loan. Every little bit counts, as it helps reduce the interest you’ll pay on the balance going forward.

Supercharge your super

Once you’ve built up your cash reserves, and have your debt situation under control, you can look at putting any extra savings towards investments, like superannuation.

For those nearing retirement, or reliant on superannuation income, the recent market fluctuations can feel worrying. But now is not the time for sudden changes, or you could be undoing years of hard work.

Switching to cash can feel safe, but taking this course of action is almost certainly locking in the losses. Remember that markets are forward looking and will generally recover before the economy does.

While the COVID-19 pandemic won’t be with us forever, good financial management will. By taking a few simple actions now, you can help protect your way of life far into the future.

Source: FPA Money and Life


A guide to active and passive investingInvestment funds can be broadly split into two categories – active and passive.

Passive investing has gained momentum in Australia, and beyond, over the last decade.

It could be because this style of investing aims to replicate the returns of a particular market index (for example, the S&P ASX 200 Index). This means, that when the value of the index rises, so too will the value of the fund. On the flip side, as the value of the index falls, so too does the nature of the fund.

Exchange-traded funds (ETFs) are some of the most popular passive investments. They are similar to managed funds, in that they involve a trust structure which holds a basket of securities.

As described above, the investments in the fund replicate the make up of the relevant market index. For example, if the index is made up of stocks that include banks, mining businesses, retail companies and supermarkets, the ETF will also hold these stocks. Units in ETFs are listed on stock markets and can be traded just like shares.

It’s important to note, that while there are also actively managed ETFs, passive ETFs are most common of the two.

Basics of active investing

In contrast, an active approach to investing involves a fund manager choosing the assets in the fund, depending on the manager’s view of markets and the type of fund it is.

Like passive investments, there are many types of actively managed funds which offer exposure to different asset classes and

industries. Rather than track an index, an active fund will target a return above a particular benchmark. An example of this is, every year, an actively managed fund might aim to achieve the same return as the S&P ASX 200 plus two per cent.

Another common way of measuring the performance of an active fund is for it to target a premium above the rate of inflation. For example, a fund might aim to achieve inflation plus two per cent per year.

Cost benefit analysis: fees

Cost is one of the major differences between these two styles of funds. Typically, passive investments are lower cost, as investors are not paying for the fund manager’s expertise in choosing the investments in the fund.

Active funds, on the other hand typically charge a base fee and a performance fee, to incentivise the fund manager to produce the highest possible return.

Market conditions

It’s important to remember that markets will always go up and down, and actively managed funds still have many benefits (as well as risks) while factoring:

� Funds that track an index only produce the return of the index

� Fund manager skills can be used to pick investments that have the potential to do well when economic growth is slow and markets are falling

� Active managers can also avoid stocks and sectors that are not doing well.

It’s very difficult to get a true picture of whether actively managed funds perform better over time versus passive funds. It’s probably more instructive to think about how each style of investing is used in a portfolio.

A balanced perspective

There’s really no right or wrong approach when it comes to investing in active and passive investments.

Many investors choose to invest in a combination of the two styles to achieve a level of diversification in their portfolios and to get access to a broad range of asset classes across the risk spectrum.

Source: BT


insurance AND millenials

Today, young people are often dubbed the “the smashed avocado generation,” supposedly frittering away money on ‘luxury’ items rather than working hard to save for their first home or retirement nest egg.

However, despite their spendthrift reputation, most millennials are quite prudent when it comes to managing their financial affairs.

Research by Afterpay found that millennials are saving more than their parents and are 30 per cent more likely to save regularly. They are also careful money managers, with more than 80 per cent of millennials having a budget, compared to two-thirds of older generations.

In today’s uncertain world, it’s little wonder that millennials are adopting a cautious approach to managing their money. They’re often trying to save for their first home, or may already have a mortgage, or planning to have a family, and simply don’t have much in the way of surplus cash.

We often say that an individual’s ability to earn an income is their greatest asset, yet many people – millennials included – overlook the importance of this principle when it comes to planning their finances.

This means that future goals of home ownership and financial security for a young family could be at risk without ensuring they have appropriate insurance protection in place today.

Ask yourself; “if I lost my source of income tomorrow, how would I pay the rent (or mortgage) and feed the family?”

While some households may ‘get by’ for a month or two, few would have the savings to survive financially for a few months or possibly longer.

And it’s not just about money. Financial pressure can place a great strain on relationships during what can already be a difficult and stressful time.

This is why we believe that insurance is the cornerstone of a sound financial plan, regardless of your age and what your goals may be.

For millennials, this means protecting your income, your health, and other risk factors that could jepordise your wellbeing and those you care for.

To find out more, please contact us.

Source: Capstone.

Afterpay Touch Group: How Millenials Manage their Money report.

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WHY IT MATTERS

Even a small contribution can make a big difference over time, as you earn concessionally taxed returns on your contributions. When you invest pre-tax income through salary sacrifice, you may also benefit from the 15 per cent concessional tax rate on super contributions (rather than your marginal income tax rate), putting you even further ahead.

As of 1 July 2017, you can contribute up to $25,000 in concessional super contributions before additional tax applies. Concessional contributions include compulsory super guarantee from your employer, other employer contributions such as salary sacrifice, and personal tax-deductible contributions.

Finally, if there is a large sum you would like to contribute to super, for example, if you plan to sell a non-super asset, such as an investment property, you can do this by making a non-concessional personal contributions of up to $100,000 a year from your after-tax income.

You may also utilise the bring-forward rule which allows for members aged 64 or less to bring forward three years’ worth of non-concessional contributions and contribute up to $300,000 at any time over a three year period.

As of 1 July 2017, your total super balance (across all funds) may further limit your non-concessional cap – your cap is Nil if your total super balance is $1.6 million or more, while the amount of bring forward cap you can use is reduced once your total super balance is $1.4 million or more.

Review your investment optionsSuper is one of our most valuable assets, so it’s not surprising many of us seek to protect it by investing in a low risk option.

But it’s also important to remember that trying too hard to avoid risk today could expose you to a greater risk — running out of money tomorrow, when your savings don’t produce the returns you need for a comfortable retirement.

So it’s important to choose the right investment option for your goals and investment time-frame. That’s where personalised advice from a professional financial adviser can make a difference.

Source: Colonial First State


Australians enjoy one of the highest life expectancies in the world, which means you can look forward to a long and comfortable retirement.

While that’s fantastic news, it also makes saving for retirement more important than ever.

Indeed, the majority of Australians over age 40 who are yet to retire are concerned about not having enough money to live on, with many recognising they need professional assistance to reach their retirement goals.

But by getting good advice and planning ahead now, you can take control and enjoy the peace of mind that comes from knowing your future may be secure.

The first step is to figure out how much income you want to receive each year in retirement, and how much you may need to save in order to get there. It’s also important to think about how your spending patterns may change during your retirement, and to plan ahead accordingly.

You may also want to keep your options open for the later years when you may need more intensive health support, including specialised accommodation.

Also don’t forget to factor in lump sum spending on big ticket items, such as home renovations or a new car. Because, as retirements grow longer, our cars and appliances are increasingly likely to fade away before we do.

Boost your superWhen you crunch the numbers, you may find you’re facing a super gap. An effective way to boost your super savings while potentially paying less tax may be via salary sacrifice.

MAKE YOUR SUPER LASTWhen you crunch the numbers, you may find you’re facing a super gap.


In times of uncertainty, when share markets and interest rates are falling, along with declines in consumer and business confidence, investors often question if their money is safe and if it’s still going to meet their long-term investment goals.

It’s almost thirty years since Australia last experienced a recession, so for many investors where to put money during a recession isn’t something they’ve had to think about before.

We understand you’re probably concerned about your investments and wondering what to invest in if Australia does enter a recession. Volatility isn’t something investors enjoy. The pain of losing is significantly more powerful than the pleasure of gaining, which makes us more likely to overreact during market downturns than when the market is booming.

To help your investments continue to work hard for you, we’ve outlined four simple strategies you could consider.

Invest for the long term

If you’re a long-term investor (with a time horizon of 10+ years), don’t let emotion get in the way of sensible decision making. Selling out of your investments and moving to cash may seem like a safe option, but you’ll potentially be crystallising your losses and missing out on any opportunities that could arise when the market rebounds.

Try to invest regularly

Volatility doesn’t necessarily result in poor investment outcomes. It can present opportunities. The principle of investing regularly, regardless of whether the market is rising or falling, allows you to buy more of an asset when prices are low and buy less when prices are high.

Known as “dollar cost averaging”, not only will this average out over the long term, resulting in a better average price for the assets, but you’ll also potentially hold more of an asset, which will be beneficial when prices rise again.

Be sensible and leave the decisions to the professionals

Market timing is an investment strategy used to try and ‘beat’ the share market by predicting its movements and buying and selling accordingly. It’s the exact opposite of the long term ‘buy-and-hold’ strategy, where an investor buys shares or assets and holds them for a long time, designed to ride out periods of market volatility.

According to Morningstar, investors would need to be correct 70% of the time to get any benefit from an active market timing strategy. This is almost impossible to achieve, even for market professionals. You’re more likely to miss some of the best days of the market rather than picking them correctly.

Allow diversification to spread your risk

Not only is it difficult to time the market correctly, but it’s also hard to predict which asset class will perform best in any given year. Last year’s best performing asset class can easily become next year’s worst, or vice versa.

Many investors choose to manage this by diversifying their investments across different asset classes (shares, bonds, cash etc.) and create a portfolio that’s based on their risk tolerance, time horizon and investment goals.

However, it’s important to understand that diversification doesn’t mean you’ll avoid market volatility completely. Even with a well-diversified portfolio, your investments could still potentially experience periods of what you’d probably deem underperformance.

Staying positive during market downturns

The most important thing you can do during market downturns is not panic. Stay emotionally strong and ensure your investments remain aligned to your investment goals.

Source: BT.

INVESTING DURING A RECESSIONDon’t let emotion get in the way of sensible decision making.


Am I eligible for the HomeBuilder grant?There are rules around who is eligible and the type of renovations or properties you can use the money for.

Available for a limited time, the HomeBuilder grant offers eligible owner-occupiers, including first-home buyers, a potential tax-free $25,000 boost to help fund the cost of building a new home or substantially renovating an existing home.

Although not specifically targeted at first-home buyers, the Government expects the HomeBuilder grant will be popular with first-home buyers looking to buy a house and land package, as well as growing families upgrading to a bigger new home.

It could also spark interest for retirees who might see this as a trigger to downsize their home, using the grant to help purchase a new smaller apartment or unit, and potentially the money saved to invest into their retirement fund.

As with any Government grant program, there are rules around who is eligible and the type of renovations or properties you can use the money for.

Deciding if you’re eligible

The first and most simple criteria for the Homebuilder grant is that you must be an owner-occupier. If you tick that box, and you’re someone looking to build or renovate your home, you must also meet the following criteria:

� Be an Australian citizen aged 18 or over.

� Have an annual income less than $125,000 for individuals or less than $200,000 for couples (based on your 2018/19 (or later) tax return).

� Planning an appropriate renovation or new build.

The Government has defined strict price caps

for renovations and new builds to ensure the HomeBuilder scheme sits in-line with other programs already operating in Australia.

Substantial renovations - the planned cost of a renovation must be between $150,000 and $750,000, and the value of the property being renovated should be less than $1.5 million when work begins.

New builds – the purchase value of new homes (house and land combined) must not exceed $750,000. This also applies to new homes bought off-the-plan.

In addition, all building contracts must be entered into at arm’s length. This means the builder you choose cannot be a relative for example, and you cannot be an owner-builder.

Types of property eligible for the HomeBuilder grant

This is the most flexible part of the HomeBuilder scheme. Whether you own a house or apartment, or you’re buying a new house and land package or a property off-the-plan, all are eligible types of dwelling.

However, you must live in (or plan to live in) the property, ie you’re an owner-occupier. The HomeBuilder grant is not available to investors looking to renovate or those wanting to build a new home to use as an investment property.

Defining ‘substantial renovations’

In simple terms, the renovations you undertake must improve the liveability, accessibility or safety of your home. And the changes or additions must be connected to the main property.

While there isn’t an exhaustive list of do’s and don’ts, here are a few things that aren’t considered improvements.

� Tennis courts

� Swimming pool

� Spas and saunas

� Sheds or garages not connected to the property

Given that the scale of required renovations far exceeds just painting walls and replacing carpets, the work must be carried out by a licensed or registered builder. Also, the terms of any contract should be commercially reasonable and the contract price should reflect fair market value and not be inflated to ensure it fits within the imposed price boundaries.

The HomeBuilder grant is only available for a limited time, so if you’re thinking of applying there’s no time to lose.

Source: BT

Consumer spending is a more significant influencer on the economy than many people realise. Even a small reduction in Australian spending habits has a dramatic impact.

Digital disruption for retailersFor the retail sector, it’s a story of mixed fortunes. Shops forced to close face the difficult decision about whether it’s still financially viable for them to re-open. But on the positive side, online sales have accelerated rapidly with some digitally-agile businesses recording exceptional uplifts in sales figures and profits.

While retail sales have bounced back since restrictions were initially eased at the beginning of May, online shopping remains the potential saviour for retailers, with many analysts predicting consumer behaviour may have changed permanently. And as we face into a second wave of the pandemic, online sales may prove even more important.

But it won’t be a solution that works for all retailers. The impact and success of individual companies will depend on the types of products they offer online and how much they had invested in the brand’s digital presence before the pandemic.

New consumer spending patterns reveal how important the stimulus measures, being primarily JobKeeper and JobSeeker, have been and still are. On July 21, the government announced proposed changes to JobKeeper, including an extension through to 28 March 2021. These changes do not impact JobKeeper payments until after 28 September 2020.

With 56% of households believing their financial situation to be vulnerable or worse because of the pandemic, they are likely to struggle to meet all their financial commitments unless they either reduce spending, draw down on savings or access credit.

Australian consumers have some important decisions to make about both their short-term spending habits and their long-term wealth accumulation and retirement savings.

The temptation to focus purely on immediate needs will be strong but seeking good advice about how to prepare and invest for the future is equally as important.

Source BT.


Consumers continue to worry about the strength of the economy, the duration of the pandemic and overall public wellbeing. But while Australian consumer spending remains slow, we’re seeing signs of recovery across most categories and grocery spending, in particular, is finally stabilising.

With restrictions easing in some states, some Australians can spend more time outside their homes. The rapid increase in online spending has slowed, and, for those in states with eased restrictions, a return to more ‘normal’ consumption habits are resuming. However, it’s likely the increased appetite for spending via online channels will stay with us beyond the pandemic.

Economic impact of consumer spendingGovernments face a constant dilemma when managing key economic indicators and the impact of the current pandemic has been no different.

� Should a government stimulate spending to delay or avoid a recession?

� Or should a government cut business taxes to create jobs and increase wages?

The problem is, without spending, businesses will eventually stop trading and be forced to lay off workers, leaving the government with less tax revenue. If the economy is left to rely on exports, which as we’ve seen isn’t sustainable during the global pandemic, this could cause supply chains to grind to a halt.

The only way to support businesses long term is then to rely on borrowing, which creates debt-laden balance sheets and potentially hampers future recovery and growth. To a degree, that’s why we have seen our own reserve bank cut rates to historical lows.

How has COVID-19 changed Australian consumer spending habits?Australian spending habits have changed markedly in the last few months.

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