October, 2020 - Macarthur Wealth Management

US ELECTION UPDATE

There’s never a dull moment when it comes to us politics and particularly during a presidential race. Regardless of your political persuasion or whether you think us politics doesn’t affect you, The US remains the world’s superpower and US politics and policy can have a significant impact on investment markets.

Right now, less than 10 days out from the election, it’s important to understand how markets may be impacted or react to the result. Much of the share market rally over the last 3-4 weeks can largely be explained by the market’s acceptance that a Democrat / Biden clean sweep (ie. House, Senate, President), as indicated by the polls and betting odds, would usher in a huge stimulus package, lead to less adversarial foreign policy, and give the elected government sufficient power to “get things done”.

However, the polls and betting odds look eerily like they did leading into the 2016 US election with Clinton leading Trump. The difference this time is that we have Covid-19 and President Trump as the 1st term incumbent. Long term history shows that 1st term Presidents generally get a 2nd term and recent history shows that election polls can be well and truly off. As 2016 showed, President Trump didn’t win the popular vote, but he did win the Electoral College which means key swing states are likely to come into play this time around too.

Putting that aside, this is what we know:

• US equity markets generally go up after a Presidential election.
• Republican policy is generally more Wall Street (ie. share market) friendly.
• President Trump, if re-elected, will continue to operate on the same platform he has for the last 4 years – ie. smaller government, lower taxes, pro-US policies.
• Joe Biden, if elected, will increase taxes, support a very large stimulus package, and support pro-environmental policies.
• Both the Democrats and the Republicans are anti-China, but Democrats support continued globalisation whilst Republicans under Trump prefer less globalisation.
• Republicans prefer a faster re-opening of the US economy whilst Democrats prefer a slower re-opening.
• A President Trump re-election will likely result in both a US equity market and US dollar rise, with a faster short-term recovery in the economy.
• A Biden win could see the US equity market rise (under a huge stimulus package) or fall (under the burden of rising taxes) and likely continued to downward pressure on the US dollar, with a slower short term recovery in the economy.

There are a lot of variables and a lot of unknowns for the market to digest. The following is key to note:

• Markets won’t like a delayed result – ie. the result could take some time to obtain given the number of postal votes. In addition, if the result is tight, it’s likely either side will request a recount.
• Markets won’t like a messy result – ie. a result whereby Trump or Biden win with very small majority or no majority in the Senate. Believe it or not, a Democrat House and Senate with Trump retaining the Presidency is actually possible!
• Markets will like a decisive result – ie. a clear election win for either side will see market volatility subside.
• Markets will like a clean result – ie. a Biden or Trump victory with either clean sweep of the House and Senate, or at the very least, a clear majority in the Senate.

The election is 4th November Australia time (3rd November US time). It will make for an interesting week with a Melbourne cup with no spectators and a Reserve Bank of Australia meeting which is likely to see the bank cut the cash rate to 0.1% and launch a large bond buying program (Quantitative easing).

Equity markets slide as virus cases rise

MARKETS

Local and global equity markets weakened this week as the US failed to pass any new stimulus and rising virus cases in Europe saw significantly increased restrictions.

In local stock news, Rio Tinto’s September quarter iron ore production improved to be slightly below the same period last year as staff returned to pre-virus work rosters. Production year to date is running slightly ahead of the same time last year. BHP posted a 7.2% rise in iron ore production in the quarter, supported by strong demand from China.

Westpac Bank said it would sell its 10.7% stake in Zip Co whilst also confirming a court has approved its $1.3 billion fine for breaching anti-money laundering rules.

The Aussie dollar had a mixed week, falling early in the week on increased likelihood of RBA stimulus at the November meeting, but then rising late in the week on the back of some strong economic data out of China.

ECONOMIC

Preliminary estimates have Australian retail trade falling by 1.5% in September. Falls were recorded in food, household goods and clothes, whilst spending on department stores and eating out rose. Consumers possibly getting thriftier in light of tapering JobKeeper and JobSeeker payments. In annual terms, retail trade sits 5.2% higher over the year.

Australian Bureau of Statistics data showed that just under a 1/3^rd of businesses reported a fall in monthly revenue in October, compared with nearly half in July, whilst 7% reported a decrease in their number of employees versus 13% three months earlier.

A key US central bank member made comments that caught some by surprise. He indicated that there is now an open question as to whether there will be an indefinite need for the US central bank to keep buying US bonds (QE) to support market function given how big the US bond market has become, which may be too large for private investors to absorb, thus resulting in higher borrowing costs for the US government. Most people in the know expect this to be the case anyway. Maybe the member’s brazenness caught people by surprise instead.

US retail sales in September far outstripped expectations and consumer sentiment for October has come in better than expected. However, the lack of new government stimulus may reverse some of these gains.

Data showed that the number of Americans filing for unemployment benefits last week dropped more than expected to 787,000, but still remains very high, especially in the absence of any new stimulus.

Key Chinese economic data was released with the economy growing 4.9% in the September quarter from a year earlier, which was lower than expectations for 5.2% rise. Industrial output rose strongly in September, consolidating the strong August numbers. Retail sales grew 3.3% which was significantly better than August numbers.

POLITICS

Looks likely the Chinese government is now targeting Australia’s cotton industry with China apparently discouraging its spinning mills from using Australian imports. The development follows reports that China has suspended purchases of Australian coal. The last time they restricted Australian coal in February 2019 was due to the Australian Government’s restrictions on Huawei.

Whilst we saw increased virus restrictions throughout Europe, as the Europeans realised that normal summer vacationing probably wasn’t the best idea, we still haven’t seen a corresponding surge in hospitalisations and/or deaths. As such, any increased restrictions should be measured, targeted, and temporary. Ireland disregarded that, locking down all non-essential businesses for 6 weeks. Interestingly, Sweden is seeing no increase in cases. We saw declining new cases closer to home with NSW & VIC lifting more restrictions whilst NSW is allowing in NZ travellers. The other states need to move towards lifting border restrictions. Pfizer, one of the companies developing a vaccine, announced it could apply for US authorisation for their vaccine in November.

European Union leaders refused to make any further concessions over post-Brexit trading arrangements with the UK, putting pressure back on UK PM Boris Johnson to honour the terms of the withdrawal agreement signed last year. Not looking good for the UK and their economy.

Fresh new US fiscal stimulus remains unlikely even though the Treasury Secretary told House Speaker Pelosi that President Trump would lean on his party to sign in a stimulus package if agreed to by Democrats and the Trump administration. Senate Majority Leader McConnell rejected Trump’s assertion, risking Trump’s ire, saying that he could not sell a larger package to his members but that the Senate would vote on a smaller package next week. Tough game. American people need more stimulus, and that stimulus needs to be purposeful not wasteful, all whilst politicians are seeking re-election.

General Advice Warning

The information provided on this website is general in nature only and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information on this website you should consider the appropriateness of the information having regard to your objectives, financial situation and needs. Before making any decision, it is important for you to consider these matters and to seek appropriate legal, tax, and other professional advice.

Disclaimer

All statements made on this website are made in good faith and we believe they are accurate and reliable. Macarthur Wealth Management does not give any warranty as to the accuracy, reliability or completeness of information that is contained in this website, except in so far as any liability under statute cannot be excluded. Macarthur Wealth Management, its directors, employees and their representatives do not accept any liability for any error or omission on this website or for any resulting loss or damage suffered by the recipient or any other person. Unless otherwise specified, copyright of information provided on this website is owned by Macarthur Wealth Management. You may not alter or modify this information in any way, including the removal of this copyright notice.

Aussie shares rise on expected RBA stimulus

MARKETS

The Australian equity market rose this week as investors continued to digest the Federal Government’s huge budget whilst the RBA Governor seem to indicate that more stimulus will be provided at the November meeting. Declining virus cases in Victoria also supported investor sentiment.

Global equity markets fell this week as concerns arose regarding a broader European lockdown with virus cases escalating, whilst US lawmakers failed to reach agreement on fresh new stimulus.

The Chinese central bank has made changes to currency requirements to stop the Chinese Yuan from rising any further. The measures were previously put in place to stop the decline in the currency, but the recent strong falls in the US dollar have seen the Yuan rise too strongly. All governments and central banks want their currencies lower – a race to the bottom.

The Aussie dollar fell this week as China seemed to restrict the import of Australian coal and the RBA Governor laid the groundwork for a rate cut and more bond buying at their November meeting.

ECONOMIC

A key speech by RBA Governor Lowe seems to have locked in a rate cut at the November meeting, from 0.25% to 0.10%. This will likely extend to the rate the RBA lends money to the banks and the Government’s 3-year bond yield which the RBA is currently fixing at 0.25%. In addition, the speech seems to pave the way for more traditional quantitative easing (QE), where the RBA will be printing money to buy longer dated Government bonds in order to lower their yields. Both measures should also put a cap on any significant Aussie dollar rise from here.

Australian employment fell by 29,500 in September whilst hours worked lifted by 0.5% in the month. Most of the fall in employment came from Victoria with more than 35,000 jobs lost. The unemployment rose to 6.9% whilst the underemployment rate rose to 11.4%.

The value of all housing related lending surged by more than 12% in August, with strong growth across owner occupiers, investors, and first home buyers. Annual growth is almost 20%. Record low interest rates and lack of supply are combining support house prices, outside of Victoria.

Commonwealth Bank said the number of their loans with deferred repayments dropped by 45,000 ($17 billion) by the end of September to 129,000 loans ($42 billion). Better signs, but repayment extensions were also given to 17,300 customers.

Australian consumer sentiment lifted by almost 12% in October to its highest level since July 2018. The lift was somewhat expected given the significant Federal Budget handed down, but came in much higher than expected, with the rise driven by future expectations in response to personal income tax cuts. Confidence in the housing market also strengthened whilst jobs security also improved.

The International Monetary Fund is forecasting global growth to shrink by 4.4% in 2020 (prior forecast of minus 5.2%) before expanding by 5.2% in 2021 (5.4% previously). They expect the Australian economy to contract by 4.2% in 2020 (minus 4.5% previously) with growth of 3% in 2021 (4% previously).

POLICTICS

Australia’s Trade Minister is investigating reports China has suspended the imports of Australian coal. Chinese steel mills and power plants have reportedly been told to stop using Australian coking and thermal coal. The Minister confirmed there has been some disruptions of shipments but no evidence yet of an import ban. PM Morrison and Treasurer Frydenberg are facing increased pressure from export industries and business leaders to soften their stance on China.

US President Trump fuelled hopes for fresh fiscal support telling Congress to “go big” and to get a deal done. Republicans then put forward a larger package which the Democrats turned down. This saw Democrat Speaker Nancy Pelosi come under attack from within her own party and supporter base. US households and businesses desperately need a deal to get done. Politicians playing with people’s lives and livelihoods doesn’t go down well leading into an election. More than 10 million Americans remain out of work. Either they full open the economy or they provide the stimulus.

Virus cases continued to fall in Victoria, but Premier Dan Andrews and CHO Brett Sutton continued to power ahead with Stage 4 restrictions. The problem this time around is that NSW has Stage 2 restrictions with more daily cases. Politicisation of the virus here along with still insufficient contact tracing in Victoria. State borders remain shut, but will hopefully open over the next couple of weeks.

Virus cases continued to increase throughout Europe with leaders potentially reneging on their promises not to lockdown again. France locked down 9 cities whilst the UK was heading towards Tier 3 restrictions. Interestingly, the Mayor of Manchester made it clear they won’t be following any increase to current restrictions, prioritising the livelihoods of their citizens over rising virus cases.

In vaccine news, Johnson & Johnson halted their clinical trial of its vaccine after a participant fell ill. The US FDA has increased safety measures thus extending the timeline for approval. This means we may not get an approval before the US election. Another report cited that the US will have a widely available vaccine by April 2021.

Big Tech came under political pressure this week, drawing the ire of both the Europeans and the Americans. The European Union wants big tech to come under increased regulation to stop them abusing their market power, with new rules to force tech companies to share data with rivals and force them to be more transparent on how they gather information. Across the Atlantic, Twitter and Facebook bordered on interfering in the US election by censoring a New York Post article releasing details of potential Biden family impropriety. Those that shared the article or commented on it saw themselves locked out of Twitter.

British PM Boris Johnson heeded his threat to walk away from negotiations over the future relationship between the UK and the EU on the 15th October, a deadline he had previously set. There remains little sign of an agreement at this stage.

General Advice Warning
The information provided on this website is general in nature only and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information on this website you should consider the appropriateness of the information having regard to your objectives, financial situation and needs. Before making any decision, it is important for you to consider these matters and to seek appropriate legal, tax, and other professional advice.

Disclaimer
All statements made on this website are made in good faith and we believe they are accurate and reliable. Macarthur Wealth Management does not give any warranty as to the accuracy, reliability or completeness of information that is contained in this website, except in so far as any liability under statute cannot be excluded. Macarthur Wealth Management, its directors, employees and their representatives do not accept any liability for any error or omission on this website or for any resulting loss or damage suffered by the recipient or any other person. Unless otherwise specified, copyright of information provided on this website is owned by Macarthur Wealth Management. You may not alter or modify this information in any way, including the removal of this copyright notice.

Monster budget propels Aussie market higher

MARKETS

Local and global stock markets rose strongly this week, getting a boost from President Trump’s swift recovery from the virus and a potential increase in household stimulus, whilst local stocks got a boost from the Federal Budget.

US Tech stocks came under some pressure as a US Hose committee report laid out damning details of the many anticompetitive practices of the tech giants. The report offered some ideas for controlling them including potential breakups. This action would be more likely in a Democrat / Biden led Senate, even though President Trump has previously threatened to remove some of the special privileges these tech companies have.

In local stock news, Morgan Stanley analysts are expecting the big 4 major banks to record total impairment charges of $2.5 billion in the September quarter. The low number relative to the significant economic contraction can be explained by a combination of JobKeeper, loan repayment holidays, and temporary amendments to insolvency laws. The status of loan repayment deferrals will be key ahead.

The big 4 banks rose strongly this week getting a significant boost from investor sentiment which rose strongly on the back of the Federal Budget. Investors took some comfort that income tax cuts and business incentives will help reduce household and business stress thus shortening or reducing any bad debt cycle ahead.

CSL said subsidiary Seqirus has finalised a deal with the federal government for a possible virus vaccine from the University of Queensland. However, the timeline on this appears well behind the 6 vaccine candidates globally that are in phase 3 trials now.

Oil prices rose strongly this week after OPEC sent a strong signal that the worst was behind the oil industry and that they expect a strong recovery demand in the 4th quarter.

ECONOMIC

Treasurer Josh Frydenberg handed down the delayed 2020-21 Federal Budget announcing an expected deficit of more than $200 billion and cumulative deficits of almost $500 billion out to 2024-25, in what was the biggest budget since World War II. Significant stimulus in all the right places including income tax cuts to help support consumption and business tax incentives to support business growth and employment, plus manufacturing support and accelerated infrastructure spending. Plenty of assumptions baked into the budget which means more stimulus may be needed.

The RBA kept the cash rate on hold at 0.25% as expected in light of the Federal Budget being handed down on the same day. Expectations are firming that the RBA will announce additional measures at the November meeting including potential small rate cut (unlikely) and further expansion of its balance sheet (i.e. bond buying).

The National Australia Bank monthly business survey showed business conditions rose by a further six points in September. Conditions are now back around the levels seen earlier this year, but remain well below long term averages.

Australian car sales fell sharply in September with demand for new vehicles falling by almost 22% versus the same time last year. To be expected given household employment and income uncertainty ahead.

The Australian trade balance recorded another surplus of $2.6 billion in August, down from $4.7 billion in July and smaller than we’ve seen in recent years. Exports fell 4.2% whilst imports rose 2%. There were large falls in exports of non-monetary (i.e. central bank) gold and exports of services, whilst imports of consumption and intermediate goods rose strongly.

State Street’s global investor confidence index fell in September, with the largest falls coming from Europe and Asia, whilst North America investor confidence rose slightly.

POLITICS

US President Trump recovered swiftly from Covid-19, helped by a range of readily available drug treatments that have been used globally for decades, returning to the White House to continue the election campaign.

US President Trump announced via Twitter that he had called off all negotiations regarding the next US stimulus bill and that any decision will be delayed until after the elections, as both Democrats and Republicans remained too far apart. They actually got pretty close on the dollar value of stimulus, but the Democrat proposal included way too much non-Covid related spending like bailing out the states and repair bills for looting and rioting. He later proposed that he would be willing to sign very specific executive orders to make payments directly to households and provide support to the airline industry.

Prime Minister Scott Morrison announced changes to his front bench following Finance Minister Mathias Cormann’s decision earlier in the year to retire from politics. Simon Birmingham, Minister for Trade, Tourism, and Investment will take on the added responsibilities of Finance Minister and become leader of the Senate, whilst Employment Minister Michaelia Cash will become deputy leader of the Senate. The Prime Minister further announced he will nominate Cormann as its candidate for the secretary general of the OECD.

Australian state borders remain shut and heavily politicised. The Qld premier has vowed to open the border with NSW 1 day after the upcoming Qld election. Victoria remains in stage 4 lockdown whilst reporting less daily cases than NSW. Rumour has it that the WA Premier intends to keep his border shut until April 2021. Australian borders are lines on a map, nothing else. The quicker premiers realise this the quicker the Australian economy can recover.

The 2nd virus wave globally is resulting in increased restrictions across Europe and the US as leaders attempt to bring down daily infection rates. New York will shut schools and businesses in nine neighbourhoods, the French are shutting bars and other restrictions in the Paris region, whilst UK Prime Minister Boris Johnson came under increasing pressure as the country’s test and trace system failed to capture 15,000 positive tests last week. Pleasingly, daily death rates remain largely under control in light of widely used treatments and better testing and tracing.

FEDERAL BUDGET BRIEFING 2020

Last night the Federal Government handed down its Budget for the 2020–21 financial year.

The Budget’s focus for this year is to regrow the economy by creating job opportunities and encouraging spending.

SOME KEY BUDGET ANNOUNCEMENTS WERE

• Bringing forward the income tax cuts that were scheduled for 2022

• Helping members pay less in super fees and holding super funds accountable for poor performance

• Additional support payments for Age Pension and welfare recipients

• Temporary full expensing to encourage business investment, and tax changes to help businesses offset their tax losses against past profits.

It’s important to remember that the Budget announcements are still only proposals at this stage. Each of the proposals must be passed by Parliament before they are legislated.

TAX

Personal tax cuts Effective 1 July 2020

The Government has announced it will bring forward, by two years, stage two of the previously legislated tax cuts that were due to take effect from 1 July 2022.

As a result, from 1 July 2020:

• The Low-Income Tax Offset (LITO) will increase from $445 to $700. The increased LITO will be reduced at a rate of 5 cents per dollar for taxpayers that have taxable incomes between $37,500 and $45,000. The LITO will then be reduced at a rate of 1.5 cents per dollar for taxpayers that have taxable incomes between $45,000 and $66,667.

• The top threshold of the 19% tax rate will increase from $37,000 to $45,000, and

• The top threshold of the 32.5% tax rate will increase from $90,000 to $120,000.

The Government has also announced that the Low and Middle Income Tax Offset (LMITO), which was due to be removed with the commencement of the stage two tax cuts on 1 July 2022, will be maintained for the 2020 – 2021 yearly only

However, it should be noted that the tax cut of $1,080 for individuals earning between $48,000 and $90,000 will only apply for this year and will cease to be apply from 1 July 2021 due to LMITO being phased out from that date. Other individuals earning below $126,000 will also be impacted (to a lesser extent) by the removal of LMITO from 1 July 2021.

SUPERANNUATION REFORM

Effective 1 July 2021

When a person starts a new job and does not nominate a super fund, employers will be required to contribute to the employee’s existing super account, rather than the employer’s default super fund. Under this measure, the existing super account will be ‘stapled’ to the member so that they keep their current super fund when they change jobs.

The aim of this measure is to improve member outcomes by reducing unintended multiple super accounts that erode member balances through unnecessary fees and insurance premiums. This measure implements Recommendation 3.5 of the Hayne Royal Commission. Employers will be able to obtain the new employee’s existing super fund details from the ATO’s online services. It is important to note that the opportunity to nominate a chosen fund is still available under this reform

Your Super Comparison Tool

Effective 1 July 2021

A new, interactive, online YourSuper comparison tool, to be developed by the ATO, will make it easier for members to choose their super fund.

The online tool will:

• Rank MySuper products by fees and investment returns

• Provide links to super fund websites

• Show the member’s current super accounts and prompt members to consolidate.

The Your Super tool will make it easier for members to compare the fees and performance of super funds in the market creating more competition amongst super funds.

Holding Super Funds to account for underperformance

Effective 1 July 2021

By 1 July 2021, APRA will conduct annual benchmarking tests on the net investment performance of MySuper products.

If a fund is deemed to be underperforming, it will need to inform its members of its underperformance by 1 October 2021. At this time, members must also be provided with information about the YourSuper comparison tool, which will identify any underperforming funds.

Funds that fail two consecutive annual underperformance tests will not be permitted to accept new members until a further annual test shows that they are no longer underperforming. By 1 July 2022, annual performance tests will be extended to other superannuation products.

The reporting of underperforming funds is likely to encourage members to rollover to a super fund with better performance, hence may lead to a consolidation of a number of super funds in the industry.

New responsibilities for Super Fund Trustees

Effective 1 July 2021

The Government will ensure superannuation trustees are more accountable and transparent as to how they manage the retirement savings of members.

By 1 July 2021:

• Superannuation trustees will be required to comply with a new duty to act in the best financial interests of members.

• Trustees must demonstrate that there was a reasonable basis to support their actions that is consistent with members’ best financial interests.

• Trustees must provide members with key information regarding how they manage and spend their money in advance of Annual Members’ Meetings.

This new duty is to act in the best financial interests of the members

SOCIAL SECURITY – ECONOMIC SUPPORT PAYMENT

Effective December 2020 and March 2021

The Government is providing two separate one-off Economic Support Payments of $250 to individuals receiving eligible income support payments or concession cards.

The $250 payments will be paid progressively from December 2020 and March 2021. Eligible individuals must be in receipt of eligible income support payments as at 27 November 2020 and/or 26 February 2021.

• Age Pension (including Age Pension (Blind))

• Carer Allowance*

• Carer Payment

• Commonwealth Seniors Health Card

• Disability Support Pension (including Disability Support Pension (Blind))

• Double Orphan Pension*

• DVA Gold Card

• DVA Payments

• DVA Seniors Card

• Family Tax Benefit (fortnightly recipients) *

• Family Tax Benefit (lump sum recipients) *

• Pensioner Concession Card (PCC) holders (covers non-income and asset test PCC holders and customers who have an extended entitlement to a PCC even though their payment has stopped).

Please note – * If they are not receiving a primary income support payment

Please note that individuals eligible for the Coronavirus Supplement of $250 per fortnight, such as Job Seeker, are not eligible for the one off $250 Economic Support Payment. In addition, if an individual only holds a Low-income Heath Care Card, they do not qualify either for the $250 one off Economic Support Payment.

General Advice Warning

Disclaimer

Month: October 2020

US ELECTION UPDATE

Equity markets slide as virus cases rise

Aussie shares rise on expected RBA stimulus

Monster budget propels Aussie market higher

FEDERAL BUDGET BRIEFING 2020

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Month: October 2020

US ELECTION UPDATE

Equity markets slide as virus cases rise

Aussie shares rise on expected RBA stimulus

Monster budget propels Aussie market higher

FEDERAL BUDGET BRIEFING 2020

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