Jacqueline Barton

Savings and investments are both strategies that share a common financial goal – to grow your wealth. Despite this key similarity, there are a few differences between the two, and finding the right balance can assist you in building a more stable financial future.

Navigating the decision of when to save and when to invest can be challenging, so we’ve provided some tips below to help you decide.

Savings

As we know, savings form from setting aside a portion of your income into a low-risk savings account that can accrue interest over time… but when is it best to do so?

When to save:

• If you’ll require the money in the next few years – when working towards a goal that you know you’ll require funds for in the near future, a savings account offers enhanced liquidity and flexibility.
• If you haven’t already built up an emergency fund to cover unexpected expenses – it is often recommended to have an emergency fund set aside should something happen and you are unable to work. This is also useful before implementing an investment strategy, as it can help mitigate potential risk.
• If you have a low appetite for risk – if your risk tolerance is low, you may feel more comfortable putting your money into a savings account as opposed to investing which can be unpredictable and carries a higher level of risk.

Investments

Investments involve putting your money into assets with the expectation of generating returns over time and can include stocks, bonds, real estate, and more. As already mentioned, one of the key differences that set investments and savings apart is the level of risk, so consider the following scenarios before proceeding:

When to invest:

• If you don’t require the money for a longer period of time e.g., five years – investments take time and patience and are not typically intended as a short-term strategy. If you’re comfortable with not accessing your funds until the distant future, you may be ready to invest.
• If you have a cash emergency fund to help manage the risks of investing – no one can predict what the markets will do with 100% accuracy, so it’s recommended to have an emergency fund as a buffer against unforeseen events.
• If you’re comfortable with taking some risk to build your wealth – the world of investing is unpredictable, continuously changing, and at times, volatile. Understanding and accepting the level of risk before proceeding may instil you with more confidence throughout the process.

By striking the right balance between savings and investments, you can pave the way towards a more secure financial future. If you’d like to tailor a strategy that aligns with your goals, get in touch with your financial adviser.

In this month’s update, we provide a snapshot of economic occurrences both nationally and from around the globe.

Key points we cover:

• Inflation has undeniably come down but is higher than Central Banks’ preferred range
• Is there something different about this inflation and interest rate hiking cycle?
• The road ahead for the economy, inflation, interest rates, and markets

We hope you find this month’s Economic Update as informative as always. If you have any feedback or would like to discuss any aspect of this report, please contact your Financial Adviser.

The Big Picture

The latest inflation data in Australia, the US, and indeed, many other economies is showing inflation has declined from their respective peaks. So the question is, how low does inflation need to be before the mindset of central banks transitions away from inflation-fighting and a bias to lower interest rate settings? And, assuming this transition occurs, the obvious question then becomes; when are they likely to start cutting interest rates?

We have previously documented the source of this bout of inflation. To recap, prices rose post-Covid as demand increased rapidly but, because of Covid lockdowns, the supply side e.g. shipments of manufactured goods from Asia was unable to respond to the sudden rise in demand. Consequently, competition for the limited supply available resulted in price rises which fed into a corresponding jump in inflation.

Central bankers, economists, and many others assessed that the drivers of this inflation were transitory. The rationale is that once the supply side responded to the Covid-created demand imbalance, prices would recede to ‘normal’ levels and inflation would return to manageable levels in the 2% to 3% p.a. range. That being the case, the need for interest rate policy tightening at that time was not required as the period of elevated inflation would indeed be temporary.

As a consequence of this assessment, central banks did not respond to the initial price surges. Dr Philip Lowe, Governor of the Reserve Bank of Australia (RBA), throughout much of 2021 said that rates would not rise until at least 2024. So why was there a change of heart?

There are a range of reasons, key among these were:

• The timing of the Russian invasion of Ukraine exacerbated inflationary pressures through food and energy price inflation as instability in the supply of these fundamental resources drove their prices higher.
• The general supply-demand imbalance lasted longer and remained more severe than anticipated as much of the developing world continued to grapple with Covid, long after the developed world had contained the pandemic as mass vaccination programs proved effective.
• Central banks saw inflation rising as they anticipated and, in keeping with their ‘transitory’ assessment, were unresponsive to interest rate policy. By the time inflation data confirmed that inflation was not as transitory as anticipated and that it had become more entrenched, they then had a well-documented change of heart.

The RBA first raised interest rates in May 2022 while the US Federal Reserve (Fed) started increasing US interest rates in March 2022. Fed chair, Jerome Powell, has since said he regretted ever using the word ‘temporary’. With the exception of Switzerland and Japan, most developed world economies have seen their central bankers walk a similar path.

Part of the problem has also been data dependency i.e. Central Bankers waiting for the data to confirm what was already known before responding with policy changes. The risk of this delay now is an economic recession. Some developed economies are already there.

A major risk is that, as central bankers delayed interest rate tightening on the way into this bout of inflation, they will be slow in cutting rates on the way out as they wait for longer timeframes of inflation data to confirm that it has indeed receded. Look back to the experience during the 1989 to 1991 period in Australia when there was the interest-rate-induced ‘recession we had to have’. The recession persisted even though the RBA was sharply cutting interest rates throughout that period!

But is this time different?

That phrase, or its affirmative variant, is used too often but there are some differences worth noting for the current cycle. Prior to this bout of inflation interest rates had been low and even negative in some countries for a very long period. That is extremely unusual!

In economics, there is a concept of a ‘neutral rate of interest’ – one which is neither expansionary nor contractionary. Economist consensus is that in Australia and the US, that neutral rate is about 2.5% to 3.0% p.a.

In the current cycle in Australia, the RBA cash interest rate did not get into ‘tightening’ mode until December 2022 i.e. RBA taking the cash interest rate above 3.0% – the first seven rate hikes from 0.1% to 3% merely reduced and then removed the existing ‘loose monetary policy’. One reason we haven’t seen economies falling into recession is that interest rate increases only became restrictive in the last 12 months. Using the same metric, the US monetary policy became restrictive i.e. higher than 3.0% p.a. in September 2022 after the Fed started hiking in March of that year. What is different this time is that tightening cycles do not usually start from such a low base.

There is also another important fact to consider. Fixed-rate mortgages don’t ‘exert any pain’ on borrowers until the loans roll over or a new loan is initiated. The so-called ‘mortgage cliff’ is just starting in Australia as borrowers on fixed interest rate loans move to variable interest rate loans. In the US, where fixed rate loan terms are much longer (up to 30 years) the effect of such a short sharp rates’ upswing is diluted even more.

In the current environment, the data is not all pointing to the same outcome. Some key data points indicate ongoing strength (upward inflationary pressure) which is adding to the complexity for Central Bankers trying to manage inflation back to preferred or neutral levels.

Key among these in both Australia and the US is the labour markets which are still holding strong but the same is not true for other inputs. The US has experienced several months of contraction in retail sales and Australia’s GDP, in the March quarter of 2023 (reported in June), was barely above zero (and was negative when population growth is taken into account). The recent June quarter 2023 estimate of growth for the US was an impressive 2.4%, but that includes a lot of fiscal stimulus (government spending) from the Biden administration, which is actually stimulatory and is fighting against the Fed policy.

The economic outlook remains opaque as we transition from tightening monetary policies through to a plateau phase (it feels like we are entering the plateau phase now), before interest rates decline to support economic growth/recovery post inflation returning to its neutral range.

The outlook for share markets is somewhat brighter even though earnings forecasts for companies were revised down for the June quarter in the US and the half-year ending June 30 in Australia. So, the current forecast for corporate earnings is not that high and, as a consequence, not that hard for companies to achieve.

Markets can look through the malaise and rise before a downturn in the economy is over, and, based on historical experience, often do. Refinitiv, one of our data providers, surveys hundreds of stock broker forecasts of company earnings for the three years ahead. The analysis of that data is, on average, supportive of current share market valuations and prices.

Asset Classes

Australian Equities

The Australian share market as measured by the ASX 200 Index was up +2.9% in July. The index of Energy shares led the way rising 8.8% whereas the Indices of Financial and IT companies rose 4.9% and 4.4% respectively. Good results all things considered. The indices for Staples and Healthcare went backward in July.

It would appear that equity investors have gradually moved to be more accepting of a ‘soft-landing’ scenario for the economy and are allocating capital back into shares as markets are trending more positively. While a ‘hard landing’ remains a risk for markets, data, particularly in the US, continues to support a ‘soft-landing’ outcome.

International Equities

The US S&P 500 Index of the largest 500 companies listed on the US share market had a strong July rising +3.1%.

Much attention continues to be paid to the magnificent 7 large-cap technology stocks listed in the US and, while they have performed well and largely carried the market to its loftier heights, the positive move in the market has been broader than these stocks alone. This broadening provides a degree of comfort in the general health of the share market.

Bonds and Interest Rates

In a widely telegraphed move, the Fed raised its cash interest rate by 0.25% to a range of 5.25% to 5.5% (the highest level in 22 years). The RBA, on the other hand, decided to leave our cash interest rate on hold at 4.1% p.a. at its meeting on August 1. The European Central Bank (ECB) took its base interest rate to a record-high level of 3.75% p.a. The Bank of Japan (BoJ) unsurprisingly stayed at ‑0.1% p.a. but it did adjust the allowed movement around its longer maturity bond rates (e.g. 10-year Government bond.

It appears that the mood across developed economies at least is that central banks are at or near their expected highs for interest rates. The US Fed has an estimated probability of 20% for one more interest rate increase to be announced at its next meeting on September 20^th. With inflation seemingly coming under control, there is a growing belief among many analysts that the Fed might already be ‘done’ raising rates.

The US 10-year Government bond rate has moved both up and down in recent months. The latest move was to briefly rise back above 4%. We note that after a period of volatility, the US bond market is stabilising somewhat.

Other Assets

The price of oil moved sharply higher in July (+14%) fuelling gains in the energy sector of the ASX 200.

The price of iron ore was down a little (‑1.9%). The price of copper was up +3.6%. The price of gold was up +2.7%. The Australian dollar appreciated 0.8% over July.

The VIX volatility index, a measure of share market volatility, closed in July at 13.6, a level that is in the normal range.

Regional Review

Australia

Our jobs report for June was strong with 33,600 new jobs being created and the unemployment rate at 3.5%. Of course, immigration is strong perhaps helping the increases in the demand for labour.

Dr Philip Lowe was not reappointed for a second term as RBA Governor. He is to be replaced by the current Deputy Governor, Michele Bullock, on September 17^th. We do not think that change will make a material difference to the conduct of monetary policy, particularly as inflation is now receding.

We do not think the RBA will start cutting interest rates any time soon unless, or until, more of a material slowdown in economic growth is observed. Retail sales fell by ‑0.8% over the last month but rose 2.3% on the year. In other words, the annual growth in retail sales at current prices is about the same as the general level of prices so inflation-adjusted retail sales have been flat.

China

China data are a little mixed. The latest GDP growth for the June quarter came in at 6.3%, 1% below the expected 7.3%. Both figures are well above the long-run expectation of a little over 5% p.a. because of the ‘base effect’ of coming out of the three-year-long lockdown. However, the quarterly growth was 0.8% against an expected 0.5%. That bodes well for the September quarter.

The usual monthly growth statistics of retail sales, industrial output, and fixed asset investment were at or above expectations but weaker than pre-pandemic rates. Exports and Imports both contracted in the latest month and were worse than expected. Youth unemployment was reported to stand at 22.3%! No doubt a concern for Chinese authorities.

China’s manufacturing PMI came in at 49.3 making it the fourth successive reading below 50 (a reading below 50 indicates contraction). However, the index has risen slightly in the last two months from a low of 48.8 in May.

US

US employment growth (non-farm payrolls) increased by 209,000 in June slightly missing the expected 225,000, but the unemployment rate fell from 3.7% to 3.6%. Importantly, around 150,000 of the jobs created were in government positions and lower-level healthcare. This change in the mix could be a sign of weaker job growth to come and, hence, to a softer monetary policy stance from the Fed.

The US has two more Consumer Price Indices (CPI) reports and two more employment reports before the next interest rate setting meeting on September 20^th. The Fed will also be hosting the Jackson Hole global conference for Central Bankers in late August. Should we expect a joint statement that the bulk of the work on inflation is over?

US June quarter GDP growth surprised to the upside at 2.4% when 2% had been expected. We recall that March quarter growth was 1.1% for the preliminary estimate reported in April which was then revised upwards to 1.3% and then 2% in June, indicating some resilience in the US economy.

US retail sales were weak at 0.2% for the month and industrial output went backward at ‑0.5%. Despite this, the mood continues to remain sanguine.

Europe

UK wage inflation grew the equal fastest on record in the three months to June 30 at 7.3%.

France’s GDP growth for the June quarter came in at 0.5% against a forecast of 0.1% and a previous reading of 0.1%. Inflation came in at 4.3% from a previous reading of 4.5%.

There is little in Europe data to give us much joy but they seem to be struggling through rather than collapsing. The latest European Union GDP growth data for the June quarter ended the run of two consecutive quarters of negative growth rates with a rate of 0.3% against an expected 0.2%.

Rest of the World

Japan’s inflation is off its recent high at 3.3% and core inflation was 4.2%. The Tokyo core inflation read was 3% which beat expectations. Japan retail sales came in at 5.9% above the expected 5.6%. However, industrial output at 2.0% was slightly below forecast.

Russia has reportedly ended the food corridor for ships carrying Ukrainian grain exports to pass freely through the Black Sea. There are many reports of Ukraine fighting back by firing missiles at Russian targets. There seems to be no peace in sight. There is an elevated chance of a hike in food and fertilizer prices from these recent moves but we do not see it as having the same effect as at the start of the invasion in February 2022. Alternative sources of supply have, to some extent, been found.

You’re about to enjoy a cappuccino from your local coffee shop, and you find yourself faced with an abundance of payment choices when the moment arrives to pay. Do you use your card? Cash? Your smart watch? Your phone? The chip embedded in your hand? (Just kidding).

This has become the reality with the rise of digital payments, with 98.9% of Australian customer banking interactions now taking place via apps or online, and cash being used for just 13% of payments (down from 70% in 2007).*

We’ve explored the growing trend of digital payments and outlined its benefits, challenges, how consumers and businesses can harness its full potential, and why cash still holds significance.

Benefits

• Convenience – the most obvious benefit that pops to mind is the convenience digital payments provide that not only allow us to make purchases swiftly, but reduces our reliance on physical cash and cards.
• Enhanced security – with advanced encryption and authentication measures, digital payments provide a secure way to protect financial information, reducing the risk of fraud and theft.
• Real time transactions – instant transfers and payments enable quicker access to funds and better visibility of financial status. For businesses, it also reduces the time staff need to spend handling, counting, reconciling and fixing errors that are associated with cash.
• Contactless – COVID may feel like a lifetime ago, but during that time, contactless payments gained popularity as a hygienic option for both customers and businesses.

Challenges

• Cyber security – where there is technology, there are cyber-attacks, so you need to be on alert when making online transactions. If you’re unfamiliar with a name or purchase on your account, it’s best to contact your bank to check.
• Connectivity – although most places we go have phone and internet coverage, this isn’t always the case, especially in regional areas and if connectivity is down.
• Data privacy – digital transactions require more personal data, which as we know, runs the risk of ending up in the wrong hands.

While the vast majority of consumers and businesses using digital payments appears to be the way of the future, cash still provides inclusivity for those without digital access, can be vital in emergencies, practical for small transactions, and provide people with a level of privacy. However, with more and more talk of Australia becoming a ‘cashless society’, the relevance of physical currency prompts us to reflect on our evolving financial landscape.

So, how will you be paying for that cappuccino?

* https://www.ausbanking.org.au/mobile-wallet-transactions-skyrocket-to-93-billion-as-98-9-of-bank-interactions-take-place-digitally/

The winter chill is in the air, and so too is the increased use of electricity to keep us toasty and warm. Dryers, heaters, electric blankets, heat lamps… the list goes on! With the cost-of-living pressures on the rise, we’ve listed a variety of practical ways to help you reduce your energy consumption.

Avoid the dryer when possible

Throwing clothes in the dryer can become a convenient default choice during the winter months, but can hurt our wallets as they’re notorious for sucking up energy. Try and take advantage of the sunshine when you can to dry them naturally outside or alternatively, use an indoor drying rack during rainy weather.

Heating the home

It may seem obvious, but only heating the room that you’re currently in is a simple way to keep energy costs down. Closing doors to unused rooms and blocking any drafts will also help you maintain a warm environment.

Let the light in

On those beautiful clear winter days, open up the curtains and blinds to use the natural light as an alternative to switching on the artificial ones.

Switch off and save

Even when appliances are on stand-by, they can still be consuming energy, so consider turning them off at the power point when not in use.

Shop around

It may help to put aside some time to research different energy providers to ensure you’re getting the best deal possible. You can find free comparison sites online who do most of the work for you such as Canstar, Energy Made Easy and Finder.

Rug up

Pull out the cosy socks, jumpers and blankets and layer up to avoid the temptation of reaching for the heater. Of course, there are times when the layers just won’t cut it, but have those winter woollies as a go-to when you can.

Slow cooker

Cold weather calls for comfort food, and slow cookers not only provide the convenience of cooking while you’re out and about, they also use less energy than ovens. If you’ve got a slow cooker, now is a great time to put it to use.

By adopting some of these small changes in your habits and home, you have the potential to save money on your energy bill over time.

It’s become almost impossible to watch, listen, or scroll recently without headlines about AI and ChatGPT infiltrating every aspect of our lives. From “ChatGPT wrote my fitness plan”, to “AI is taking over the world”, the general consensus seems to come down to one word – controversial.

A language model developed by the company ‘OpenAI’, ChatGPT is designed to generate human-like responses with impressive speed by scraping the internet for data. The system uses this information to respond to prompts provided by the user, that can range from answering simple questions to producing complex code for websites.

As the developments with this kind of technology evolve, so do the concerns about its role in our everyday lives and the industries it will continue to impact – with financial advice being no exception. Whether you’re for or against AI, there’s no doubt that it’s changing the way we do things. So, what could software like ChatGPT do for your investments?

The Financial Review tested this functionality[1], asking ChatGPT “How much tax is payable if you earn $250,000 a year with $40,000 tax deductions and should you make concessional super contributions?” In response, the software automatically applied Australian resident tax rules for 2022-23 (potentially learning this from previous prompts in the software) but calculated the marginal tax and concessional contribution cap incorrectly, applying one marginal tax rate to the entire net income, and stating $25,000 instead of $27,500 for the concessional contribution cap.

“Problematically, ChatGPT had no idea it was wrong. It gave these answers confidently – only someone who knew the correct answer could correct it. An investor relying on the data could be in trouble.” – Tim Mackay, Financial Review

However, when asked to provide the top 20 Australian Exchange-Traded Funds (ETFs) and links to their website, it was able to instantaneously provide the information (albeit, utilising some strategic prompts that asked the software to pretend it wasn’t actually ChatGPT to bypass its rules).

Although the software has the capacity to provide financial information in just seconds, it’s not always accurate, and this presents a unique set of challenges in an industry that so frequently changes and that faces such stringent regulations. Nevertheless, using ChatGPT for general enquiries, to improve financial literacy, to simplify complex information or even assist with budgeting plans, can provide an easily accessible and free tool to use in conjunction with a (human!) financial adviser.

It is also important to note that although some advisers may use the software for certain aspects of their financial planning process, it cannot account for unexpected events or changes in the market. Human expertise and judgement remain essential in adapting to these shifts.

[1] https://www.afr.com/wealth/personal-finance/what-chatgpt-can-do-for-your-investments-20230125-p5cfee

Like life insurance, planning for the end can be a difficult and confronting process. The best way to save your family from emotional and financial hardship, should you pass suddenly or be unable to manage your affairs, is to plan your estate.

Estate planning involves making important decisions as to who will be managing your affairs, who will be inheriting your assets, and ensuring that your assets are distributed according to your wishes.

If you haven’t yet considered implementing an estate plan, here are some of the important elements.

What makes up an estate plan?

• Will – a will outlines how your assets will be distributed after your death and can include things such as who will look after your children if they’re still minors, naming an executor of your estate, charities you wish to contribute to and funeral plans.
• Power of attorney – this is a person you appoint to make important decisions about your finances and healthcare should you become incapacitated, with many electing a trusted family member.
• Advance health care directives – a legal document that allows you to specify your healthcare preferences such as medical treatments and end-of-life care.
• Superannuation death benefits – when someone dies, their super provider typically pays out the person/persons nominated as their beneficiaries, known as the ‘super death benefit’. This nomination could be binding or non-binding. A binding nomination means your super fund is required to pay your nominated people in the proportions you have specified. A non-binding nomination means the fund has some discretion over where your money goes.
• Guardianship – appointing a guardian for minor children will mean they will be looked after by a person you trust in the event of the parents’ death or incapacity.
• Trusts – a legal arrangement where the trustee holds and manages assets on behalf of the beneficiary. Trusts allow individuals to transfer assets to their beneficiaries in a more tax-efficient manner.
• Life insurance – incorporating life insurance as part of your estate plan means your loved ones can be financially looked after when you pass, and use the funds to pay off any debts you leave behind.

What does this mean?

As you can see, there are quite a few elements that make up an estate plan, but overall, the main purpose is to protect your assets and ensure they’re properly distributed. Without one in place, you run the risk of them being allocated according to state law which may not reflect your preferences, your estate could be subject to higher taxes and your control is limited. It also takes the difficult decision-making away from your family and beneficiaries, creating a less stressful time for them and minimising disputes.

If you haven’t created an estate plan or are interested to learn more, get in touch with your financial adviser to get started.

It seems like every other week there’s another cyber-attack, data breach, or hacking incident in Australia, releasing our highly sensitive financial, medical, and other personal information onto the dark web. It’s a scary thought!

Although we have limited control over how third parties handle our personal details, there are some simple things we can all put in place to best protect our data online.

Multi Factor Authentication (MFA)

MFA is a security measure that requires two or more proofs of identity to grant access to an account. For example, when logging into a PayPal or Facebook account, you’ll receive a notification via your selected choice of SMS, email, pin number etc. to confirm that it was you who was accessing it. This means that if someone does gain access to your pin or password, they’ll still need other forms of identity to log in. If it’s an online account, we recommend having this enabled.

Passwords

As tempting as it is to use the same password across all of your accounts, or the classic variations of the word ‘Password’, it makes us more vulnerable to cyber-attacks if they’re cracked. Best practice is to create complex passwords that are different for each platform which you can keep track of by using a trustworthy application such as 1Password or Bitwarden.

Emails

Don’t recognise the sender? Approach with caution. Phishing and spam emails can often look like they’re from a legitimate source, even pretending to be from your friends and family! They can include links that when clicked, can have you reveal passwords and personal information. If there’s a link in an email that you’re not sure about, it’s best not to click.

Updates

Regularly updating your devices and software means they will have the most recent security upgrades to protect you. Hackers look for weaknesses in systems, so setting up auto updates is an easy way to make sure you’re less susceptible to attacks.

Anti-virus software

Protect your computer from malicious software, viruses, and malware with an effective anti-virus solution. This software will run regular scans on your device, preventing and removing any viruses that try to infect your computer. There are plenty of options to choose from, so research what’s available or consult an IT professional for their recommendations.

Stay up to date

Keeping in the loop with the latest news about your subscriptions, providers and other services means that if a security breach happens, you can minimise any potential problems by immediately updating your passwords.

If you do find yourself a victim of a cyber-attack or would like to know more about how to protect your devices and accounts, visit the Australian Cyber Security Centre.