• It caused a massive health crisis claiming at least 1.5 million lives, with many countries seeing at least two waves.
• It kept many confined to their homes and shut down big chunks of economies, driving the biggest fall in economic activity since the end of WW2 if not the Great Depression, with major economies seeing peak to trough falls in GDP of 10% to 20% and the Australian economy contracting by 7.3%. This saw unemployment surge and inflation plunge.
• Share markets had 35% or so plunges in February/March, commodity prices collapsed with the oil price going negative at one point as investors sought out safe havens like bonds.
• And it, or rather the poor management of it, lost President Trump the US election (even though he denies losing).

The pandemic also increased tensions with China and is likely to leave a longer term mark with a further set back to globalisation, more social tensions, bigger government and public debt, the risk that massive money printing eventually results in higher inflation, faster structural change due to an accelerated embrace of technology, more consumer caution and a lower population in Australia due to the hit to immigration.

However, while 2020 is a year many of us would prefer to forget and coronavirus continues to wreak havoc in much of the world, the end result for economies hasn’t been as bad as had been feared back in March and April. This reflected a combination of:

• An unprecedented and rapid fiscal stimulus that protected businesses, jobs and incomes;
• Debt forbearance schemes that headed off defaults;
• The massive monetary stimulus that saw interest rates plunge;
• Social distancing which has helped contain the virus enabling some reopening – albeit better in some countries (eg, Asia, Australia and New Zealand) than others.

This enabled economic activity to bounce back faster than expected through the second half as restrictions eased, even though it wasn’t always smooth (eg, in Victoria or in Europe and the US) and we still have a way to go to full recovery. As a result, investment markets also performed far better than feared.

Source: Thomson Reuters, Morningstar, REIA, AMP Capital

• While share markets plunged in March during the early stages of the pandemic, they then rebounded thanks to massive fiscal stimulus and reopening, low-interest rates and bond yields that made shares cheap as well as good news on vaccines that enabled investors to look forward to further recovery in 2021.
• This all drove solid returns in global shares with Asian and US shares (which were boosted by a relatively a high exposure to IT and initially health care stocks which benefitted from the pandemic) outperforming. The more cyclical Japanese and European markets underperformed.
• Australian shares also unperformed due to the greater cyclical exposure of the Australian share market.
• Government bonds had reasonable returns as yields fell in response to central bank rate cuts and bond-buying along with safe-haven demand – which drove capital growth.
• Real estate investment trusts had negative returns as a result of a hit to property space demand and rents.
• It was the same story for unlisted commercial property and infrastructure, although industrial property did well.
• Home prices fell 3% around mid-year but then started to recover as low-interest rates, government support measures and reopening swamped the hit to immigration, weak rental markets and higher unemployment. Houses, outer suburbs & regions benefitted from “escape from the city.”
• Cash and bank term deposit returns were poor as the RBA cut the cash rate to just 0.1%.
• After a pandemic driven plunge to $US0.55 in March the $A rose reflecting higher commodity prices and a falling $US.
• Due to reasonable share returns but weak property and infrastructure returns balanced super funds have so far seen low but positive returns – but this followed a strong 2019.

2021 – recovery

Just as 2020 was dominated by the pandemic and this determined the relative performance of investment markets and stocks, 2021 is likely to be dominated by the recovery. This in turn will have a profound effect on investment markets. There are four reasons for optimism. First, massive fiscal and monetary stimulus is still feeding through economies with very high saving rates indicating pent up demand that can be spent once confidence improves, which will also help offset the wind-down of some support measures like JobKeeper in Australia.

Second, the news on vaccines is positive. While uncertainties remain, by end 2021 or early 2022 there is a good chance the world will be approaching a degree of herd immunity.

Third, a new US president in Joe Biden should usher in a period of more stable and expert-based policy-making in what is still the world’s biggest economy. In particular, it will likely head off a return to trade wars that could have wreaked havoc in 2021. A more diplomatic US approach to resolving differences with China could also help Australia move down a path to resolving its own differences with China.

Finally, Australia along with NZ has navigated 2020 remarkably well, controlling coronavirus far better than most comparable countries and seeing its politicians and institutions work well together. It also led to structural reforms that may help future growth (e.g., property tax reform in NSW, IR reform nationally).

The combination of vaccines, policy stimulus and pent-up demand is expected to see a supercharged cyclical rebound in global GDP of around 5.2% and 4.5% in Australia in 2021. This is likely to see strong double-digit rebounds in profit growth.

Inflation is likely to remain weak, reflecting still high levels of spare capacity which in turn means interest rates will remain low. While this is not good for those relying on bank interest, it benefits the household sector as a whole (with debt exceeding bank deposits) & corporates, eases the servicing of high public debt levels and makes shares cheap. So, in a way we remain in the sweet spot of the investment cycle with improving growth but low rates. In Australia, the cash rate is expected to end 2021 at 0.1% but there is still a risk of more quantitative easing.

Implications for investors

Shares are at risk of a short-term correction after having ran up so hard recently and 2021 is likely to see a few rough patches along the way (much like we saw in 2010 after the recovery from the GFC), but looking through the inevitable short term noise, the combination of improving global growth and low-interest rates augurs well for growth assets generally in 2021. In particular, we are likely to see a continuing shift in performance away from investments that benefitted from the pandemic and lockdowns – like US shares, technology and health care stocks and bonds – to investments that will benefit from recovery – like resources, industrials, tourism stocks and financials.

• Global shares are expected to return around 8% but expect a rotation away from growth heavy US shares to more cyclical markets in Europe, Japan and emerging countries.
• Australian shares are also likely to be relative outperformers helped by better virus control, enabling a stronger recovery in the near term, stronger stimulus, sectors like resources, industrials and financials benefitting from the rebound in growth and as investors continue to drive a search for year yield benefitting the share market as dividends are increased resulting in a 4.4% grossed-up dividend yield. Expect the ASX 200 to end 2021 back around 7200.

Source: Bloomberg, AMP Capital

• Ultra-low yields & a capital loss from a 0.5-0.75% or so rise in yields are likely to result in negative returns from bonds.
• Unlisted commercial property and infrastructure are ultimately likely to benefit from a resumption of the search for yield but the hit to space demand and hence rents from the virus will continue to weigh on near term returns.
• Australian home prices are being boosted by record-low mortgage rates, government home buyer incentives, income support measures and bank payment holidays but high unemployment, a stop to immigration and weak rental markets will likely weigh on inner-city areas and units in Melbourne and Sydney. Outer suburbs, houses, smaller cities and regional areas will see stronger gains in 2021.
• Cash and bank deposits are likely to provide very poor returns, given the ultra-low cash rate of just 0.1%.
• Although the $A is vulnerable to bouts of uncertainty about coronavirus and China tensions and RBA bond-buying will keep it lower than otherwise, a rising trend is still likely to around $US0.80 over the next 12 months helped by rising commodity prices and a cyclical decline in the US dollar.

What to watch?

The main things to keep an eye on in 2021 are as follows:

• Coronavirus and vaccines – problems with vaccines or their deployment could result in ongoing waves of new coronavirus cases & slower recovery than we are assuming.
• US politics – a Democrat victory in Georgia’s January 5 US senate elections would risk more of a leftward tilt under Biden, although conservative Democrat senators will limit this. Trump could also try to throw a spanner in the works.
• China tensions – we expect a shift to a diplomatic approach here but there is a risk of misjudgement on either side which could start to slow our longer-term economic growth rate.
• Inflation – we are assuming it remains weak but if it rebounds faster than expected it will mean faster increases in bond yields and downward pressure on asset valuations.
• The hit to immigration in Australia – it’s hard to see 700,000 less immigrants out to mid-2023 having no impact on inner-city Sydney and Melbourne property prices.

Source: AMP Capital – Oliver’s Insights

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Last year Australians spent about $1000 each for Christmas on presents, decorations, travel and charity donations. For 28 per cent of us, this expenditure meant using credit cards or buy now pay later (BNPL).ⁱ

While many will use credit again this festive season, the current economic circumstances may make us think twice about our spending. It’s not just what you spend, but how you spend that could make all the difference.

So, if you plan to use credit to help manage your Christmas spending, what are the options?

Buy now, pay more later?

Even before COVID, more and more people were turning away from the traditional credit card and opting instead for a buy now, pay later payment method. BNPL providers in Australia include companies such as Afterpay and Zip, but there are many more.

The use of BNPL may be due to convenience or an aversion to debt, or a bit of both.

In a recent report, the Australian Securities and Investments Commission (ASIC) found BNPL transactions jumped by 90 per cent to 32 million in the 2018-19 financial year.ⁱⁱ

Meanwhile, the number of credit card accounts fell 7 per cent in the 12 months to March 2020 from 14.6 million to 13.6 million.ⁱⁱⁱ

But for those who still use a credit card, it is estimated that more than 2 million Australians have gone over their limit since March this year as the economic slowdown takes its toll on household finances.^iv

Initially, BNPL was popular with millennials, but over time more baby boomers and Gen X have opted for this form of credit which boasts that it is interest-free. Compare that with interest on credit card balances which are mostly in double digits and can even be as high as 20 per cent.

But don’t be fooled.

Watch for fees

There may be no interest rates on buy now pay later, but there are fees and these can quickly add up.

All BNPL providers have slightly different terms and conditions, but fees may include:

• Late fees of up to $15 a month,
• Monthly account keeping fees of up to $8 a month
• Payment processing fee of $2.95 every time you make an extra payment
• Establishment fees can range from zero to $90.^v

Of course, that does not mean you should avoid buy now, pay later offerings. If you meet all your payments on time, then it can be a useful form of credit. The key is to be cautious.

For instance, do not run up debt with multiple providers. Not only can that prove expensive, but it can also be difficult to manage. It can soon become expensive if you have late payment fees to pay to several providers.

ASIC research found one in five BNPL users missed payments in the 2018-19 financial year. This translated into fee revenue of $43 million for providers, a jump of 38 per cent over the year and financial hardship for 21 per cent of users. As a result, ASIC said some people were cutting back on meals and other essentials or taking out additional loans to make BNPL payments on time.

Bank alternative

Now the big banks are meeting the challenge of BNPL to traditional credit cards head-on, with the launch of interest-free credit cards and partnerships with BNPL providers.

While the new interest-free credit cards have no interest charges or late fees, they typically have a minimum monthly payment and a monthly fee in months where you don’t make a transaction.

Finding money for everyday items, let alone festive spending has become a juggle for many this year. The gradual transitioning away from support payments such as Job Keeper and Job Seeker won’t make things any easier.

Whatever your financial circumstances, if you monitor your money carefully and make changes to your expectations, then there is no reason why this festive season can’t be just as good this year as last. One of the lasting benefits of 2020 may well be that it makes us more proactive about managing our money wisely.

Managing your money during the Festive season can get overwhelming. Give the Integra team a call or book a meeting here.

i https://www.finder.com.au/australias-christmas-spending-statistics

ii https://asic.gov.au/about-asic/news-centre/find-a-media-release/2020-releases/20-280mr-asic-releases-latest-data-on-buy-now-pay-later-industry/

iii https://www.afr.com/companies/financial-services/credit-cards-slump-as-customers-shift-to-buy-now-pay-later-20200512-p54s4z

iv https://www.finder.com.au/press-release-october-2020-over-the-limit-pandemic-pushes-2-million-aussies-beyond-credit-means

v https://moneysmart.gov.au/other-ways-to-borrow/buy-now-pay-later-services

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While it hasn’t received much publicity, increasing numbers of Australians are using charitable trusts to give in a more planned and tax-effective way.

The turning point came in 2001 when the Howard Government introduced the Private Ancillary Fund (PAF) with the aim of encouraging more individual and corporate philanthropy. PAFs are charitable trusts that can be used by an individual or family for strategic long-term giving.

Since then, the number of PAFs and the amount of money contained in them has grown steadily. In early 2018, JB Were reported that there were 1600 PAFs, housing $10 billion and distributing $500 million a year.ⁱ

Claiming a tax benefit

According to Philanthropy Australia, in the 2015-2016 financial year 14.9 million Australians collectively donated $12.5 billion to charities and not-for-profits (NFPs).ⁱⁱ The median donation was $200 and 4.51 million taxpayers claimed for a ‘deductible gift’ on their tax return, highlighting that you don’t have to be wealthy to live generously.

Though donations to appropriately accredited charities and not-for-profits are tax-deductible, the figures indicate two-thirds of taxpayers don’t bother to claim. It’s well worth keeping track of receipts so you can claim when you think that, for example, a single donation of $5000 to a charity or NFP in a financial year will reduce your taxable income by $5000.

A core principle of tax-deductible philanthropy is that the giver shouldn’t stand to receive any material benefit. For example, if you buy tickets in a raffle run by a charity you can’t claim a tax deduction on the cost of the tickets. In order to receive a tax deduction for your donation, the recipient must also be registered as a deductible gift recipient (DGR).

There are many ways to be charitable but the impact on your tax bill will vary depending on how you go about it.

A more sophisticated approach

These days, people who want to take philanthropy to the next level with an ongoing, tax-effective approach have a variety of trusts to choose from.

The Private Ancillary Fund

PAFs are the best-known of the new breed of trusts. The money placed in a PAF is tax-deductible and assets in the fund aren’t subject to income or capital gains tax (but do qualify for franking credits).

Let’s say a dentist sets up a PAF and gifts half his $500,000 annual income into the fund where it’s invested in a diversified portfolio. The dentist’s taxable income now drops to $250,000. What’s more, no tax is paid on the returns made on the $250,000 that has been invested in the PAF. The dentist has to distribute a minimum of five per cent of their PAF’s net asset value annually, or a minimum of $11,000. After meeting that requirement, the dentist has a relatively free hand about which charities to support and how much they receive.

The Public Ancillary Fund (PuAF)

PuAFs work the same way as PAFs but operate on a larger scale. For example, 10 dentists may set up a PuAF to finance the building of dental hospitals in Africa. As well as gifting part of their incomes, the 10 dentists can (in fact, are obliged to) invite the general public to make tax-deductible donations to their PuAF.

Testamentary Trust (or Will Trust)

These are used by individuals wanting to leave money in their will to a specified charitable purpose. The two advantages of this type of trust are that the trustee(s) can distribute the income generated by the trust in a way that minimises the tax burden of beneficiaries, and the assets in the trust can’t be accessed by parties such as creditors and the divorcing partners of a beneficiary.

Smart selflessness

Like many parts of the economy, the charity sector has been ‘disrupted’ in recent years, with a stronger focus on donor engagement.

Organisations such as Effective Philanthropy and Effective Altruism have emerged to analyse how the charity dollar can be best spent. While crowdfunding platforms such as GoFundMe have emerged to facilitate, for example, the funding of individual medical procedures.

As a result, many philanthropists have gone from simply writing cheques to directing – or at least monitoring – how their money is spent.

Your contribution is most likely to be well spent if you donate it to an organisation that defines its mission clearly, has measurable goals, can demonstrate concrete achievements and is transparent about its finances (e.g. has annual reports available on its website).

Few people give to get a tax deduction but by supporting good causes in a tax-effective manner you can achieve a bigger bang for your philanthropic buck. If you would like to know more about tax-effective giving, give us a call.

Take a step in the right direction by putting the right structure in place to support your charitable donations. Give the Integra team a call or book a meeting here.

i https://www.strategicgrants.com.au/au/free-resources/blog/19-blog-kate/280-grantseeking-donor-giving

ii http://www.philanthropy.org.au/tools-resources/fast-facts-and-stats/

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On the positive, this disruption has given us an unexpected gift of space and time; physical space and time to think about how prepared we were coming into this pandemic. If the current situation is making you worry about your finances, we have some tips to get you through the crisis.

The Great Lockdown

In an attempt to contain the virus, social distancing and quarantine measures have caused major inactivity; causing immediate job losses and business shutdowns. The economic toll of which will be felt for years to come. The International Monetary Fund (IMF) even likened the impact of the downturn as its worst since the Great Depression. The IMF also warned the global economy would contract by 3 per cent in 2020, a reversal of their earlier forecast the world economy would grow by 3.3 per cent, outpacing 2019.

On a smaller scale, this crisis has brought about a new set challenge for all of us. If you are impacted or likely to be impacted through reduced income or unemployment, then we have 5 tips on how you can adjust your spending to weather these difficult times.

Take stock of all your bills

You’ll need to know how much money you have coming in and out every month. If you’ve lost your job or you expect your income will be reduced, it’s important to know if your income will cover all your bills. These important bills are your rent or mortgage, utilities, credit cards, and loans. Call your bank or loan provider to find out if they offer extensions or deferred payments for a period of time. Shop around for lower insurance premiums on your car or health fund. If you have direct debits in place, it’s a good idea to cease them and pay these manually until your income situation improves.

Buckle down

If you haven’t got one, it’s time to make a crisis budget. Do you know if you’re living below your means or over-extending yourself? Categorise your items as “wants” and “needs”. If you’re feeling adventurous, try doing the budget as if you had half of your income available. Once you’ve determined your living expenses, find areas where you might be spending more money than necessary.

If you’re paying for internet data that you don’t use, switch to a lower plan. Switch your plan to a cheaper mobile phone. Do you really need that landline? If you have both Netflix and Foxtel, cancel one of them. If you have a credit card, get a better credit card deal with a lower-rate and transfer the balance. Keep cutting down until your expenditures match your diminished income.

Shop smarter

Toilet paper and pasta aside, there is no shortage of common foodstuff in the supermarket. Choose to focus on food with long shelf lives and don’t be afraid to buy generic brands. Plan your meals and know what’s in your pantry so you don’t buy food you don’t need. Takeaway food is convenient but also expensive, compared to home-made. It could be fun to start growing your own vegetable garden with your children or grandchildren! It’s a great to eat healthy and paying the cost of over-indulging in the wrong food. Learn to manage your grocery shopping and your wallet will thank you for it.

De-clutter for some extra cash

Stuff you no longer use sitting in your wardrobe or shed can be sold for extra cash online or a garage sale. Generally, if you haven’t used something for at least 12 months, you don’t need it. Even small amounts can add up to something meaningful. At the very least, you’ll have a less cluttered house.

Emergency savings

Only in the event of an extreme financial crisis, you may need to dip into that savings fund. You may have been working hard to save up for that Caribbean Cruise or that Mt. Everest trek, but you may need to use your savings to meet any budget shortfall temporarily until the economic situation improves.

Time to recalibrate

During these tough times, we need to re-assess and prioritise. Sometimes we are clouded by what we think we need because we’ve become used to having it. We drift off-course and need to recalibrate. Sometimes recalibration happens by choice. Sometimes it’s forced upon you.

Recalibrating is not easy because we’re creatures of habit. Routines are hard to change.

So, stop focusing on the negatives and obsessing over what you’re missing out on. Instead, start thinking about what you do have and all the things you could do.

Don’t be afraid to adjust and adapt to the current conditions. Recalibrating by controlling costs is a proactive way to prepare yourself and lower your risk of a financial crisis. The goal is to survive without losing the things most important to you.

Final Note

It’s ok to be worried about money. Your action plan for a financial crisis depends on your individual needs. By re-calibrating your goals to meet your income and spending, you can focus on what’s important now you will come out the other side of this challenging time.

While we won’t know the full impact of this pandemic for a few years, implementing these tips can help bring some degree of comfort knowing you can still take control of your finances even if we’re in the midst of a crisis. If you need support, the Integra Financial team are here to support you. Book a meeting here to discuss how to manage your money, whether you are in retirement or still planning your retirement.

The post Recalibrate: Tips on how to adjust your spending throughout a crisis appeared first on Integra Financial Services.