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Glass half empty or half full?

It is fair to say the 2011 financial year has provided a largely positive, yet modest year for investment returns. This modest year for returns, hides the underlying story of renewed investment market volatility, brought on by social and political unrest, natural disasters and fluctuating economic signals.

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Budget wrap up

Hopefully you received Cornerstone's budget update last month. The budget was relatively quiet on Superannuation and Pension related matters, however as always the budget is not without controversy.

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Cornerstone Buzz

The Senate has just approved the Government's banning of mortgage exit fees. Bans will commence from 1 July. ? Exit fees are generally a recoup of up front costs should the loan be terminated early.

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New beginnings

With the end of financial year just around the corner, there is still time to make a couple changes and adjustments if warranted.

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Comedy Corner (With thanks to Brian and Jill!)

Economic models explained - with cows

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Glass half empty or half full?

It is fair to say the 2011 financial year has provided a largely positive, yet modest year for investment returns. This modest year for returns, hides the underlying story of renewed investment market volatility, brought on by social and political unrest, natural disasters and fluctuating economic signals.
After the trials and tribulations of the Global Financial Crisis it is natural that investors are pretty cautious at the moment.
Volatility in markets is likely to be around for the short term. Whenever markets are trying to determine if the "investment glass is half full or half empty" there is increased likelihood of strong up and down movements on a daily basis. Markets become unduly sensitive to the news of the day and tend to fluctuate based on mood and sentiment more so than economic fundamentals.
Let's consider the world as it stands today and the positive and negative signals on show:

AUSTRALIA
Natural disasters such as floods and cyclones have put a dampener on economic activity in the first half of the year. This is expected to rebound in the second half of the year as investment spending picks up. Our fragile federal government is widely seen as a drag on economic activity as is the state of residential housing and retail spending.
It is fair to say Australia is a 2 speed economy at present with certain sectors, such as resources, leading the charge. Despite all of our issues we are still one of the best performing developed economies globally and this, in conjunction with our high interest rates, has seen our currency surge and stay comfortably above $1US. Our strong dollar is great for Australians heading overseas yet a real drag for our domestic tourism industry and certain import sectors.
In many ways we are the lucky country still. It's just that for many Australians it doesn't feel that way at the moment!

ASIA
The Japanese earthquake and Tsunami left us all shocked and saddened. Japan is recovering from this tragedy and production across most regions is now back to normal. Japan has a massive Government Debt and this is likely to constrain growth for years to come.
Asia collectively (ex Japan) continues to be the growth engine of the world economy and an area Australia is increasingly reliant on for key import and export markets.
The largest contributor to this Asian growth story is without doubt China. We all know the economic benefits China provide to Australia. One of the areas most impacted has been our terms of trade. Perennial Investment Partners often explain the terms of trade as being "5 years ago, a ship load of iron ore was worth 2,200 flat screen TV sets. Today, it is worth about 22,000 flat screen TV sets."
Chinese economic data is closely watched to ensure inflation is kept in check and that growth continues at a strong yet sustainable pace. No other large country in the world can quote economic growth figures north of 7% and get market disappointment!
The Asian growth story is likely to be with us for decades to come. Its benefits will be significant. We have to realise however that it won't be smooth sailing all of the time.

EUROPE
Europe is certainly the flavour of the month currently, with the unfolding "Greek Tragedy" concerning investors worldwide. The European Union has significant challenges ahead of it. Germany and France are the economic powerhouses benefitting from a low Euro currency and strong economic growth. Their citizens however are gravely concerned at the prospects of having to underwrite the heavily indebted member states now known as the PIIGS (Portugal, Italy, Ireland, Greece and Spain).
The PIIGS have gorged at the debt trough and are now struggling to meet their loan repayments. Each country needs to tighten its financial belt, however their citizens are not too keen on the prospects of increased taxes and lower government benefits. The PIIGS economies are collectively struggling and they don't have the age old benefit of devaluing their currency to trade their way out of trouble. As they are now part of the EU they have to compete against the might of Germany and France on equal currency footing.
There is no doubt this mess will take some time to clear up. Current market jitters revolve around Greece defaulting on its debt with the fear fellow PIIGS will follow suit. The Greek debt issue is small in relation to Spain. The European Central Bank will no doubt be doing everything in its power to avoid this current issue evolving into something much worse. Some sort of bailout package would "kick the can down the road" to hopefully allow the issue to be dealt with finally once Europe is in better shape to deal with it.

AMERICA
The USA faces an interesting dynamic. Interest rates are artificially low and are likely to be for some time. The Government (State and Federal) is heavily indebted whilst companies are relatively cashed up. The consumer in the US has been hit with falling house prices and high unemployment upwards of 8%.
Companies have been the beneficiary of post GFC government policy and have recovered well. The post GFC economic recovery is showing signs of slowing and this is now cause for concern. Given many of the worlds Multinational companies are US based, strong global growth, headed by Asia, is critical for larger companies to continue their growth momentum.
How the US Government deals with the conflicting goals of pumping up the economy whilst reducing its significant debt will be of great interest to us all.

There are certainly negatives and positives for the global economy right now. As always, it is important to consider longer term fundamentals rather than the day to day mood of markets. Expect volatility to remain in the short term, but never forget the underlying economic fundamentals. Markets have historically been able to successfully “climb the wall of worry” and prove incredibly resilient.

Whether its glass half full or glass half empty is debateable. In 6 – 12 months from now we will all be the wiser. Till then here’s cheers to the end of another financial year and lets propose a toast to a prosperous 2011-12 for us all.

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Budget wrap up

Hopefully you received Cornerstone's budget update last month. The budget was relatively quiet on Superannuation and Pension related matters, however as always the budget is not without controversy.

Listed below are a few of the budget matters you need to be aware of:

Personal income tax and flood levy
For the first time in almost a decade, marginal rates of tax were not reduced. What was added however was a flood levy for those earning over $50,000pa. This comes into effect from July 2011. Under the levy:

• Individuals with a taxable income between $50,001 and $100,000 will pay a 0.5% levy on the part of their taxable income above $50,000;
  
• Individuals with a taxable income of $100,001 or more will pay a 0.5% levy on that part of their taxable income between $50,001 and $100,000 and a 1% levy on that part of their taxable income above $100,000; and
  
• No levy is payable where the taxpayer has a taxable income of $50,000 or less, or where they fall into an exemption category.
  

One rather large trap is for those over 55 yet less than 60 who are accessing some or all of their super. Despite the fact this money may not be taxed (under the tax free threshold $160k), it may well be subject to the fLood levy. This is one to be carefull of!!

There is an exemption for individuals who were affected by the natural disaster in 2010-11 and who received an Australian Government disaster recovery payment.

Minimum pension drawdowns
The minimum annual payment amounts for pensions and annuities that was reduced by 50% for 2008-09, 2009-10 and 2010-11 financial years will begin to be phased out with a 25% reduction in the 2011-12 financial year.

This means that if you have been receiving the reduced minimum income level from your pension your income level may increase as of July 1, 2011. You will receive correspondence from your provider in the new financial year.

Concessional contribution limit changes
This is one of the most disappointing changes proposed in the 2011 Budget. The proposal is that for individuals over the age of 50, with more than $500,000 in their super funds, the concessional contribution limit (ie employer contributions including salary sacrifice contributions) will be reduced from $50,000 to $25,000 pa, from 1 July 2012. We do not have any details on the legislation as yet or how this will be calculated. Needless to say that if you are someone who could be affected by this change please contact your planner sooner rather than later as there are various strategies (such as super splitting) that may be able to be considered for you.

Excess contributions
The Financial Planning industry has been lobbying hard for reconsideration of the 93% tax that is imposed on persons who exceed both their concessional and non concessional (personal) contribution limits. The level of penalty tax and the way it is implemented have received universal condemnation. Many tens of thousands of people are being caught up in this each year.

The government's response is an announcement that first time offenders in the 2012 financial year may get a one-off "get out of jail free card" if you breach your cap by less than $10,000.

Excess contributions tax is something to be very wary of. If you are planning on making large contributions to your super fund, PLEASE seek advice first. The rules are more complicated than they should be and there are severe consequences for making inadvertant mistakes.

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Cornerstone Buzz

1. Loan exit fees
The Senate has just approved the Government's banning of mortgage exit fees. Bans will commence from 1 July. ? Exit fees are generally a recoup of up front costs should the loan be terminated early. The concern now is whether up front fees will increase as a result. Call us if you need your home loan reviewed.

2. Shane Oliver Predictions- If you believe Economists
These are some predictions for the remainder of 2011 from one of the best

• Australian Sharemarket - ASX/200 to rise to 5,200
• $A - $1.10
• Interest Rates - Another 0.25% rise in before the end of 2011
  

3. Best Investment class 2010/11
For the 12 months to 31 May 2011 returns for each asset class index are

Source: Van Eyk

4. Superannuation
There is now $1.32 trillion in superannuation assets at 31 December 2010. Self Managed Super appears to be the fastest growing area with over $400 billion in assets from over 440,000 funds. 10 years ago SMSF's accounted for only 10% of the super pie. This is a complex area and advice is warranted before establishing a fund.

5. SMSF's
What are the most popular investments within an SMSF? Shares (directly and via managed funds) account for more than 30%, followed by cash and Term deposits with about 26%. Direct Property makes up about 15%. Collectibles only make up 0.1%.

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New beginnings

With the end of financial year just around the corner, there is still time to make a couple changes and adjustments if warranted. It is also a great time to pre plan for next financial year so that strategies can be utilised across the whole year rather than being part of the end of year rush.

Making the most of your super
If you are earning under $31,920 and make an after tax contribution to super (non concessional) of $1,000, you may be eligible to receive the Government co-contribution of $1,000 also. This doesn't have to be made as a lump sum it can be made as a series of payments over the whole year. So if you are not in a financial position to make a lump sum now, consider drip feeding in next year to take advantage of this Government offer.
As a rule of thumb If you earn over approximately $50,000 pa, you may be better placed to salary sacrifice part of your salary into super rather than accessing the Government co-contribution. This would be something to consider for next financial year. Be aware however that there are strict contribution limits in place for making contributions to super, so if in doubt contact your Planner first to ensure you won't face an unexpected tax bill.

Considering charities
Remember that donations over $2 that are made to a registered charity are tax deductible if you have the receipt. Once again, this may be something you wish to plan for on a regular basis rather than worrying about a lump sum at the end of the year.

Net medical expenses
If you have spent over $1,500 on medical expenses this financial year, you may be eligible for a medical expenses rebate. If you require prescriptions on a regular basis, most pharmacies are able to print out what you purchased for the whole year, this is a very easy way to manage the administration on your pharmaceuticals.

If you are over 65 and do not receive the Aged Pension, will you qualify for the Commonwealth Seniors Health Card (CSHC)?
The CSHC is a card offered to persons who are over the age of 65 who are ineligible to receive part Aged Pension due to their level of assets. It is available if your adjusted taxable income is less than $80,000 for a couple (combined) and $50,000 for singles. Remember that income drawn from your Account based pension (Allocated pension) does not count towards this limit. If the majority of your income is pension related you may still be eligible.

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Comedy Corner (With thanks to Brian and Jill!)

ECONOMIC MODELS EXPLAINED - WITH COWS

SOCIALISM
You have 2 cows.
You give one to your neighbour.

COMMUNISM
You have 2 cows.
The State takes both and gives you some milk.

FASCISM
You have 2 cows.
The State takes both and sells you some milk.

BUREAUCRATISM
You have 2 cows.
The State takes both, shoots one, milks the other, and then throws the milk away...

TRADITIONAL CAPITALISM
You have two cows.
You sell one and buy a bull.
Your herd multiplies, and the economy grows.
You sell them and retire on the income.

AN AMERICAN CORPORATION
You have two cows.
You sell one, and force the other to produce the milk of four cows.
Later, you hire a consultant to analyse why the cow has dropped dead.

ENRON VENTURE CAPITALISM
You have two cows.
You sell three of them to your publicly listed company, using letters of credit opened by your brother-in-law at the bank, then execute a debt/equity swap with an associated general offer so that you get all four cows back, with a tax exemption for five cows. The milk rights of the six cows are transferred via an intermediary to a Cayman Island Company secretly owned by the majority shareholder who sells the rights to all seven cows back to your listed company. The annual report says the company owns eight cows, with an option on one more. You sell one cow to buy a new president of the United States , leaving you with nine cows. No balance sheet provided with the release. The public then buys your bull.

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