02 9683 5999MARKET UPDATE
Often we are guilty of being too short term in our investment thinking. In this update we focus on key medium and long term drivers of Australian investment markets. In the medium term interest rates are of fundamental importance. Legislated growth in superannuation contributions, combined with baby boomers retiring, has long term ramifications for Australian investors.
INTEREST RATES
Previously in our December update we wrote about the potential for a sustained period of low interest rates.
We wrote;
“The RBA has cut rates from 4.75% a year ago to now 3.00%. When we talk to people outside of the finance industry most think that rates will not stay here long. Most expect rates to go back up next year.
“Now rates are going lower, not higher and we are soon going to see rates at 50 year lows. What no one has lived through is a “sustained period of low rates.” One where yield will dominate.
Those companies with high dividend yields will see their share prices continue to work higher as investors chase higher yields relative to what banks will be offering.”
In August the RBA cut rates again to 2.50%. As interest rates continue to decrease, some of the $300 Billion that went into bank deposits in the last 3 years will continue to move back into high yield Australian shares.
LEGISLATED GROWTH IN COMPULSORY SUPERANNUATION CONTRIBUTIONS
The superannuation system underpins Australia, generating high savings and levels of investment.
Many people believe demand for fully franked dividend streams is purely cyclical (low interest rates). However, there is also an element of structural change in demand.
As of 1 July, the superannuation guarantee increased from 9 to 9.25% for approximately 8.4 million Australians, and will continue to increase the rate gradually to 12% over the next seven years.
This initiative is part of the Government’s superannuation reforms aimed at increasing the national pool of superannuation savings, primarily to ease growing pressure on funding the Age Pension.
The legislated growth in compulsory super contributions, when combined with our aging population entering the aged pension phase of super, has long-term implications for Australian investors.
INCREASED DEMAND FOR FULLY FRANKED DIVIDENDS
There is evidence that superfunds in the pension phase generally hold less property, and more shares than in the accumulation phase. This is because income stream to survive is vital. The first of the baby boomers just started to retire last year. This trend will accelerate over the years ahead.
Industry forecast for pension phase to grow by 12.5% a year versus 9.0% for overall superannuation. As shown in the following chart, total superannuation assets are expected to grow exponentially in the next 20 years.
Lastly a question that we get asked frequently is why you don’t just pick the stocks with the highest dividend yield. The simple answer is that often the companies that pay a very high dividend one year will often decrease their dividend the next.
We target high quality companies that have growing sustainable dividend yields. Despite daily share price fluctuations these companies continue to grow both their earnings and dividends.
If you would like to discuss any of this information covered please call me on 9683 5999.
