The Panoptic View April 2020 - David Reynolds
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March Quarter Update - Panoptic Wealth Management
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The Panoptic View April 2020 - David Reynolds
- 2. 1 Announced Australian Government Initiatives The Morrison government has unleashed stimulus worth more than $200 billion in a bid to save Australia from a very deep and prolonged coronavirus-induced recession. Prior to the global financial crisis, the Howard government had managed to reduce Australia’s net debt to effectively zero, thanks to the mining boom. Last financial year, Australian government net debt stood at $373 billion or 19.2 per cent of gross domestic product. This compares favourably to other nations. Both the United Kingdom and the United States carry net government debt worth about 80 per cent of their economies. At the time of the last budget, the Australian government was forecasting it would achieve a budget surplus this financial year and use the surplus funds to pay down net debt to $360 billion, or 18 per cent of GDP. Now, however, net debt can be expected to top half a trillion dollars. To fund the announced stimulus package, the Australian government will conduct more frequent and larger auctions of bonds. As a result, the level of outstanding government debt will go up and so too will the total interest bill that must be paid out. To ensure that interest rates are kept low, The Reserve Bank has also started to purchase Australian government bonds. These asset-purchasing programs are usually referred to as “quantitative easing”. Ultimately, we can expect the central bank to become a bigger owner of Australian government bonds. The good news is that debt is very cheap because interest rates are so low. So, while the value of Australian government debt in dollar terms is historically high, the interest bill on that debt as a proportion of the broader economy is not. The government paid $14 billion in net interest payments on its borrowings last financial year. But as a per cent of GDP, net interest payments were just 0.7 per cent of GDP, compared to 1.7 per cent in the aftermath of the early 1980s and early 1990s recessions. With interest rates so low, the interest bill on the additional $213 billion of borrowings will be just $1.6 billion a year. When the virus has run its course, and particularly if the stimulus has been successful in protecting jobs, we can expect spending needs to subside and economic activity to lift, producing more tax revenue to help manage the national debt. 180 160 140 100 80 60 40 20 0 Net public debt compared % of GDP, 2019 Australia Eurozone JapanUS
- 3. Tax-free payments of $750 to eligible recipients The Government will be providing two separate $750 tax-free payments (referred to as ‘economic support payments’) to social security, veteran and other income support recipients and to eligible concession card holders. The first $750 payment will be available to individuals who are residing in Australia and are receiving an eligible Government payment, or are the holders of an eligible concession card, at any time from 12 March 2020 to 13 April 2020 (inclusive). This payment will be made automatically to eligible individuals from 31 March 2020. The second $750 payment will be available to individuals who are residing in Australia and are receiving one of the eligible Government payments or are the holders of one of the eligible concession cards on 10 July 2020 (except for those receiving an income support payment that qualifies them to receive the $550 fortnightly Coronavirus supplement). This payment will be made automatically to eligible individuals from 13 July 2020. Each of the $750 payments will be exempt from income tax and will not count as income for the purposes of Social Security, the Farm Household Allowance and Veteran payments. 2 3 Income Support Eligibility for JobSeeker Payments will be temporarily expanded to workers who lose income due to the pandemic. In addition, any person in receipt of an eligible Government payment will be paid a temporary Coronavirus Supplement of $550 per fortnight. Minimum pension drawdown rates halved for 2019/20 and 2020/21 On 22 March 2020 the federal government announced that the minimum pension drawdown rates would be temporarily reduced by 50% for the 2019/20 and 2020/21 financial years. Please contact our office to discuss your options if you would like to reduce your current pension drawdown payments. 4 5 Early access to superannuation The Government is also allowing those who have seen their hours of work or income fall by 20 per cent or more as a result of the pandemic to access their superannuation. This is capped at $10,000 this financial year and a further $10,000 next financial year. The withdrawals will be tax free. Under 65 65 - 74 75 - 79 80 - 84 85-89 90-94 95 or over 4% 5% 6% 7% 9% 11% 14% 2% 2.5% 3% 3.5% 4.5% 5.5% 7% Your age Default minimum drawdown rates (%) Reduced rates by 50% for the 2019-20 and 2020-21 income years
- 4. JobKeeper The largest component of the stimulus package is a wage subsidy program under which the Federal Government will pay a flat fortnightly JobKeeper wage subsidy of $1500 per worker. This is paid to businesses that see a 30% or greater reduction in revenue (or 50% reduction for firms with sales above $1bn) from 30 March for up to six months. The subsidy comes with the obligation for the business to pass the payment on to their employees and to keep them on their books. It’s a far preferable approach to relying on supporting incomes via enhanced unemployment benefits through Centrelink/Services Australia as it keeps people employed, takes pressure off businesses, takes pressure off Centrelink, minimises a confidence-sapping surge in unemployment and keeps workers connected to their employer. Longer term, this will expedite the resumption of business and economic activity once the virus is under control. 6 7 Market Update It was the worst calendar quarter for Australian equities (-23.1% total return) since the 1987 crash, underperforming both its global and regional counterparts. Energy, Real Estate and cyclicals (Consumer and Industrials) led the declines. Even traditionally defensive areas such as infrastructure, property, telco’s and toll roads experienced a sell off from the economics of a “sudden stop”. The US has become the epicentre of the Coronavirus pandemic with over 434k confirmed cases while Italy has now seen over 17k deaths. To date, there are now 5 countries which have surpassed China’s death toll (Italy, Spain, Germany, France and USA) with a number now not far behind (Iran and the UK). Despite a short rally driven off the back the US fiscal stimulus, it was a rather acrimonious end to the quarter with global equities suffering their worst decline since 4th Quarter 2008, falling 21%. To make a very difficult time for investors worse, Russia announced in early March that it would no longer restrict oil production as part of their agreement with other OPEC members. Russian President Vladimir Putin, worried about ceding too much ground to American oil producers, said countries could produce as much as they please from April 1. This is all happening at a time when the coronavirus has undermined energy demand worldwide. We note at the time of writing that the OPEC members have now agreed to a reduction of a minimum of 10 millions barrels per day. This should support oil prices moving forward. The current hit to economic activity may be very deep but it won’t necessarily be longer than past recessions. And there is good reason to believe that if the virus comes under control in the next 2-6 months and we minimise the collateral damage from the shutdowns that the hit to activity may be shorter.
- 5. We do not believe investors need to sell or switch out of bank stocks in order to preserve dividend income At the time of writing this letter The Australian Prudential Regulation Authority (APRA) has written to Australian banks on the 7th April advising them to exercise caution in the payment of dividends to shareholders. APRA has however left it to the Bank Boards to determine dividend decisions, in line with their obligations under APRA’s prudential framework. As we only recently had a Royal Commission into the Banks, the decision to heed their words may be more of show of remorse for past behaviour than an actual requirement to retain funds. At present the banks comprise around a third of all dividend income paid of $24bn in 2019, which would mean that a potential halt, even if only temporary, would represent a significant cut to dividend income levels on top of the hit to capital values suffered by investors since late February. We accept that bank dividends will be reduced but don’t believe that they will be removed in full. If dividends did stop, we believe that it would more likely be for just the current half year payment. The major banks are trading at historically cheap valuations. ANZ, NAB and WBC are all trading less than 10 times consensus earnings. While banks currently no longer have the same earnings growth potential as the past , we consider valuations to be reasonably cheap, and suggest holding onto bank stocks rather than selling at depressed levels. 8 We note that there has been some commentary recently suggesting that portfolios should be rebalanced to take advantage of the higher yield offered to resource shares. We encourage investors not to make long term decision in response to a short-term issue. Resources are cheap at the moment however cyclical in nature and should be held for their capital returns rather than income. As our cash rate is now .25% the premium of dividend yield to cash is once again widening. So at a time when all our normal daily activities have halted, our view is that the same approach should be taken with your investment portfolio. Investment asset allocation should only change if your personal circumstances have changed. Sometimes doing nothing is the best thing you can do.