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Monday, November 1, 2010

What does a strong Aussie dollar means for you?

What a strong Aussie dollar means for you!

Last month the Australian dollar hit parity with the US dollar for the first time since it floated in 1983, prompting celebration around the country for holiday-makers and online consumers. But aside from parity parties and Aussie pride, what does a strong Aussie dollar mean for our economy, our industries and our investments?

Since January 2009 the Australian dollar has risen against most major currencies due to both the outperformance of our economy and our high official interest rates.

Having an interest rate higher than most other countries over the past two years has seen a lot of foreign investment pouring into Australia. This in turn has caused the Australian dollar to edge higher and higher against the greenback and other currencies.

Of course this is great news for those of you planning to take an overseas holiday during the Christmas period. The strong dollar will see you get a lot more bang for your buck in other countries.

It’s also pretty good news for consumers, especially those who are savvy online, as now is a great time to pick-up bargains on imported goods just in time for Christmas. But others aren’t so lucky.

When the dollar is strong our tourism industry at home suffers with most people booking holidays overseas where the Aussie dollar will go much further.

It’s also tough on companies that sell goods and services offshore as a high Australian dollar makes our exports more expensive.

Luckily, mining and energy are still in hot demand in China and India at the moment so many of our largest exporters should still be able fetch high prices. But other traditional sectors such as manufacturers and agriculture will definitely feel the pinch.

Worse still, if investment switches from these industries into the more lucrative mining and energy industries we run the risk of losing key skills and jobs in the Australian economy.

That’s why a strong Australian dollar often has a cooling effect on our economy.

The other area negatively affected by a strong dollar is global investments. Unfortunately, when the Australian dollar is rising, investments in global shares are lower in Australian dollar terms. This is why some investors prefer to invest in hedged products to help protect against changes in the Australian dollar.

Of course it’s important to remember the converse is also true – when the Australian dollar is lower, investments in global shares are higher in Australian dollar terms. So by hedging currency you may also decrease any upside in this scenario.

How a strong dollar affects your investment position will depend on the exact mix of investments across your whole portfolio.

If you’re concerned about how the rising Australian dollar is affecting your investments, the best thing to do is talk to your Financial Adviser. They can run you through what’s happening and help find the approach that suits you the best.

*Hugh Kilpatrick is an Authorised Representative of RI Advice Group Pty Limited ABN 23 001 774 125, AFSL 238429. This editorial does not consider your personal circumstances and is general advice only. You should not act on any recommendation without considering your personal needs, circumstances and objectives. We recommend you obtain professional financial advice specific to your circumstances.

Monday, October 18, 2010

Is Australia Immune?

Western world may struggle, but not Australia it appears

Since mid-2009, the world economy has recovered from what is considered the worst economic and financial crisis since the 1930s. After shrinking almost 2% in 2009 – the first contraction since World War II – global real GDP is expected to grow by 3.5% in 2010, the United Nations Council for Trade and Development (UNCTAD) said in a report out in September.

In line with the upturn, world trade has picked up again since mid-2009. Higher commodity prices are boosting national incomes and fiscal revenues. Emerging-market economies, especially in Asia and Latin America, are roaring. UNCTAD expects Asia´s GDP to jump by almost 8% this year, while Latin America´s is forecast to grow by 5%.

But the UN body is worried the global recovery may be derailed in 2011 by the poor performance of Western economies. Fiscal austerity in Europe and the US is pushing the global economy closer to a “deflationary spiral” that will choke off economic recovery, it said. “Ending stimulus measures too soon in an effort to restore the confidence of financial markets could be counterproductive.”

European countries such as Germany, the UK and France implemented austerity programs to appease bond markets after the Eurozone debt crisis erupted this year. The US Government is struggling politically to pass any more fiscal stimulus, especially with elections coming up in November for the House of Representatives and one-third of the Senate. The US Federal Reserve, which has already reduced interest rates to close to zero, is in effect contemplating printing another US$1 trillion, in an attempt to reignite US economic growth.

Australia is a Western economy with the opposite problem. The biggest mining boom in more than a century is powering the economy – the Reserve Bank forecasts it to grow between 3.75% and 4% p.a. in 2011 and 2012. The jobless rate has fallen to what is considered full employment at around 5%.

Rather than deflation, the danger is that inflation rises beyond the Reserve Bank’s target range of 2% to 3% a year. Consumer prices rose 3.1% in the 12 months ended June 30, though the more-watched core inflation – which removes volatile items from the consumer price gauge – stood at 2.7% over that time.

“The task ahead is likely to be one of managing a fairly robust upswing,” Reserve Bank Governor Glenn Stevens said in a speech in September.

Still, the Reserve Bank left the cash rate unchanged at 4.5% for a fifth consecutive month in October. But don’t be surprised if the central bank soon adds to the six quarter-percentage-point rate increases it undertook from October last year to May, which lifted the cash rate from 3%.

1 United Nations Conference on Trade and Development. “Trade and Development Report, 2010. Employment, globalization and development.“ 14 September 2010.
Report: http://www.unctad.org/Templates/webflyer.asp?docid=13740&intItemID=2068&lang=1
Release: http://www.unctad.org/Templates/webflyer.asp?docid=13723&intItemID=1528&lang=1

RI Advice Group Pty Limited ABN 23 001 774 125, AFSL 238429. This information does not consider your personal circumstances and is general advice only. You should not act on any recommendation without obtaining professional financial advice specific to your circumstances. Past performance is not indicative of future performance.
This article has been produced by FIL Investment Management (Australia) Limited ABN 34 006 773 575, AFSL No. 237 865 (“Fidelity Australia”).
Fideli Australia is a member of the FIL Limited group of companies known as Fidelity International. © FIL Investment Management (Australia) Limited
ty2010.

Tuesday, September 21, 2010

How is China fairing as an economy?

China becomes the world’s second-largest economy

China achieved another milestone in August when the country skipped ahead of Japan to become the world’s biggest economy after the US. The news came only a few months after China toppled Germany to become the world’s biggest exporter.

With that size goes power. Beijing, which has the world’s largest foreign exchange reserves under its control, has publicly challenged the role of the US dollar as the default global reserve currency and has led a push for more equitable representation in global bodies such as the International Monetary Fund. It is evident in a series of forums, from the Copenhagen climate talks last December to the G20, that you can't reach a genuine global solution without China.

China’s rise to get to this point has been nothing short of spectacular. Just 10 years ago, its economy ranked sixth in the world. If the country can maintain its recent 10% p.a. growth rate, Goldman Sachs expects China to overtake the US to become the world number one by 2027.

While China may have taken great strides in an aggregate sense, on a per capita basis it still lags far behind other economies because of its vast population. GDP per capita in China is still just about a tenth of that in Japan.

The government is encouraging consumption as it realises that relying on the over-leveraged western consumer as the hub of its export-led economic policy may not be the best long-term approach. Investment is also being made to link its hinterlands with the booming coastal regions and the world through new roads, railways and airports.

The significance of this next stage of growth is not lost on rest of the world. Developed world economies are hopeful that China will become a market for their goods and services when the demand of the Chinese consumer is unleashed.

The troubled economies of Europe and the US hope that China will deliver much-needed sales. Likewise, the better-performing Asian Pacific countries – especially Australia – hope that they too can use China to grow their own economies through greater trade.

Any investors who have been put off by weakness in the Chinese equity market this year may be a little short-sighted. A new world order is being established and it makes sense to back the new leaders.

RI Advice Group Pty Limited ABN 23 001 774 125, AFSL 238429. This information does not consider your personal circumstances and is general advice only. You should not act on any recommendation without obtaining professional financial advice specific to your circumstances. Past performance is not indicative of future performance.
This article has been produced by FIL Investment Management (Australia) Limited ABN 34 006 773 575, AFSL No. 237 865 (“Fidelity Australia”).
Fideli Australia is a member of the FIL Limited group of companies known as Fidelity International. © FIL Investment Management (Australia) Limited
ty2010.

Wednesday, September 15, 2010

Getting to the heart of financial advice

Editorial - August 2010

When the subject of financial advice is raised there is always plenty of comment on what it costs, but precious little about what value such advice can have. So it's fair to ask; is there value in getting financial advice? Is the cost justified? How do you separate myth from fact?

Recent research conducted by CoreData commissioned by the Association of Financial Advisers (AFA) into how consumers view financial advice may help answer these questions. The research indicates that people who have a financial adviser are better planned and are happier with their investments than those who don't.

The answer seems to lie in the fact that financial advice is not just a matter of processing facts and figures, nor does it revolve around having a 'crystal ball' view of what the next stock market move is going to be. Those who have a financial adviser seem to attribute a much deeper, more personal value to having a confidante or coach that can help them to define their goals and discuss their desires, fears and aspirations for the future.

"I liken my role to that of a 'financial dentist'. Nobody likes the initial thought of coming to see me, but everybody likes the end result! Many of my clients have understandable trepidation when we first meet because they don't really know what to expect. This quickly disappears once they begin to share their financial concerns and realise I can help them answer some deep questions about their financial plans and help get them get to where they want to be. There is no pain involved either - simply choices!

It’s a good feeling to see people visibly relieved once they start sharing their fears and hopes and when together we start to put things into perspective. Of course the technical aspects of what I do are vital, but in the end it's the emotional investment that a person puts in me first that really matters, before we consider the financial investments they may need to make".

The increasing regulation of financial advice over the last two decades has seen compliance within the industry becoming more stringent. The level of education and training required to permit someone to run an advisory practice is a far cry from the days where anyone could be employed to 'sell a product'.

"The accreditation regime now in place is quite rigorous and advisers are now required to consider the breadth and depth of a client's situation in great detail, before formulating recommendations. This professional approach is no doubt related to the increased level of trust that financial advisers enjoy from their clients.

The combination of taking the time to understand a person's financial aspirations and applying our professional expertise to their situation, allows us to develop a plan that helps them face the future with confidence. This includes setting out strategic principles, providing tactical advice on suitable investments and facilitating the implementation of the plan we agree on".

"Every day I see the results of people having the weight of investment decisions lifted from their shoulders, so I make a point of asking them to spread the word and tell their family and friends about how getting advice has helped them. Good financial planning speaks to the heart and the head - and that is what makes it such a worthwhile exercise".

If you are interested in exploring the benefits of financial advice, contact Hugh Kilpatrick from Reservoir Office on 03 9471 0080 or service@rireservoir.com.au for further information.


*Hugh Kilpatrick is an Authorised Representative of RI Advice Group Pty Limited (ABN 23 001 774 125), Australian Financial Services Licence 238429. This editorial does not consider your personal circumstances and is general advice only. You should not act on any recommendation without considering your personal needs, circumstances and objectives. We recommend you obtain professional financial advice specific to your circumstances.

Self managed super funds now gearing into the property market

Editorial – July 2010

Many investors know the attraction of negative gearing for property investment. Now super rules have opened up the way for self managed super funds to access this powerful investment strategy.

“It's not that surprising that those who like the direct control of self managed super are often also very interested in the benefits of gearing into property investment. Super rules now allow self managed funds to borrow and this has opened up the opportunity to use gearing to buy direct property assets as part of their SMSF portfolio”.

Guidelines on how the borrowing and purchase are arranged are strict, but as long they are satisfied and the purchase suits the overall fund investment strategy, it can be a highly rewarding and tax efficient option to build retirement assets.

A tax effective strategy
“Rental income generated from your property investment is normally taxed at marginal rates, but within a SMSF it will only be taxed at the superannuation tax rate of 15%. Furthermore, if sold before retirement, the property proceeds will generally only attract capital gains tax at the rate of 10%. After retirement there is no capital gains tax liability and no tax on rental income from the property.

Add to this the normal tax deduction opportunities that gearing offers on property upkeep and you have a very tax effective strategy to complement other investments within your super fund”.

Apart from the tax advantages, many are simply attracted to having the direct control and freedom of a 'hands-on' investment, where they can get involved in finding and buying a property and see a tangible asset that is growing in value towards their retirement.

“When a business already owns a commercial property, what they can do is have their self managed super fund buy the property from their business - which in turn frees up cash within the business to invest in more productive ways. It's a very neat solution”.

A structured approach is essential
The many benefits of this strategy need to be tempered by a rational approach to how it is implemented. The guidelines are strict and the penalties for non-compliance are severe.

“My first priority when advising clients is to impress upon them that this is a far more complex situation than normal property investment gearing, in terms of the borrowing and ownership structures that are required. It is vital to involve their legal and accounting advisers in the process and follow a carefully mapped out sequence to make sure it is above board”.

While the suitability of the strategy will depend on individual circumstances, the basic steps involved in implementation and keeping within super regulations can be summarised in the following key steps:

• Engage an adviser to manage the process and co-ordinate legal and accounting involvement
• Check that the fund's Trust Deed permits borrowing and has a stated strategy that will accommodate direct property investment
• Establish a separate instalment warrant and a security trust arrangement – this is the approved mechanism enabling the SMSF to invest directly in property
• Consult with your financial adviser on an appropriate level of existing fund assets to be directed into the property purchase
• Source lending that complies with SMSF borrowing rules - specifically, in the event of default, the lender can only claim on the property itself and not other fund assets.
• Negotiate the property purchase
• Arrange ongoing procedures – the SMSF will service the loan and will directly collect interest on the property. Regular review, valuation and tax reporting will be required to maintain compliance with regulations

The selection of property is something that obviously is of great interest to those who can access this strategy. It is critical to have an appreciation of the rules and what is permissible. “Investors can choose either commercial or residential property, but residential property cannot be bought from a related party, such as another family member. If it is a commercial property purchased from a related party, then the valuation and rental rates must be commercial levels so that the fund is not disadvantaged.”

“The opportunities are great but the obligations are serious, so get advice from someone who knows the territory”.

If you are interested in exploring property investment through your SMSF, contact Hugh Kilpatrick from Reservoir Office on 03 9471 0080 or service@rireservoir.com.au for further information.


*Hugh Kilpatrick is an Authorised Representative of RI Advice Group Pty Limited (ABN 23 001 774 125), Australian Financial Services Licence 238429. This editorial does not consider your personal circumstances and is general advice only. You should not act on any recommendation without considering your personal needs, circumstances and objectives. We recommend you obtain professional financial advice specific to your circumstances.