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The Tony Diaries Day 3 - FIREWALKER

Wow I have to admit to having really mixed emotions about yesterday… It was terrific and Tony was a rockstar, but 12 hours without a break is a little much even for someone with high energy levels like me!

Probably the biggest take-away for me was the bio chemical change you can effect in your body by changing your physiology, focus, and language.

I can't wait to share the technique with some of my business owner clients who I know can get stuck in a bit of a "funk" spiral when life and business just gets too busy!

I ended up getting a little overwhelmed by the crowd (5000 people) last night and gave the firewalk a miss (I'm only little). But Mick ripped his shoes and socks off and was 3rd in line to go running through that fire with no fear. Very impressed!!!!

Today Tony is taking a break and we have someone else which I was disappointed to learn but I guess at 56 he probably needs to start thinking about a succession plan. And to be fair, Joseph rocks and we are having a lot of fun and making some key decisions :-). 

Oh and best of all, he has given us a freaking lunch break!

The Tony Diaries Day 2 (AM)

Okay so I've arrived at the stadium and the massive crowd is electric! Everyone is so pumped and my butterflies are going crazy. I imagine this is what it is like for some people to see their team in the grand final and yes I appreciate how geeky that statement is!

Tony Robbins was the inspiration behind what I do today so it's a big deal for me to be part of a live event with him.

My Man Mick on the other hand is being dragged along kicking and screaming ha ha.

Today's session goes through until midnight and as many of you know, that will be difficult for me because I am unashamedly passionate about my sleep… Not sure I'll make it that late but will definitely give it a try.


The Tony diaries day one…

Just landed in Sydney and have butterflies already!! Can't believe that tomorrow I am going to finally see my hero – Tony Robbins...

My friends have told me I'm taking nerd to a whole new level and none of them want to see me for at least a week afterward :-)

At least the time will go fast tonight because Mick and I are catching up with one of our absolute favourite clients who we haven't seen in ages!!!

Wish me luck trying to sleep tonight ha ha



They're here!!!
To make life as easy as possible for you this tax-time, we've developed our annual handy tax-time checklist. Just check your information against this comprehensive list to make sure you have everything you need for your tax return preparation.
We've also put together our two page annual tax newsletter to give you a quick update on some of the more pertinent issues for this year. It also includes a guide to pricing for this year's tax return preparation services.
BTW, if you own property or shares, or if you salary package meal entertainment, this information is particularly useful.
Click here to

Happy EOFY,
Dean Hendrie

Time is running out.

If you want to take a few simple preventative measures to minimise or defer how much tax you will pay for this Financial Year, you need to do two things:

          1. Read the following 9 point checklist,


          2. Call or email us as soon as possible so we can make a time to sit do with you to assess which of these preventative measures can be done for you in your circumstances.

Depending on your situation, this tax planning process could save you many thousands of dollars. That's cash in your bank account, rather than the Tax Office's.

After all, why pay one more dollar in tax than you have to?

I'm sure you have better uses for your money, such as investing in your future or just investing in the here and now and rewarding yourself with a little 'lifestyle indulgence'.

Now ... to the checklist. Tick each item you think is relevant to you: 

  • Review your stock levels. The value of your closing stock directly affects your business profit, the higher your stock value the higher your profit and tax. Review and identify any obsolete or old stock and scrap it or re-value it to its correct value. Individual items of stock can be valued at cost, market value, or replacement value.
  • Review your business assets. Write off any obsolete asset and claim its remaining book value now. There are also new ways assets can be depreciated, called pooling, that will increase the depreciation expense. This isn't suitable for all business, but it is worthwhile reviewing.
  • Defer income. A simple tip that can defer a lot of tax for you. If your cashflow allows, you may consider deferring some of your invoices until July. If the income was not invoiced this financial year, it can't be taxed this financial year. Before taking this option we recommend having a budget to manage these months income and expenses. We can help you with that.
  • Review your invoices issued. If you have invoiced someone in advance for services you will provide in the next financial year, then you may not have earned that income in this tax year. That income may belong in the year you provide the service. Again, this is something we can work out with you when we meet for tax planning.
  • Pay the June quarter superannuation. Superannuation if paid on time is deductible when paid. Since you have to pay the 9.5% superannuation by 28 July, bring it forward a month and pay it now and claim the deduction now. Why wait a whole year to reduce your tax?
  • Using all of your superannuation cap. If maximising your superannuation is part of your retirement plan, then don't forget to contribute as much as you can into your super fund. We can guide you as to how much you can contribute. It's a missed opportunity not to do this each year.
  • Employee bonuses. Bonuses to employees are deductible when the business has committed to paying them and it is not subject to any discretion. So finalise and sign off on the bonuses to be paid and reduce this year's tax.
  • Capital Gains Tax (CGT). Minimising your capital gains tax is often about timing. Ensure the asset has been owned for at least 12 months. If you already have a capital gain, are there any investments making a loss you can sell? Do you qualify for any capital gain rollover relief concessions? (Again, we can guide you here.) CGT is a whole topic on its own, and the potential savings are so great, it is definitely an area in which you should seek our guidance.
  • Review debtors. Your income tax is payable on any invoices you've issued, even if you haven't been paid. Don't pay tax on any invoice you know won't ever get paid. Review the list of those who owe you money and write off those 'bad debts' now.

If you ticked any of the above items, then we need to talk. And soon.

Get in touch to make a time to meet and discuss your tax planning options.

Plain English Budget Breakdown

Federal Budget - small business

This year's Federal Budget is based on a ten-year enterprise tax plan designed to stimulate more small business activity by boosting new investment, creating jobs and increasing real wages.

One of the key features of this plan is that the small business entity annual turnover threshold will be increased from $2 million to $10 million from 1 July 2016.

The Government will also reduce the corporate tax rate for businesses with a turnover of less than $10 million per year to 27.5 per cent from 1 July 2016. This lower rate will be progressively reduced to 25 per cent over 10 years.

An 8 per cent unincorporated tax discount will be provided to unincorporated businesses with turnover less than $5 million per annum, capped at $1,000 per year from 1 July 2016 for the following eight years. The discount will increase to 16 per cent in increments from 2024 to 2026 to coincide with the staggered reductions in the corporate rate.

All Australian small businesses from 1 July 2016 with an annual turnover of less than $10 million will have access to:

Simplified depreciation rules

These include immediate tax deductibility for asset purchases costing less than $20,000 until 30 June 2017.

Simplified trading stock rules

New rules will give businesses the option to avoid end of year stocktake if the value of their stock has changed by less than $5,000.

Simpler PAYG instalments

Instalments will be calculated by the ATO, removing the risk of under or overestimating PAYG and the resulting penalties that may be applied.

The option to account for GST

Small businesses will have the option to account for GST on a cash basis and pay GST instalments as calculated by the ATO.

Other tax concessions

Other tax concessions that are currently available to small businesses, such as fringe benefits tax (FBT) exemptions (from 1 April 2017 to align with the FBT year).

A trial of simpler BAS

The trial is to reduce GST compliance costs, with a full roll-out from 1 July 2017.

These threshold changes will not affect eligibility for the small business capital gains tax concessions, which will remain available for businesses with annual turnover of less than $2 million or that satisfy the maximum net asset value test.


Industries on the ATO's radar this year

The ATO has identified that businesses in the supermarket, bakery, computer system design and car retailing industries often need more help meeting their tax and super obligations.

From July 2016, the ATO will be undertaking audits of employers who continually fail to meet their obligations, particularly those who do not correctly meet their superannuation obligations. In this regard, the tax office will be examining:

  • how much employers are required to pay
  • if employers are meeting their quarterly deadlines
  • if employers pay super for contractors
  • if employers are keeping accurate records
  • if employers pass on an employee's TFN to their super fund within 14 days of receiving it

Employers must pay their employees superannuation if all of the following apply:

  • the employee is aged 18 years old or over
  • the employee is paid $450 (before tax) or more in a calendar month
  • the employee works on a full-time, part-time or casual basis

Super payments for employees must be made at least four times a year by the quarterly due dates of April 28, July 28, October 28 and January 28. Employers who miss those deadlines become liable for the Superannuation Guarantee Charge (SGC).

The ATO has said it will support employers who genuinely try to rectify their mistakes by catching up on late payments and paying a little extra into their employee fund accounts. No action is likely to be taken in these circumstances. However, if an employer does nothing and waits for an employee complaint or for the ATO to audit their business, the ATO has warned that the SGC and other penalties may be applied.

The ATO has also reminded employers that they must pay superannuation contributions for contractors who they employ under a contract that is wholly or principally for the labour of that person. The reasoning behind this is because the contractor is considered as an employee for the purpose of super guarantee.

Another area where employers make mistakes is regarding the choice of employee super funds. All employees are eligible to choose which super fund their super contributions are paid into, therefore employers must provide them with a standard choice form within 28 days of the employee commencing work. While employees do not have to complete the form if they don't want to nominate a fund, employers must give them a choice if they are eligible.


Federal Budget - superannuation changes

The Budget has introduced a series of changes to superannuation tax arrangements that are intended to align superannuation with the purpose of providing income in retirement. 

The key elements of the superannuation changes include: 

Introducing a transfer balance cap 

There will be a $1.6 million superannuation transfer balance cap on the total amount of super that individuals can transfer into retirement phase accounts. While this limits taxpayer support for tax-free retirement phase accounts, it does not restrict the savings that can accumulate outside of superannuation or in superannuation accumulation phase accounts.

Increasing the 15 per cent tax rate on concessional contributions

Those with combined incomes and super contributions greater than $250,000 will now be required to pay 30 per cent tax on their concessional contributions. This extends the current treatment of people with combined incomes and superannuation contributions over $300,000. Superannuation fund members who are affected will still have significant incentives to save for their retirement alongside other provisions.

Lowering the superannuation concessional contributions cap 

The superannuation concessional contributions cap will be lowered to $25,000 per annum to provide more flexibility and accommodate modern working arrangements. Reducing the caps will only affect around three per cent of superannuation fund members, who will still be able to make enough contributions during their working life to be self-sufficient in retirement.

$500,000 lifetime cap for nonconcessional contributions:

The lifetime cap will limit the extent individuals can use superannuation for tax minimisation and estate planning. Less than one per cent of Australian superannuation fund members have made contributions above this cap since 2007.

Low Income Superannuation Tax Offset:

The Low Income Superannuation Tax Offset (LISTO) will replace the Low Income Superannuation Contribution when it expires on 30 June 2017 to continue to support the accumulation of superannuation for low-income earners. The LISTO will allow individuals with an adjusted taxable income of $37,000 or less to receive a refund of the tax paid on their concessional contributions, up to a cap of $500. The LISTO will, in particular, assist women to build their superannuation savings.


ATO to focus on collectables

The ATO is working with insurance companies to assess artworks and collectables owned by taxpayers and identify the owners of these kinds of assets. 

There has been an increasing concern by the ATO that assets such as collectables are not being properly accounted for. Since these assets may be subject to capital gains tax (CGT) on disposal, taxpayers should be properly accounting for their assets and aware of any CGT applicable.

Collectables are items that individuals use or keep mainly for the personal use or enjoyment by them or their associates and include items such as paintings, sculptures, drawings, engravings or photographs, reproductions of these items or property of a similar description or use, jewellery antiques and coins.

A collectable also includes an interest in any of the items listed above, a debt that arises from any of those items or an option or right to acquire any of those items.

Capital gains or losses made from a collectable can be ignored provided the collectable was acquired for $500 or less; the interest in the collectable acquired was for $500 or less before 16 December 1995, or the interest in the collectable had a market value of $500 or less when acquired.

Capital losses from collectables can be used only to reduce capital gains (including future capital gains) from collectables. There is no time limit on how long a net capital loss from the disposal of a collectable can be carried forward.

The ATO's attention is not limited to capital gains tax and new rules have been introduced in relation to the recording and storage of collectables held by self managed super funds.

From 1 July 2016 new rules regarding any collectable and/or artwork owned by an SMSF state:

  • collectables cannot be stored at an SMSF trustee's residence
  • an SMSF trustee or a related party is not permitted to lease or use any of the collectables
  • the collectable must be insured by its own separate policy 
  • the storage decisions by the trustees must be documented and minuted
  • if the collectable is to be sold to an SMSF trustee or related party, then a valuation by a qualified independent valuer may be required to determine the market value

Tax on gifts and donations

Individuals can claim tax deductions when giving gifts or donations to organisations that have the status of deductible gift recipients (DGR).

To be eligible to claim a tax deduction for a gift, the ATO stipulates that it must meet the following four conditions:

  • the gift must "truly be a gift"; that is, a voluntary transfer of money or property where the giver receives no material benefit or advantage
  • the gift must be made to a deductible gift recipient (DGR)
  • the gift must be money or property
  • the gift must comply with any relevant conditions. For some DGRs, the income tax law adds extra conditions affecting the types of deductible gifts they can receive.

What you can claim

The amount an individual can claim for a gift or donation depends on the type of gift given. For gifts of money, individuals can claim the total amount of the gift, as long as it is $2 or more.

Different rules exist for gifts of property, and the amount of the tax deduction depends on the value and type of property.

Tax deductions for the majority of gifts can be claimed in the tax return for the income year when the gift is made. However, individuals can also spread the tax deduction over five income years under certain circumstances.

What you can't claim

Individuals cannot claim a tax deduction for gifts or donation items that provide some personal benefit, such as raffle tickets, the cost of attending fundraising dinners (unless certain conditions are met), membership fees, payments to school building funds, payments where there is an understanding with the giver and recipient that the payments will be used to provide a substantial benefit for the giver.


Federal Budget - individuals

The Government is now giving individuals a greater incentive to work without being taxed more by making a start to personal income tax relief.

The changes will take place from 1 July 2016 and will prevent average full-time wage earners from moving into the second top tax bracket until 2019-2020, by increasing the 32.5 per cent tax threshold from taxable incomes of $80,000 to $87,000. This will affect around 500,000 taxpayers who will no longer face the 37 per cent marginal tax rate.

The policy objective is designed to keep those earning average wages in the middle tax bracket for longer. This measure will reward hard working Australians for doing more overtime, picking up more shifts, taking a promotion or a better new job, without being penalised by paying more tax through the higher rate.

In addition, the Government will increase the low-income thresholds for the Medicare levy and surcharge from the 2015/16 income year, so that low–income taxpayers can continue to be exempted from paying the Medicare levy.


Federal Budget - flexible super

The Budget has made changes that reflect that the current superannuation system is out of kilter with individuals current lifestyles, with the introduction of more flexibility to address this.

Concessional contributions

Individuals under the age of 75 will now be able to claim tax deductions for personal superannuation contributions. From 1 July 2017, individuals can make concessional super contributions up to the concessional cap. This will benefit partially self-employed individuals and partially wage and salary earners whose employers do not offer salary sacrificing.

The Budget will improve the superannuation balances of low-income spouses as the current spouse tax offset is extended to assist more families in accumulating superannuation. The current income threshold for the receiving spouse (whether married or de facto) will be lifted from $10,800 to $37,000. A contributing spouse will be eligible for an 18 per cent offset worth up to $540 for contributions made to an eligible spouse's superannuation account.

Catch-up concessional superannuation contributions will be introduced to allow those with lower contributions and interrupted work patterns to make 'catch-up' payments to boost their nest egg. This will apply to those with account balances of $500,000 or less whereby allowing unused concessional contribution caps to be carried forward on a rolling basis for up to five years.

Contribution rules removed for older Australians

Australians aged 65 to 74 will be able to access the bring-forward of non-concessional contributions, minimum work requirements for voluntary superannuation contributions and restrictions on spouse contribution from 1 July 2017. The incentive is to assist older Australians to make superannuation contributions appropriate to their circumstances.

Retirement income products

Barriers are being removed to encourage innovation in the creation of retirement income products. These income products can enhance the flexibility and choice for retirees to better manage risk and improve their standard of living in retirement.

From 1 July 2017, the tax exemption on earnings in the retirement phase will be extended to products such as deferred lifetime annuities and group self-annuitisation products.


Income protection insurance

Many Australians overlook the tax deduction they have available for the premiums paid for income protection insurance.

Income protection insurance policies are designed to protect individuals in the event they become unable to work due to sickness or an accident. Policies will generally pay a portion of an individual's income up to a maximum time period if they are unable to work. Payments are usually subject to a waiting period.

Generally speaking, taxpayers can claim the cost of premiums they pay for insurance against the loss of income. However, any amounts received for lost salary or wages under an income protection insurance policy must be included in an individual's income tax return.

Where an insurance policy provides for benefits of an income and capital nature, only that part of the premium attributable to the income benefit is deductible. Taxpayers cannot claim a deduction for a premium or any part of a premium for a policy that compensates them for such things as physical injury. Proceeds received from this form of insurance are usually tax-free, provided certain conditions are met.

Individuals cannot claim a tax deduction for a premium where the policy is taken out through superannuation and insurance premiums are deducted from their super contributions.


Renting out a room can incur CGT

Many taxpayers who rent out a room in their home, whether it be via Airbnb or another avenue, are unaware that the practice can incur capital gains tax (CGT).

Many assume CGT does not apply because profit made on the sale of the family home (or 'primary residence') is tax-free. However, those who earn an income from a portion of the family home may inadvertently create a capital gains tax liability.

Some people are aware that renting out a portion of their home may trigger a capital gain event, but errors when calculating the percentage of the property the calculated gain should be attributed to are still common.

Taxpayers that sell a property need to work out the portion of the property that was used for 'investment' or 'income producing' purposes based on the floor area rented out as a percentage of the total property. This needs to then be apportioned to the period that space was made available to rent for the duration of ownership.

Even though CGT is affected by events throughout the ownership period, it is often calculated many years down the track. Many owners do not remember or are unable to locate records for a relatively short time in which they were renting part of the house out.

Taxpayers may have some CGT relief where they owned the property for more than a year, giving them a potential CGT discount of 50 per cent.






Stop Donating to the Government

I've just had a great meeting with my Financial Planner, Michael Crowe to review my own personal superannuation (yes even us experts have experts we work with). And I wanted to share what happened.
He had some terrific advice regarding some of my investments, and together we worked out a strategy to squeeze some more dollars from the government (legally of course).
We make a great team!
So I've got a question for you… Would some advice around saving tax and building real wealth be of value to you? If so Michael and I will be working with business owners this year who want to pay less tax, and who want to build a real wealth – not just "plod along".
To start the ball rolling, we've written a short guide called: 
'No more government donations! 9 Steps to reducing taxes in your small business'
It will help you get on top of your finances, by sharing 'tried and tested' strategies that improve their tax structures and show you how to create a 'game plan' to have financial abundance (not just security).
That's how business owners achieve more MONEY! CHOICES! FREEDOM!
Business owners who don't use a guide like this, have a few negative things happen to them… They end up aimlessly plodding along and have no clear direction for their nest egg – no plan of action – no real target to aim for – they just HOPE for the best…. They miss out on seriously attractive and guaranteed tax savings. And worse still, they fall waaayyy short of the lifestyle they had been dreaming of.
But our clients here at The Hendrie Group are not like that. And the way to get your copy is to just hit this link.
BTW - we'll also be holding a workshop on Wednesday May 11 4.30pm - 6.30pm. Details to come but there will only be 20 places available so grab your spot here.

Hendrie Group Christmas wishes and trading hours

We would like to take the opportunity to wish you and your family a very Merry Christmas and a Happy New Year.

Thank you for your business this year and we look forward to continuing to work with you in 2016.

A quick note to let you know that our office will be closed from 3pm on Wednesday 23 December 2015 and will re-open at 8.30am on Monday 4 January 2016.

Have a safe and relaxing festive season!

From all the team at,
The Hendrie Group

A Lesson in Finance from the Tulips

After Michael's great market update last week, I thought it was worth re-visiting one of my favourite finance stories as a great reminder about the role emotion plays in sharemarket volatility.

If you've read all the guff about me in my profile, you'll know I have a background in literature and history (yeah, small career swerve!). One of my favourite novels is Thomas Hardy's Far From the Madding Crowd. Great title eh? It was borrowed from a Thomas Gray poem (Elegy in a Country Churchyard).

Given my background, you can imagine how excited I was upon first entering the finance industry, to attend a lecture "Tulip Mania and the Madness of Crowds." And I wasn't disappointed. The protagonist of the story was the humble tulip, and I'm still not sure whether the moral of the story was supposed to be the role of supply and demand in economics, or the stupidity of the human race. 

In the early 17th century, the Dutch literally went mad for tulips and demand ultimately outstripped supply. If I remember rightly, someone brought (stole?) some back from Turkey and didn't want to share. Of course we know what happens when someone tells you that you can't have something – you want it even more right? So began the manic trade of tulips.

There are stories of farmer's mortgaging their farms just to get hold of a couple of tulip bulbs. Tulip traders made a fortune, and there was even a future's market for these much sought after flowers!! 

Obviously they became waaaaaaaaaaaaaaaaaaaaaay over-priced, and what has to happen then? Yep, you guessed it, a market correction! It started with some astute businessmen deciding that they would sell out and take some profits. This proved to be a prudent move given that new tulip varieties were being introduced, and thereby increasing the supply. Then a few more sold out of their "tulip position", then a few more, and suddenly people started to panic, and the tulip market went into freefall. 

To put things in perspective, tulip prices fell more than 90% in a matter of weeks. It's impossible to accurately convert this to current monetary value, however popular consensus puts the comparison at something like $80,000 per bulb to less than a dollar per bulb. 

You have to wonder at what point it occurred to some people that they had spent their life savings on flowers! OUCH.

More than one historian has linked this tulip phenomenon to the onset of the Great Depression in the Netherlands, not to mention "the madness of crowds"…

We often tell our clients that if we took emotion out of the market, it would be extremely rational. However, it's risk that drives reward so if there was no emotion there'd be little opportunity to make money. I guess we can't have our proverbial cake...

The best advice I can give is to make sure you take a leaf out of Hardy's book (pun intended), and stay far from the madding crowd when it comes to investment decisions. Make your decisions based on fact and fundamentals, and with professional guidance from your Financial Planner.

Talk soon,

A few weeks ago I blogged about what was happening in Greece and the impact on the sharemarket, but while Greece was certainly the 'loudest' issue at the time, it wasn't the only issue...

There's been a long standing debate over whether or not markets are rational and efficient. Some experts argue that the sharemarket automatically factors in any news – good or bad – before anyone has a chance to do anything about it.

There are some fairly reasonable arguments, but for me it all falls apart with one significant element – human nature. Wherever there is emotion there is the chance of irrational behaviour and there's a lot of emotion involved in the movement of our sharemarket at the moment.

So let's focus on the facts and try to get some perspective on what's really going on and what it means for us in the scheme of things.

Since April we have seen several major sharemarkets have decent corrections, eg Chinese shares -32%, Asian shares (ex Japan) -17%, emerging market shares -16%, Eurozone shares -13% and Australian shares. Of course the US share market has been relatively stable with at most a 4% pull back, although being virtually flat year to date it might be described as being in a "stealth correction".

So what are the current issues?

  • Uncertainty remains in relation to China following recent softer economic data, continuing volatility in Chinese shares and China's move to devalue the Renminbi by 3% and allow market forces to play a greater role in its determination.

  • The commodity sector is experiencing a bear market due to more supply than demand, slowing growth in China and the rising trend in the value of the $US (most commodities are priced in US dollars). At present it seems the negative impact of falling commodity prices on producers (eg, US energy companies) is dominating the positive effect on commodity users (eg, US consumers). And China's currency devaluation is seen as reducing demand for them particularly to the extent it makes Chinese producers more economic.

  • The end of the commodity boom effectively ended the strength of emerging markets. Slower growth in China is not helping and the devaluation of the Renminbi has helped accelerate the collapse in emerging market currencies (which are down 36% from their 2011 high). The problems in the emerging world are weighing on global growth as they are now more than 50% of world GDP.

  • Greek related Eurozone risks could re-emerge, albeit briefly. While Greece and the Eurozone have agreed on a third bailout program, Greece is heading back to the polls in a month and the IMF is likely to insist that Greece's debt burden is reduced before participating in the bailout with a decision due in October. Neither of these are likely to be major threats though however, uncertainty around either or both of these could cause short term nervousness.

  • The combination of slower growth in China, falling commodity prices, weakness in the emerging world and the fragility of growth in developed countries indicate the risk of deflation globally remains high. Just to explain – where inflation reduces the value of money over time; deflation increases the value of money –- the currency of a national or regional economy. This means you can buy more goods with the same amount of money over time. In some ways this is good as a slower global recovery means less inflation and a longer global recovery. But it also poses risks for profits.

  • The Fed (the central banking system in US) appears to be heading towards a rate hike - and it's worth remembering here that the current rate is 0% so I use the term 'hike' a bit loosely. But the start of a rising cycle in US interest rates is often associated with market volatility because of this uncertainty. How far will it go? Is the Fed going to stifle growth? The start of the last two major interest rate tightening cycles by the Fed in 1994 and 2004 were associated with falls in US shares of 9% and 8% respectively.

    Investors have now grown used to near zero interest rates for more than 6 years in the US and there is naturally fear that raising them will threaten the still fragile US and global economies. And remember that element we can't ignore when it comes sharemarket movement – human nature and emotion...

  • Australian shares are not being helped by a somewhat disappointing start to the local earnings reporting season. So far 46% of companies have beaten expectations and 61% have seen profits rise from a year ago which is okay, but it's down on what was seen in the February reports, and given the tendency for good results to come early there is a risk of slippage as the reporting season continues.

  • Should mention that reduced liquidity across markets has played a critical role in what's been going on, as there's been a selling-off of equities so that people can get access to cash. Reduced liquidity isn't actually unusual at this time of the year when the northern hemisphere is on summer holidays and creates an environment where market developments can generate more sizeable moves.


From this perspective the recent correction is reasonable and not out of the ordinary. From a portfolio perspective, our recommended equity funds have been well-positioned to weather the downturn, and most investment managers have allowed for this in their planning. It can also position them well to take advantage of future buying opportunities.

In a liquidity driven market we are looking for events that could trigger an end to the selling. We see the following possibilities:

  1. A Chinese stimulus package would be helpful but it would need to be large enough to restore some confidence to Chinese investors. There is speculation of the liquidity injection this week.
  1. Markets become absolutely cheap enough. We are probably close in this respect although we do not think the US is there yet. However given the speed of the falls it is not that far off causing valuation support to cause a change in asset allocations and money back into equities. 

So it all begs the question, is the current weakness is just a correction or the start of a new bear market? Periodic sharp falls in the range of 5% to even 20% are quite normal and healthy in that they help the market let off steam and the rising trend resume. Of course it becomes more concerning if the rising trend in share prices gives way to a declining trend and a new bear market sets in.

First up, it's important to point out that notwithstanding the issues I've just discussed, it should also be recognised that the seasonal pattern for shares typically sees rougher returns over the period May to November. This is consistent with the old saying "sell in May and go away, buy again on St Leger's Day" (a UK horse race in September).

We really don't feel this is the end of the bull market - shares are not seeing the sort of conditions that normally precede a new cyclical bear market.

  • Share market valuations are mostly okay. Sure, measured in isolation against their own history some share markets are not cheap anymore. However, once the gap between share market earnings yields and bond yields is allowed for, shares still look cheap.

  • While global economic growth is constrained, a slower recovery should mean a longer recovery as it means spare capacity remains significant and we are a long way from the sort of inflation and debt excesses that precede cyclical downturns/recessions. In terms of current specific concerns: China is unlikely to allow growth to slip much lower for the simple reason that it will lead to social unrest, lower commodity prices will ultimately be positive for growth in developed and Asian economies which are mostly commodity users and while parts of the emerging world will remain weak a re-run of the 1997-98 crisis looks unlikely as the conditions today are very different.
  • Global monetary conditions look set to remain easy. Continued spare capacity and the lack of inflationary pressure has seen global monetary conditions ease not tighten this year. And while the Fed may raise interest rates by year end, they will still remain very low (in a range of 0.25% to 0.5%) and the Fed is likely to signal that any further moves are likely to be gradual, unlike in past tightening cycles. So monetary conditions in the US and globally are likely to remain easy for a long while.
  • Finally, shares are a long way from being over loved. There's a famous quote by the late billionaire investor Sir John Templeton, who said "bull markets are born on pessimism, grow on scepticism, mature on optimism and die of euphoria". There still looks to be a lot of scepticism out there and we haven't hit anywhere near euphoria. In fact various measures of investor sentiment are showing high levels of pessimism which is a bullish sign from a contrarian perspective. This is particularly the case in relation to Asian and emerging market shares.

From Australia's perspective there are a range of reasons to be optimistic. 

  • The size of the fall of 15% is quite a substantial correction especially given the economic outlook has not changed substantially. Sentiment indicators have turned sharply negative (which is a bullish indicator) and investors are heavily underweight emerging market positions. 
  • Valuation and yield looks very attractive relative to low interest rates and relative to global comparatives.

  • The risk for markets appears to be in the resource related sectors. However resources represent only 15% of the market (was 30% a few years ago) and the declining A$ will provide a cushion for the non-mining sectors of the economy (and their earnings).

  • Corporate balance sheets remain in good shape. Net debt to equity sits at 40% compared to 55% pre GFC. There are some pockets of stress in resources and mining services but it is not widespread. 

  • Australia has greater ability to stimulate the economy with interest rates at 2% (high compared to other markets) and Government debt at 23% of GDP.

So in summary, you can't ignore that there are some negative forces in the economy and sharemarket at the moment. In particular, the situation in China, the reaction to a US rate 'hike' and reduced liquidity are probably the three main factors to be keeping an eye on.

And if you're an investor, then it's important to separate out the noise of the market during this latest bout of volatility and focus on the fundamentals of the companies and investments within your portfolio. Those companies with good balance sheets and quality businesses can actually emerge stronger from these types of disruptions. 

But of course, uncertainty leads to volatility in the short term and all markets will experience this from risk aversion.

In our view, it will be a bumpy ride and as such, caution and patience are key.

Ultimately, you shouldn't be overly concerned about market fluctuations if you have a long-term financial strategy in place to effectively cope with short-term falls in the sharemarket.

We believe that market volatility will continue for a while and as many of our current financial planning clients already know, we believe times like this usually call for some strategic defensive positioning. In particular, holding enough equity exposure to take advantage of any market rallies over the next 6-12 months, but also putting measures in place to help protect against "downside" risk.

For this reason we prefer strategies that include tactical decisions, rather than "set and forget" which is somewhat redundant in this environment.



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