In the US, the most anticipated news is whether the US Federal Reserve will announce a tapering of its bond purchase program on the back of an improving US economy. However, the fragility of financial markets was highlighted in June with the Fed’s comments, which resulted in a sharp selloff in both equity and bond markets. We do expect that the Fed will begin to moderate its support for the economy through the later stages of 2013 into 2014. The timing, speed and communication of this change will be an important determinant of the performance of financial markets over this period.
Across the Atlantic, Europe continues to slowly come out of financial repression. While the recent economic data has provided some level of support to markets, the structural impediments of a high jobless rate and a struggling financial sector along with the potential need for further monetary support for a number of the (debt laden) Euro countries means that risks for Europe still remain high. However, given the degree of market dislocation, selective investment opportunities remain prevalent for the patient investor.
In Asia, all eyes are fixed on China. While we continue to expect that growth will moderate further, which will cause further consternation in Australia around commodity prices, we remain of the view that the government will provide the support needed to assist the economy through this current phase. Overall, financial markets will continue to gyrate around the macro backdrop as the global economic recovery evolves. In this context, we remain of the view that taking a more selective approach to investing with a focus on managing downside risk (as much as possible) remains the right strategic approach heading into 2014.
The recent federal election saw a change from a minority Government to a majority one that should deliver a more stable Government and more consistent policy (regardless of which party). The business sector has been looking for a change in Government, one they expect to be more consultative, stable and one able to make progress to encourage business confidence post the election, although the composition of the Senate may hamper this.
Interest Rate Update
The Reserve Bank of Australia has indicated further cuts in official interest rates are still a possibility. Unless we see a marked turnaround in sentiment post rate cuts and the election, and/or further weakness in the Australian dollar, a further cut in rates is unlikely before year end. However whilst lower rates will be supportive for growth, at the same time they could stoke asset prices and thus create potential financial stability problems down the track.
The Coalition Government has made a commitment to “no unexpected negative changes to superannuation”. The Government proposes to hold the Superannuation Guarantee rate at the current 9.25% for the next two financial years, and then continue to increase to 12% by 2021/22.* The Coalition will revisit the level of contribution caps and co-contribution benefits for low income earners once the Federal budget is in a strong enough position to afford this legislated increase.
The Government has announced it intends to scrap the current low income superannuation contribution regime (which is only available for those earning up to $37,000). Removal of this contribution scheme has the potential to reduce retirement income for low income earners.
*Any amendments to legislation must be introduced into the House of Representatives and passed by both houses of Parliament before these measures can be enacted.