The Federal Election
As this update is posted, there are only 18 ‘sleeps’ to go until the nation goes to the polls.
Sportsbet currently has Labor as short-priced favourites at $1.22 to win the federal election, with the Liberals appearing to be ‘rank outsiders’ at $4.25.
We know from the Trump victory in 2016 and Brexit that the unexpected can still happen, but in the absence of a significant turnaround in voter sentiment, it is likely that Australia will get its 31st Prime Minister on the 18th of May.
If Labor win – providing they don’t face a hostile Senate – they intend to make the following ‘once in a generation’ set of changes to tax laws:
- Negative gearing – from 1 January 2020 the ALP has proposed limiting negative gearing to new property investments only
- Capital Gains Tax – from 1 January 2020 the ALP will halve the CGT discount, effectively increasing the amount of this tax by 50%
- A 2% Budget Repair Levy imposed on taxpayers earning over $180,000 per annum – effectively raising the marginal tax rate to 49% (inclusive of the Medicare levy)
- Non-concessional contributions – the ALP have announced they will reduce the annual cap from $100,000 to $75,000. For those using the ‘bring forward’ provisions this will reduce the limit from $300,000 to $225,000
- Division 293 Tax Threshold – the ALP will impose an additional 15% tax on the super contributions of taxpayers earning over $200,000. (The current threshold is $250,000.)
- Borrowing in Super – the ALP will ban SMSFs from borrowing to purchase investment property
- Franking credits – the ALP will end the practice of allowing excess franking credits to be refunded to investors with a nil tax liability
- Trusts – the ALP will impose a 30% minimum tax rate on discretionary trust distributions to prevent the use of these structures as a tax planning mechanism
The radical nature of the reforms that the ALP are proposing has resulted in a lot of economic uncertainty for share and property markets.
With the residential property market already dropping, particularly in Sydney and Melbourne – which together combined account for between 50% to 55% of the entire nation’s housing stock – there are widespread concerns that the negative gearing reforms could lead to a more pronounced economic slowdown and further dampen consumption and investor enthusiasm.
The potential removal of refundable franking credits and changes to Capital Gains tax rates are also weighing heavily on the minds of investors.
With so much uncertainty on the immediate horizon in 2019, it is likely that we will only see a clear path forwards once the outcome of the federal election is known.
The last three months of 2018 saw share markets both here and around the world drop significantly on the back of three key themes:
- The escalating trade war between the US and China – leading to a slowdown in growth in China (which in many ways had been the ‘go-to’ economic engine for global growth)
- Concerns about a slowdown in growth in the EU and the messy and protracted Brexit negotiations
- The US Federal Reserve threatening to rapidly raise interest rates and reverse the ‘quantitative easing’ (i.e. printing money) program which has supported the US economy since the GFC
The reversal in world share markets amounted to a technical ‘correction’ – meaning a drop of more than 10%. Global shares, as measured by the MSCI World Share Index (ex-Australia), dropped 11.10% in the December quarter.
The Australian market followed the lead from international markets, with the S&P ASX 200 index dropping by 8.24%.
Things looked pretty grim heading into the Christmas break and 2019.
Was this the start of something bigger – GFC 2.0, the next ‘recession we had to have’, the Zombie Apocalypse?
Fast forward to today – and all of those concerns seem to have eased (despite the uncertainty surrounding the federal election).
Trade war tensions have eased with China announcing further stimulus to boost its economy. Brexit negotiations are still unresolved but there seems to be a strong desire among all parties to avoid a ‘hard exit’ and to maintain the economic benefits of (quasi-) EU membership. The US Fed seems to have taken a ‘chill pill’ and ruled out further interest rate rises until 2020.
Accordingly, the first three months of 2019 have surprised on the upside – with a market turnaround which has seen international shares bounce back by 11.5% to the end of March, recovering all the losses from the previous quarter.
Australian shares rose 10.9% in the quarter to be up by just 1.8% over the last 6 months.
This has been a perfect real-life example of market volatility with the graph showing a ‘v-shape’ for the last 6 months:
For clients using a DCA (Dollar Cost Averaging) strategy, it has been a great six months. Dollar Cost Averaging is the strategy where you invest the same amount into markets on a regular basis (usually monthly) to benefit from any market dips, resulting in assets being purchased at ‘bargain’ prices.
The graph (above) shows the performance of the Australian share market (grey line) and the US market (brown line). For investors using a DCA strategy, some of their shares would have been purchased at discounts of roughly 10% for Australian shares and 20% for US shares.
Volatility can ‘be your friend’ and you can see how profits can be made in markets where prices have essentially been flat over the last 6 months.
We don’t know exactly where markets will go from here, but with more ‘bumps in the road’ being likely, similar investment opportunities are likely to arise.
The first quarter of 2019 has seen a continuation of falling house prices, primarily in Sydney and Melbourne will falls of 3.2% and 3.4% respectively.
Nationwide the overall drop was 2.3%, with Brisbane performing better than average with a fall of only 1.1% over the same period.
The RBA have recently said that interest rate cuts could be on the cards as a potential mechanism to the help stimulate a weakening economy, with official interest rate reductions more likely to eventuate, particularly if unemployment rates start to trend higher.
Despite the recent ‘doom and gloom’ and the uncertainty surrounding the federal election, some recent data released by the ABS shows some very positive signs for Brisbane property investors.
Two weeks ago, the ABS released their ‘net migration’ figures for 2017-2018.
The ABS defines regional internal migration as being both the interstate and intrastate movement of people from one region to another within Australia.
Brisbane had the highest net internal migration stats among all the capital cities:
The second highest region in terms of ‘net migration’ was the Gold Coast, with third place going to the Sunshine Coast.
With the South East Queensland ‘corridor’ taking the top three spots, it indicates that this strong population growth is likely to be structural rather than seasonal in nature.
Melbourne came in fourth place for net migration gains.
For 2017-2018 Sydney suffered the highest net loss of all the capital cities. (Will the last person out please remember to turn off the lights?)
With Brisbane residential property still achieving impressive yields of close to 5% and with price points that are still much more affordable that Melbourne and Sydney, we expect the long-term growth trend to favour the ‘river city’.
Sources: Russell Market Insights, Advance Asset Management, Australian Bureau of Statistics, Morningstar Australasia Pty Ltd, Domain Group, Big Charts.com