Monthly Update – May 2022

Federal election result – business as usual for investors

The weekend saw the Liberal Morrison government replaced by Labor’s Albanese government – but the move from a centre-right party to a centre-left party has no significant ramifications for investors, given they have been well catered for under governments from both sides of politics over the last 20 years.

Labor’s primary focus is on its core areas of healthcare, aged care, education, climate, energy, and housing. Its election priorities add an extra $7.5 billion over the next four years compared with the previous government but this is an amount that can be easily accommodated in the budget.

The major challenge for the incoming government will be high inflation, given its desire to increase real wages, as this usually feeds into price increases.

Australia’s Future Fund prepares investors for lower returns

In May, Future Fund Chairman Peter Costello noted that he expects future investment returns to be lower than in the past. The Future Fund, established in 2006 to provide for the superannuation liabilities of federal public servants, has achieved a 10-year average return of 10% per annum.

Recently the Fund’s returns have been affected by falling overseas share markets, which make up its largest exposure, at 22% of the portfolio. The Fund’s holding to cash which is sitting at 15%, has also been a drag on returns. The return for the March quarter was -1.5% and for the financial year to date +1.9%. This compares to the Kauri Wealth Investment portfolio return of +5.0%.

Peter Costello has reiterated that the challenge of dealing with global inflation will continue to affect the Fund’s investment returns over the next few years.
In addition, the Fund became caught up in the Ukraine conflict, as it was holding a portion of its portfolio in Russian stocks. The closure of the Russian stock exchange has caused delays in exiting some of the Fund’s Russian holdings.

Investors have been well catered for under governments from both sides of politics over the last 20 years. The move from a centre-right party to a centre-left party has no significant ramifications for investors.

The peak in US inflation may be here

Many analysts are updating their economic forecasts and expect US inflation to peak at close to the current rate of 7% and to then commence falling over 2023, into the 3% range.

Victor Shvets, Head of Global Strategy at Macquarie Bank, expects the current US interest rate cycle to shift to lower interest rates during 2023.

Shvets assesses today’s high inflation in the US as transitory and believes it will not become entrenched because significant factors such as ongoing pandemic linked disruptions, massive levels of fiscal support, and geopolitical supply and demand dislocations will all now decrease and have much less impact.

Shvets considers it unlikely all three will be maintained over 2023. In fact, he cautions about the chance of disinflation over the medium term, due to ongoing investment and innovation in technology; stagnating real wages; and rising inequalities. (‘Deflation’ is a decrease in general price levels throughout an economy, while ‘disinflation’ is what happens when price inflation slows down temporarily).

The financial advice industry continues to shrink at a time when demand is rising

Recent figures from the Financial Planning Association (FPA) indicate that Australia’s number of registered financial advisers has fallen by 39%, from 28,000 advisers registered on ASIC’s Financial Adviser Register in 2018 to 17,000 advisers in 2022.

At the same time, only 82 new financial advisers have registered this year. However, the FPA estimates that more than 1,000 new advisers are needed every year to meet the demand. It therefore believes the industry faces a classic supply and demand crunch. With the peak retirement of the baby boomer generation currently in play and Generation X starting their retirement planning journey, the need for financial advice in Australia is at a peak.

The primary cause of the reduction has been the extra workload placed on advisers following the Royal Commission. Many industry professionals suggest that advisers have to spend too much time on compliance and meeting regulatory hurdles, rather than providing sound advice to clients. The FPA estimates that advice fees are rising by around 8% pa.

Kauri Wealth Management is a Fee for Service investment advisory business and as such my advice is built around ongoing personal relationships with my client base. Personalised independent advice is backed up by a breadth of industry knowledge.

I accept a limited number of new clients each year and would be happy to discuss this further with you. Please don’t hesitate to contact me.

Russell Lees
Senior Adviser
Phone: +61 439 852 963

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