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Superannuation Update and The Share Market - Where to from here?

Superannuation Update and The Share Market - Where to from here?. February 2008. Disclaimer.

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Superannuation Update and The Share Market - Where to from here?

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  1. Superannuation Update and The Share Market - Where to from here? February 2008

  2. Disclaimer This presentation (and any private discussions with the presenter) is not personal securities advice and does not take into account any person's investment objectives, financial situation or particular needs. Before making an investment decision you need to consider, whether any investment is appropriate in light of your particular investment needs, objectives and financial circumstances and you should consider obtaining expert financial, legal and taxation advice. This presentation does not constitute taxation advice. Information and opinions presented in this report have been obtained or derived from sources believed by Wilson HTM Ltd to be reliable, but Wilson HTM Ltd makes no representation as to their accuracy or completeness. Past performance should not be taken as an indication or guarantee of future performance. The price, value of and income from financial products may fluctuate and any product may become worthless.

  3. Wilson HTM Investment Group

  4. Superannuation:Further Change

  5. Contribution Limits • Removal of Reasonable Benefit Limits (RBL’s) • Limits on concessional contributions • Over 50: $100,000 per annum (FY 2012) • Under 50: $50,000 per annum • Limits on non-concessional contributions • $150,000 per annum • $450,000 over three years • Effective penalty tax rate of 46.5% - 93.0% • Government Co-Contribution

  6. Withdrawals • Removal of compulsory cashing rules • Under 60 – same rules apply. • Over 60 • Tax free pensions • Tax free lump sums • Application of preservation rules • Transition to retirement pension

  7. Pensions $100,000 Employment $92,000 $8,000 Individual Super Fund $42,780 $1,250 Tax Man

  8. Pensions $100,000 Employment $0 $100,000 Individual Super Fund $50,000 $0 $15,000 ? Tax Man

  9. Borrowing inside super • Section 67 SIS Act Prohibits borrowing (limited exceptions) • Reg 13.14 SIS Act Prohibits super fund giving charge over asset • Section 71 (1) SIS Act Defines related trusts as In-house Assets • Section 273 ITAA 1936 Special Income Provisions • Amendments made to SIS Act, to allow instalment warrants: • Section 67 (4a) Allow borrowing (in specific circumstances) • Section 71 (8) Exemption to in-house asset rules

  10. The basic structure 5 Basic Conditions • The lender has limited recourse against the super fund • The borrowed funds are used to purchase an asset the super fund could otherwise acquire • The asset is held on trust, so that only the super fund has a beneficial interest • The super fund can acquire the asset by paying one or more instalments • The asset (or replacement asset) must be the only asset held by the trust Lender Limited Recourse Loan Investment Super Fund Trust Acquisition through instalment(s) Property

  11. Borrowing to Invest • Investment strategy must allow for: • Borrowing to take place • Specific asset to be purchased • Sole purpose test must be considered • In house asset rules should be considered • New legislation is wider than intended / necessary • Clearly not what was intended

  12. Australian Equity Market

  13. Another year of strong returns in 2007

  14. What a Year! S&P/ASX 200 Accumulation Index - 2007 AUD hits high – US$0.93 Shanghai composite up 50% for 2007 Fed drops interest rates Earnings growth and strong economic forecasts US economic fears Superannuation inflows - $1m each Low CPI and strong corporate earnings Sub prime crisis begins 24%+ returns in 2006 Shanghai correction Fed drops interest rates Source: IRESS, Wilson HTM

  15. What of the Heavy Weights? Resources Energy Financials ex prop Listed Property XKO     ASX 300 XKR     300 Resources XXK     300 Financials ex Property Trusts XEK     300 Energy XPK     300 Property Trusts Source: IRESS, Wilson HTM

  16. Earnings growth may have downside risk

  17. Similar sector performance again in 2007

  18. Mining sector valuations have risen

  19. US Economy and its impact upon Australia

  20. US Sub Prime Crisis • Causes • Excessive lending to borrowers lacking the capacity to pay over the last 2-3 years • Repackaging debts into Collateralised Debt Obligations (CDO’s) • Selling CDO’s with inflated credit ratings • Effects • Write downs on CDO’s on hedge fund and investment bank balance sheets • Write-downs exceed US$125Bn. • Bond Insurers under pressure US $200Bn to restore AAA Credit Rating • Poor housing market and falling property values • Increased occurrence of defaults • Increased credit spreads due to risk aversion in credit markets • Higher cost of borrowing • Reduced corporate/private deal flow • Volatility on US stock market

  21. 70% 2,500 USA New Housing Starts 50% seasonally adj 2,000 30% 1,500 Growth year-on-year (%) Total (000 units) 10% 1,000 -10% 500 -30% yr-on-yr% 000 units -50% - Jan-88 Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 US New housing starts -38.2% yoy growth following rates of -25.0% for Nov and -13.3% for Oct. Levels back to June 1991. Source: USA Bureau of Census, WilsonHTM

  22. 10.0% 120 USA Industrial Production 8.0% 1997=100 110 6.0% 100 4.0% 90 2.0% US IP (2002 = 100) IP Yr-on-Yr Growth 0.0% 80 -2.0% 70 -4.0% 60 IP Y-o-Y% -6.0% Industrial Production -8.0% 50 Jan-88 Jan-89 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 US Industrial Production – slight improvement however is a trailing indicator Source: USA FRB, Wilson HTM

  23. US Potential Housing Loan Defaults Source: CBA

  24. US Mortgage Rate Re-Sets Source: CBA

  25. US Housing Balance Sheet Source: CBA

  26. US Employment Source: CBA

  27. US Consumer Confidence Source: CBA

  28. What of China?

  29. What of China? – RIO have identified 4 themes Rapid growth 2. Decoupling 3. Commodity intensive growth 4. Increasing domestic resource production costs

  30. Rapid Growth - Chinese growth accelerated in 2007 Source: Global Insight

  31. Growth Forecasts – China forecast to grow 10.5% 2008 and 9% in medium term Source: Financial Times

  32. Increasing FX reserves provide buffer against external shocks Source: State Administration of Foreign Exchange

  33. Decoupling - Direct trade effects from a US slow down are anticipated to be small Source: Centre for International Studies

  34. Commodity Intensive Growth - Rapid Industralisation/Urbanisation = China as the world’s largest consumer of commodities Source: WBMS, Barlow Jonker,IEA, PB

  35. Key targets for China’s economic & social development - The 11th 5 year plan Source: Chinese government and provincial levels 5 year plans 2006 to 2010

  36. Increasing Domestic Resource Production Costs -Chinese currency likely to strengthen further (increasing long term commodity prices) Source: Centre for International Economics

  37. Strong demand from economic and demographic development favours major base metals Sources: Global Insight – for population distribution, RIO Tinto for commodity expenditure profiles

  38. China – Is it really that good? • Ernst and Young conducted a study of the Non Performing Loans in China in 2006 • The big 4 banks (which control approx. 70% of financial assets) US$358Bn • “Official” figures for China’s NPL’s = US$150Bn for the big 4 banks • Total financial system US$911Bn = 40% of GDP • In 2005 comparative numbers in the region where: • India’s NPL 5% GDP • Indonesia NPL < 5% GDP and • Japan NPL < 3% GDP. • S + P and Fitch estimates are US$320 to 330Bn Source: Financial Times

  39. Where to from here?

  40. World Economic Growth

  41. Market valuation had been above average

  42. Sector PE ratings vary across industrials

  43. Sectors have re-rated others have de-rated

  44. Aust Housing Loan Arrears

  45. Repricing of Default Risk Source: Bloomberg

  46. The Way Forward - Summary • US Economy • Affects of credit crisis likely to take several months to un-wind • Asset de-valuation likely to be more wide spread than residential real estate • Government cutting rates short term to stimulate the econ • US slowdown expected to continue? • Medium to long term possible export lead recovery • Watch inflation pressures • Chinese industrialisation • Growth likely to remain above 8-9%pa for medium term • US slowdown exp to reduce growth by circa 1%? • Demand and pricing of commodities likely to remain high • Australia • Fundamentals of economy intact • Volatility likely to remain (opportunities?) • Focus on fundamentals CF, Margins, Dividends and strong management • PE compression expected to consolidate • Concern over emerging inflation i.e. wages growth??

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