Market volatility has been elevated over the past week driven by the failure of the Silicon Valley Bank (SVB). Global banking system volatility is on the rise!
The unfolding situation in the US could be seen by some as having echoes of the Global Financial Crisis (GFC) from 2008. This, combined with recent falls in Credit Suisse shares (which appear to be unrelated to the US mid-tier banks), has caused jitters. Despite SVB’s failure being the second largest in US history, when put into perspective. However, it’s assets are less than one tenth of J.P.Morgan’s, one of the major players in the US banking system.
The US Federal Deposit Insurance Corporation (FDIC) has already taken control of the SVB to navigate the collapse. This is to ensure the best interest of the financial system. Further announcements from U.S. Treasury have sought to calm the broader market of the financial system’s health. And also, to reassure the market the relevant tools are available. There will be no GFC-style bailout, nor will one be necessary.
The US financial system is considered to be well capitalised overall. According to Mark Zandi, Moody’s Chief Economist, the size of the smaller banks at risk is not likely to pose any threat to the financial system.
How it happened
• SVB has been operating in a relatively unusual manner. Instead of lending the deposits received, the Bank invested in long dated fixed interest rate bonds. This exposed the Bank’s assets to significant interest rate risk which was not sufficiently hedged.
• Given rising interest rates, the value of the bonds held to cover customer deposits have fallen significantly. The need to sell fixed interest rate securities to cover the withdrawal requests resulted in realised losses.
• Earlier in the month, a single sale resulted in a $1.8 billion loss. This led the Bank to raise capital to increase the balance sheet health. The capital raise failed, which prompted customers with deposits with the Bank to withdraw their funds. In turn, resulting in a run on the Bank.
• Within 48 hours the Bank was bankrupt with the FDIC taking control.
• The US Federal Reserve and US Government have guaranteed customer funds at SVB will be paid back in full.
• Major investment bank Credit Suisse experienced panic after the share price dramatically fell, with banking operations under pressure.
• Overnight, the Swiss National Bank and the Swiss financial regulator announced support for the Bank. They announced, “Credit Suisse meets the higher capital and liquidity requirements applicable to systemically important banks.” And confirmed they will “provide liquidity to the globally active bank if necessary.”
What to do?
This current market volatility, while significant, does not alter our long-term views on how portfolios are positioned. It is important to manage your portfolio in line with long-term objectives, aligned to risk tolerance. Please give us a call to discuss your portfolio if you still have concerns.
Time is running out to apply for a Director Identification Number (director ID)
You may have heard about the new rules which require directors of Australian companies to obtain a Director Identification Number (director ID). It is a unique 15-digit identifier that directors apply for once and keep forever.
The following provides some useful further information.
As a director of my SMSF’s corporate trustee do I need a director ID?
The new requirement to obtain a director ID applies to all directors of corporate trustees of an SMSF. This obligation also applies to any directors who may have resigned from all director roles after 31 October 2021. This applies even if you have no intention to ever be appointed as a director of an Australian or foreign company.
How long do I have before I need to get my director ID?
Individuals that were a director of any company prior to 1 November 2021 have until 30 November 2022 to get a director ID. This transitional period also applies to newly appointed directors of corporate trustees of an SMSF. This is provided they were an existing director, of a company, before 1 November 2021.
Otherwise, first time directors are now required to have a director ID before they are appointed as director of any company.
What is the fastest way to apply for a director ID?
With 30 November 2022 fast approaching, we strongly encourage all directors to apply for their director ID now. The fastest way to apply for your director ID is online at abrs.gov.au/directorID.
A myGovID is different to your myGov account. Your myGov account allows you to link to and access online services provided by the ATO, Centrelink, Medicare and more. myGovID is an app that enables you to prove who you are and log-in to a range of government online services.
Don’t already have a myGovID? You will need to set this up before you can apply for your director ID online. Refer to mygovid.gov.au/setup for more information.
You will need to choose your identity strength, noting that ‘standard’ identity strength is the minimum required for a director ID.
What if I can’t set up myGovID online?
Where you are experiencing difficulties setting up your myGovID, the ATO encourages you to contact them on 13 62 50.
To speed up the phone application, please have your TFN ready as well as the information listed below, required to verify your identity.
If you’re unable apply online or over the phone, the ATO will provide you with a paper form to complete. This is the least preferred option and will require you to provide certified copies of documents to verify your identity.
Can we help you get your director ID?
You must apply for your director ID yourself, so that the ATO can verify your identity.
Verify your identity against your ATO records: once you have logged into ABRS online using myGovID, you’ll need your tax file number, residential address held by the ATO, and information from two of the following:
· bank account details (where your tax refunds or payments are made and received)
· an ATO notice of assessment
· a dividend statement
· Centrelink payment summary
· a PAYG payment summary (this is different to your income statement or your PAYG instalment activity statement).
How can we help?
Have questions or would like further information about director IDs? Please feel free to give me a call on 07 5593 0855. Or arrange a time for a meeting, so we can discuss your requirements in more detail. Although we are unable to apply for a director ID on your behalf, we would be more than happy to guide you through the process. And where possible, source documents to help you verify your identity with the ATO.
For other information, resources, and timely updates relevant to your SMSF, please refer to the SMSFA’s trustee education platform. SMSF Connect.
Heightened global markets volatility can easily trigger kneejerk reactions by panicked investors.
Widespread selling, triggered by the Russia-Ukraine crisis, has been behind recent big swings on global financial markets. This includes stock markets, commodities and currency markets.
As serious as the current events are, heightened market volatility is nothing new. The onset of the COVID-19 pandemic also triggered major falls on global markets two years ago.
In March 2020, the Australian share market dropped 35%+ over 20 trading sessions. It reached its lowest level in over a decade. Very soon after, it and other global financial markets staged a quick and very strong rebound.
By the end of 2020, share markets were back near record levels, and last year they continued to build momentum.
Investors who didn’t panic, chose to ride through all that early 2020 markets volatility. Those who have remained invested ever since, have been well rewarded with both capital and income growth over time.
In volatile market conditions, staying the course is generally the best investment strategy.
Three mistakes to avoid during a downturn
1. Failing to have a plan
Investing without a plan is an error that invites other errors. Chasing performance, market-timing, or reacting to market “noise” driven by headlines included. Temptations multiply during downturns, as investors looking to protect their portfolios seek quick fixes.
2. Fixating on losses
Market downturns are normal, and most investors will endure many of them. The number of shares you own won’t fall during a downturn unless you sell. In fact, the number will grow if you reinvest your funds’ income and capital gains distributions. And any market recovery should revive your portfolio too.
3. Overreacting or missing an opportunity
In times of falling asset prices, some investors overreact by selling riskier assets. And, then moving to government securities or cash equivalents. It’s a mistake to sell risky assets amid market volatility in the belief that you’ll know when to move your money back to those assets.
Time in the markets is what counts
Trying to time markets is virtually impossible. Just being invested in the market, and making ongoing contributions, will ensure you never miss out on long-term growth.
If you’re unsure about your current investment portfolio, call the Wealth Planning Partners Team today to discuss a strategy for you.
Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFS Licence 227263) is the product issuer. We have not taken yours and your clients’ circumstances into account when preparing this material so it may not be applicable to the particular situation you are considering. You should consider your circumstances and our Product Disclosure Statement (PDS) or Prospectus before making any investment decision. You can access our PDS or Prospectus online or by calling us. This material was prepared in good faith and we accept no liability for any errors or omissions. Past performance is not an indication of future performance.
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The volatility that we’ve seen over the last six months, while significant, is not an unusual occurrence for a normal and healthy functioning market. Heightened volatility is an uncomfortable experience in the short- term. Equity markets and some parts of the bond markets will continue to be an important contributor to overall long-term returns.
We appreciate that the current environment looks concerning given falls in markets and likely further interest rate rises during 2022. With the possible risk of recession, however it is important to continue to stay invested. Manage your portfolio in line with your long-term objectives, aligned to your risk tolerance. We encourage investors to discuss their portfolio with their adviser to ensure that it meets their personal needs, objectives and is in line with their risk tolerance.
Key Summary Points:
Stock and Bond Markets have fallen dramatically this week, continuing the trend since the start of 2022.
High inflation in the U.S. was the cause – coming in at 8.6%. The highest in 40 years. This prompted the U.S. Federal Reserve to raise interest rates by 0.75%. Domestically, the RBA raised rates by 0.5%.
The Inflation is being caused by a range of factors, including supply chain disruptions due to the COVID crisis and the war in Ukraine.
Investors fear rising interest rates, to combat inflation, will hurt economic growth and cause a recession.
Fear of slower economic growth has hurt the share market, which performed strongly in 2020 and 2021.
Stocks market and Bond market falls means they are now more attractively priced.
Take a long-term view and stay invested, with diversification, in line with your risk tolerance.
Time in the market, is more important than timing the market.
The chart above shows the recent dramatic increases in US Inflation with the colours reflecting where the inflation has come from. Mainly from energy prices, services and food.
The COVID crisis and the war in Ukraine caused reduced supply of goods and services. Also, just after the COVID crisis, governments and central banks increased the money supply to support markets and economies. The increased money supply, meant more money bidding for the same quantity of goods, causing rising prices. This will likely continue throughout 2022, as it takes time to work through the global economy.
What’s ahead?
We expect inflation and interest rates to continue rising in 2022. This will have an effect in the short-term, slowing economic growth. We also expect inflation to reduce in 2023 and this should take pressure off the global economy. This is because supply side shocks should reduce as the world opens up.
An end to the war in Ukraine would also help the inflation situation, as supply of many key commodities would increase.
Markets have fallen substantially and are therefore more attractively priced than recent all-time highs at the end of 2021. There are asset classes that should do well in the coming periods, including floating rate Bond markets and asset classes that benefit from inflation. That is, Infrastructure and Commodities.
One of the important lessons in investing is that time in the market, is more important than timing the market. The following chart demonstrates that short term movements in markets (in this case the ASX 200) can be extremely volatile. This is what we have witnessed in the past six months. Investing for the longer term (the blue line) provides a much more stable outcome. As we continue working through heightened volatility, keep the longer-term in mind.
Long Term Returns (Blue Line) More Stable than Short Term Return (Green Line)
If you’re worried about your personal situation, give the Wealth Planning Partners team a call on 07 5593 0855 to chat further.
Disclaimer
The information in this report is general advice only and does not take into account the financial circumstances, needs and objectives of any particular investor. Before acting on the advice contained in this document, you should assess your own circumstances or seek advice from a financial adviser. Where applicable, you should obtain and consider a copy of the Product Disclosure Statement, prospectus or other disclosure material relevant to the financial product before making a decision to acquire a financial product. It is important to note that investments may go up and down and past performance is not an indicator of future performance.
The contents of this report should not be disclosed, in whole or in part, to any other party without the prior consent of the IOOF Research Team and Advice Licensees. To the extent permitted by the law, the IOOF Research team and Advice Licensees and their associated entities are not liable for any loss or damage arising from, or in relation to, the contents of this report.
For information regarding any potential conflicts of interest and analyst holdings; IOOF Research Team’s coverage criteria, methodology and spread of ratings; and summary information about the qualifications and experience of the IOOF Research Team please visit https://www.ioof.com.au/adviser/investment_funds/ioof_advice_research_process
Chances are the funding of your lifestyle in retirement may be on your mind!
Take steps now to avoid getting caught short on retirement income and live the retirement lifestyle you want. It’s time to take control of your retirement.
The qualifying age is increasing by six months every two years until it reaches 67 in July 2023. The Age Pension age increased to 66 and a half on 1 July 2021.
If for example, you are planning to retire at 60 you will need to wait until you’re 67 before you can apply for the Age Pension. You’ll have to rely on your own savings and super in the interim, making it crucial to ensure you have enough money put away for later years. But the good news is that there’s still time to grow your retirement savings. Take control of your retirement savings now.
Boost your super
Contributing more to your super can be a reliable route to bolstering your retirement fund. By making extra contributions through salary sacrifice, you can grow your super and at the same time reduce the amount of income tax you pay. The government will tax your salary sacrificed contributions, within the allowable concessional contribution cap, at 15 per cent, which may be much lower than your marginal tax rate.
Making non-concessional or after-tax super contributions is another option. Generally, you can contribute up to $110,000 each financial year if your total super balance is less than $1.7 million at 30 June of the last financial year. To understand how these contributions work, it’s wise to get professional advice.
Beef up your savings
Your personal savings outside of super can supplement your super payments in retirement. But are they growing enough now to provide you with some level of income when you retire?
To build up your savings, you may have to invest part of it and make sure it’s growing faster than the rate of inflation over the long term. You should seek professional advice to see what investments are appropriate for you.
Know your entitlements
Besides the Age Pension, you may be eligible for other government benefits and concessions. For example, you may be eligible for a concession card such as the Pensioner Concession Card (if you are receiving the Age Pension), Commonwealth Seniors Health Card or the state based Seniors Card. Concession cards like these may entitle you to discounts on some commercial and public services. Concessions that allow you to buy prescription medicine at a discount may also be available.
But keep in mind that these benefits have strict eligibility rules. There’s also no guarantee that these entitlements will still be available by the time you retire. So, take charge of your retirement.
Working with your financial adviser, you can develop a strategy that helps ensure you’ll be well provided for regardless of changes to pension policies. If you’d like to discuss your own retirement needs, reach out to the team at Wealth Planning Partners to chat about your situation.
