Efficient portfolio implementation is sometimes overlooked as a ‘nice-to-have’ rather than something that adds value to the investment process. This attitude is far less viable today given recent market volatility and product rationalisation, which have made the ability to implement timely portfolio changes essential for advisers and their clients.

The market downturn in March prompted many of us to reassess our investment strategies. We tried to understand where the pockets of risk were in our portfolios and identify opportunities presented by the market dislocation. Most of the key platforms in the market recorded a significant increase in portfolio changes during this period as managers of managed portfolios repositioned their allocations, taking into account their revised view of the world.

This shift in the way we viewed the world resulted in changes to the overall asset allocation positioning of portfolios, as well as changes to underlying investments. Lonsec was no different. From an asset allocation perspective, we increased our exposure to risk assets such as equities and identified a window of opportunity to gain exposure to assets that in our view were mispriced by the market, such as parts of the credit markets.

An example of this was the syndicated loan and high yield market, which experienced a significant blowout in credit spreads as the market priced in a significant uptick in defaults in these assets. We believe the market over anticipated a rise in defaults and that a pricing opportunity presented itself. Lonsec acted on this view by adding the Bentham Syndicated Loan Fund to the Lonsec Multi-Asset portfolio in late May. We have subsequently reduced our allocation to the fund given the strong return the fund has generated as we have seen credit spreads narrow.

The addition of Bentham offers an excellent example of how timely implementation affects return. As at 30 November 2020, Bentham added 7.38% for the five months since the fund was added to the portfolios. If implementation was delayed by a month, the return would have been only 5.70%, and if a two-month implementation delay was experienced, the return would have been even less, at 3.52%.


Source: Lonsec iRate Bentham Syndicated Loan Fund

A one- or two-month implementation delay is not uncommon outside of a managed account structure, where advisers may be following a model portfolio and having to issue ROAs to clients to implement changes.

Efficient implementation can also be additive where a product issuer decides to close a product. Such occurrences can be difficult to predict, but there are times when the risk of a product being wound up increases, particularly where a fund may be in significant outflow.

A recent example has been the winding up of the CFM IS Diversified Trust. The trust was held in the Lonsec Multi-Asset portfolios before being removed earlier in the year. The rationale to remove the trust was primarily driven by the inconsistent nature of fund returns and a recognition of the challenges faced by systematic risk premia strategies, which generally struggled to perform in a market distorted by central bank policy.

Recently, the product issuer made the decision to wind up the trust. In contrast to a traditional model portfolio approach, whereby clients may still be invested in the trust because the portfolio change has not yet been implemented, the managed account structure ensured that—in the case of Lonsec’s Multi-Asset portfolios—all clients invested in the managed portfolio were exited from the trust.

There are numerous ways to measure value. We believe that one of the key value propositions of managed accounts is the ability to implement portfolio changes in a timely manner, allowing clients to capture portfolio exposure as intended by the model manager. We believe that platform technology will continue to evolve to allow model managers to increasingly finesse portfolio implementation with a view of adding value to end clients.

IMPORTANT NOTICE: This document is published by Lonsec Investment Solutions Pty Ltd ACN 608 837 583, a Corporate Authorised Representative (CAR 1236821) (LIS) of Lonsec Research Pty Ltd ABN 11 151 658 561 AFSL 421 445 (Lonsec Research).  LIS creates the model portfolios it distributes using the investment research provided by Lonsec Research but LIS has not had any involvement in the investment research process for Lonsec Research. LIS and Lonsec Research are owned by Lonsec Holdings Pty Ltd ACN 151 235 406. Please read the following before making any investment decision about any financial product mentioned in this document.

DISCLOSURE AT THE DATE OF PUBLICATION: Lonsec Research receives a fee from the relevant fund manager or product issuer(s) for researching financial products (using objective criteria) which may be referred to in this document. Lonsec Research may also receive a fee from the fund manager or product issuer(s) for subscribing to research content and other Lonsec Research services.  LIS receives a fee for providing the model portfolios to financial services organisations and professionals. LIS’ and Lonsec Research’s fees are not linked to the financial product rating(s) outcome or the inclusion of the financial product(s) in model portfolios. LIS and Lonsec Research and their representatives and/or their associates may hold any financial product(s) referred to in this document, but details of these holdings are not known to the Lonsec Research analyst(s).

WARNINGS: Past performance is not a reliable indicator of future performance. Any express or implied rating or advice presented in this document is limited to general advice and based solely on consideration of the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (“financial circumstances”) of any particular person. Before making an investment decision based on the rating or advice, the reader must consider whether it is personally appropriate in light of his or her financial circumstances or should seek independent financial advice on its appropriateness.  If the financial advice relates to the acquisition or possible acquisition of a particular financial product, the reader should obtain and consider the Investment Statement or the Product Disclosure Statement for each financial product before making any decision about whether to acquire the financial product.

DISCLAIMER: No representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the information presented in this document, which is drawn from public information not verified by LIS. The information contained in this document is current as at the date of publication. Financial conclusions, ratings and advice are reasonably held at the time of publication but subject to change without notice. LIS assumes no obligation to update this document following publication. Except for any liability which cannot be excluded, LIS and Lonsec Research, their directors, officers, employees and agents disclaim all liability for any error or inaccuracy in, misstatement or omission from, this document or any loss or damage suffered by the reader or any other person as a consequence of relying upon it.

Copyright © 2020 Lonsec Investment Solutions Pty Ltd ACN 608 837 583 (LIS). This document may also contain third party supplied material that is subject to copyright.  The same restrictions that apply to LIS copyrighted material, apply to such third-party content.

Watch the video.

Markets seem to have taken a sigh of relief post the US election result with risk assets seemingly returning to their upward trajectory. Lukasz de Pourbaix ED, CIO Lonsec Investment Solutions will discuss the latest insights for our recently held asset allocation investment committee. Specifically, Lukasz will discuss the rotation into value style stocks, a discussion of the key economic and market indicators and risks investors should look out for.



This information is provided by Lonsec Investment Solutions as a corporate authorised representative of Lonsec Research Pty Ltd who hold an AFSL number 421445. This is general advice, which doesn’t consider your personal circumstances. Consider these and always read the product disclosure statement or seek professional advice prior to making any decision about a financial product. You can access a copy of our financial services guide at lonsec.com.au

This video is provided by Lonsec Investment Solutions Pty Ltd ACN 608 837 583, a Corporate Authorised Representative (CAR 1236821) (LIS) of Lonsec Research Pty Ltd ABN 11 151 658 561 AFSL 421 445 (Lonsec Research). LIS creates the model portfolios it distributes using the investment research provided by Lonsec Research but LIS has not had any involvement in the investment research process for Lonsec Research. LIS and Lonsec Research are owned by Lonsec Holdings Pty Ltd ACN 151 235 406. Past performance is not a reliable indicator of future performance. This is general advice, which doesn’t consider your personal circumstances. Consider these and always read the product disclosure statement or seek professional advice prior to making any decision about a financial product. While care has been taken to prepare the content of this video, LIS makes no representation or warranty to the accuracy or completeness of the information presented, which is drawn from public information not verified by LIS. The information contained in this video is current as at the date of publication. Copyright © 2020 Lonsec Investment Solutions Pty Ltd ACN 608 837 583

The US election has come and gone (almost) and markets have reacted positively to the likelihood of a Democrat President and a Republican Senate, which would be able to moderate Democrat policies such as tax increases on corporations and capital gains.

The election result, together with positive developments regarding a vaccine for Covid-19, have seen traditional value style stocks (companies deemed to be trading below their intrinsic value), including banks, rally ahead of growth stocks (companies trading at a premium for the growth they offer), such as the much-loved tech stocks, which have dominated market returns over the past decade.

It has been a long time coming, however whether the rotation into value stocks is a short-term phenomenon or a longer-term structural trend remains debatable and will be largely dependent on what bond yields and cash rates do. If bond yields and cash rates rise substantially, we may see a prolonged value rally. However, this would not be our base case as we don’t see bond yields rising materially in the short to medium term.

The rotation into value, whether a short-term phenomenon or a longer-term trend, does highlight the importance of portfolio diversification. We have observed many investors over recent years discount value style investing and traditional value stocks as a thing of the past. While it is true that there have been headwinds for this part of the market, avoiding value is, in our view, unwise as market dynamics can shift quickly, particularly in today’s environment.

Overall, we are seeing some positive signs that we believe are supportive of risk assets. Liquidity in markets remains strong, the equity premium relative to bonds still supports holding risk assets, and earnings are trending back to pre-Covid levels. Risks still remain, notably the rising numbers of Covid-19 numbers in Europe and the US, but we believe that, moving forward, selecting the right underlying investments will become as important as the asset allocation call.

Lonsec is very pleased to be able to announce that, for the 5th year running, we have once again been declared the overall winner of Research House of the Year. The award is the result of an annual questionnaire carried out by Money Management magazine.

Lonsec is continuing to invest in its infrastructure, systems and team, to ensure that we stay in this position going forward. Some exciting developments are planned for next year and we look forward to sharing them with you in due course.

In particular we would like thank our many thousands of clients for continuing to use our services and telling us and the wider industry how you value what we do.

Thank you,
The Lonsec Team 

Watch the recording.

Many of you will be aware that your clients are increasingly seeking out investments that align with their personal values.

Further to the launch of the Lonsec Sustainability Score, the Lonsec Sustainable Managed Portfolios will utilise Lonsec’s extensive portfolio construction experience, together with detailed sustainable investing (and ESG) research, to provide a solution that genuinely caters to the needs of investors.

Listen to the key members of the Lonsec investment team to find out more about how the portfolios are formulated and how they can help deliver what your clients really need.

Lonsec’s managed accounts have posted the fourth consecutive month of record growth in October, adding $100m in net inflows across its broad suite of diversified, retirement and listed portfolios.

The results highlight the success of Lonsec’s research-backed managed account model, which combines Lonsec’s portfolio construction expertise with Australia’s largest investment product research team.

Lonsec CEO Charlie Haynes said more advisers were turning to Lonsec for a professional, actively managed investment solution, whether off-the-shelf or tailored to a licensee or practice’s needs.

“The success of our managed portfolios comes down to three things: our investment philosophy, the diversity of expertise on our investment committees, and our research capabilities,” said Mr Haynes.

“Our active approach to asset allocation and asset selection, coupled with our ability to identify high-quality investments based on our extensive research coverage is proving attractive to advisers.”

The growth in Lonsec’s managed accounts reaffirms the importance of knowledge as well as execution, positioning the company as a major provider of investment solutions, along with its traditional research offering.

Part of the appeal is the breadth of Lonsec’s solutions, including diversified multi-asset portfolios, objectives-based retirement portfolios, listed portfolios, and direct equity SMAs. All are underpinned by the same proven philosophy and dynamic approach to portfolio management.

“Lonsec is known for its research and investment insights advisers and investors can trust, but more and more advisers are approaching Lonsec as a one-stop-shop for their investment solution needs,” said Mr Haynes.

Lonsec will add to its suite of investment solutions with the imminent launch of its Sustainable Managed Portfolios. These draw on Lonsec’s latest sustainability research to construct high-quality, risk-managed portfolios that target sustainable themes.

“The Sustainable Managed Portfolios are a great example of how Lonsec continues to develop its offering to meet a wide range of investment needs,” said Mr Haynes.

“We want to help advisers provide a genuinely sustainable investment solution that aligns to their clients’ values and investment objectives.”

Release ends

SuperRatings and Lonsec have announced the winners of this year’s Fund of the Year Awards, which was held virtually for the first time in the event’s 18-year history.

The Fund of the Year Award went to QSuper, which also took home the Pension of the Year Award and the Smooth Ride Award. UniSuper claimed the MySuper of the Year Award, and Sunsuper clinched the MyChoice Super of the Year Award.

The winners were announced at a virtual awards event on 29 October, broadcast live from the Museum of Contemporary Art, Sydney.

“It’s important to recognise the significant work that all funds have done to support their members through a very challenging year,” said SuperRatings Executive Director Kirby Rappell.
“In a highly competitive field, we decided that QSuper was the fund that performed most strongly across the key criteria of investment performance, fees, member services, financial advice and insurance, and fund governance.”

“Congratulations to the team at QSuper on a fantastic effort. It was a strong field this year and we note the high calibre of all award winners, with the quality of their offerings shining through the pandemic.”

“A lot has changed in super, and there are even more changes to come. We should always be focused on improvement, but we shouldn’t lose sight of the incredible outcomes being produced by a large number of funds, both for their members and the retirement system as a whole. Despite the uncertainty, there is every reason to be positive about super.”

 

Congratulations to all of the finalists for this year’s SuperRatings and Lonsec Fund of the Year Awards Dinner. A full list of the awards is available below.

SuperRatings Fund of the Year Award

Winner

QSuper
 
 
 
 
 
 
 
 

SuperRatings MySuper of the Year Award

Awarded to the fund that has provided the Best Value for Money Default Offering.

Winner
UniSuper

Finalists
AustralianSuper
BUSSQ
CareSuper
Cbus
Equip
HESTA
QSuper
Sunsuper
TelstraSuper
UniSuper

SuperRatings MyChoice Super of the Year Award

Awarded to the fund with the Best Value for Money Offering for Engaged Members.

Winner
Sunsuper

Finalists
AustralianSuper
Aware Super
Hostplus
Mercer Super Trust
NGS Super
QSuper
Statewide Super
Sunsuper
Tasplan
UniSuper

SuperRatings Pension of the Year Award

Awarded to the fund with the Best Value for Money Pension Offering.

Winner
QSuper

Finalists
AustralianSuper
Aware Super
BUSSQ
Cbus
HESTA
Hostplus
QSuper
Sunsuper
TelstraSuper
UniSuper

SuperRatings Career Fund of the Year Award

Awarded to the fund with the offering that is best tailored to its industry sector.

Winner
Cbus

Finalists
BUSSQ
Cbus
HESTA
Mercy Super
TelstraSuper
Hostplus

SuperRatings Momentum Award

Awarded to the fund that has demonstrated significant progress in executing key projects that will enhance its strategic positioning in coming years.

Winner
Aware Super

Finalists
Aware Super
Cbus
Equip
HESTA
Mercer Super Trust
Sunsuper

SuperRatings Net Benefit Award

Awarded to the fund with the best Net Benefit outcomes delivered to members over the short and long term.

Winner
AustralianSuper & HESTA

Finalists
AustralianSuper
Cbus
HESTA
Hostplus
QSuper
UniSuper

SuperRatings Smooth Ride Award

Awarded to the fund that has best weathered the ups and downs of the market, while also delivering strong outcomes.

Winner
QSuper

Finalists
AustralianSuper
Aware Super
BUSSQ
CareSuper
Cbus
QSuper

Infinity Award

Awarded to the fund most committed to addressing its environmental and ethical responsibilities.

Winner
Local Government Super

Finalists
Australian Ethical Super
CareSuper
Christian Super
Future Super
HESTA
Local Government Super

Lonsec Investment Option Award

Seeks to recognise and highlight the work of asset managers and key players incorporating ESG.

Winner
CareSuper – Sustainable Balanced

Finalists
CareSuper – Sustainable Balanced
Cbus – Growth (Cbus MySuper)
Suncorp Multi-Manager Growth
Sunsuper for Life – Balanced

 

Release ends

US elections, daily pandemic updates, and political scandals are dominating the news headlines. In this world of hyper-connectivity and a constant flow of information, investors must be focused on their game plan and learn to tune out the noise of the crowd. As we witnessed during October’s grand final (AFL or NRL depending on your favoured code), discipline is the key to success.

Markets don’t like uncertainty. True to label in the current environment, markets have been range-trading as significant uncertainty surrounds the outcome of the US elections, as well as the size and scope of a US fiscal package, which requires an agreement with Congress. Add to this ongoing concerns over the pandemic, especially in the US and Europe, and the fraught process of reopening, which has seen mixed success globally.

Managing our portfolio through times like these calls for a solid game plan and the patience to see it through. We can’t afford to bank on one particular outcome (a strategy akin to flipping a coin). We must determine which part of our portfolio will provide protection and which part will allow us to capitalise on the upside and take advantage of potential growth.
Lonsec’s game plan is simple. In a low yield world, you need growth. We have retained our exposure to growth assets such as equities, especially as interest rates remain low and markets continue to be supported by liquidity from central banks. However, we are cognisant that there are risks in the market and therefore we have diversified our equity exposure to incorporate a mix of investment styles that can perform well in different market conditions.

We’re also consciously ensuring that we have exposure to some traditional defensive sectors and investment strategies that we expect to hold up better than the market should we experience a correction. Incorporating diversifying assets that can behave differently from equities and bonds is prudent. We have therefore incorporated alternative assets such as gold in some of our portfolios to bolster our defensive positioning.

Periods of uncertainty can provide opportunity as well as risks, and a dynamic approach is essential for managing both. We have invested in parts of the bond market where we identified significant mispricing opportunities, and we continue to have a positive view on emerging market equities, where we believe the additional potential returns warrant the risk.

As investors, we’re not just playing a single match, or even a single season—we’re playing for long-term success. Markets are unpredictable, but having the right strategy that takes into account a range of possible scenarios, including those that might seem unlikely to us today, will assist in generating more consistent outcomes over the long-term. We can’t win every game or every premiership, but we can increase our chances of accumulating some silverware over time.

IMPORTANT NOTICE: This document is published by Lonsec Investment Solutions Pty Ltd ACN 608 837 583, a Corporate Authorised Representative (CAR 1236821) (LIS) of Lonsec Research Pty Ltd ABN 11 151 658 561 AFSL 421 445 (Lonsec Research).  LIS creates the model portfolios it distributes using the investment research provided by Lonsec Research but LIS has not had any involvement in the investment research process for Lonsec Research. LIS and Lonsec Research are owned by Lonsec Holdings Pty Ltd ACN 151 235 406. Please read the following before making any investment decision about any financial product mentioned in this document.

DISCLOSURE AT THE DATE OF PUBLICATION: Lonsec Research receives a fee from the relevant fund manager or product issuer(s) for researching financial products (using objective criteria) which may be referred to in this document. Lonsec Research may also receive a fee from the fund manager or product issuer(s) for subscribing to research content and other Lonsec Research services.  LIS receives a fee for providing the model portfolios to financial services organisations and professionals. LIS’ and Lonsec Research’s fees are not linked to the financial product rating(s) outcome or the inclusion of the financial product(s) in model portfolios. LIS and Lonsec Research and their representatives and/or their associates may hold any financial product(s) referred to in this document, but details of these holdings are not known to the Lonsec Research analyst(s).

WARNINGS: Past performance is not a reliable indicator of future performance. Any express or implied rating or advice presented in this document is limited to general advice and based solely on consideration of the investment merits of the financial product(s) alone, without taking into account the investment objectives, financial situation and particular needs (“financial circumstances”) of any particular person. Before making an investment decision based on the rating or advice, the reader must consider whether it is personally appropriate in light of his or her financial circumstances or should seek independent financial advice on its appropriateness.  If the financial advice relates to the acquisition or possible acquisition of a particular financial product, the reader should obtain and consider the Investment Statement or the Product Disclosure Statement for each financial product before making any decision about whether to acquire the financial product.

DISCLAIMER: No representation, warranty or undertaking is given or made in relation to the accuracy or completeness of the information presented in this document, which is drawn from public information not verified by LIS. The information contained in this document is current as at the date of publication. Financial conclusions, ratings and advice are reasonably held at the time of publication but subject to change without notice. LIS assumes no obligation to update this document following publication. Except for any liability which cannot be excluded, LIS and Lonsec Research, their directors, officers, employees and agents disclaim all liability for any error or inaccuracy in, misstatement or omission from, this document or any loss or damage suffered by the reader or any other person as a consequence of relying upon it.

Copyright © 2020 Lonsec Investment Solutions Pty Ltd ACN 608 837 583 (LIS). This document may also contain third party supplied material that is subject to copyright.  The same restrictions that apply to LIS copyrighted material, apply to such third-party content.

The shockwaves caused by the COVID-19 pandemic are still being felt across the economy with extreme readings observed across various economic indicators over the June and September quarters. These include a spike in the unemployment rate to 7.5%, a 7.0% decline in GDP, and a 12% decline in household spending over the June quarter. In this article we look at some of these historic fluctuations and discuss the likely path to recovery.

Households

Household income rose 2.2% over the June quarter despite a 10% fall in hours worked, driven by the increase in social assistance schemes and additional COVID-19 support payments including Jobkeeper. Household spending also declined 12% over the June quarter, reflecting significant changes in spending patterns of consumers due to COVID-19 restrictions around the country. Consumer spending patterns are expected to remain volatile for the remainder of the year, particularly across the services and goods categories.

Household spending

Businesses

The COVID-19 pandemic has also had a significant impact on businesses with many industries recording declines in gross value added over the June quarter. Hospitality and tourism related industries have recorded the largest declines on record, with payroll data indicating a 15–20% decline in jobs in these sectors over the June quarter.

The mixed fortunes of various industries become more obvious when we look at retail sales data, which have also seen historic swings post March 2020. After an initial spike in March, retail sales fell 17.7% in April before showing a record monthly rise of 16.9% in May. The numbers have turned negative again in August, falling 4.0% over the month, driven by the Victorian lockdowns. Nonetheless, despite the extreme volatility experienced since March, overall retail sales are around 6% above the pre-COVID levels in February 2020. At the industry level, Food and Household goods retailing have grown strongly since March, while sales within the Cafes, Restaurants, Clothing and Footwear segments have recorded double digit declines over the period and continue to remain relatively weak into the December quarter.

Retail sales – seasonally adjusted % change

Online retail and e-commerce have also been a main beneficiary of recent events, with many online businesses seeing a huge influx of orders during the lockdowns. Following a large spike in online sales in March and April, the seasonally adjusted online sales figures rose 81.1% in August 2020 compared to August 2019, highlighting the shift to online shopping at the outset of the COVID-19 pandemic in Australia. While these elevated levels of sales activity are unlikely to continue post the lockdowns, COVID-19 has to some extent expedited the structural shift to online retail, a trend we expect will continue for some time given the relatively low penetration of online sales (around 10%) within retail sales in Australia.

Total online sales

International travel

No industry has been more impacted by the pandemic than tourism and international travel. Overseas arrivals have virtually ground to a halt since March 2020, a far cry from the 9.5 million annual visitors to Australia in the preceding year. This has in turn had a material impact on the local tourism industry, with the federal government indicating the industry is likely to lose $55 billion this year alone. This has forced a swath of companies into survival mode resulting in significant job losses across the sector.

To date, not all companies have been able to navigate the challenging environment. The likes of Virgin Australia and STA travel fell into administration in 2020, while companies like Qantas, Sydney Airport, Flight Centre, and Webjet have been forced to raise emergency funds via discounted equity raisings to survive.

Short term visitor arrivals

Unlike some of the other industries that are expected to experience a rather speedy recovery over the next 12 months, the recovery in international travel remains uncertain. The commentary we are seeing from the likes of Qantas and Sydney Airport indicate that international travel is unlikely to return to pre-COVID levels until 2024, implying a long and slow recovery for industry participants.

Outlook

The economic indicators discussed in this article provide a small snapshot of the severe impact of the COVID-19 pandemic on the local economy, with many indicators recording extreme fluctuations over the June and September quarters. This highlights the critical nature of the monetary and fiscal policy changes implemented by the RBA and the Federal Government to support the economy post March 2020.

Looking ahead, the path to recovery remains uncertain with some industries faring better than others. As such, we are likely to see further coordinated policy responses from the RBA and state and federal governments, most likely in the shape of further targeted stimulus and accommodative monetary policy options.


This information is provided by Lonsec Investment Solutions as a corporate authorised representative of Lonsec Research Pty Ltd who hold an AFSL number 421445. This is general advice, which doesn’t consider your personal circumstances. Consider these and always read the product disclosure statement or seek professional advice prior to making any decision about a financial product. You can access a copy of our financial services guide at lonsec.com.au

This video is provided by Lonsec Investment Solutions Pty Ltd ACN 608 837 583, a Corporate Authorised Representative (CAR 1236821) (LIS) of Lonsec Research Pty Ltd ABN 11 151 658 561 AFSL 421 445 (Lonsec Research). LIS creates the model portfolios it distributes using the investment research provided by Lonsec Research but LIS has not had any involvement in the investment research process for Lonsec Research. LIS and Lonsec Research are owned by Lonsec Holdings Pty Ltd ACN 151 235 406.

Past performance is not a reliable indicator of future performance. This is general advice, which doesn’t consider your personal circumstances. Consider these and always read the product disclosure statement or seek professional advice prior to making any decision about a financial product. While care has been taken to prepare the content of this video, LIS makes no representation or warranty to the accuracy or completeness of the information presented, which is drawn from public information not verified by LIS. The information contained in this video is current as at the date of publication.

Copyright © 2020 Lonsec Investment Solutions Pty Ltd ACN 608 837 583

If the May 2019 Budget was all about back to black, this year’s Budget is all about rescuing and repairing the economy.  

Last year’s Budget forecast a small surplus of 0.4% of GDP in 2019-20, the first surplus since the GFC. In fact, a small surplus of 0.4% of GDP was indeed achieved in 2018-19, but budget deficits as large as -4.7% was forecast for 2019-20, and -10.2% for 2020-21. This compares to the -3.7% deficit at the height of the GFC, making it the deepest since World War II. 

Budget net operating balance (% GDP) 


Source: Treasury, Lonsec
 

How did we get here? 

We’ve had a tumultuous year since last year’s Budget, with bush fires, drought, and a global pandemic. Those negative shocks sank our economy into the first recession since 1991, with GDP contracting 7% in the June quarter. 

With reduced economic activity, tax receipts have reduced. Income taxes collected have fallen on the back of lower employment and hours worked. Company tax receipts have also fallen as many businesses remain shut or operate below capacity. GST revenue declined too, with fewer sales of goods and services. Tax receipts fell across the boardwith the one notable exception being—perhaps appropriately—taxes on the sale of spirits. 

Commonwealth revenue and expenses (% GDP) 


Source: Treasury
 

On the spending side, the government has put in place significant stimulatory measures to support the economy and employment. These include: 

  • $120 billion over 2019-20 and 2020-21, primarily for the JobKeeper payment. 
  • $46 billion mainly in the Coronavirus Supplement, economic support payments to households, and increased JobSeeker payment. 
  • $40 billion to provide further support for apprentices, trainees, hospitals, aviation, and the infrastructure sector. 


S
ource: Budget papers 

Overall, compared to the government’s Economic and Fiscal Update in July 2020, where a small surplus of $12 billion was forecast for 2020-21 (0.6% of GDP), this Budget shows an estimated deficit of $198 billion (-10.2% of GDP). Contributing the most to the deterioration is around $127 billion in additional spending, followed by $42 billion less in expected revenue due to reduced economic activity. 

How are we going to pay for all this?  

The short answer is, with debt. And a lot of it. Commonwealth Government net debt is forecast to rise to 36% of GDP in 2020-21, and even further to 43.8% in 2023-24. This compares to 19% in 2018-19. 

This may sound high, but by international standards Australia’s net government debt level is relatively manageable. Prior to the COVID-19 pandemic, the average net debt level among developed economies was 43% of GDP. The US and UK both had net debt of around 77% of GDP, while Japan had the highest at 155% of GDP. Ratings agency S&P has confirmed Australia’s AAA rating with negative outlook, with Fitch and Moody’s reserving judgement for now.  

With interest rates at historic lows, financing the debt should be a secondary consideration, with the primary focus being to get the economy back on track 

What are the key Budget measures? 

  • $26.7 billion temporary investment tax incentives: Businesses with aggregated annual turnover of under $5 billion can deduct the full cost of eligible capital assets acquired from 6 October 2020 and first used or installed by 30 June 2022. 
  • $17.8 billion of income tax cut: Bringing forward the second stage of the Personal Income Tax Plan by two years to 1 July 2020 as well as a one-off additional benefit from the low and middle income tax offset in 2020-21. 
  • $15.6 billion in additional spending on the JobKeeper Payment: Eligibility has been expanded largely In light of the prolonged restrictions in Victoria. 
  • $10.7 billion in infrastructure spending: Including $6.7 billion in grants to the states, $3 billion for roads and community infrastructure, and $1 billion for water infrastructure. 
  • $4 billion for a JobMaker Hiring CreditTo give businesses incentives to take on additional employees aged between 16 and 35. 
  • Additional measures: Including $1.2 billion to support 100,000 new apprentices and trainees with a 50% wage subsidy and undoing $2 billion cuts to R&D incentives. 

When will we get out of the recession? 

The Treasury forecasts economic activity to pick up from late 2020 and into early 2021. The recovery is expected to be driven by a further easing of restrictions and improvements in business and consumer confidence. Economic activity will be further supported by Government stimulatory measures, both fiscal and monetaryThe RBA has also hinted at further easing, with another rate cut or announcement of further QE widely expected at its November meeting 

The IMF in its June 2020 World Economic Outlook forecast Australian GDP to decline by -4.5% in 2020 before rising by 4% in 2021. While this is our first recession since 1991, Australia’s experience with containing the virus outbreak means the economic is faring relatively well by international standards. For example, the IMF forecast US GDP to contract by -8% in 2020, -10.2% in the UK, and -12.8% in Italy and Spain. 

Yesterday’s Budget forecasts GDP to fall by -3.75%better than the IMF forecastbefore growing by 4.25% in 2021. It also forecasts unemployment to peak at 8% in the December quarter of 2020, before falling to 6.5% by June 2022 as economic activity recovers. Both the GDP and unemployment forecasts are more optimistic than many leading economists believe. 

While the COVID-19 pandemic should be a severe but temporary shock, the path to recovery remains a gradual and uncertain process. This Budget has taken important steps to support the economic recovery, but the speed and magnitude will depend on many other factors, including international health and economic outcomes, as well as domestic business and consumer confidence. 

Broad measures such as income tax cuts and investment allowance will support overall business and consumer confidence, but more targeted measures might be welcomed by more severely affected sectors such as education and tourism. The government also failed to take the opportunity to enact structural reforms such as reforming the tax system or improving overall labour productivity, which would benefit economic growth in the long term. 

Issued by Lonsec Research Pty Ltd ABN 11 151 658 561 AFSL 421 445 (Lonsec). Warning: Past performance is not a reliable indicator of future performance. Any advice is General Advice without considering the objectives, financial situation and needs of any person. Before making a decision read the PDS and consider your financial circumstances or seek personal advice. Disclaimer: Lonsec gives no warranty of accuracy or completeness of information in this document, which is compiled from information from public and third-party sources. Opinions are reasonably held by Lonsec at compilation. Lonsec assumes no obligation to update this document after publication. Except for liability which can’t be excluded, Lonsec, its directors, officers, employees and agents disclaim all liability for any error, inaccuracy, misstatement or omission, or any loss suffered through relying on the document or any information. ©2020 Lonsec. All rights reserved. This report may also contain third party material that is subject to copyright. To the extent that copyright subsists in a third party it remains with the original owner and permission may be required to reuse the material. Any unauthorised reproduction of this information is prohibited. 

Important information: Any express or implied rating or advice is limited to general advice, it doesn’t consider any personal needs, goals or objectives.  Before making any decision about financial products, consider whether it is personally appropriate for you in light of your personal circumstances. Obtain and consider the Product Disclosure Statement for each financial product and seek professional personal advice before making any decisions regarding a financial product.