October 2018 | Investments

US markets have dropped over 5% in two days, should I sell?

The Dow Jones gave up another 500 points in overnight trading, on top of 800 points yesterday, and the broader S&P 500 and technology Nasdaq have given up more. Do I sell? Well, no, and here are the reasons why:

Firstly, this sell off is linked to ridiculous over-buying of the FAANG stocks (Facebook, Apple, Amazon, Netflix, Google) and Microsoft, which at one stage this year were, as a group, responsible for most of the US stock market’s rise.

The FAANG gang accounted for 81% of the S&P 500 return this year. Adding Microsoft to the mix, you get six stocks (“FAMANG”) that account for the entire YTD return of the S&P 500.

As these companies cop an overdue recalculation of their worth, the market has to go down with them. But to keep this in perspective, a stock like Netflix yesterday was down 21% from its recent high, but was still up 70% for the year!

What’s going on now is the over exuberance taking a break, but these stocks won’t fall to nothing (like a lot of tech stocks in the dotcom crash) because they are real companies with huge revenues.

Keep in mind that the US keeps making new record highs, and so is due for a decent correction.

Secondly, after so much optimistic buying, there has to be a period where the sellers get to dominate. After the market slips 10% or so, and once overpriced stocks look like good value, rebuying starts.

A major correction in the asset markets has been building for a while. There have been 10 years of economic growth since the great financial crisis of 2008 and a bull market in stocks of pretty much the same length. That’s a long time in terms of economic cycles, and we were overdue for a “reversion to the mean,” as statisticians say.

It may feel like we’ve been thrown out of a moving car (it hurts), but that’s because the 3rd quarter was one of the least volatile quarters since 1963.

According to Peter Switzer we won’t see a quick rebound for a number of reasons:

  1. The trigger for this sell off was “how fast will interest rates rise and how much will the rise be?” President Trump blames the Fed chairman, his appointee – Jerome Powell.“It’s a correction that I think is caused by the Fed and interest rates,” Trump said from the Oval Office. “The dollar is very strong, very powerful – and it causes difficulty doing business.” (CNBC) His view is shared by the market that monetary policy looks like it might end up being tighter than expected.

    Even with his best or worst efforts (depending on your point of view), the Fed won’t delay rate rises and risk excessive inflation because that could eventually mean that bigger and faster rate rises would be necessary. There are no hard and fast rules when it comes to monetary policy, so it’s a ‘suck it and see’ thing when it comes to rate rises. The President could be wrong but he could be right!“It’s a correction that I think is caused by the Fed and interest rates,” Trump said from the Oval Office. “The dollar is very strong, very powerful – and it causes difficulty doing business.” (CNBC) His view is shared by the market that monetary policy looks like it might end up being tighter than expected.Even with his best or worst efforts (depending on your point of view), the Fed won’t delay rate rises and risk excessive inflation because that could eventually mean that bigger and faster rate rises would be necessary. There are no hard and fast rules when it comes to monetary policy, so it’s a ‘suck it and see’ thing when it comes to rate rises. The President could be wrong but he could be right!

  2. As the FAMANG story showed, a correction was on the cards. But should this turn into a crash? A 10% (or so) fall is a correction, when the market gets a dose of realism on stock prices. A crash signals that a bull market has surrendered to the bears and that starts when the market gives up 20% or more.
  3. If the US economy was slowing and company profits were under pressure, then he’d be keen to get out of stocks. But the opposite is the case. However, the China versus Trump trade war is starting to raise questions about profits of some companies being affected. The tariffs could also affect prices and then spark inflation, and the bigger US budget deficit is also suggesting that interest rates might have to go higher because of the President’s pro-growth policies.

Over the years of trying to interpret the collective mentality of the key drivers of stock prices, Switzer says he has learnt not to believe good sense will prevail in the short term.

Of course, as long-term investor, I’m hoping my analysis above is right and I’ll be able to pick up some great companies at very good prices. And one thing I must add (and I’ve referred to this before), I’ve never had to make predictions on stock markets with someone like Donald Trump running the world’s biggest economy.”

Let’s get some perspective

Today (at the time of writing) our market is down 5 points (0.1%) – a very mature reaction. We dropped 170 points yesterday (2.8%).

The wildcard is the worsening trade war between US and China which is, in fact, a worry for us all.

If you’re looking for someone to blame, here’s a list:

https://www.businessinsider.com.au/why-global-markets-are-collapsing-and-who-is-to-blame-2018-10?r=US&IR=T

What’s Next?

Friday, thankfully. But we are only in the first trimester of October and there is a midterm election coming up in the US in less than a month. That will add more volatility to the mix.

Ryan Detrick on midterms and markets:

  • Stocks tend to do very well after midterm elections. The average 12 month gain from the lows in a midterm election year is over 30%, and since 1946 the S&P 500 has never been down 12 months following midterm elections;
  • Pullbacks are normal. Even though stocks tend to average a 7-8% gain each year, they also tend to have three to four pullbacks each year (5-10% drops) and at least one 10-20% correction. We’ve had both earlier this year but history tells us we may get more.

In Conclusion

Keep in mind that we are investing for the long term, so market volatility and corrections are normal. If you are a long-term investor you have to be able to handle the dips and the rips.

For those on our Premium Investment Portfolio Service (PIPS), you will receive your full, detailed Quarterly Report and Review shortly, that will give further insight into these, and other, issues. If you’d like to know more about PIPS, please contact us.

In the meantime, if you’re looking for more material, here are some links:

https://www.livewiremarkets.com/wires/market-timing-why-it-s-in-our-too-hard-basket

https://www.livewiremarkets.com/wires/timing-is-everything

This White Paper is general in nature only and not intended as advice. All information and views expressed in this White Paper are correct at the time of publishing, 12 October 2018.

August 2018 | Investments

Following on from the Royal Commission, we have had many clients ask us what are the key differences between Shares, Exchange Traded Products (ETPs) and Traditional Managed Funds?

In a nutshell:

  1. Shares are listed and traded on the market;
  2. ETPs are listed baskets of shares or other assets & traded on the market; and
  3. Managed funds are unlisted baskets of shares or other assets managed internally by fund managers. The relevant fund manager buys or sells assets, usually on markets, and reports on the overall value of the investments.

We attach a Summary Comparison Table outlining the main differences that we thought would interest you.

Summary Comparison Table

If you would like further information, please contact us.

February 2018 | Investments

It is with regret that we advise that Brett Catterall is leaving AustAsia Group (“AAG”).

We look forward to continuing our relationship with you and assure you of our ongoing service and support.

As you may be aware, AAG is an integrated Financial Services house, incorporating not only a full suite of Financial Planning services, but also accounting/taxation, finance broking, real estate and our own legal division, to ensure that we are across not just our clients’ current financial issues, but any matters that may ultimately affect their entire financial world.

Essentially, we are a one stop shop, striving to assist, guide and drive your financial objectives.

If you would like to call or make an appointment with Simon Chesson, Denise Locantro or another Team member, please call us on (08) 9227 6300 or contact our Client Services Team at clientservices@austasiagroup.com to arrange a suitable time.

February 2018 | Investments

Markets are tumbling, what should I do?

First of all, we need to get some perspective. So, let’s turn down the noise and look what is happening, without emotion.

To appeal to most types of investors, we have divided this White Paper into three parts:

  1. A Dot Point Summary of the issues for those who just want us to get to the point without all the detail;
  2. All the Detail; and
  3. In Conclusion, with a link to Dr Shane Oliver’s Report on the “Correction Time for Shares?” (Dr Oliver is AMP Capital’s Head of Investment Strategy and Chief Economist).

Part 1 – Dot point summary

  • Global markets have been crunched, following US markets down.
  • US markets are overdue a decent correction.
  • In 2017, the world’s major economies grew in unison for the first time in about a decade.
  • The US is still the largest economy in the world and any ramifications will have a ripple effect around the globe, but global growth is still strong.
  • Healthy growth is forecast for the world’s four biggest economies – the US, China, Europe and Japan. The IMF has forecast global growth of 3.9% for 2018.
  • The fundamentals are sound, but it is difficult to “buy” when fear abounds, which is exactly the time that you should be buying.
  • Any short-term market movements are emotional roller coasters that create buying opportunities. Price matters at precisely two times – when you buy and when you sell.
  • At AAG we have an old saying:
    Turnover and sales are vanity, profit is sanity, but cashflow is always king.
    So buy good dividend paying stocks, the gift that just keeps giving.
  • Your long-term investment goals don’t change just because of short-term exaggerated market movements.

So don’t waste the downturn. Roll up your sleeves, put on your flak jacket and let’s get to work!

Part 2 – All the detail

Global market are tumbling following the US, not because of any inherent structural problems.

Following a decent leap in US wage growth last week, bond yields have lifted. In turn, last night’s plunge in the US has triggered a further sell down in global markets, pushing bond yields even higher as the flight to safety continues.

The rise in US wages growth, has fuelled inflationary fears in the US, not the world. And while US wage growth may well be lifting, it’s still coming from a low base.

According to Dr Shane Oliver, the US share market “is long overdue a decent correction. This now appears to be unfolding and may have further to go as higher inflation, a slightly more aggressive Fed and higher bond yields are factored in”.

In 2017, the world’s major economies experienced synchronised growth for the first time since 2007.

Global economic conditions have improved and the outlook for the global economy remains relatively strong. The IMF has revised the global growth forecast for 2018 to 3.9%, up from 3.7% in October. Healthy growth in GDP is forecast for the world’s four biggest economies – the US, China, Europe and Japan. Europe should continue to perform well as it absorbs the slack created during the GFC.

The European Central Bank (ECB) has indicated more confidence in the growth outlook, but is still waiting for “a sustained upward trend” in inflation. So the ECB is likely to remain supportive for Eurozone shares and negative for the Euro for some time to come.

Years of growth downgrades have given way to upgrades as the post-GFC hangover has given finally given way to more self-sustaining growth. Just as the growth downgrades were associated with falling inflation, ongoing monetary easing and falling bond yields, the upgrades are likely to eventually give way to rising inflation, gradual monetary tightening and further increases in bond yields.

Solid global growth should continue to underpin a recovery in corporate profits.

Overall US companies posted higher-than-expected earnings with solid growth and contained costs. Importantly, US companies are enjoying both strong top line (i.e. sales) and bottom line (i.e. earnings) results and earnings expectation for Q1 2018 are also being revised upwards. Internet giants recently surged on strong results as US stocks reached unprecedented heights.

After the US Congress slashed the corporate tax rate from 35% to 21%, another theme that may emerge in the US is “infrastructure spending” with President Trump expected to talk up big spending plans.

The US Federal Reserve (the Fed, who sets interest rates in the US – the equivalent of our RBA) is expected to lift interest rates several times this year. The next one is due next month as they have all but flagged. This is not new news!

Increasing interest rates historically have led to a to a sell-off in bonds, pushing yields up, and a higher currency.

“Overall, we are still not seeing the signs of excess, euphoria and exhaustion that typically come at cyclical economic and share market peaks ahead of recessions and deep bear markets” Oliver says.

Extended bear markets usually occur after extended periods of euphoria, but people you meet in the street have definitely NOT been euphoric.

“Risk off” has invaded markets as volatility (up and down price movements) has surged and emotions run high.

Just because market volatility has escalated, the potential to earn impressive, long-term capital gains and good dividend income (that historically always eclipse returns on term deposits and cash) still remains.

Corrections may provide a wonderful opportunity to purchase more quality shares at a discounted price, as volatility is the friend of the long-term investor.

How long will it last?

We don’t know how far or how long it will take but markets historically always have recovered, and when they do, the crucial buying opportunity will be gone – there will still be opportunities, but just not as good.

Market corrections are just that, corrections, not a time to move to Byron Bay as the world as we know it is ending (although any move to Byron Bay wouldn’t be all bad).

Focus on quality and cashflow, don’t speculate. While the price of a share will certainly fluctuate, the value of a company’s future cash flows is likely to be far less volatile. No matter what asset class you are invested in, price matters at precisely two times – when you buy and when you sell. The return on an investment depends on these prices and the income/cashflow you receive over the investment period.

That is not to say asset price volatility doesn’t matter. For example, self-funded retirees being forced into selling at a temporarily reduced price in order to fund their lifestyle isn’t an attractive proposition. For this reason, we emphasise the importance of maintaining and monitoring cashflow.

In conclusion

Markets are generally driven by fear and greed. To get ahead of the game, you must

  • “buy when nobody else wants to” = fear of the market;
  • “sell when nobody else wants to” = greed will fuel inexplicable buying.

At AAG, our investment philosophy has always been to source quality income paying investments that are sustainable in times of economic or political upheaval. Focusing on income allows an accumulation of funds to invest for your future. Please click on this link to access our White Paper on Investing (dated September 2016): us4.campaign-archive.com/?u=f4dc4151a2b3f61269dcd342c&id=72648695ec

So don’t waste the downturn, let’s get to work and rise above the headlines! Take a deep breath and remember:

  1. Skilled investors stick to their flight plan – stay the course and stay on target;
  2. Cashflow is king. Look for gifts that keep on giving in the shape of dividend income paying streams;
  3. Don’t waste any downturn – history has shown them to be only temporary;
  4. Opportunities are always there, sometimes they just require a closer look; and
  5. Have realistic market expectations.

Please contact us if you would like to discuss your investment options or if you would like further information or clarification via email at investments@austasiagroup.com or call us on 08 9227 6300 and ask for the Investments Team.

Finally, as promised, please click on this link to access Dr Shane Oliver’s Report on the “Correction Time for Shares?”: www.ampcapital.com.au/article-detail?alias=/olivers-insights/february-2018/correction-time-for-shares&utm_medium=email&utm_source=ampc&utm_campaign=olivers-insights

This White Paper is general in nature only and not intended as advice. All information and views expressed in this White Paper are correct at the time of publishing, 6th February 2018.

January 2018 | Investments

With the increasing focus on Bitcoin and other crypto currencies, and a number of investors and clients who have been considering becoming Bitcoin Traders or Bitcoin Miners in order to supplement their income, or to give up their day jobs to concentrate on the investment activity, we thought it timely to provide some guidance to those thinking about doing the same from a tax point of view.

As cryptocurrencies gather momentum among investors, it is no surprise that both the public and the ATO are turning their thoughts towards those who invest in this digital asset.

A number of people have been advised, or are of the view that as Bitcoin is not easily traceable, that any gains are not taxable, and that the ATO is unable to track any income made. However, with the data matching and data sharing that the ATO has with banking institutions around the globe, and other international governments and tax agencies, the ATO is closing that gap.

It should also come as no surprise that tax is an afterthought for many seeking to jump on board, particularly given the sharp rise in popularity and value of cryptocurrencies.

Currently, there are over 1,200 different cryptocurrencies, with Bitcoin having the largest market capitalisation — in excess of USD$100b. While the task of addressing the tax treatment of each cryptocurrency is beyond the scope of this article, set out below is a summary of the tax treatment of Bitcoin and other crypto or digital currencies that have similar characteristics.

Like all other investment bubbles, we advise clients to consider their own situations before going into investment in Bitcoin or other investments, and make sure that they consider their risk profile and their reasons for investment.

The information provided below is of a general nature only, and as such, does not take into account your personal circumstances.

AustAsia Group, including all of our entities, disclaim any liability or responsibility for any losses incurred by any reader, as this article is only general in nature.

What is Bitcoin?

Bitcoin is one of many cryptocurrencies, with alternatives to Bitcoin often being referred to as Altcoins. On the Bitcoin blockchain, transactions take place between users directly (peer-to-peer) and are verified by a network. Transactions on the blockchain only become permanent once they are verified by the network.

The network is represented by a community of nodes (ie host computers) which run Bitcoin software. Through the use of computer-processing power, each member of the network is repeatedly updating and verifying transactions on its copy of the ledger, which helps to keep the blockchain consistent, complete and unalterable.

The verification service carried out by members of the network is called “mining”, and the reward for this service comes in the form of new Bitcoin and a share in transaction costs. Other blockchain-based cryptocurrencies may have different bases of providing rewards.

The Bitcoin blockchain maintains a record of ownership without the need for a central authority or government backing.

Are gains made on Bitcoin taxable?

In its online guidance, the ATO has stated its view that Bitcoin (and other crypto or digital currencies that have similar characteristics) are capital gains tax (CGT) assets.

Investment & personal transactions

Where a person or entity has purchased Bitcoin for investment and is not carrying on a business of Bitcoin investment, any profit from resale will generally be assessable as a capital gain and not on revenue account.

The threshold question is whether someone buying Bitcoin can evidence that it was purchased for investment purposes when there is no expectation of a periodic return, such as rent from an investment property or dividends from listed shares. In many cases, the ATO will consider that the buyer did so for a profit-making purpose and not for investment.

If Bitcoin has been held as an investment by certain individuals and trusts for more than 12 months, a 50% CGT discount may apply to reduce the taxable gain.

As Altcoins are commonly purchased using Bitcoin, and not cash, it may be difficult to access the 50% CGT discount unless the original Bitcoin has been held for 12 months. In any event, subject to market movement there may be little gain or loss where Bitcoin is purchased and disposed of in a short period of time to purchase Altcoin.

The ATO is clear in its view that Bitcoin is neither money nor a foreign currency. However, in such circumstances, the CGT rules or the profit-making scheme rules may operate similarly to the foreign currency tax rules in calculating the gain or loss on conversion from Bitcoin to Altcoin.

If the intention in purchasing Bitcoin is to use it to buy goods or services for personal consumption (ie retail goods, home utility services or food and beverages), then any profit from resale will be assessable as a capital gain and the 50% discount may apply. Where the original cost of purchase was under $10,000, any gain made will be tax free as it is a “personal use asset”. Following is an example of how this could work.

Example

Sarah bought $4,000 of Bitcoin on 1 January 2013 with the intention that, once it became more widely accepted, it would be used to buy goods or services for personal consumption.

Sarah has not yet disposed of her original Bitcoin, as popular uptake has been slow, and her original Bitcoin are now worth $20,000.

Over the course of 2017, Sarah spends her Bitcoin on coffee, food, drink and a gym membership.

Sarah will pay no tax on the gain that she made of $16,000.

It is important to remember that, each time Bitcoin is used to purchase goods or services for personal consumption, or Altcoin, it will be considered as a disposal for tax purposes.

Traders and speculators

For traders, speculators and those who buy Bitcoin with a profit-making purpose, any profit from resale will be assessable income (ie revenue income and not treated on capital account) unless such activity can be classified as a hobby. Expenses incurred in purchasing Bitcoin will be fully deductible for traders/speculators.

A profit-making purpose is likely to prevail in the majority of circumstances, as ownership of Bitcoin does not (at this point in time) entitle the holder to rent or a periodic return as may be the case with assets such as property or shares. Even if Bitcoin is held for a significant period of time, it may still be considered to have been purchased for a profit-making purpose, particularly in light of the absence of a periodic return.

However, as more businesses in Australia and around the world begin to accept Bitcoin as payment, there is an increasing case for the argument that Bitcoin was purchased for a purpose other than speculation or profit making.

Bitcoin in business

Where Bitcoin is received in return for goods or services provided through a business, its Australian dollar value will need to be included in the ordinary income of the business. Similarly, if carrying on a business there will be an entitlement to a deduction for goods or services purchased using Bitcoin. The easiest way to determine the Australian dollar value of Bitcoin is through a reputable Bitcoin exchange.

The law on the GST treatment of digital currencies has undergone changes, which result in some digital currencies being treated like “money”.

Bitcoin exchanges

Where a taxpayer is carrying on a business of buying and selling Bitcoin as an exchange service, the Bitcoin held will be considered trading stock. All proceeds will be included in assessable income, and the taxpayer will be required to bring to account any Bitcoin on hand at the end of each income year. Any expenses incurred, including in the purchase of Bitcoin, will be deductible.

Mining

Although the ATO has not released any specific guidance, it is likely that if a taxpayer is mining Bitcoin they will be considered to be carrying on a business of Bitcoin mining. As such, the Australian dollar value of Bitcoin rewards from mining, and any gains made from the sale of mined Bitcoin, will be included in assessable income. Expenses incurred in mining activities should be deductible.

Tax reporting and record-keeping obligations

Taxpayers have an obligation to report their assessable income each income year and to keep appropriate records to support their income tax return disclosures.

Given the decentralised and unobservable nature of cryptocurrency, it is likely that the ATO and other government agencies will not be able to track all transactions and trades — at least for the time being. However, if a taxpayer is living beyond their means, and reported income, they may nevertheless face an ATO review or audit. A decline in bank account activity could also be a trigger for ATO review or audit.

If the ATO conducts a review or audit and has reason to believe that a taxpayer has not reported all of their assessable income, it may issue them with an amended income tax assessment. If the taxpayer refuses to cooperate with the ATO, they may issue them with a default income tax assessment where they will estimate the taxpayer’s actual assessable income based on what they consider to be reasonable grounds.

Those investors/speculators who make a loss need to consider whether that loss is deductible (only if a profit-making purpose existed) or a capital loss on investment is available (only where acquisition costs are more than $10,000).

If a taxpayer has been issued with an amended or default assessment, they will have the onus of objecting to the assessment and proving that it is excessive.

Regardless of individual circumstances, if a taxpayer is transacting in Bitcoin they should keep a record of all of their trades and activity. In this regard, many exchanges will allow users to access and download their transaction history.

Finally, if a taxpayer is purchasing Bitcoins for both personal use and speculation, it is particularly important that they keep clear records. This is because it will be up to the taxpayer to show the intention behind each purchase and transaction.

The important messages to take away are:

  • given the recent sustained upward movement in value of Bitcoin, don’t assume that the profit on Bitcoin transactions is not taxable or not subject to CGT. Even if gains from Bitcoin transactions are not reported, the ATO may issue amended or default assessments if they believe a taxpayer is living beyond their means
  • those who invested in very recent times where the value of Bitcoin has fallen may make losses that are deductible if there was a profit-making intention on acquisition, and
  • clear records of transactions, activities and the intentions behind them must be kept, particularly if Bitcoin is purchased both for personal use and for speculative gain.

Anyone considering investing in Bitcoin or other currencies, or requiring assistance in dealing with the tax implications of Bitcoin can contact us for more information.

* Reference has been made to various articles and information from CCH Australia and other technical materials.

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