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Welcome to our May newsletter. After an extraordinary month of social and economic hibernation, there are positive signs that some of the restrictions on our everyday lives will soon be loosened somewhat. This is welcome news for households, businesses and our economy.

Data released in April provided an early insight into the impact of the coronavirus on the Australian economy. Inflation rose by an unexpected 0.3 per cent in the March quarter, lifting the annual rate from 1.8 per cent to 2.2 per cent. The biggest increases were food, alcohol and tobacco and health. The biggest falls were petrol, travel and accommodation. 

Retail sales jumped a record 8.2 per cent in March as consumers stocked up on food and essentials ahead of the shutdown. New home sales fell 23.2 per cent in March while new vehicle sales were down 9.1 per cent in the year to March as Australians reassessed their finances. But consumer confidence rebounded in April, with the ANZ/Roy Morgan consumer confidence index lifting to 85 points, up from record lows of 65 points in March. National petrol prices fell to an average of 100.6c a litre in April, the lowest in 15 years. This follows a further 22 per cent drop in global crude oil prices in April as a result of a glut in supply. 

Business confidence was also at record lows in March, with the NAB index falling from -2.4 points to -65.6 points. Unemployment rose slightly to 5.2 per cent in March but Reserve Bank Governor, Philip Lowe said in a speech that he expects the rate to climb to 10 per cent in the June quarter and remain above 6 per cent for the next few years. He also expects inflation will fall significantly in the June quarter as our economy contracts but said: “We can be confident that our economy will bounce back”. The Aussie dollar rose over 6 per cent in April to over 65 US cents, perhaps due to Australia’s success to date in dealing with the coronavirus.

Investment research company Morningstar have compiled a guide to market recovery patterns, looking at returns over one, three and five year periods as well as reaching back into the archives for data from 120 years ago.  Click through here to see the charts.

The Morrison Government’s mind-bogglingly large support packages to get Australians through the COVID-19 shutdown have dominated headlines, and rightly so. Only months ago, the Australian economy was in relatively good shape and headed for a Budget surplus. 

Behind the scenes, the Reserve Bank of Australia (RBA) has also pulled out all stops to keep the economy moving. 

RBA monetary policy is the yin to the Government’s fiscal policy yang. During the current crisis it’s designed to complement and to some degree pay for Government spending which already exceeds $250 billion. 

On March 19, RBA Governor Philip Lowe announced a package of monetary support policies to “support jobs, incomes and businesses”. These policies included maintaining the cash rate at 0.25 per cent, the creation of a $90 billion funding facility to support business lending, and the purchasing of government bonds. 
 

Rates as low as they will go

After two rate cuts in March, the cash rate is currently at a new all-time low of 0.25 per cent. The RBA has promised to keep it there until “progress has been made towards full employment and it is confident that inflation will be sustainably within the 2-3 per cent target range”. With unemployment expected to hit double digits we could be waiting for some time, although inflation jumped to 2.2 per cent in March.ⁱ 
 

Increased funding for SMEs

While low interest rates traditionally encourage individuals and businesses to borrow and spend, there’s less inclination to do either while the Coronavirus shutdown continues. So the RBA has provided a three-year funding facility for the banks at a low fixed rate of 0.25 per cent. The banks will be able to access this funding if they increase lending to businesses. 
 

Bond buying bonanza

In its March statement it also set a target for the yield on 3-year Australian Government bonds of around 0.25 per cent, in line with the cash rate. This was a signal to the market that the central bank is serious about keeping rates lower for longer. At the time 3-year Government bond yields were around 0.85 per cent. 

The RBA set out to achieve this target by buying Government bonds in the secondary market. This is a monetary policy lever it has never used before, known as quantitative easing (QE). 
 

How does quantitative easing work?

QE is where central banks print money to buy government bonds. A government bond is a low risk investment product whereby investors lend money to the government for a set period at a predetermined rate of return referred to as the yield or interest rate. 

When the RBA enters the secondary market to buy billions of dollars of government bonds, it effectively gives the Government a lot more cash to spend and this money flows through the economy. 

To date, the RBA has spent more than $36 billion in bond purchases and 3-year Government bond yields have dropped to around 0.25 per cent.ⁱⁱ So, by spending huge quantities of cash the RBA eased monetary policy, which is a roundabout way of saying it used quantitative easing. 
 

What does it mean for me?

The prospect of low interest rates for the next few years creates opportunities and dilemmas for borrowers and investors. 

As banks pass on some or all the cuts in official interest rates to their home loan customers, first home buyers are well-placed to secure a good deal. Existing homeowners might also take the opportunity to refinance. 

According to Canstar, by shifting from the average variable interest rate of 3.52 per cent to the lowest rate on offer of 2.39 per cent, a borrower on a 30-year, $400,000 loan could save more than $240 a month or more than $87,400 over the life of the loan.ⁱⁱⁱ 

Retirees and others seeking income from their investments are not so lucky, but there are some good rates on offer if you are prepared to shop around. The best 12-month term deposit rates and bonus savings account rates are as high as 2 per cent.^{iv, v} 

These are undoubtedly difficult times, but the decisions you make now could put you in a good position when markets recover. So give us a call to discuss your financial situation. 
 

i https://www.rba.gov.au/ 

ii https://www.afr.com/markets/debt-markets/rba-the-new-major-bond-market-player-20200414-p54jjz 

iii https://www.canstar.com.au/home-loans/coronavirus-refinance/ 

iv https://www.finder.com.au/term-deposits 

v https://www.canstar.com.au/savings-accounts/anz-nab-86400-savings-rate-changes-april-2020/

At a time of uncertainty about the economy, not to mention unexpected social isolation, people are rethinking their personal and financial priorities. 

Whether you are spending less by necessity or because you are living more simply at home, this could be a good time to reassess your spending and review your household budget. 
 

Our spending habits have changed

Even though we are spending less in lockdown overall, we have also changed what we spend our money on. We are spending more on groceries, food delivery, streaming services, alcohol, pet care and (home) office supplies. But a lot less on gyms, travel, cafes and restaurants.ⁱ 

What’s more, many of us are discovering we can happily do without many of the treats we used to think were essential. So, if we can avoid slipping back into our old spending habits, we could be in a much better financial position when the pandemic has passed. 

By doing some legwork to find the best deals on offer, it may be possible to reduce your outgoings on essentials such as utilities, groceries, petrol, general insurance and housing. However, the big savings usually come from eliminating – or at least limiting – non-essential goods and services. 
 

Eating and drinking

One spending behaviour that has shifted significantly during lockdown is dining out. A 2019 survey revealed Australians spent $2,704 a year on dining out, on average, and $1,612 on alcohol.ⁱⁱ We are now cooking at home a lot more and we seem to be enjoying it, with households now baking their own bread and embracing the slow cooker. 

Once we are able to go back to eating out and visiting pubs and bars we can fatten our wallets by reducing the number of times we eat out, inviting friends over for a coffee, beer or meal rather than meeting them at a café, pub or restaurant. 

When it comes to cooking at home, where you purchase your food can have a big impact on your grocery bill. CHOICE found shopping at Aldi can be up to 50 per cent cheaper than other supermarkets.ⁱⁱⁱ 

We are also tending to do a larger shop less frequently. Meal planning and doing a shopping list is one way of avoiding the spontaneous purchases that lead to food wastage. Given that the average Australian household throws away $3,500 worth of food each year these are worthwhile changes that will help our hip pockets on an ongoing basis. ^iv 
 

Exercise

Another big shift that has come from the lockdowns has been in the way we exercise. When the walls closed in, we took to our bike paths and parks and went for a walk or run. 

So maybe it’s worth rethinking the expensive gym membership and keeping up our Corona exercise plans – particularly if you’re one of the 1.5 million Australians who have a gym membership but rarely use it.^v 
 

Travel

Prior to the crisis, heading off on holiday usually meant jumping on a plane. Back in 2018, 6.3 million Australians were holidaying overseas and spending an average of $4,750 per person – or $19,000 for a family of four.^vi Of course, it’s unlikely you’ll be engaging in any international travel for a while. But after borders reopen, you may wish to holiday in Australia anyway. 

Not only is holidaying locally likely to be less expensive, but it could also mean your dollars flow into one of the tourism-dependent regions which have been so badly hit by last summer’s bushfires and now the Coronavirus shutdown. 
 

Thinking to the future

During difficult times such as these, a sound budget based on your financial priorities will help you continue to work towards your long-term goals. 

Depending on your financial situation you may even wish to go against the trend and look for ways to get your money working for you. This could include making personal contributions to your superannuation after the recent market falls, or investing outside super, to capture the upswing when the market bounces back, as it always does. 

If you would like to set some new financial priorities and discuss your situation, give us a call. 
 

i https://www.smh.com.au/business/the-economy/stimulus-payments-arrest-spending-slump-real-time-data-shows-20200408-p54ida.html/ 

ii https://thenewdaily.com.au/finance/consumer/2019/09/23/food-spend-australia-budget/ 

iii https://www.choice.com.au/shopping/everyday-shopping/supermarkets/articles/cheapest-groceries-australia 

iv https://www.samedayrubbishremoval.com.au/War-On-Waste-Statistics.php 

v https://www.news.com.au/finance/money/costs/lazy-aussies-wasting-18-billion-on-unused-gym-memberships/news-story/6243cf35a8424a8dfa212ea17c1a0208 

vi https://www.budgetdirect.com.au/travel-insurance/research/average-holiday-cost-statistics-2019.html

When you are young, healthy and just starting your working life the last thing on your mind is life insurance. In your 20s and 30s your financial focus is more likely to be on saving for a car, holidays, a home or the birth of a child. But failing to protect the lifestyle you are creating could have a devastating financial effect. 

Like many Australians young and old, it’s possible that you already have insurance cover in your superannuation fund without realising it. But that could be about to change. 

Under new legislation proposed with this year’s Budget, large numbers of super fund members are likely to lose their insurance cover. The legislation is still before the Senate but if the changes go ahead from July 1, 2019, those aged under 25 or with low super balances will be required to ‘opt-in’. 
 

When to consider insurance

The move to ‘opt-in’ insurance for young members has been generally welcomed, as some may have more insurance than they need at their age and stage of life. But there are concerns that a significant minority could be left underinsured. 

No matter how fit and healthy you are, accidents happen – on our roads, while playing sport or on the job. Insurance may be a necessity if you work in a hazardous occupation such as construction. Major illness and chronic health problems can also strike in your 20s and 30s. 

While Australians are marrying and establishing families later than previous generations, there are still plenty of people under 25 with a partner, and/or children, who would be financially disadvantaged if they were to die or be unable to work due to accident or illness. 

Even though Millennials may not have dependents yet, or the financial commitments their parents have, spending on rent, car loans, credit cards and daily expenses all require a steady income. 
 

So why the changes?

The Government’s Protecting Your Super package is designed to protect members’ savings from being eaten up by excess fees and insurance premiums. 

Most super funds currently make automatic deductions from members’ contributions to pay for life insurance. This is known as “opt-out”, as the onus is on members to cancel the insurance if they don’t want or need it. 
 

Typically, there are three types of insurance offered to members:

• Death Cover or Life Insurance – part of the benefit your beneficiaries receive when you die.
• Total and Permanent Disability (TPD) – pays you a benefit if you become seriously disabled and are unlikely to ever work again.
• Income Protection Insurance – pays you an income stream for a specified period if you can’t work due to temporary disability or illness.

Under the new rules, funds will only offer insurance on an ‘opt-in’ basis for new members who are under 25 years old, members with balances below $6,000 or those who have an account that has been inactive for 13 months. 
 

Good news and bad

Despite the good intentions of the new rules, the bad news is that insurance premiums are likely to increase for most members who retain cover. This is because under the present system younger, healthier members cross-subsidise insurance claims by older members. 

According to Price Warner, premiums are likely to increase by about 11 per cent on average.ⁱ Premium rates will vary considerably from fund to fund, depending on the benefit design, demographics of the membership, and changes to terms and conditions to deal with switching cover on and off. 

The good news is that there is time to consider your options. Funds are required to notify members with low balance or inactive accounts and outline what steps they can take if they have insurance and want to continue their cover. 

To find out what insurance cover, if any, you may already have in super, contact your fund or speak to us. We can help you assess your insurance needs and whether you should consider opting-in or taking cover outside super. 
 

i ‘Federal Budget average premium increases’, Rice Warner, 31 July 2018, https://www.ricewarner.com/federal-budget-average-premium-increases/

Sinclair Financial Group
Level 2
47 Warner Street
Fortitude Valley QLD 4006
P (07) 3117 0607
E admin@sinclairfg.com.au
W www.sinclairfinancialgroup.com.au

Norman Sinclair – MastFP, DipFP, AFP ASIC No. 249943.
Stephen Vigh – CFP, B Bus (Acc & Man), Dip FP ASIC No. 239508
Sef Pandzo – BComm (FinPlan) ASIC No. 278807
Kyle Medson – Certified Financial Planner ASIC No. 328912
Sinclair Financial Group is an authorised Representative of Madison Financial Group Pty Ltd | ABN 36 002 459 001 | AFSL 246679
This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information. Investment Performance: Past performance is not a reliable guide to future returns as future returns may differ from and be more or less volatile than past returns.

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