Within this special update, we share with you an observation of the recent bout of market volatility.

We can certainly understand why many investors are disturbed by the market volatility over the last few days. After about 18 months of great consistent returns on the S&P 500 with little volatility, January’s return was a massive 5.6%. That’s about an average year’s return in one month!

The reasons for the surge are fairly obvious. Trump got his tax cut through at the end of December – his first major victory. It was not at first entirely clear how much of a boost the tax package would give for the US and global economy so there was a fear of missing out in the investment community. There was a lot of cash on the sidelines needing a home.

The Australian story was quite different. The ASX 200 had an ordinary January because we had no new good news to process.

The S&P 500 corrected quite sharply in the first few days of February but only back to the trend that had been established in 2017. Intra-day volatility rose sharply after an unusually benign year or more.

So why did the ASX 200 also go down if it had not been overpriced? Typically investors sell first and ask questions later. Wall Street sneezed and we caught a cold as the saying goes.

We strongly believe that the rally on Wall Street will continue because analysts are still factoring in the impact of Trump’s tax cuts; a one and a half trillion dollar infrastructure programme is now on the table; and volatility is still at or below average levels – except for the blip over the last few days. Moreover, the IMF just upgraded its global growth forecasts for 2018 and 2019 from 3.7% to 3.9% pa. And the US Senate just voted for a two-year deal on their budget funding pushing those intermittent debt-ceiling debacles back to at least 2020.

With global growth booming and interest rates still low, the only ‘fly in the ointment’ is that the US Fed has only just sworn in a new chair (Jay Powell) and the latest wage inflation data was the strongest in a while. At 2.9% wage inflation is not a problem and there are good reasons why it might be an aberration.

So will rates rise faster in the US than previously expected? Markets were less optimistic than the Fed before Christmas but now the Fed and the market are in agreement that gradual rate hikes will follow.

To bring it all together, Wall Street just had a great ‘company reporting season’ – one of the best in recent history – so US companies are really strong. The global economy is really strong. The Europe economy is also strong and Brexit issues are being dealt with. The China economy growth for 2017 recently beat expectations at 6.9% for 2017.

The Australian economy is not as strong as we would like but it is nowhere near recession.

The recent sell-off was price-driven, not fundamentals-driven.

We firmly believe that this sell-off will be over soon and, by the end of the year we will have enjoyed another strong year of gains. Of course volatility does not usually vanish as quickly as it arrives. There have been some wild swings during the US sessions as investors try to work out a fair pricing for the market.

This recent market performance is a text-book version of an overpriced market correcting. Fundamentals will soon reappear as the main driver of the markets upwards. Long-term investors do not need to worry about when that will start.

*This article is by Ron Bewley (PhD,FASSA) – Director, Woodhall Investment Research on behalf of Infocus Securities Australia

Important information

This information is the opinion of Infocus Securities Australia Pty Ltd ABN 47 097 797 049 AFSL and Australian Credit Licence No. 236523 trading as Infocus Financial Advice and Infocus Money Mangement and may contain general advice that does not take into account the investment objectives, financial situation or needs of any person. Before making an investment decision, readers need to consider whether this information is appropriate to their circumstances. Past performance is not a reliable indicator of future performance.

Retirement. The word either excites or scares you. No matter what your current opinion of retirement is it’s important to ensure that your finances are in order when the time comes to hang up your work boots and kick back to enjoy your glory years.

We’ve put together a few vital points to help you prepare for your retirement milestone…

Give your super a boost

If the balance of your super account is on your mind, it is worthwhile investigating the tactic of salary sacrificing. Simply put, salary sacrifice allows you to work with your employer on contributing to your super with your pre-tax income. Although this means taking home less income than you’re used to, it’s one of the easier ways to increase your super and can prove to be tax effective in the long run.

Check out this Super Contribution Maximiser calculator for some useful projections.

Additional investments

Although your superannuation will be the key strategy to fund your retirement years, for most everyday Australians this may not be enough to live out your days quite the way you expected. It’s important to investigate how you can best invest your money now and for the future to help.

If you don’t know where to start, take a look at this Retirement Adequacy calculator for some estimates.

Make a slow transition

For the sake of your finances as well as your health and well being, easing yourself into retirement is deemed as a much preferred lifestyle choice for many Australians. Not only will reducing your working hours gradually get your mind used to having extra free time, the steady, albeit reduced, income will allow you to continue adding to your savings fund whilst experiencing a semi-retirement – win win!

Gain professional advice

Finally, gaining sound financial advice about all of the above is probably the most valuable piece of the puzzle. Whether you’ve been on the receiving end of a professional financial adviser for years, or you’ve never thought it would add value to your situation – the time approaching retirement is probably the most important to seek a professional financial opinion – and we’re here to help.

Planning is not everyone’s forte, especially when it comes to money and budgeting. So it’s no surprise that new research from the Financial Planning Association of Australia suggests that 80 per cent of working-age Australians are stressed about money and finances.

Other research shows the number of Australians living from pay cheque to pay cheque is on the rise from 29% in 2015, to 32% in 2017, while the National Debt Helpline is struggling with the volume of calls flooding its call centre. And official data published by the Reserve Bank in July showed that Australian household debt was at new all-time high.

But it’s not all doom and gloom. A common misconception is that only those with high incomes can benefit from financial advice. In fact, everyone can benefit from meeting with a financial adviser. From consolidating your superannuation accounts to selecting the most appropriate insurance options for your lifestyle, a financial adviser can be your one stop shop to freedom by having your finances sorted.

Once you’ve made the decision to seek financial advice, it’s important to find someone you trust – after all, they will be handling your finances and sensitive information. Ask friends or family if they have any recommendations, or Google advisers in your local area. Most should offer a free introductory meeting where you can get to know them and ask about the process and any fees involved.

Because everyone’s goals are different, a financial adviser is able to tailor the plan to suit your needs and lifestyle. Whether it’s to buy your first home, take your family on that dream holiday or to retire early, your adviser is there to help you with the right products and path to get you where you want to be.

It’s important to meet with your financial adviser regularly, so they can adapt your plan to suit market trends or your changing goals.

Ready to start your path to financial freedom? Contact us for your free initial consultation now!

Rod Bristow Managing Director and CEO of Infocus

Within this month’s update, we share with you a snapshot of economic occurrences both nationally and from around the globe.

It’s been all growth on Wall Street

– United States (US) tax reform

– Australian economy is warm at best

– Japan economy is on fire

We hope you find this month’s Economic Update as informative as always. If you have any feedback or would like to discuss any aspect of this report, please contact your Financial Adviser.

The Big Picture

The Big Picture The third quarter of 2017 just ended with Wall Street’s S&P 500 index not only posting a positive return – but it posted the eighth successive quarter of growth! Indeed, the last six months were also all positive.

So where did we go wrong? Out market has moved sideways since May in a very tight range. Basically, expected earnings for companies on the ASX 200 just aren’t cutting the mustard. But the growth in earnings on Wall Street has been sufficient to justify their index returns over the last two years.

On top of that, Trump has started to articulate his tax reform package. The details are sketchy at this point but the right noises are being made both in politics and in business.

Our GDP growth came in at a moderate 1.8% for the year which was more or less in line with expectations. We had more strong jobs data but what will come next? The Reserve Bank (RBA) is upbeat. The worry is that they will get too enthusiastic and pull the trigger for a rate hike making the wheels fall off.

Turnbull at least got one win on the energy policy but we need more.

We reported last month that Japan’s economic growth was strong at 4%. This month, Japan export growth ran into double digits for the second month in succession. So good is it that Shinzo Abe has called a snap election. He wants to usher in a big stimulus package and make a more concerted stand against North Korea.

China data over September was a little softer than the previous month but still strong. The new politburo will be ushered in this month for its five year term. The infrastructure highway across Asia and into Europe will put massive demands on steel production – and we are in a position to help. BHP was very vocal and positive last week!

Angela Merkel was returned as Chancellor in the Germany elections – but with a different blend of coalition. Not a resounding success! New Zealand elections were even more wishy-washy.

The one to watch is the UK. Its inflation read came in at a lofty 2.9% – well above the pack. The Bank of England will start tightening soon.

October is going to be very special indeed for central bank watchers. The US Fed has announced that it will no longer buy back all of the bonds that mature. In a sensible and staged fashion, they will very gradually reduce the 4.5 trillion dollar debt to about half of that over a few years.

Most commentators believe that will put upward pressure on long bond rates. There has already been some impact in this direction on the expectation of this ‘balance sheet repair’. That’s all good and necessary. But what will happen at the short end? Will the Fed still hike its fund rate?

It surprised many – including us – that in the latest minutes, the Fed is still planning on one more hike this year (December), three next year and two the year after – down from three. We do not think it wise to hike rates while it is commencing budget repair.

The current chair – Janet Yellen – has her term up in February and Trump has signalled he will announce the next chair in the next 2-3 weeks. Depending on the views of the new chair (or Yellen if reappointed) we could be in for a bit extra volatility to go down with the Christmas turkey. But US growth and tax reform should steer us through any bumps along the way.

Asset Classes

Australian Equities

The ASX 200 was down slightly ( 0.6%) for the month but the index is up only +0.3% for 2017 to date (plus dividends makes a total return of +3.9% including franking credits).

So being in equities for 2017 would have been better than cash but there is a sense of frustration among investors.

Since May we have had the tightest range on record for the index. Of course it will break one day but there are a lot of factors at work. Some have suggested that local super funds buy in strongly at around 5,650 but foreign funds sell at above 5,800.

Such behaviour means that we are living off our rather lucrative franked dividends. Not bad if you can get it.

We think we need three things to change before our market takes another ‘leg up’. First, we need our political system to engage on tax reform and infrastructure. Second, we need the US Fed to clearly articulate its plan for the next year or so. Third, we need the soon-to-be-sworn-in China leadership team to announce its new plans. On this basis it is hard to get excited about potential gains in October but we could get a really good Santa rally – and not because it is that time of year. It is that confluence of events.

Foreign Equities

The S&P 500 was up 1.9% over September. The German DAX was up 6.4% and the Tokyo Nikkei was up 3.6%. So there was a lot of action but it is hard being in the right markets at the right time.

Going forward, it is probably smart to be weighted a little out of Australia and towards Europe and Emerging Markets with a healthy – but not overweight – stake in the USA.

Bonds and Interest Rates

The RBA was on hold in September and will hopefully not raise rates until at least 2019. But some commentators are calling for a hike in early 2018. They must use a different crystal ball supplier.

We expect some volatility towards the end of 2017 as the Fed sorts out its new direction. And there is pressure on the UK to hike.

While we expect volatility, we do not expect a long-run impact on our markets. We have lived in a low volatility regime for much of 2017. If volatility goes back to normal levels, so what?

Other Assets

Oil prices were up about 10% while iron ore was down about 20% over the month. In both cases, these changes are not establishing new trends but correcting previous moves.

Regional Analysis

Australia

While economic data last month came in reasonably positively, the data were not strong. The future could go either way. Recessions and the like are way out of line but slow to moderate growth is possible.

On the other hand, a concerted effort by the government and the RBA could make things happen. But our media seems centred on causing conflict. We need a circuit breaker and one isn’t stepping up to the plate!

China

The China data in September was a bit light on but nothing to worry about. There is always statistical variation. In October there will be a new leadership team to run the second biggest economy in the world.

The Purchasing Managers’ Indexes (PMI) which look forward, were very strong. The manufacturing index came in at well above the ’50 mark’ that indicates strengthening expectations. At 52.4 it was actually at a five year high. The services PMI was even stronger at 55.4 which was a three year high. Not much to worry about there!

China debt was downgraded in September (but so was UK debt). The new massive infrastructure programme is likely to change the world order and we should benefit. But it might take a while for the flow on to take hold.

US

Trump has had no real wins this year but the tax plan might make it. So far there is no real plan but there is enough at least to get his own team on side. To cut the corporate tax rate from 35% to close to 20% would have a massive positive impact. It has to be funded (at some point) but there is lots of wiggle room.

The jobs data were a little bit soft in September but one month does not make a trend. The average for 2017 job creation is the same as the 2016 average.

Europe

Brexit dominates but the noise seems to be subsiding. Naysayers seem to want the UK to fail but the leaders are being measured.

Europe is now so far from the basket case it was a few years ago, it can work its way through this. With the all-important German and French elections behind us we can look to the future. The European Central Bank is unlikely to upset the balance.

Rest of the World

North Korea has seemingly gone quiet after China closed ranks with the West on the recalcitrant North Korea. That will help markets.

But the big ‘Rest of the World’ news must be that Saudi Arabia is now allowing women to drive cars. Hopefully no one thinks that women shouldn’t be allowed to drive but when half of the population suddenly gets a learners permit after many years in the passenger seat, what chaos can follow? Robot-driven cars are needed quick-time.

By Ron Brewley on behalf of Infocus.