Asset Class and Economic Themes

As we begin 2024, we want you to know what a privilege it is to serve as your advisor. Hopefully each quarterly newsletter gives you some insights into our thinking and its evolution as we are confronted with new information and ideas in an ever-changing financial landscape.  As always, we strive to maintain a balanced approach with awareness of both upside return and downside risks.

Asset class volatility has continued into 2024, with large return variations observed quarter-on-quarter. Indeed, we have seen correlated asset class performance over 2023 and we think this behaviour will likely continue over the short term. Over the 3-months to January 2024 all asset classes printed positive, driven primarily by market expectations of policy rate cuts over the first half of 2024.

Figure 1: Asset Class Performance as at 31 January 2024

Source: Allied Wealth, Morningstar.

Coming into Q4 2023, we implemented an overweight allocation in hedged international equities relative to the unhedged position. This decision contributed to performance as the Australian Dollar strengthened over the period. Over the quarter, portfolios have maintained a marginal defensive bias expressed as an underweight in growth assets in favour of defensive assets – this position has marginally detracted from relative performance over the quarter.  The combined asset allocation decisions are net positive and additive to long-term portfolio returns. While we are pleased with the results, we would emphasize that the asset allocations decisions have been made both from the perspective of risk mitigation as well as alpha generation.

Figure 2: Asset Allocation Performance as at 31 December 2023

Source: Allied Wealth, Morningstar. Note: Returns are based on an asset allocation index returns which do not include manager and advice fees so actual portfolio returns will vary. The purpose is to determine if our tactical asset allocation decisions are adding value over the Strategic Asset Allocation for each model.

Strategic Asset Allocation Review

In Q4 2023, we conducted a Strategic Asset Allocation (SAA) review of client portfolios across the risk spectrum – Moderate, Balanced, Growth and High Growth. Review includes an assessment of our current Capital Market Assumptions and long-term implications for the baseline SAA.

Our analysis of asset class returns and risks suggests that while there are short-to-medium term market considerations of note, the relative attractiveness of asset classes have not changed over the long-term (20-years forward). Structurally, we see a rise in income yields across asset classes, more so in bonds and credit compared to equities. The attractive level of income has resulted in an increased allocation to Income Alternatives across Moderate, Balanced and Growth portfolios.

Figure 3: Allied Wealth Strategic Asset Allocation 2024

Investment Outlook & Strategy Implications

One of the key themes discussed at the Investment Committee was narrow market representation. Looking through the market indices we note that positive performance in international equities was primarily driven by strong performance in a small number of large-cap tech stocks (Microsoft, Google, Nvdia, Meta, Apple and Amazon). While there is an argument to be made that large-cap tech is overvalued, we have seen positive earnings growth which continues to support the lofty valuations. However, we note in most cases (exception being Nvidia) a material contribution to earnings growth have been job cuts in the second half of 2023.

The AI boom remains the gift that keeps on giving. Despite record number of lay-offs in the tech sector, companies continue to invest in AI and data processing which has led to strong demand for both software and hardware. This trend has also percolated across property and infrastructure. We have seen substantial investments in data centres and energy infrastructure, supported by new equity and debt raisings. Investors continue to be extremely bullish on these themes coming into 2024.

We believe that central banks globally are mostly at the tail-end of their hiking cycle. Tight monetary policy has led to softening of economic conditions and moderation in inflationary pressures. Inflation remains on the higher end of the target range at around 3%, and we expect this to continue over the first half of 2024.

Investor sentiment remains too bullish for our liking. At this point, equity market valuations are expensive but as history indicates, expensive valuations may persist over long-periods of time. Our analysis suggests that equity valuations today include an expectation that interest rate will fall in H1 2024 followed by earnings growth coming into H2 2024. This thesis at current valuation does not leave much room for error and thus we have remained cautious.

Geopolitical conflict continues to be an ongoing theme. With the US presidential elections in November 2024, primaries have already commenced. Polling and voting to date suggest the upcoming election will be a Trump vs Biden showdown. Irrespective of which candidate wins, we expect further escalation of trade conflict between US and China.  

Following the investment committee discussion, members agreed to retain the current asset allocation stance which reflects 1) a marginally defensive stance overweight cash and fixed interest in favour of an underweight in international equities and 2) within international equities, an overweight in hedged international equities relative to unhedged. Despite the appreciation of the Australian Dollar (relative to US Dollar and Euros), current valuations still look cheap relative to history.

Figure 5: Asset Class Summary and Portfolio Stance

In-line with the outlook, the Investment Committee decided to maintain our marginal underweight in growth assets in favour of an overweight to defensive assets; and an overweight to hedged international equities relative to unhedged. Given the current market environment we have thought it appropriate to maintain the cautious stance but will look to reassess our position should it be warranted.

Thank you once again for your continued trust and confidence. We wish you a fruitful and prosperous 2024.

Yours faithfully,

Allied Wealth Investment Committee

What sets Allied Wealth apart

Allied Wealth's core principles

You are welcome to pass on this commentary or our contact details to anyone whom you think would benefit from our services.

General advice warning

Disclosure

The information provided in and made available through this document does not constitute financial product advice. The information is of general nature only and does not take into account your individual objectives, financial situation or needs. It should not be used, relied upon, or treated as a substitute for specific professional advice.

We recommend that you obtain your own professional advice before making any decision in relation to your particular requirements or circumstances.

Allied Wealth Pty Ltd is a Corporate Authorised Representative of Allied Advice Pty Ltd for financial planning services. AFS Licence No. 528160

Financial Independence, Retire Early

If you’ve been hearing FIRE AKA financial independence, retire early floating around but you aren’t quite sure what it all means, you aren’t alone. The FIRE movement has gained traction in previous years and if it’s something you’ve been considering adopting but you’re not sure how, this guide is for you. 

Our team of experts at Allied Wealth have extensive experience in the world of retirement planning and we have broken down where FIRE came from and what exactly it is. 

What is Financial Independence, Retire Early (FIRE)? 

FIRE is a movement of people that are committed to a life of extreme saving in the hopes to retire far earlier than other individuals may be able too. It’s not known exactly where FIRE originated, but a core premise of the movement is that you should be evaluating every single expense in terms of the number of hours you had to work to pay for those expenses.

What’s the purpose of FIRE? 

The FIRE movement aims to get individuals to retire early, instead of the regular retirement age of 65, the FIRE movement encourages people to dedicate a majority of their incomes to savings so that they can retire and live off their savings years before they reach the traditional retirement age. 

FIRE is an extreme saving lifestyle that encourages people to save up to 70% of their yearly income. When their savings reach 30 times their yearly expenses, they are able to leave their jobs or retire all together. 

The movement also encourages people to make small withdrawals from their savings after they retire early, roughly 3-4% of the overall balance a year. This requires diligence and extensive budgeting to ensure the success of their efforts. 

Who is FIRE made for? 

You wouldn’t be alone in thinking that FIRE is designed for individuals who get a substantial income and can afford to save a majority of their salary and if you’re trying to retire by your 30s or 40s, that’s probably true. BUT there is also a lot to be learnt from the movement that can help people save for their retirement and achieve an early one, even if it isn’t quite as early as retiring in your 30s. 

What are the variations of FIRE? 

There are three variations of the FIRE movement, Fat Fire is a more laid-back approach that encourages people to save more while giving up less. Lean FIRE will require individuals to be devoted to a very minimalist lifestyle and Barista FIRE which is for people wanting to quit their 9-to-5 and are willing to cut back on their spending and only work part time. 

What can Allied Wealth do for you? 

At Allied Wealth we are committed to providing you with a financial plan that best suits your needs, goals and expenses. If you’ve been considering undertaking the FIRE movement as part of your retirement planning, contact us today to find out how we can help you achieve your goals and plan for your future. 

Is there a difference? 

If you’re new to the financial planning world, you’ve probably heard the terms “independent financial advisor” and “financial advisor” thrown around a lot and also often used interchangeably which can be confusing if you’re new to the financial planning landscape. 

Understanding the differences between these two roles is crucial in order to help you make an informed decision about the type of financial expert you should choose that will best suit you and your needs.

What are the key differences? 

Independence

The key difference between a financial advisor and an independent financial advisor is their independence. If you’re looking for financial advice that isn’t associated with banks or financial institutions an independent advisor is the way to go! Independent financial advisors don’t have limitations on the products and services they can recommend so their advice is unbiased and aligns with your financial goals.

Types of recommendations 

Financial advisors may have a vested interest in recommending specific products or services that they are affiliated with or that are offered by their employer. Independent financial advisors have the freedom to recommend products and services from a huge range of providers so your needs are always met rather than trying to meet a quota for a financial institution. 

Client focused 

Independent financial advisors are more known to be client focused, taking the time to understand your individual needs and goals. It’s a personalised approach that allows them to tailor their advice to you and your specific circumstances whilst financial advisors may have to offer more generalised advice due to guidelines put in place by their employers. 

Fee structures 

The cost and fee structures can vary from financial advisor to independent financial advisor. This may be because financial advisors may earn a commission based on products they sell. Our independent advisors work to be completely transparent with our fees and you can be sure that the way we charge is not at all influenced by any commissions. 

Choosing the right advisor for you

When you’re choosing between a financial advisor or an independent financial advisor it all comes down to you and your financial goals. At Allied Wealth we offer you the expertise of independent advisors that are completely committed to your financial growth, independence and transparency. 

Understanding the difference between independent financial advisors and financial advisors is crucial when it comes to making an informed decision that best benefits you. 

Asset Class and Economic Themes 

Equity markets rallied over the first half of 2023 but lost steam coming into September and October. Over the 3-months to October, all asset class performance was negative except for Alternatives and Cash. While recent market movements have vindicated the defensive positioning taken in Q2 2023, we remain cautious on both the upside and downside going forward.

Markets have remained volatile over the year and the last few weeks of quarter four have not been an exception. For us this highlights the level of disagreement embedded in the investment views held by both institutional and retail investors.

Figure 1: Asset Class Performance as at 30 September 2023

Source: Allied Wealth, Morningstar.

Please note that asset allocation performance calculations have been conducted as of September 2023.

Portfolios currently maintain a marginally defensive asset allocation stance. As was discussed in the last newsletter, the decision reflects a focus on risk management rather than profit maximisation. This position has proven prescient as growth assets have underperformed defensive assets over the quarter.

Figure 2: Asset Allocation Performance as at 30 September 2023

Source: Allied Wealth, Morningstar. Note: Returns are based on an asset allocation index returns which do not include manager and advice fees so actual portfolio returns will vary. The purpose is to determine if our tactical asset allocation decisions are adding value over the Strategic Asset Allocation for each model.

Structural Market Changes – The Returns of Income

Over the past year, rising interest rates have meant a higher income return across defensive asset classes as well as select Alternative asset classes. Where equities have (over the last 10 years) provided a higher income yield compared to bonds, the recent hiking cycle has seen income levels across multiple asset classes rise materially.

Figure 3: Asset Class Yield Comparison Since December 2021

Notes:

Dividend yields have been used for equities; yield-to-maturity for bonds

For private credit and Aust. bank hybrids yield have been calculated as a spread plus cash

Comparing yields at the end of October 2023 to December 2021, we see a material increase in yields across Fixed Interest, Cash and Income Alternatives. In some cases, yields exceed dividend yields for equities. Another important point to note is that these asset classes also exhibit lower volatility of capital relative to equities which makes for an attractive investment proposition particularly for investors with lower risk tolerance. As an investment committee, we have begun discussing the implication for client portfolio and expect this to be an important consideration in the upcoming Strategic Asset Allocation review.

Investment Outlook & Strategy Implications

We continue to maintain a cautious asset allocation stance. We see a combination of growth headwinds in the medium-to-near term. The impact of higher interest rates is working through the economy, and we have seen signs of corporate earnings under pressure. Consumers have started to feel the pinch and have adjusted their spending accordingly.

Geopolitical conflict has been a theme well covered in all our publications as well as internal discussions. The escalation of conflict in the middle east represents a grave humanitarian crisis with implications for oil prices. However, the impact of the conflict on global GDP currently remains minimal. It remains too early to tell the secondary or third-order effects and we continue to monitor the situation as it develops.

Market movements across equities and bonds suggest market participants remain glued to central bank commentary. While any indication of a “pause” in policy rates is cheered on by investors and may lead to a short-term equity rally, we believe fundamentals are likely to deteriorate further before improving. Despite falling equity prices in the recent months, we continue to view the asset class as overvalued especially when earnings momentum and economic fundamentals are considered. Based on our current assessment, we would like to see a further 5% to 10% fall in prices before adding back to underweight positions.

Within international equities, we have made some minor allocation changes resulting in a marginal overweight to hedged international equities (relative to unhedged). Over the preceding quarters we have seen the Australian dollar materially weaken relative to the US dollar and Euros. Based on our analysis, the Australian dollar currently trades cheaply when compared to other development market currencies. Our experience with FX suggests that while mean reversion is likely, this can happen over an extended period. Current valuation provides a good entry point, and we expect to hold on to this position over the medium term.

Figure 4: Asset Class Summary and Portfolio Stance

Bottom-up market observations

Reporting Season Scorecard

The last four years have been very eventful for bank shareholders, with each year bringing a new set of worries predicted to bring the banks to their knees. 2020 saw an emergency capital raising from NAB (some of which was used to pay the dividend) and Westpac missing their first dividend since the banking crisis of 1893, as experts forecasted 30% declines in house prices and 12% unemployment! Then, 2021 saw the banks grappling with zero interest rates and APRA warning management teams about the systems issues they may face from zero or negative market interest rates expected to come in 2022. In 2022 and 2023, the concerns have switched to the impact of a 4.25% rise in the cash rate on bad debts and the looming fixed interest rate cliff that would see retail sales and house prices plummet. 

In this Allied Wealth quarterly, we will look at the themes in approximately 900 pages of financial results released over the past ten days by the financial intermediaries that grease the wheels of Australian capitalism.

Figure 5: Reporting season scorecard November 2023

Low Bad Debts

From May 2022, Australia's official cash rate climbed from 0.10% to 4.35% across 13 different rate hikes. Every time we had a cash rate increase, the first question was how it would impact consumers and whether bad debts would rise sharply and house prices would collapse. What we have seen over the last year is that employment in Australia has remained remarkably robust in a tight labour marketplace. This has seen consumers being able to reallocate funds from discretionary or non-necessity spending to being able to fund their home loans. Additionally, we have seen a substantial increase in offset account balances that have risen rather than fallen, with $5 billion being added since March 2023. 

Figure 6: Growth in Offset Account Size

Bad debts remained low in 2023, with all banks reporting negligible loan losses; ANZ and Macquarie reported the lowest level, with loan losses of 0.01%. To put this in context, since the implosion in 1991 where, banks grappled with interest rates of 18% and considerable losses to colourful entrepreneurs such as Bond, Skase et al. Since then, loan losses have averaged around 0.3% of outstanding loans, and the banks price loans assuming losses of this magnitude. 

The level of loan losses is important for investors as high loan losses reduce profits and, thus, dividends and erode a bank's capital base. Conversely, the very low losses in 2023 have translated into record dividends and billion-dollar share buybacks. 

Show Me The Money

While the big Australian banks are sometimes viewed as boring compared with the biotech or IT themes du jour, what is exciting is their ability to deliver profits in a range of market conditions. In 2023, the banks generated $32.7 billion in net profits after tax. This saw dividends per share increase by an average of 15% per share, with all banks except for NAB now paying out higher dividends than they did pre-Covid 19. The star among the banks was ANZ, which raised dividends per share by 19%! 

Well Capitalised 

Capital ratio is the minimum capital requirement that financial institutions in Australia must maintain to weather the potential loan losses. The bank regulator, the Australian Prudential Regulation Authority (APRA) has mandated that banks hold a minimum of 10.5% of capital against their loans, significantly higher than the 5% requirement pre-GFC. Requiring banks to hold high levels of capital is not done to protect bank investors but rather to avoid the spectre of taxpayers having to bail out banks. In 2008, US taxpayers were forced to support Citigroup, Goldman Sachs and Bank of America, and British taxpayers dipping into their pockets to stop RBS, Northern Rock and Lloyds Bank going under. The Australian banks were better placed in 2008 and did not require explicit injections of government funds; the optics of bankers in three-thousand-dollar Armani suits asking for taxpayer assistance is not good. 

In 2023, the Australian banks are all very well capitalised and have seen their capital build. This allows the banks to return capital to shareholders in the form of on-market buybacks. During the bank reporting season, Macquarie announced a $2 billion dollar on-market buyback, Westpac announced a $1.5 billion share buyback, CBA announced a $1 billion share buyback, and NAB announced they had a remaining $1.2 billion share buyback. For investors, this not only supports the share price in coming months but reduces the amount of shares outstanding to divide next year's profits by! 

Our View

Overall, we are happy with the financial results in November from the banks owned by the Concentrated Australian Equity Portfolio. The three main overweight positions, Commonwealth Bank, ANZ and Westpac, all increased their dividends, which is a crucial signal indicating improving prospects and board confidence in the outlook. All banks showed solid net interest margins, low bad debts and good cost control. Profit growth is likely to be tough to find on the ASX over the next few years, with earnings for resources and consumer discretionary likely to retreat; however, Australia's major banks look to be placed in a good position in current turbulent markets.

Every investment decision is not undertaken lightly and is based on investment research, sized by our conviction. In-line with the outlook, the Investment Committee has decided to maintain our underweight in growth assets in favour of an overweight to defensive assets. Apart from a marginal overweight in hedged international equities within the asset class, no other allocation changes have been made.

Yours faithfully,

Allied Wealth Investment Committee

What sets Allied Wealth apart

Allied Wealth's core principles

You are welcome to pass on this commentary or our contact details to anyone whom you think would benefit from our independent financial advice services.

General advice warning

Disclosure

The information provided in and made available through this document does not constitute financial product advice. The information is of general nature only and does not take into account your individual objectives, financial situation or needs. It should not be used, relied upon, or treated as a substitute for specific professional advice.

We recommend that you obtain your own professional advice before making any decision in relation to your particular requirements or circumstances.

Allied Wealth Pty Ltd is a Corporate Authorised Representative of Allied Advice Pty Ltd for financial planning services. AFS Licence No. 528160

What Every Retiree Should Consider

When you’re nearing retirement age, it’s vital to understand your finances so you can live comfortably during the later years of your life. At Allied Wealth we know how complex and confusing it can be to understand all the nuances of financial planning for retirement. We know there are a different set of challenges faced by individuals who are planning to retire and our independent financial advice is tailored to make your retirement financial planning as easy to navigate as possible. 

I’m thinking of retiring, where do I start? 

If you’ve been thinking about retirement for a while now but you’re just not sure where to start on your financial planning journey, you aren’t alone – and we are here to help! Financial planning for retirement is crucial and we know there are a whole range of considerations you have to keep in mind.

When you’re starting on your retirement financial planning journey you’ll need to regularly  assess your financial situations as well as your ongoing needs and goals. 

At Allied Wealth we know that there are different financial concerns for Australians that are at different stages of their lives which is exactly why we provide retirees with specialised guidance. 

One of the biggest concerns for Australians considering retirement is ensuring that you have the funds to be comfortable and secure. At Allied Wealth we do it all, from evaluating your current savings to helping you invest, our advisors help you every single step of the way. 

Consider health care costs 

It’s no secret that as you age, the cost of health care needs to be included as a significant part of your budget. At Allied Wealth we can help you plan for these potential costs to ensure you have the finances to cover any medical procedures or appointments and the cost of private health insurance. Planning for health care expenses (whether expected or unexpected), ensures you have the finances to handle whatever life may throw at you! 

Estate planning 

When you are in the midst of planning for your retirement, estate planning cannot be overlooked! We can help you to create a comprehensive plan for your estate that respects exactly what you want and protects your assets. Our advisors can help you with your estate planning so you can pass on your assets to future generations.

Think about potential tax benefits 

Navigating possible tax benefits within retirement can be a difficult thing to do, but it’s an important part of any financial planning process. We can help you explore tax-efficient strategies that help you to make the most of your finances. Our advisors provide you with personalised insights and potential tax benefits that can make a significant difference to your financial situation. 

Why Choose Allied Wealth? 

When you’re beginning to plan for retirement, checking over your finances and ensuring they align with your future goals is crucial. With Allied Wealth at your side, you can handle your retirement with confidence knowing that you have experienced advisors who provide personalised guidance to help you navigate the Australian financial landscape. 

Key Themes

During February and August every year, most Australian listed companies reveal their profit results, and most guide how they expect their businesses to perform in the upcoming year. Whilst we regularly meet with companies between reporting periods to gauge how their businesses are performing, companies open up their books during reporting season to allow investors a detailed look at the company's financials. As company management has been on "blackout" (and prevented from speaking with investors) since mid-June, share prices in the six weeks leading up to the result are often influenced by rumours, theories, and macroeconomic fears rather than actual financials.

The August 2023 company reporting period that concluded last week displayed stronger-than-expected results in a higher inflationary and interest rate environment. The dominant themes of the August reporting season have been higher interest repayments, higher input costs and a weaker Australian dollar. Many companies were able to weather these headwinds and deliver some strong results, and others got caught in the headwinds. In this week's piece, we look at the key themes from the reporting season that finished last week, along with the best and worst results and the corporate result of the season.

Better than expected

Going into the August reporting season, the market expected the profits to fall sharply due to the combination of cost inflation, higher interest costs and slowing retail sales from domestic consumers under pressure from higher mortgage rates. However, the reporting season showed that many companies were able to manage the current economic environment better than expected, with earnings beating expectations outnumbering companies missing expectations by a ratio of 5:3. Looking through the ASX companies that exceeded expectations were in the telco, IT, consumer discretionary and financial sectors. Conversely, disappointments were clustered in the consumer staples and healthcare sectors.

Higher interest rates - Good and bad

One of the main themes over this reporting season was how each company would be able to handle a rising interest rate environment. Since 2008, companies globally have enjoyed declining interest rates, which have seen the interest cost line on the Profit and Loss statement decline, thus boosting earnings. However, since April 2022, the cash rate has increased from 0.1% to 4.1%. August 2023 was going to be the first reporting season, with sharp increases in financing costs taking a bite out of company profits.

Aurizon (nee Queensland Rail), Australia's largest rail freight operator, underwent a large acquisition last year, adding close to $2 billion in additional debt. When combined with an increase in interest rates, the rail company saw its interest expense explode by 84%, dragging earnings down. Similarly, we have seen financing costs increase for the more highly geared listed property trusts such as Charter Hall Long WALE REIT, which saw financing costs increase by 56%. Retailer Harvey Norman is another company that has seen a large increase in financing costs of 76% due to having to take on more debt to fund more capital expenditures.

Conversely, the insurers all reported strong earnings results courtesy of finally earning an income return above zero on their "insurance float". In addition to profits made via underwriting insurance, insurance companies receive premiums upfront and pay claims later, which gives the company a cost-free pool of money that can generate investment profits for the benefit of shareholders. This pool constantly has inflows from premiums and outflows from claims, but the aggregate amount tends to remain constant. For the last several years, with rates close to 0%, insurers were earning close to nothing for their multi-billion-dollar investment floats. However, with rising interest rates, QBE Insurance earned US$662 million on its US$27 billion float in the first half of 2023. Conversely, the company made only US$382 million in all of 2021.

Input cost inflation

Over the past year, wages have risen across many sectors in Australia due to a combination of maintaining real wages in the face of higher inflation and a tight labour market with unemployment the lowest since the early 1970s. In August, cost inflation was seen very clearly in the profit results of the big miners. BHP reported higher production costs for FY2023 with diesel, explosives, machinery, and labour increasing costs by 10% over the year and expects higher costs to remain in FY2024.

Retailers Coles and Woolworths both saw higher costs of doing business in FY2023 due to higher minimum wage awards and cost inflation. Additionally, Coles lost $60 million in "shrinkage" (theft) during the second half, which alarmed investors and saw the company's share price fall. To combat this, Coles plans to add additional personnel in 2024 to watch self-checkouts, which will add to the cost of doing business.

Building products company Boral noted that input materials inflation surged over the past year, with higher transport, energy and labour costs. Despite these input cost increases, Boral increased profits by passing these on to customers, increasing the price of concrete and cement by 12 and 8 per cent, respectively.

Inflation is negative for consumers as it erodes their purchasing power, but it benefits those with existing assets with revenues linked to inflation. The best examples of companies with this characteristic are the toll road operators Transurban and Atlas Arteria, which saw strong increases in revenue from both inflation-linked tolls and higher traffic volumes. Their largest cost of interest repayments barely increased as these companies fixed their interest costs during periods of low-interest rates for a long duration.

Weaker Australian dollar

While the falling Australian dollar is a negative for Australians looking for a winter holiday in the south of France or Qantas buying jet fuel in US dollars on the world market, it is positive for Australian companies earning profits offshore. Over the past year, we have seen the Australian dollar trend downwards compared to most large currencies but most significantly against the USD. The weakening Australian dollar has provided a tailwind for companies that earn revenues in foreign currencies. Once earnings and dividends are translated into weaker Australian dollars, local investors enjoy elevated earnings per share and dividend per share growth. Some companies that benefitted from this tailwind in August were CSL, which saw dividends increase by +18%, and Amcor, where dividends rose by +13% once converted into Australian dollars.

Show me the money

Unlike the previous few reporting seasons, August 2023 saw companies cut dividends, and share buy-backs were not a feature outside of Commonwealth Bank, Qantas and Computershare. Across the ASX Top 25 stocks (that reported - the other banks have a different financial year-end), the weighted average increase in dividends was 4%. The three miners, BHP, RIO and Fortescue, cut their dividends on weaker profits, higher costs and an uncertain outlook, with Xero not paying a dividend and James Hardie replacing their dividend with a buy-back. On the positive side of the ledger, QBE, Transurban and Woodside offset the cuts, posting strong increases in cash flows to their shareholders.

Figure 1: Dividend growth per share – ASX Top 25 August 2023

Best and worst

Over the month, Altium Limited, Inghams Group, GUD Holdings, Johns Lyng Group, Life 360 and Wesfarmers delivered the best results over the month. Despite the uncertain economic environment, especially around higher interest rates, these companies were able to combat these costs by lowering their gearing and leverage ratios whilst still being able to grow the business, in some cases lower losses, along with optimistic outlooks for 2024.

Looking at the negative side of the ledger, Chalice Mining, Core Lithium, Alumina Limited, Fletcher Building, Costa Group Holdings reported poorly received results by the markets. The common themes amongst this group are a delay or cancellation of dividends due to a potential takeover (Costa Group) or due to a lower earnings environment (Alumina) combined with lower profit guidance moving forward. Additionally, high price-to-earnings (PE) companies such ResMed, WiseTech and Ramsay that delivered profits below expectations or gave weak guidance saw their share prices sell off.

Result of the season

Before the August 2023 reporting season, conglomerate Wesfarmers would not have been many investors pick (including ours despite holding it in our portfolio) for the result of the season.  Many in the market expected Wesfarmers’ earnings to contract based on a weaker domestic consumer, however the company grew profits on a strong rebound in Kmart, as well as growth in Bunnings, Officeworks and chemicals. Record Kmart earnings indicates consumers switching to the company’s low-price offer. Additionally, management provided upbeat guidance for 2024 which will see the first earnings from the Mt Holland lithium mine with the share price rallying by +11% in August.

Our Take:

Overall, we were reasonably pleased with the results from the reporting season with most of our portfolio companies able to increase earnings and dividends with some reporting record profits in a tougher economic environment.

Figure 2: How did the portfolio fare?

As a long-term investor focused on delivering income to investors, we look closely at the dividends paid out by the companies that we own and whether they are growing. After every reporting season, we look to "weigh" the dividends that our investors will receive. Our view is that talk and guidance from management are often cheap, and that company CFOs can use accounting tricks to manipulate earnings, but actually paying out higher dividends is a far better indicator that a business is performing well. Additionally, global macroeconomic events and market emotions can temporarily cause the share prices of companies performing well to fall.

Using a weighted average across the portfolio, our investors' dividends will be +15% greater than for the previous period in 2022, and every company held in the portfolio was both profitable and paid a dividend.

On this measure, we are pleased with the results of the August 2023 reporting season.

Yours faithfully,

Allied Wealth Investment Committee

What sets Allied Wealth apart

Allied Wealth's core principles

You are welcome to pass on this commentary or our contact details to anyone whom you think would benefit from our services.

General advice warning

Disclosure

The information provided in and made available through this document does not constitute financial product advice. The information is of general nature only and does not take into account your individual objectives, financial situation or needs. It should not be used, relied upon, or treated as a substitute for specific professional advice.

We recommend that you obtain your own professional advice before making any decision in relation to your particular requirements or circumstances.

Allied Wealth Pty Ltd is a Corporate Authorised Representative of Allied Advice Pty Ltd for financial planning services. AFS Licence No. 528160

When you’re trying to navigate your finances and unlock a future of financial freedom, choosing an independent financial advisor that has your back and your best interests in mind is crucial. 

Just one quick Google search will unlock a number of different independent financial advisors, but which one will be best for you? 

Choosing an independent financial advisor that aligns with your goals and has ample experience in the Australian financial landscape is crucial, at Allied Wealth we have the tools to help you on your financial journey. These are our six key considerations we think you should keep in mind when you are trying to choose an independent financial advisor. 

1. Try to find an independent financial advisor 

Independent financial advisors are a great choice when you’re looking for an independent financial advisor. Independent advisors like our team at Allied Wealth aren’t tied to a specific financial institution so you can be sure that the advice you receive is completely unbiased and based on your best interests. This independence also allows them to give you objective advice that is tailored to your unique financial situation. 

2. Look for experienced advisors 

Financial planning isn’t easy, and experience and expertise is crucial to ensure you get relevant advice. When you’re picking an independent financial advisor you may want to consider the number of years experience they have. At Allied Wealth our independent financial advisors have over 20 years of experience so you can be sure you’re getting informed, relevant and tailored advice. 

3. Check client testimonials & reviews 

Before you commit to a decision, you’ll want to check out what other people have to say about the services on offer. Checking out client reviews and testimonials is a great way to gauge how satisfied previous clients have been with the independent financial advisor you’re considering. At Allied Wealth, we value your satisfaction – and our client testimonials are proof of our commitment to offering quality advice. 

4. Find someone who prioritises YOU

A good independent financial advisor prioritises you and your individual goals and dreams. Pay attention to whether or not your independent financial advisor listens to your concerns and goals, and how well they tailor their advice to your specific financial situation. We are committed to maintaining a client-centric approach to fully understand your circumstances and how we can best help you reach your financial goals. 

5. Look for an advisor with transparent fees

When choosing an independent financial advisor, understanding how they charge is crucial. You may want to ask for a breakdown of the fee’s to understand exactly how your independent financial advisor is being compensated. Fee transparency is a crucial aspect to build trust between you and your advisor. 

6. Look for a range of services

You’ll want to look for an independent financial advisor who offers a comprehensive range of services that meet all your needs. Whether you’re after retirement planning, wealth management or wealth growth strategies, our team at Allied Wealth can help you out! 

How can we help you? 

At Allied Wealth, we are committed to independence, experience and your overall satisfaction. If you’ve been on the hunt for an independent financial advisor but haven’t had any luck, contact us for all the tips and tricks you need to find an independent financial advisor who prioritises you with Allied Wealth.

Retirement is a significant life milestone that many look forward to finally achieving – after years of hard work retirement offers a reprieve where you can start spending your days exactly how you like! BUT proper financial planning is crucial when considering retirement to ensure that you have a comfortable and secure retirement. 

Whether you're nearing retirement age or you’re just starting to get your ducks in a row for when that day comes, it's never too early to begin your retirement planning journey. 

At Allied Wealth, we specialise in providing financial advice for would-be retirees, and we're here to help you navigate this exciting (and sometimes daunting) phase of your life. 

With over 60 years of combined experience, we've gathered valuable insights into effective retirement planning. In this blog, we'll share our seven top tips to help you kickstart your retirement planning journey.

1. Define Your Overall Retirement Goals

The first step in retirement planning is to clearly define your retirement goals – take some time to envision your ideal retirement lifestyle and what that looks like for you. Ask yourself: What do you want to do each day? Any activities you want to pursue? Where do you want to live? What do you envision as a day in your life during retirement? 

Setting specific and achievable goals will provide you with a clear sense of direction for your financial planning. At Allied Wealth, we work closely with our clients to understand their unique aspirations and create customised retirement plans for every unique individual that aligns with their plan for retirement.

2. Assess Your Current Financial Situation

To plan effectively for retirement, you need to have a clear understanding of your current financial situation and the finances you need to retire comfortably. Calculate your current savings, assets, and debts as well as analyse your current income sources and various everyday life expenses. 

This assessment will help you determine how much you need to save for retirement to live comfortably and how close you are to your financial goals. Our team at Allied Wealth can assist you in conducting a thorough financial review to identify any areas that may need some extra love.

3. Create a Retirement Budget

Once you have assessed your current financial situation, it's time to embark on creating your retirement budget. A retirement budget will help you allocate your resources and funds to ensure that you have enough income to cover your expenses in retirement. 

Consider factors such as housing, healthcare, travel, and any fun hobby activities you wish to partake in during your retirement. At Allied Wealth, we recommend a proactive approach to budgeting, to ensure that your retirement income aligns with your desired lifestyle.

4. Diversify Your Investments

At Allied Wealth, we believe in a proactive, discretionary, and personalised asset allocation approach. Diversifying your investments is a key component of this retirement strategy. 

Spread your various investments across different asset classes, such as stocks, bonds, and real estate, to reduce risk and optimise your overall returns. Our experienced financial advisors can help you design an investment portfolio that suits your risk tolerance alongside your long-term financial retirement goals.

5. Take Advantage of Retirement Accounts

Maximising your retirement savings is crucial, and taking advantage of retirement accounts is a smart way to do so. In Australia, options like superannuation funds and self-managed superannuation funds (SMSFs) provide tax advantages and investment opportunities for budding retirees. 

Our team at Allied Wealth can guide you in selecting the right retirement accounts and optimising your contributions to secure your financial future.

6. Review and Adjust Your Retirement Plan Regularly

Retirement planning is not a one-time task – it's an ongoing process that changes frequently. Life circumstances, financial markets, and economic conditions can change, all of which may impact your retirement plan. 

It's essential to review and adjust your plan regularly to stay on track. At Allied Wealth, we maintain an in-depth knowledge of our clients' financial environments, allowing us to be highly responsive and effective when adjustments are needed.

7. Seek Professional Financial Advice

One of the most important tips for successful retirement planning is to seek professional financial advice. At Allied Wealth, we have a team of senior advisors with over 60 years of combined experience in looking after clients and their needs. 

Our expertise allows you to benefit from ongoing advice at a transparent flat fee, with no extra costs or commissions. We provide ethical and independent financial advice for retirement planning, to ensure that your best interests are always at the forefront of our recommendations.

Get Your Retirement Plan Started Today!

Retirement planning is a critical aspect of securing your dream financial future and ensuring you live the life you’ve always dreamed in retirement. At Allied Wealthwe are committed to helping you achieve your retirement goals with our proactive and personalised approach to financial advice for retirees and individuals looking to retire in the future. 

Plan today with Allied Wealth, and secure tomorrow with ease, our dedicated team of senior advisors is here to support you every step of the way, ensuring that your retirement years are filled with financial security and peace of mind. Contact us today to start your retirement planning journey off on the right foot – it’s never too early to start planning for your future!

Asset Class and Economic Themes

In our last newsletter we highlighted a volatile market environment which has continued unabated. As the year has progressed, we have become resigned to the fact that volatility is here to stay. RBA cash rates are currently at 4.1% and this means that bonds once again produce yield. The impact of higher debt costs, combined with higher than target inflation prints, does introduce an increased level of future uncertainty – thus reflected in the volatile environment.

Whilst growth assets posted positive returns over the 3-month and 1-year periods, performance over the August month has been negative. The exception has been unhedged international equities which has benefitted from the depreciation of the Australian dollar, offsetting the negative equity returns.

Figure 1: Asset Class Performance as at 30 June 2023

Source: Allied Wealth, Morningstar.

Please note that asset allocation performance calculations have been conducted as of June 2023 and we will provide a further update to performance by the end of September 2023.  

Portfolios currently maintain a marginally defensive asset allocation stance. As discussed in the last newsletter, the decision reflects a focus on risk management rather than profit maximisation. Whilst total return outcomes for clients are positive, our relative to SAA attribution indicates that this defensive position has detracted value over the June quarter as equity markets rallied.

Figure 2: Asset Allocation Performance as at 30 June 2023

Source: Allied Wealth, Morningstar. Note: Returns are based on an asset allocation index returns which do not include manager and advice fees so actual portfolio returns will vary. The purpose is to determine if our tactical asset allocation decisions are adding value over the Strategic Asset Allocation for each model.

What is Our Current Investment Outlook?

At the time of writing, the Reserve Bank of Australia (RBA) cash rate stands at 4.1% p.a. and represents an increase in interest rates by a whopping 4% since May 2022. The impact of higher interest rates has been felt by consumers; more so on the lower-income end of the spectrum. Higher mortgage payments and material increase in rents have eaten into the excess savings accumulated through the Covid19 pandemic and resulted in negative disposable income.

Figure 2: RBA Measure of Australian Household Income and Consumption

Obviously, this is not just a localised phenomenon. The same consumer impact is also observed in the United States (US). Despite tighter labour markets, wage growth has not outpaced the combined impact of higher inflation and mortgage rates.

Figure 3: Consumers Aggregate Personal Savings versus the Pre-Pandemic Trend

Source: Federal Reserve Bank of San Francisco

From an inflation management standpoint, the sharp interest rate hiking cycle saw inflation ease over the last 6 months. In Australia, inflation peaked at 8% in December 2022, but since moderated to 6% in June 2023. Since the last rate hike in June this year, the RBA remained on pause but left the door open to further interest rate hikes if required. At 6%, inflation remains materially above the 2% to 3% targeted by the RBA.

Across July and August, companies domestically and globally reported on Q2 2023 earnings. Data suggests that earnings to date have remained resilient, but the forward outlook has been revised downwards. Costs management remains problematic for companies particularly as it relates to labour, rent and energy prices. Profit margins so far have been retained by passing on costs to consumers, and this in turn has contributed to the above target inflation number.

Ironically, labour cost pressures faced by companies is the reason why consumers have been able to broadly absorb the increased costs of goods. Consumers domestically face increasing cost pressures which is exacerbated by a large number of low fixed rate mortgages rolling off in August (termed the mortgage cliff). Anecdotally we believe the low-income cohort of consumers are already affected. In the most recent earnings season, Woolworths and Coles reported the highest number of grocery theft experienced in recent history.

Our base case remains that inflationary pressure is likely to stay above the targeted rate. This may mean another hiking cycle at the beginning of 2024. Timing of the interest rate hikes may occur at the same time labour market softens and when the majority of consumers have drawn down their pandemic savings. This is likely to lead to lower growth going forward which will in turn weigh on equity valuations. 

What is the Counter to Our Investment View?

Whilst we have an investment outlook which reflects a negative view on growth assets, discussions held at the investment committee also included scenarios which would run counter to our base investment thesis. Following our analysis, we believe there are a specific set of conditions that will need to be met for equities to grind higher.

The key condition is that inflation continues to moderate over the forward period and comes in below the 3% upper band without any additional interest rate hikes. Additionally labour markets will have to soften but with increased labour productivity (i.e. people work harder for same level of pay). These two in combination will allow corporate profit margins to grow and justify current equity market valuations.  

Despite our negative outlook, we acknowledge that both regulators and central banks have done a fantastic job at steering the economy over the last 12-months. We continue to expect them to utilise all the tools at their disposal to ensure any market downside is not permanent or long lasting.

Investment Market Trends

Outside of economic conditions, there have been two market themes that have captured our attention. Over the preceding quarters, we have written about how the geopolitical tension between US and China has resulted in a shift of factories and production away from China to US-friendly countries. We are finally seeing some concrete evidence to back this view. Trade data for the 12-months to July 2023 indicates that Mexico has now overtaken China as the largest exporters of goods to the US.

Figure 4: Mexican Exports to the US Finally Outpace China

Artificial Intelligence (aka. machine learning) has come a long way since its humble beginnings in 1956 when the first artificial intelligence (AI) program was presented at the Dartmouth Summer Research Project on Artificial Intelligence conference. Since then, we have seen substantial improvements to machine learning algorithms, data availability, computational power and costs of access such that machine learning models may be built and deployed by anyone with a personal computer and access to the internet. Thus, it is not surprising AI has taken over everything from creative endeavours to industrial manufacturing. Some machine learning models have even been deployed to support corporate decision making.

Even though we are very positive on the development of AI and its implications for humanity, we are concerned that AI has also become the marketing buzz word and the go-to panacea to resolve all our worldly ills. Take for example the claim that AI will solve global warming; whilst we can see how AI can help, ultimately a change in human behaviour will still be required to get there.   

Selfishly, we are also getting a little tired of seeing AI slides in earning presentations promising the world. It would not be an exaggeration to say that 3 out of 4 earning presentations would include a slide dedicated to AI.

Investment Decisions and Strategy Implications

Coming back to our base investment thesis, given the confluence of events, we have made the decision to maintain a defensive stance across our portfolios. We believe there is stress building in the system despite the fantastic job done by regulators and central banks over the last 12-months. So far, the negative impact from the rise in interest rates has been broadly offset by substantial amounts of pandemic driven savings and tightness in labour markets – we do not believe this will last much longer. Despite the negative view, we are also monitoring the market for signs which are counter to our investment thesis. Emergence of a more positive macroeconomic environment may require a change in stance. From a risk management perspective, we remain comfortable with our current positions.

In-line with the outlook, the Investment Committee has decided to maintain an underweight growth assets in favour of an overweight to defensive assets. No asset allocation changes have been made.

Figure 5: Asset Class Summary and Portfolio Stance

Every investment decision is not undertaken lightly and is based on investment research, sized by our conviction. As with every decision we continue to monitor the market for signs of support or contradiction to our investment thesis.

Yours faithfully,

Allied Wealth Investment Committee

What sets Allied Wealth apart

Allied Wealth's core principles

You are welcome to pass on this commentary or our contact details to anyone whom you think would benefit from our services.

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Disclosure

The information provided in and made available through this document does not constitute financial product advice. The information is of general nature only and does not take into account your individual objectives, financial situation or needs. It should not be used, relied upon, or treated as a substitute for specific professional advice.

We recommend that you obtain your own professional advice before making any decision in relation to your particular requirements or circumstances.

Allied Wealth Pty Ltd is a Corporate Authorised Representative of Allied Advice Pty Ltd for financial planning services. AFS Licence No. 528160

Episode details - 22 August 2023

Greg and Brendon Vade chat about the benefits advisers have experienced from having an investment committee and outline some of the challenges they have faced throughout their journey.

Our team discuss the challenges faced in dealing with an investment committee. Greg is a highly experienced independent advisor at Allied Wealth who can offer you investment advice that is the best possible solution for you.

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