October 2024 Newsletter
Our articles cover a range of topics which we hope you will find interesting. We aim to keep you informed of changes as they happen, but we also want to provide ideas to help you live the life you want – now and into the future.
In this edition, we discuss the the relationship between politics and global markets, an explainer on tariffs, key insights into how debt may affect retirement, and a February-March recap video on the months’ market movements.
If you are interested in discussing the topics raised in this month’s newsletter, please don’t hesitate to contact us.
In the meantime, we hope you enjoy the read.
All the best,
The Wealthy Me Team
From the economy bending policies of Trump 2.0 to the growing strength of the far right in Europe, the new alliance between Russia and the United States, the wars in Ukraine and the Middle East, and the US President’s vow to upturn world trade rules, the markets are certainly navigating tricky times.
In recent months we’ve seen volatility in some areas but cautious optimism in others in a reflection of the hand-in-glove relationship between politics and markets.
Of course, economic policies, laws and regulations– think tax increases or decreases, new business regulations or even referendums – have a big effect on how investors allocate their portfolios and that impacts market performance.
In 2016, when the United Kingdom voted to leave the European Union, the UK pound plunged and more than US$2 trillion was wiped off global equity markets.i
In the following four years until Brexit was finally achieved in 2020, the FTSE 100 performed poorly compared to other markets as domestic and international investors looked elsewhere to avoid risk. While it has risen since a massive drop during the coronavirus pandemic, the exodus of companies from the London Stock Exchange continues with almost 90 departures in 2024.ii
Interest rate movements and any hint of political instability can also bring about a sell off or a rally in prices, with companies holding off on capital investment and causing economic growth to slow.iii
Global oil prices rose 30 per cent in 2022 when Russia invaded Ukraine causing European stock markets to plunge 4 per cent in a single day.iv Since then, oil prices have fluctuated and are now back to pre-war levels and gold has reached new heights as investors globally look for a safe haven from high geopolitical risks.
Do elections have an effect?
Elections, which almost always cause market disruptions during the uncertainty of the campaign period and shortly after the vote is known, have featured strongly in the past six months or so.
A review of 75 years of US market data has found that, while there may be outbursts of volatility in the lead up to the vote, there’s minimal impact on financial market performance in the medium to long term. The data shows that market returns are typically more dependent on economic and inflation trends rather than election results.v
Nonetheless, the noisy 2024 US Presidential campaign saw some ups and downs in markets during the Democrats’ upheaval and the switch to Kamala Harris as candidate. Donald Trump’s various policy announcements on taxes, immigration, government cost cutting and tariffs both buoyed and dismayed investors.
Analysis by Macquarie University researchers of the three days before and after election day found significant abnormal returns in US equities immediately after the vote.vi
But the surge was short-lived as investor sentiment fluctuated. Small cap equities with more domestic exposure experienced the highest returns while the energy sector also saw substantial gains, in anticipation of regulatory changes.
While currently the S&P500 and the Nasdaq have both gained overall since the election, there’s been extreme share price volatility.
Meanwhile, any impact on markets ahead of Australia’s upcoming federal election has so far been muted thanks to the volume of world events.
The on-again off-again US tariffs are causing more concern here for both policymakers and investors. Tariffs on our exports could mean higher prices and a drop in demand for our goods and services, leading to economic uncertainty.
In early February, the Australian share market took a dive immediately after President Trump’s announcement of tariffs on Mexico, Canada and China, wiping off around $50 billion from the ASX 200. They recovered slightly only to fall again later as the Reserve Bank cut interest rates. In the US, some tech companies delayed or cancelled their listing plans because of the volatility and uncertainty caused by the announcements.vii
Amid a turbulent start to 2025, most economists agree the markets are unlikely to hit last year’s 7.49 per cent achieved by the S&P ASX 200.
Reserve Bank of Australia governor Michele Bullock is similarly downbeat on the prospects for the year, saying uncertainty about the global outlook remains “significant”.viii
Please get in touch if you’re watching world events and wondering about the impact on your portfolio.
i Post-Brexit global equity loss of over $2 trillion worst ever -S&P
ii London Stock Exchange suffers biggest exodus since financial crisis
iii Policy Instability and the Risk-Return Trade-Off | St. Louis Fed
iv Why Financial Markets Are Sensitive to Political Uncertainty
v How Presidential Elections Affect the Stock Market | U.S. Bank
vi 2024 presidential election: U.S. equities surged, then retreated, after Trump’s victory
vii They’ve Been Waiting Years to Go Public. They’re Still Waiting. – The New York Times
viii Statement by the Reserve Bank Board: Monetary Policy Decision | Media Releases | RBA
Thanks to the decisive victory of US President-elect Donald Trump, we’re now set to hear a whole lot more of his favourite word.
It’s something of a love affair. On the campaign trail in October, he said:
To me, the most beautiful word in the dictionary is tariff.
Previously, he’s matched such rhetoric with real policies. When he was last in office, Trump imposed a range of tariffs.
Now set to return to the White House, he wants tariffs of 10-20% on all imports to the US, and tariffs of 60% or more on those from China.
Most of us understand tariffs are some kind of barrier to trade between countries. But how exactly do they work? Who pays them – and what effects can they have on an economy?
An import tariff – sometimes called an import duty – is simply a tax on a good or service that is imported into a country. It’s collected by the government of the country importing the product.
How exactly does that work in practice?
Imagine Australia decided to impose a 10% tariff on all imported washing machines from South Korea.
If an Australian consumer or a business wanted to import a $1,200 washing machine from South Korea, they would have to pay the Australian government $120 when it entered the country.
So, everything else being equal, the final price an Australian consumer would end up paying for this washing machine is $1,320.
If a local industry or another country without the tariff could produce a competing good at a similar price, it would have a cost advantage.
Because tariffs make imports more expensive, economists refer to them as a trade barrier. They aren’t the only kind.
One other common non-tariff trade barrier is an import quota – a limit on how much of a particular good can be imported into a country.
Governments can also create other non-tariff barriers to trade.
These include administrative or regulatory requirements, such as customs forms, labelling requirements or safety standards that differ across countries.
Tariffs can have two main effects.
First, they generate tax revenue for the government. This is a major reason why many countries have historically had tariff systems in place.
Borders and ports are natural places to record and regulate what flows into and out of a country. That makes them easy places to impose and enforce taxes.
Second, tariffs raise the cost of buying things produced in other countries. As such, they discourage this action and encourage alternatives, such as buying from domestic producers.
Protecting domestic workers and industries from foreign competition underlies the economic concept of “protectionism”.
The argument is that by making imports more expensive, tariffs will increase spending on domestically produced goods and services, leading to greater demand for domestic workers, and helping a country’s local industries grow.
Tariffs may increase the employment and wages of workers in import-competing industries. However, they can also impose costs, and create higher prices for consumers.
True, foreign producers trying to sell goods under a tariff may reduce their prices to remain competitive as exporters, but this only goes so far. At least some of the cost of any tariff imposed by a country will likely be passed on to consumers.
Simply switching to domestic manufacturers likely means paying more. After all, without tariffs, buyers were choosing foreign producers for a reason.
Because they make selling their products in the country less profitable, tariffs also cause some foreign producers to exit the market altogether, which reduces the variety of products available to consumers. Less foreign competition can also give domestic businesses the ability to charge even higher prices.
At an economy-wide level, trade barriers such as tariffs can reduce overall productivity.
That’s because they encourage industries to shift away from producing things for which a country has a comparative advantage into areas where it is relatively inefficient.
They can also artificially keep smaller, less productive producers afloat, while shrinking the size of larger, more productive producers.
Foreign countries may also respond to the tariffs by retaliating and imposing tariffs of their own.
We saw this under Trump’s previous administration, which increased tariffs on about US$350 billion worth of Chinese products between 2018 and 2019.
Several analyses have examined the effects and found it was not foreign producers but domestic consumers – and especially businesses relying on imported goods – that paid the full price of the tariffs.
In addition, the tariffs introduced in 2018 and 2019 failed to increase US employment in the sectors they targeted, while the retaliatory tariffs they attracted reduced employment, mainly in agriculture.
Tariffs can generate tax revenue and may increase employment and wages in some import-competing sectors. But they can also raise prices and may reduce employment and wages in exporting sectors.
Do the benefits outweigh the costs? Economists are nearly unanimous – and have been for centuries – that trade barriers have an overall negative effect on an economy.
But free trade does not benefit everyone, and tariffs are clearly enjoying a moment of political popularity. There are interesting times ahead.
Source: https://theconversation.com/what-are-tariffs-243356
About 36% of homeowners still have a mortgage when they retire, up from 23% a decade ago.
This increase in mortgage debt is due to soaring property prices, changes in retirement ages and easy access to drawdown equity loans (where you use your home as security to get a loan, which can be used to fund travel, medical costs and other expenses).
So, what are the options for homeowners who carry debt into retirement?
If you keep the family home in retirement, you get to own a property and can still receive the age pension.
For example: Jackie has a home worth A$2 million with a $200,000 mortgage. She also has $800,000 in superannuation. She is 67 but is not eligible for the age pension because her assessable assets – her super – is above the $695,500 cut off.
If Jackie takes $200,000 from her super and repays the outstanding mortgage debt, she will save on interest and principal repayments for the next ten years. She will also reduce her assessable assets by $200,000. This makes her eligible for a part pension.
So while Jackie has less super, she gets to receive a pension and gets all the subsidies associated with being a pensioner.
Downsizing can extinguish any remaining debt, and can free up money for holidays, restaurants and the good life in retirement. It also enables a move to a more age-friendly home or apartment.
And the government does provide a superannuation incentive via the downsizing contribution.
This allows homeowners over 55 who have lived in their home for more than ten years to make a one-off contribution of $300,000 (singles) and $600,000 (couples) to their super, using money from the sale of their home.
But when a person reaches pension age, currently 67, any money in super will be included in the government’s assessment of your financial assets and income. It could mean you don’t qualify for a pension or pensioner subsidies.
Of the approximately 2.6 million who receive a part or full the age pension, only 78,000 people have taken up this initiative. That begs the question if this option really does create a true financial downsizing incentive.
Think again of Jackie, the woman with the $2 million home and the $200,000 in mortgage debt. Say she decides to sell her home and move to a smaller house close to family and friends. This will incur about $40,000 in selling and marketing fees, and stamp duty of around $62,000 on her new $1.4 million apartment.
Downsizing leaves her with $1.1 million in financial assets (after transaction costs), which means that Jackie is not eligible for the pension.
While she’ll be able to fund a comfortable lifestyle, this decision to downsize may not be as attractive as keeping the house.
The decision to sell and move has cost her an extra $100,000 in transaction costs and her pension.
So, people need to think carefully about downsizing. It can allow people to move closer to children, grandchildren, and the services they need – but these must be balanced against the financial implications.
Paying market rent while on a fixed income can be very hard, so renting is a challenge for retirees.
According to the 2021 census, women aged 55-64 and those over 65 are among the fastest-growing groups experiencing homelessness.
The good news is many profit and not-for-profit retirement communities provide rental models and discounted entry contributions to residents with limited means (but there are often waiting lists).
Retirement village residents may also be eligible for rent assistance depending on their circumstances.
Rent assistance is an extra $5,751 per year in social security benefits and provides extra financial support to eligible age pension recipients.
Retirement communities provide vulnerable older Australians a unique opportunity to move into a community under a leasehold or licence agreement. More than 260,000 senior Australians live in about 2,500 retirement communities across the country.
While a retirement village may not be the first option for many retirees, they can provide affordable accommodation.
Navigating housing decisions as you approach retirement means balancing financial, emotional, and lifestyle considerations.
Homeowners retiring with a mortgage face a choice: keep their home or downsize to alleviate debt.
Keeping the home and accessing super to pay the outstanding debt improves cash flow and allows you to keep your biggest asset.
Downsizing helps eliminate debt and boosts the super balance, but comes with extra transaction costs (and you may end up with less pension, or none at all).
Seeking professional financial advice is crucial, so contact us today if you have any questions regarding downsizing or the Age Pension eligibilty.
Stay up to date with what’s happened in the Australian economy and markets over the past month.
The RBA dropped the cash rate to 4.10%, the first reduction since November 2020, however the RBA remains cautious regarding further cash rate cuts.
While tension continues between Russia-Ukraine and the Middle East, and a trade war looms due to Trump’s proposed tariffs, the global economic outlook remains unpredictable and markets are volatile.
Click the video below to view our update.
Please get in touch if you’d like assistance with your personal financial situation.
