Bond markets are full of surprises. Core government bonds have been one of the strongest performing asset classes in 2014, propelled in part by worrying signs of emerging market stress.

Emerging market (EM) debt has suffered relentlessly for nearly a year, scant reward for those emerging economies that spent most of the last decade bolstering their finances. Meanwhile, in the eurozone, Greece, Portugal, Spain, Italy and Ireland are among the world’s most indebted countries, and yet their bond markets have witnessed one of the most explosive rallies in history. Is this fair, and what explains this dichotomy?

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Retirement: one of the 5 most popular topics for discussion during the Financial Planning Week.

The questions financial planners are most asked, as well as the most debated topics from last year’s Financial Planning Week will form the basis of the key areas for discussion during this year’s Financial Planning Week.

Financial Planning Week, an initiative by the Financial Planning Association (FPA), will run nationally from 26^th August to 1^stSeptember. Mark Rantall, CEO of the Financial Planning Association (FPA), said that part of the aim was to build on the work the FPA community had done to transform financial planning into a trusted and respected profession.

“The FPA has always sought to promote the take-up of financial advice by helping Australians identify professional financial planners, and we hope that Financial Planning Week will encourage even more Australians to seek trusted financial advice.”

The FPA listened to questions asked by the public in last year’s Financial Planning Week and spoke with members about topics most popular with clients to list the top five topics which will form the basis of discussion and interaction during this year’s Financial Planning Week.

1.Retirement (Monday)

Making your money last, aged care, self-funding retirement, income streams and Centrelink entitlements.

2. Saving (Tuesday)

Children’s’ education, holidays, saving for a home, children’s’ weddings and other expected and unexpected events.

3. Super and Investments (Wednesday)

Accumulating and consolidating super, general wealth, shares and managed investments, different types of super funds, including SMSFs

4. Debt (Thursday)

Debt management, debt reduction, debt consolidation, cash flow management, loans, budgeting and deductible vs. non-deductible debt

5. Life Insurance (Friday)

Life insurance, income protection, disablement, trauma, how much you need, what type of cover, protecting your income, assets and family and considerations associated with family planning (e.g. education costs)

The FPA has chosen some of the most qualified financial planners in Australia to lead the discussion around each of these topics that the public is most interested in. Each Certified Financial Planner will blog and answer questions relating to their topic of expertise.

Mr Rantall outlined some of the activities on offer during Financial Planning Week.

“One of our most popular initiatives is the ‘Ask an Expert’ online forum,” he said. “It allows all Australians to pose financial questions, no matter how simple or complex, and have them answered by an expert financial adviser.”

“In addition to the online forum on the FPA’s website (www.fpa.com.au/askanexpert), questions can also be posed via Twitter. Questions should be sent to @AustraliaFPA using #AskanExpert,” he explained.

“There will many other materials including case studies available through our website. www.fpa.com.au and we would encourage everyone to have a look and engage with our financial advisers. And if you are looking to find a reputable adviser, the Find-A-Planner directory, will help you to find one in your area.”

Mr Rantall concluded by saying that he hoped all Australians would find something of assistance in the topics to be discussed during Financial Planning Week.

“We are covering a broad range of financial issues, so we would encourage everyone to engage via our website, blogs and to take advantage of the other information of offer. Trusted financial advice can help achieve better outcomes for all of us, so make sure you educate yourself and take advantage of Financial Planning Week,” concluded Rantall.

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FPA Planning week starts on August 26.

The Financial Planning Association (FPA) is set to hold the 13th annual Financial Planning Week from 26 August – 1 September.

This week-long consumer initiative is designed to encourage, educate and empower Australians to discover the positive difference that certified financial advice can make to their everyday lives.

Financial Planning Week provides all Australians with the opportunity to receive financial advice for free from Certified Financial Planners. Over the course of the week, some of Australia’s most qualified financial planners will volunteer their time to cover various topics, including:
1. Retirement
2. Saving
3. Super and Investment
4. Debt
5. Life Insurance

These financial planners will answer some Frequently Asked Questions and the public will also have the opportunity to participate in Financial Planning Week through a range of channels:

The ‘Ask an Expert’ online forum, where consumers can put their questions to Certified Financial Planners at: http://askanexpert.fpadifference.com.au/

The FPA consumer website will be loaded with useful insights and jargon-free information as well as real life case studies to help bring the benefits of quality financial advice to life: www.fpadifference.com.au

The FPA Twitter handle (@AustraliaFPA) will answer Tweets and post links to a range of financial content at:  http://twitter.com/australiafpa

What: Financial Planning Week 2013
Who: The Financial Planning Association of Australia community
When: 26 August – 1 September
Why: Trusted and professional financial advice improves the lives and financial futures of all Australians

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What do the figures show?

• Private sector credit (lending) rose by 0.2 per cent in March after a 0.2 per cent rise in February. Annual credit growth fell from 3.4 per cent to 3.2 per cent – the slowest pace in 19 months.
• Housing credit grew by 0.4 per cent in March after rising 0.4 per cent in February. Housing credit is up 4.4 per cent on a year ago – equalling the weakest annual growth in records going back to 1976.
• Owner occupier housing credit rose by 0.4 per cent in March to stand 3.9 per cent higher than a year ago. And investor housing credit lifted 0.4 per cent in March to be up 5.4 per cent over the year.
• Personal credit rose by 0.1 per cent in March after rising by 0.1 per cent in February. Personal credit was down 0.1 per cent over the year, and has been falling in annual terms for 20 months.
• Business credit was flat in March after falling by 0.2 per cent in February. Business credit is 1.6 per cent higher than a year ago, after being up 2.3 per cent in the year to February.
• Monetary aggregates, M3 and broad money, are growing at the slowest pace in 30 months.

What is the importance of the economic data?

• Private sector credit figures are released by the Reserve Bank on the last working day of the month. Credit is separated into three categories – housing, other personal and business. Private sector credit is effectively the amount of loans outstanding in the economy. If growth in lending is strong then it suggests that credit from financial institutions is freely available, underlying demand for assets such as cars and houses is firm and that the price of credit (interest rates) is attractive.

What does it all mean?

• No change – Aussie consumers and businesses are still winding back debt levels. Still, it’s important to remember that credit is a lagging indicator – it reflects earlier decisions to increase borrowings and reduce outstanding debt. There are early indications in other statistics that people are starting to borrow again. But the pace of debt creation is not strong enough to offset debt repayment and refinancing activity.
• Weak growth in outstanding debt together with low inflation means that the Reserve Bank can cut rates further if it believes it will be beneficial. But with less indebtedness and fewer people wanting to borrow, a rate cut could prove more negative – reducing the income of savers. It is a difficult environment for lenders.

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The key points are as follows:

• Australia has a low level of total debt compared to other major countries. But while public and corporate debt is low, one area of greater vulnerability is household debt.
• A chronic current account deficit in Australia and relatively high net international liabilities also means a degree of vulnerability to foreign investor sentiment – although this has been the case for decades.
• While Australia is not without debt risk, it is relatively low in part due to the flexibility the RBA has to cut interest rates further, the buffer the $A provides during extreme shocks, pent up demand in the non-mining parts of the economy and the low likelihood of a hard landing in China.

 To read this edition of Oliver’s Insights, click here.

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• Australia’s trade surplus widened by $716 million to $2,333 million in May – a seven month high. Exports rose 3.2 per cent with imports up 0.4 per cent.
• The trade surplus with broader China (China and Hong Kong) has risen from $10.3 billion to $25 billion in the space of a year. The increased surplus is the equivalent of $650 for every man, woman and child in Australia.
• The Performance of Services index fell by 1.4 points to 48.5 in June. The sector has been contracting for 12 out of the last 14 months. Sales expanded at a slower pace while new orders recorded a modest improvement. Both input and selling prices fell in the month.

What does it all mean?

• The economy may be going through a soft patch but the dollars keep rolling in. The impact of the natural disasters on the trade balance is all but finished and Australia is again paying its way in the world. Australia has now notched up a total trade surplus in excess of $26 billion over the past 14 months. Despite the boost to Australian coffers the impact has yet to have a resounding effect on the economy. The weakness in business and consumer spending suggests the additional income is being saved rather than spent.
• However, as the Reserve Bank has highlighted, increased savings will eventually mean a pickup in spending down the track. It is the multiplier effect that essentially the Reserve Bank is banking on to spur domestic growth over the coming year. At present the additional income is not being spent, but as the recovery gains traction it is likely that Australian businesses and consumers will follow through on spending and investment plans.
• Higher commodity prices and increased demand for coal and iron ore has helped insulate the Australian economy in the near term and will be the catalyst for the robust 4½ per cent growth that the Reserve Bank is anticipating over the current financial year.
• Interestingly Australia is now as reliant on China as it was on Japan in the late 1980s. The trade surplus with broader China (China and Hong Kong) has risen from $10.3 billion to $25 billion in a space of a year- and it is still rising. The increase in the surplus is the equivalent of $650 for every man, woman and child in Australia. If the money was handed out to households chances are that it would be spent, but at present the dollars are heading back to mining companies and being paid out in wages, bonuses, tax, and dividends. For most Australians the effect will be felt in superannuation returns over the years to come.
• Australia is now as reliant on China as it was on Japan in the late 1980s. And it is still early days. While we will ride China’s successes in coming years we are also vulnerable to its stumbles.
• The data last Friday highlighted a surprising improvement in the manufacturing sector (from a level of substantial weakness) however there is no such turnaround taking place in the service sector. The services sector has contracted for 10 months out of the past year and there is no real catalyst to suggest a turnaround.
• There are a couple of factors driving the weakness in the services sector including higher interest rates, a stronger currency and the conservative buying behaviour of consumers and businesses.
• Businesses are under substantial pressure at present with costs edging higher and consumers driving hard bargains. Business margins are constrained, thus depressing profitability. On an encouraging note the forward looking index of new orders recorded is back in expansionary mode and holding at 8-month highs. However it is still early days and a period of interest rate stability would clearly help the situation. If the Reserve Bank stayed on the interest rate sidelines over the next couple of months, activity levels should improve.

What do the figures show?

• Australia’s trade surplus widened by $716 million to $2,333 million in May.
• Exports of goods and services rose by 3.2 per cent while imports of goods and services rose by 0.4 per cent. Exports are up 5.7 per cent on a year ago while imports are up 8.1 per cent.
• Rural exports rose by 6.4 per cent in May while non-rural exports rose by 0.6 per cent.
• Within imports, consumer imports rose by 4.0 per cent in May. Capital goods imports fell by 7.7 per cent while intermediate goods imports rose by 1.8 per cent.
• Consumer goods imports are down 5.1 per cent on a year ago but capital goods are down 3.6 per cent and intermediate goods are up by 18.6 per cent.
• The trade surplus with broader China (China and Hong Kong) has risen from $10.3 billion to $25 billion in the space of a year – a lift in the surplus that is the equivalent of $650 for every man women and child in Australia.

Performance of Services

• The Performance of Services index fell by 1.4 points in June to 48.5. The sector has been contracting for 12 out of the last 14 months. The key 50.0 level separates expansion from contraction.
• Four of the nine sub sectors expanded in the month – unchanged from the previous month. Sales expanded at a slower pace while new orders recorded a modest improvement. Both input and selling prices fell in the month.

What is the importance of the economic data?

• The monthly International Trade in Goods and Services release from the Bureau of Statistics provides estimates on exports and imports of physical goods (such as coal, beef and computers) and services (such as travel receipts). The balance of goods and services (BOGS) is a narrower description of Australia’s external position than the current account estimates. The import data is a useful gauge of consumer and business spending while exports reflect global demand as well as domestic influences such as drought.
• The Performance of Services index is released by Australian Industry Group and the Commonwealth Bank each month. The PSI is designed to provide a guide to conditions in retail, financial and other service sectors.

What are the implications for interest rates and investors?

• Not surprisingly the strength of the Australian dollar continues to have a detrimental impact on the services sector. Australia’s notched up a record $973 million services deficit in May. It was the 16^th consecutive services deficit and clearly highlights why the services sector has been contracting in recent times.

• No doubt the strength of the currency is making Australia a less attractive destination for overseas tourists and potential international students. Interestingly when the Aussie fell below US70c in 2009 the services sector notched up a series of surpluses.

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• In a speech by RBA Assistant Governor
  (Economic) Philip Lowe entitled “Inflation: The Recent Past and the Future”
  , Mr Lowe has reiterated that the RBA believes underlying inflation will lift only slowly, and over a matter of years rather than months.
• Philip Lowe didn’t flag any near-term implications for rates, noting: “While conditions are very strong in parts of the economy, other parts are finding things very difficult.”
• Clearly the RBA remains in ‘wait and see’ mode.

What did the speech cover and what does it all mean?

• The speech by the Reserve Bank Assistant Governor was entitled “Inflation: The Recent Past and the Future”and indeed that’s what it covered: “First, I will talk in some detail about the distinct cycle in underlying inflation that we have seen in Australia over the past six years or so. After that, I will discuss the lessons that we might take from this cycle, as well as the broader lessons we have learnt from the past two decades of inflation targeting in Australia.”
• At the outset, Philip Lowe confirmed that underlying inflation was expected to lift very gradually: “As the RBAdiscussed in the latest Statement on Monetary Policy, this decline in underlying inflation looks to have now run its course and a gradual rise is expected over the next couple of years.”
• This statement is important as a number of analysts had previously interpreted RBA commentary as suggesting a relatively quick upturn in inflation, suggesting that a rate hike was imminent. But Lowe suggests a much more gradual increase for underlying inflation, currently in the lower end of the 2-3 per cent target band.
• Philip Lowe also discussed the models developed by the RBA to track inflation and their track records. He noted that the “amplitude and timing” of the inflation cycle since 2005 surprised the RBA: “The general picture that one gets from this analysis is that underlying inflation in Australia was slower to pick up than suggested by the historical relationships, but when it did eventually pick up, it did so more quickly, and by a larger amount, than suggested by these relationships.”
• The RBA has assessed the experience over that period in an attempt to be better understand the weaknesses in the models and to improve future forecasts. He focussed on unit labour costs, housing costs and international factors.
• While there is a long-run relationship between unit labour costs (basically wages adjusted for productivity) and inflation, the short-term relationship “is not nearly as tight.” In other words, unit labour costs aren’t very useful in short-term forecasting models of inflation.
• Mr Lowe believes that factors other than wages are more useful in describing inflation since 2005 – such as housing cost inflation.
• Philip Lowe indicated that changes in home prices, rents and utilities “do help explain the particular dynamics of inflation over the recent cycle.”
• In this context, it’s worth noting that home prices are now falling while utility prices have been rising, making it difficult to be precise about the influence on housing costs on future inflation outcomes.
• In terms of international factors, Philip Lowe highlights the similarity of movements in headline inflation rates across the globe. Lowe also examined the influence of the exchange rate. But overall he didn’t find that international factors were overly helpful in explaining the inflation cycle since 2005: “Overall though, these swings in the exchange rate have played only a relatively minor role in explaining the recent cycle in underlying inflation which has been primarily driven by domestic factors.”
  

Implications

• Philip Lowe concludes that capacity utilisation is the best explanation for the inflation experience since 2005: “So to summarise, an important lesson from this recent experience is that inflation responds to the changing pressures on capacity in the economy. When demand is high relative to the economy’s capacity to produce goods and services, the cost of labour and raw materials tend to rise and firms’ mark-ups tend to increase. Conversely,when demand is low relative to the economy’s capacity to produce goods and services, these pressures ease and inflation tends to fall.”

So where does all this leave monetary policy?

• The Reserve Bank Assistant Governor is far from clear. There is a boom in mining, but other sectors are finding things very difficult. Low also notes that only a very small proportion of items in the CPI are currently rising more than average. The RBA believes its best contribution is to keep rates low, but there is no short term guidance. The RBA is clearly in wait and see mode.
• “Looking ahead, as the Bank has discussed recently, the current environment is a particularly challenging one. In the central scenario, we are looking at a significant boom in investment in the resources sector at a time when the overall economy has relatively little spare capacity. While conditions are very strong in parts of the economy, other parts are finding things very difficult because of either the high exchange rate or the ongoing restraint in household spending and borrowing. And to add to the complications, global commodity prices are undergoing a structural shift as hundreds of millions of people in Asia enter the global economy.
• It is not easy to navigate our way through this difficult environment. The new realities of the global economy have improved Australia’s medium-term prospects. At the same time though, they are causing considerable structural change in the economy which is leading to difficulties in a number of areas. As Australia takes advantage of its new opportunities and manages the process of structural change the task for the RBA is to keep inflation low and stable.”

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• Lending slides again. Total lending finance fell for the third time in four months, dropping by 3.8 per cent in April to near 5-year lows. Lending is down 3.4 per cent over the year. In trend terms lending is at 8-month lows.
• The average credit card balance barely budged in April, up just $4.50 to $3,325.70. The average balance is up just 2.9 per cent on a year ago – below the rate of inflation.
• Consumers prefer to use their own money to purchase goods. Purchases made on debit cards were up by 22.2 per cent on a year ago, while purchases made on credit cards rose by just 4.6 per cent.

What does it all mean?

• The “new conservatism” appears here to stay. Not only did new lending slide again in the latest month to be back near 5-year lows but the average balance outstanding on credit cards is continuing to fall in real terms. While consumers and businesses haven’t declared debt to be “bad”, they are distinctly wary about taking on loans or credit obligations.
• The “new conservatism” is no better illustrated than in the way that consumers prefer to pay for their goods.Purchases made on debit cards are growing at four times the pace as spending made with credit cards.
• Australia’s economic momentum will continue to be restrained by the negligible pace of lending and credit use. In part the reluctance to take on debt gets down to a lack of confidence and in part it reflects concern about the cost of debt. At face value, the cash rate doesn’t seem super-high but it is certainly biting.
• You only have to lift interest rates if you need to slow the pace of the economy or check inflationary pressures. It is clear from recent data that the economy is sluggish and inflation is well contained, ensuring the Reserve Bank stays on the sidelines for the time being.

What do the figures show?

Lending Finance:

• Total new lending commitments (housing, personal, commercial and lease finance) fell by 3.8 per cent in April – the third fall in four months. Lending had lifted 6.8 per cent in March after dropping by 5.8 per cent in February. Lending totalled $50.7 billion in April, down 3.4 per cent over the year.
• All housing finance (owner occupier & commercial) rose by 6.0 per cent in April – the first rise in four months –after easing by 1.2 per cent in February.
• Commercial finance fell for the third time in four months, sliding by 8.8 per cent in April. Within commercial commitments, fixed lending fell by 11.8 per cent while revolving credit fell by 1.8 per cent. Commercial loans are down 5.3 per cent on a year ago.
• Personal finance rose by 0.4 per cent in April, the second gain in five months, after a modest 0.6 per cent increase in March. Fixed lending commitments rose 3.3 per cent, while revolving credit commitments fell 2.8 percent. Personal loans are down 9.2 per cent on a year ago.
• Lease finance rose by 2.3 per cent in April after rising by 11.2 per cent in March and falling by 11.6 per cent in February. Lease loans are up 21.2 per cent over the year.

Credit & debit card activity:

• Figures released from the Reserve Bank show that the average credit card balance rose by just $4.50 to $3,325.70 in April. The average credit card balance is up 2.9 per cent on a year earlier. The number of credit card accounts rose by just 1.9 per cent over the year to April – the slowest pace in 13 months.
• Of credit cards attracting interest charges, the average outstanding balance fell by $1.20 to $2,450.20. The average balance accruing interest is up 3.4 per cent on a year ago.
• The number of credit card cash advances fell by 8.6 per cent in April, the fourth decline in five months. Credit card advances are now down 6.1 per cent on a year ago and have largely been falling in annual terms for fouryears.
• The number of purchases made on credit cards in April was up by 4.6 per cent on a year ago. In contrast total debit card transactions were up by 22.2 per cent on a year ago – just short of the fastest growth on record. EFTPOS only transactions were up a record 25.4 per cent on a year ago.

What is the importance of the economic data?

• Lending Finance is released monthly by the Bureau of Statistics and contains figures on new housing, personal,commercial and lease finance commitments. The importance of the data lies in what it reveals about the appropriateness of interest rate settings, confidence and spending levels in the economy.
• The Reserve Bank releases data on credit and debit card transactions each month. The credit card figures are useful in highlighting consumer borrowing and spending trends.

What are the implications for interest rates and investors?

• Banks will have to work increasing hard to get consumers and businesses to take on new debt obligations. The tough business conditions will restrain margins and profitability.
• The lending and credit card data readings are the latest in a long line of indicators pointing to no change in interest rate settings for the time being. Next test is a speech by the Reserve Bank Governor tomorrow.

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Our asset allocation is overweight equities and fixed income; underweight property and cash.

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This communication is directed only at investment professionals, and should not be distributed to, or relied upon by private investors. This document is not intended for retail distribution. AEGON Asset Management UK plc is authorised and regulated by the Financial Services Authority. The information in this report is based on our understanding of the current and historical positions of the markets. The views expressed should not be interpreted as recommendations or advice. Past performance is not a guide to future performance. The value of investments may fall as well as rise and is not guaranteed.

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Click to open the White Paper on Domestic Covered Bonds

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