I was concerned that I would not have anything more to worry about other than focus on my clients, helping them to navigate the post-GFC economy, convince them that the government really doesn’t see them as bourgeoisie simply because they save for the future, and protect them from unforeseen risks through insurance.

Ah, that last part, mundane risk insurance.  For well over 120 years, Australians have relied on financial planners and before that good old fashioned insurance salesman, to be the party-poopers that reminded them that, no, they won’t live for ever and even if they do, they might just get sick along the way.  You, dear reader, may not appreciate that these types of events can have a deleterious effect on one’s prosperity planning.

Despite this obvious risk and the fact that, generally, people do care about providing for their family if the unforeseen should happen, most people don’t have enough of the stuff. I’m told in the olden days, General Stores would have shelves full of insurance policies available for purchase.  They were priced at cost, plus a simple retail mark-up for the shop owner.

Sadly, most remained unsold.  Only a few customers that had just been to their doctor and received an unfortunate diagnosis were buying – everyone else was happy to wait and delude themselves that it would happen to somebody else or they’d get to it another day.

Now, this wasn’t a good outcome, especially for those insurance companies that wanted to profit from making the insurance.  Their only customers were ones that they didn’t want to insure in the first place.

But why wouldn’t people want buy the insurance? Well mainly because it wasn’t fun.  First up, you had to dwell on the nasty things that could happen, as well as contemplate your own demise.  But even after that, you had to fill in lots of forms, and ‘fess up to all the horrible diseases and ailments you had already suffered.  As if that weren’t enough, you then get to have a stranger show up with some needles to take blood, or perhaps strap machinery to your person and run on a treadmill while a physician does his best to provoke a heart attack.

Finally, after these indignities, you get a call from the underwriter (aka a faceless stranger) to advise you that those anal fissures actually could result in colon cancer so your premium will be 25% more than you thought and didn’t your doctor tell you about these?

So, perhaps it is unsurprising that the insurance companies realised that there needed to be an incentive involved, so they built in a commission system as a way of remunerating their agents.  In fact, they’ve even increased it over the years – upfront commissions have more than doubled since this author was first involved in the 1980s.

This commission system turned out to be the worst way to structure risk insurance distribution that was ever invented, apart from all the other ways (with apologies to Churchill).  Customers loved it, because if they changed their mind or got loaded or rejected, it didn’t cost them a cent if they didn’t go ahead.  Insurance companies loved it, because it gave them an incentivised distribution channel and allowed them to arbitrage accounting standards and tax law to increase profits.  And planners loved it, because if they worked hard they could earn a good living.

Commission is an appropriate remuneration method, beyond the obvious reasons of the marketplace.  It’s a reason that most of the schmexperts seem to forget.

It’s what I call ‘completion riskc – an economic risk which all parties expect is borne by the adviser.  And, until consumer behaviour changes, it’s why upfront commissions are entirely appropriate for discretionary risk insurance purchases.

You see, unlike investments, there is an independent third party to every insurance contract who decides whether it completes or not.  No matter how much the customer and the adviser want the cover to proceed, unless the underwriter agrees as well, it will not.  Hence, this means a certain proportion of proposals are not completed.

Who pays the adviser for their professional advice when this happens?  Answer: nobody.

Alternative answer (with extra points for thinking it through): all the other people who have insurance, indirectly through cross-subsidisation.

Now, more schmexperts have decided that, despite the unpleasant process of gaining insurance, despite the completion risk being borne, despite every other damn else thing  we have to do, there is a problem.  Financial planners are churning customers insurance just to keep getting upfront commissions for the sake of getting upfront commissions.

This is a serious problem that threatens the viability of our largest insurers.  They’ve swung their massive international resources behind getting this hitherto unknown issue onto the national agenda.  It’s so serious that they are relying totally on anecdotal evidence to make their case.

Apparently, there are some advisers out there that have a bunch of customers that don’t mind undergoing invasive medical investigations every couple of years just to help said adviser make some more commish. These nefarious planners threaten to bring the entire insurance industry to its knees by refusing to leave their customers with uncompetitive insurance rates.

I have to admit, I don’t know any of these personally.  I think I met one of these guys once, Fred someone-or-other but that was in the mid ‘90s at a conference and I don’t think he stayed past FSRA reform but then again I could be wrong. But I am assured that they are out there.

I have an alternative solution.  Let the insurance companies reduce premiums by the exact amount of the upfront commission they pay to advisers at the moment.  Let the clients pay a fee for my expertise in obtaining the cover, regardless of whether they are able to get any insurance or not.

If everyone did this, would our society be better served? Answer: No

Alternative answer (yes more extra points): No, because the marketplace is not ready for that concept yet.  Yes, it’s a beautiful Field of Dreams, but build that sucker and no-one will come, at least for the next ten years or so.

To read the first article in this series, ‘Experts schmexperts’ click here.

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• The Euro-zone debt crisis is a long way from over, and it will be a long hard slog for Greece, Portugal, Ireland, Spain and Italy but I suspect that we may have passed the worst of the financial panic associated with it. With the exception of Greece, which may yet leave one day, ultimately I see the Euro-zone hanging together and becoming stronger, not weaker.
• With economic rationalist reforms being imposed across Europe, depressed European shares & assets are likely to be great value on a ten year horizon.
• Meanwhile, HSBC’s China manufacturing PMI was little changed in September coming in at 47.8, versus 47.6 in August. The good news is that it hasn’t become any worse, but the bad news is that it is yet to improve suggesting that Chinese economic growth and industrial production remain relatively soft. More aggressive policy stimulus is still called for, but it may have to wait till after the leadership transition is resolved.

To read the full report, click here.

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Where a company is domiciled is no longer such a focus for global equity managers.

Bronwen Moncrieff, Senior Investment Analyst at Zenith said “Barriers that may once have existed and encouraged the separation between developed and emerging countries are decreasing. The development of technology such as the internet, near instant access to global events and ease of travel are just a few factors that have played an important part in making the world become a smaller place. As a result, many developed market domiciled company’s now generate an increasing level of revenue from emerging market consumers, and many emerging market domiciled companies are increasing their level of exports to developed market countries.”

“The flow through impact of this change is influencing the portfolio construction approach for many managers. Where a company is domiciled is becoming less and less relevant. Research is focusing on where a company’s source of revenues or target market demand is coming from – not where a company is domiciled or listed.”

“At a fund or product level, this is influencing factors such as the choice of benchmark, and the % of a fund that can be invested in emerging markets. For the benchmark, there has been a gradual move away from the MSCI World Index to the MSCI All Country World Index, which broadens a fund’s potential investable universe by virtue of the inclusion of emerging markets. The other change has been a gradual increase in the degree a fund can be invested in emerging market domiciled companies. Funds that may have once had a restriction on holding emerging market domiciled stocks may now be allowed to hold a portion of the portfolio in emerging markets, or funds with an existing emerging market allocation limit have been increasing that limit.”

“There may come a time when you don’t need to have separate global and emerging market funds – one fund might be able to provide you with exposure to both, in fact many funds now do just that.” Moncrieff said.

Performance over the last 12 months has clearly been very difficult. The MSCI World ex Australia ($A) index generated a very modest positive return of 2.3% for the 12 months ending 31 July 2012. The majority of regions have experienced declines.

The financials sector continued to post negative returns and the energy and materials sectors have suffered with the decline in resource demand and commodity prices. On the positive side, sectors such as consumer staples, consumer discretionary, healthcare and technology have all fared well.

Certain investment styles (core, value, growth for example) are suited to different market environments, and it is fair to say the market environment has generally been tough for all managers. However, for this review, it was the value managers that generally outperformed their core and growth style counterparts over the short, medium and long-term (5 years).

Zenith’s International Shares Sector Review represents the largest sector review undertaken by Zenith. Of the 59 global, regional and specialist funds that undertook the full due diligence process, 17 funds achieved Zenith’s top rating.

Zenith’s Highly Recommended Funds
* Aberdeen Asian Opportunities Fund
* Aberdeen Emerging Opportunities Fund
* Arrowstreet Global Equity Fund
* Arrowstreet Global Equity Fund (Hedged)
* Goldman Sachs International Wholesale Fund
* IFP Global Franchise Fund
* IFP Global Franchise Fund (Hedged)
* Magellan Global Fund
* MFS Concentrated Global Equity Trust
* MFS Fully Hedged Global Equity Trust
* MFS Global Equity Trust
* Platinum Unhedged Fund
* Walter Scott Global Equity Fund
* Walter Scott Global Equity Fund (Hedged)
* Zurich Investments Global Thematic Share Fund
* Zurich Investments Hedged Global Thematic Share Fund
* Zurich Investments Unhdg Global Thematic Share Fund

The following new funds were added to the Recommended List following the completion of due diligence for this sector.

Fund Name/New Rating
* Altrinsic Global Equity Fund/Recommended
* Aubrey Global Conviction Fund/Recommended
* Fidelity China Fund/Recommended
* Franklin Global Growth Fund/Recommended
* Martin Currie Emerging Markets Fund/Recommended
* MFS Concentrated Global Equity Trust/Highly Recommended
* MFS Fully Hedged Global Equity Trust/Highly Recommended
* Schroders Global Quality Fund/ Recommended

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“Each year our ability to match data gets better, making it more likely people will be identified if they leave anything out or incorrectly report items on their tax return,” said Tax Commissioner Michael D’Ascenzo.

“We have received more than 600 million transactions from organisations this tax time to check against tax returns.

“This information comes from a range of businesses and agencies, including employers, financial institutions, share registries, and government agencies like Centrelink, who are required to report data to the ATO regularly.”

The ATO cross-checks this information after taxpayers have lodged their tax returns to help stop fraudulent claims and detect any income that has not been included.

“Last year, we wrote to 540,000 taxpayers about discrepancies in the information they reported on their tax returns. This led to 90 per cent of these returns being amended and we raised $915 million in revenue as a result,” said Mr D’Ascenzo.

If you think you have made an error or left something out, you can complete a voluntary disclosure statement that will allow you to request an amendment of your tax return.

“We are very reasonable with people who have made an honest mistake – we appreciate that can happen to anyone,” Mr D’Ascenzo said.

“However, people who deliberately attempt to defraud the tax system can face heavy fines and risk having a criminal conviction recorded.”

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Founded in 2009, Swita Investment Management is a boutique investment manager that seeks to capture macro themes and gives investors exposure to international markets when they see value. 

CIO Andrew Switajewski said Swita was making strong traction in the market and the appointment would further enable the growth strategy of the Group. 

“In three years we have successfully established a business and raised assets from a number of investors. Our Fund is rated and is available on several platforms as well as being on a number of Dealer APL’s.” 

“I am delighted to announce Richard’s appointment to our business. His impressive depth of experience in both institutional and retail markets will position us for future growth and expansion.” 

Mr Borysiewicz was previously CEO of Credit Agricole Asset Management in Australia (renamed Amundi Asset Management in 2010). Before joining Credit Agricole in January 2007, he held a number of senior roles in the investment management industry including Sales and Marketing Director at Skandia, Executive Vice President at Principal GlobalInvestors/BT and Head of Institutional and Retail at Rothschild.

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Highlights

• 165 hedge and boutique investment management firms control $208.4 billion, equivalent to 17% of the $1.19 trillion managed by all investment managers in Australia.
• The directory identifies 102 independently-owned boutiques (predominantly long-only, benchmark-unaware strategies) with $165.6 billion in assets under management (AUM), and 63 hedge fund firms with $42.8 billion in AUM.
• The industry eclipses Hong Kong’s $37 billion in hedge fund & long-only absolute return assets, and Singapore’s $20 billion sector.
• More than $60 billion (roughly 30% of sector AUM) is deployed by Australian managers into global markets such as global and Asian equities, global fixed income and global macro.
• NSW based managers have combined AUM of $142.2 billion, while Victoria and Queensland based managers have $38 billion and $24.2 billion respectively.  South Australian and West Australian managers have $3.5 billion and $0.4 billion respectively.

The report’s author and publisher, David Chin, Managing Director of Basis Point Consulting, commented, ‘The Australian hedge and boutique universe is much larger than expected and reflects the diverse investor support for the sector.’

‘Investors in hedge funds are evenly split between four categories: direct high-net-worth investors/principals own funds; offshore investors, Australian institutional investors; and Australian wholesale (dealer groups/planners) investors.  For boutiques, Australian institutions and wholesale investors account for 61% and 29% of assets respectively, reflecting the focus by many boutiques on Australian investment markets.’

Now that the size of the sector has been comprehensively reviewed for the first time, David Chin said, ‘Global investors will be more willing to send due-diligence teams to Australia.  Previously, major European and US investors would visit Asia but did not take the additional trip to Australia in the erroneous belief that the local sector was too small.’

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The scandal emerged in August when the New York State Department of Financial Services accused the “rogue” Standard Chartered of “scheming” for years to skirt US laws when processing US$250 billion worth of transactions on behalf of Iranian clients.

The accusations are the latest in a spate of banking scandals that could undermine London’s role as a global financial hub. Threats to such a critical asset as “the City” serve as a metaphor for the larger troubles the shrinking UK economy confronts in a post-financial-crisis world.

The importance of this for global investors is that the UK comprised about 8% of the MSCI All Country World Index at the end of last month, compared with 14% for the rest of Europe. To put the UK’s challenges into perspective, though, the country is not headed for an IMF bailout as happened in 1976. Record low bond yields show the country is viewed as a haven from the euro crisis. Many of its best companies are world leaders that will prosper, even if hobbled by their homeland’s slow descent.

The banking scandals rank among the UK’s top challenges because they threaten a sector that is the UK’s biggest source of foreign exchange and pays 12% of the country’s tax. Other financial scandals involve proof that the UK’s biggest banks (with foreign help) have rigged widely used benchmarks for years, that UK banks launder money for terrorists and drug lords and that they rip off local customers by mis-selling insurance and improperly selling interest-rate swaps. On top of that, just about every rogue trading arm that torpedoed its parent in recent years was based in London. The list includes the JPMorgan Chase unit that blew US$7 billion, the feral trader who cost UBS US$2 billion and the quant buffs at AIG, Lehman Brothers and Bear Stearns who fatally dabbled in derivatives.

Rogue banks
The rates-fixing scandal broke in June when regulators fined Barclays 290 million pounds (A$440 billion) for fiddling from 2005 to 2009 with the London and Euribor interbank offered rates, the benchmarks for about US$10 trillion in loans and about US$350 trillion in derivatives. The Royal Bank of Scotland and Lloyds Banking face similar accusations that their traders lied on daily surveys about borrowing costs over certain time frames and in different currencies. The Bank of England is tainted because it ignored warnings about the rigging.

Even more explosive, a US Senate investigation in July found that HSBC exposed the US to “a wide array of money laundering, drug trafficking and terrorist-financing risks” by failing to check about US$15 billion (A$14.5 billion) sourced from Mexico, Russia and other money-laundering blackspots from 2006 to 2009. In August, came the accusations that Standard Chartered left the US “vulnerable to terrorists, weapons dealers, drug kingpins and corrupt regimes”. The Royal Bank of Scotland is being investigated for infringing sanctions against Iran.

British banks have a record of violating US laws. In 2010, Barclays paid US$298 to settle claims it dealt with banks from countries under US sanctions such as Cuba, Iran and Libya. A year earlier, Lloyds paid US$350 million to settle claims over dealing with Iranian banks.

These scandals show that the gentle regulation that UK authorities pursued to promote London as a global financial centre has backfired. The government was forced to nationalise or prop up four of the UK’s nine largest banks during the financial chaos triggered by the recklessness it allowed. The wrongdoing threatens London’s role as the world’s forex hub, a global lending headquarters and a derivatives hot spot.

UK politicians are under pressure to toughen regulations on banks, which already confront sluggish earnings, spiralling bad loans and higher funding costs. Stricter rules may spook some of the 250 foreign banks based in London for they will make the City a costlier and more frustrating base. The scandals make it harder for London to ward off European Commission attempts to regulate hedge funds, most of which are based in London, or to block the European parliament’s attempts to cap bonuses to 100% of salary – a ceiling sure to frighten bankers away.

Establishment woes
A second challenge for the UK is that the banking industry is only the latest pillar of national life to be humiliated for corruption and greed. The media and police are mired in the phone-hacking and bribery linked to newspapers from Rupert Murdoch’s News. Politicians are still damaged by allegations in 2009 they had rorted their expenses for years.

More than 340 of the 646 members of the House of Commons were quizzed on irregularities that year and at least four lawmakers were convicted (two going to jail) for fraud. Companies are slammed for their excessive executive salaries and corruption – GlaxoSmithKline, for example, was fined US$3 billion for mis-marketing anti-depressants to children. The Church of England is fractured. It appears that only the public service, the judiciary and the royal family, apart from Prince Harry after his nude frolics in Las Vegas, have escaped disgrace.

The repercussions of the collapse of public faith in institutions are likely to be large over time. Social divisions may widen and anti-establishment parties are likely to impress voters while mainstream parties may pander more to populism, all to the cost of economic efficiency at the very least.

Then there is the threat posed to the UK by the eurozone debt crisis. Well might euro-sceptics in Britain gloat that they warned a monetary system without political union was doomed (even if much of the UK opposition to joining the euro reflected an island mentality). But it’s hard to see how the UK can gain from this crisis, even with its own currency and central bank.

There are only two final outcomes for the eurozone debt crisis; the end of the euro or the fiscal and political integration that saves the currency. A collapse of the eurozone would send countries that take nearly 50% of the UK’s exports into turmoil. While consumer and business confidence would be smashed everywhere and financial systems may freeze, the battering would be bigger the closer a country is to the explosion as commercial and business ties are stronger and confidence linkages greater.

Longer term, though, perhaps a bigger danger to the UK is if the eurozone survives and thrives – and don’t underestimate the will of Continental Europe to preserve the integration that has kept Europe at peace since 1945. London’s attempts to safeguard the UK’s interests threaten grand solutions for the eurozone and are costing the UK political goodwill. Eurozone members feel they are being held to ransom when the UK jangles its veto over fiscal and political steps to unification in exchange for exemptions for the UK on related or unrelated matters.

The 17 members of the eurozone, for example, were upset in December when London tried (but failed) to block an EU-wide fiscal compact unless financial regulations were eased for the City. London is fighting to keep the continent-wide bank supervision powers that EU leaders (including Prime Minister David Cameron) approved in June restricted to the eurozone rather than the 27-member EU.

A more-unified eurozone will most likely work to isolate the UK politically and economically. Any referendum that results in the UK leaving the EU to perhaps become, like Iceland, Liechtenstein and Norway, part of the European Economic Area instead will only fan anti-British feelings in the eurozone.
 
Toxic economics
Another peril to the UK is a self-inflicted punch to its economy, which struggles anyway against perennial government and current-account deficits. For ideological reasons rather than in response to any emergency, Cameron is pursuing austerity policies that in fiscal 2011 and fiscal 2012 are removing government spending worth about 4.75% of GDP – and he expects austerity to last until fiscal 2020. After only one fiscal year, the result is a textbook case of how austerity policies during a downturn make everything worse, even the budget deficit (at 8% of GDP in the UK) and government debt levels (80% of GDP) that such policies seek to correct.

The country is suffering its second recession since the financial crisis started and the jobless rate is above 8%. Output has shrunk 0.9% since the third quarter of 2010 just after Cameron came to power in May that year. GDP is 4.5% below its 2008 peak, meaning the country is on course for a longer depression than it suffered during the 1930s.

The country’s triple-A rating from Moody’s, which placed the UK on negative outlook in February, looks vulnerable.
The IMF warns the side effects of a prolonged downturn will trim the country’s long-term growth potential, a curse known as hysteresis. These consequences include the loss of skills among long-term jobless, the destruction of unused capital and underinvestment preventing innovation.

“(The IMF’s) central scenario assumes that hysteresis effects will lower potential GDP growth by about a third of a percentage point annually on average over the medium term, with other lingering effects of the crisis (e.g., restrained global demand for financial services) taking off another fifth of a percentage point,” the IMF says. It’s likely a political and business backlash will force an end to austerity before such damage is done.

Finally, the UK is structurally handicapped for the 21st century. The country is resources poor, has a political system designed to protect the rich through the unelected House of Lords, has an aging population and its class system means a large percentage of its population is kept under-educated when globalisation makes human capital a country’s greatest long-term asset.

There is hope for the UK, though. The London Olympics lifted the mood of the British, may help the economy expand during the September quarter and showcased one area where the UK is shining; namely sport. The UK team finished third on the medal tally, seven spots ahead of Australia.

While its soccer team is brittle and a Briton still can’t win Wimbledon, one claimed this year’s Tour de France, others have won recent golf majors, England’s cricket team held the world No. 1 ranking for a year until losing it to South Africa in August and its rugby team is the only one from Europe to win a World Cup. If after decades of easy-beat status, the British, with government money and foreign (much Australian) know-how, can win at play, there are no reasons why they can’t use the same sort of formula to conquer at work.

This document is issued by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL No. 409340 (“Fidelity Australia”).  Fidelity Australia is a member of the FIL Limited group of companies commonly known as Fidelity Worldwide Investment. Prior to making an investment decision, retail investors should seek advice from their financial advisers. Investors should also obtain and consider the Product Disclosure Statements (“PDS”) for any Fidelity fund mentioned in this document. The PDS can be obtained by contacting Fidelity Australia on 1800 119 270 or by downloading from our website at www.fidelity.com.au. This document may include general commentary on market activity, sector trends or other broad-based economic or political conditions that should not be taken as investment advice. Information stated herein about specific securities is subject to change. Any reference to specific securities should not be taken as a recommendation to buy, sell or hold these securities. While the information contained in this document has been prepared with reasonable care, no responsibility or liability is accepted for any errors or omissions or misstatements however caused. This document is intended as general information only. The document may not be reproduced or transmitted without prior written permission of Fidelity Australia. The issuer of Fidelity’s managed investment schemes is FIL Responsible Entity (Australia) Limited ABN 33 148 059 009. Reference to ($) are in Australian dollars unless stated otherwise.  2012 FIL Responsible Entity (Australia) Limited.  Fidelity, Fidelity Worldwide Investment and the Fidelity Worldwide Investment logo and F symbol are trademarks of FIL Limited.

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• The majority of Aussies believe that the wisest place for savings is in the bank (39.0 per cent of respondents) – the highest level in 38 years. Next favoured was “paying off debt” (20.4 per cent). Spending any additional savings was only seen as the wisest choice by 3.6 per cent of respondents – the weakest reading in six years.
• Generation Y was surprisingly downbeat. Sentiment in the 18-24 age group slumped by 12.9 per cent in September to an index reading of just 95.3.
• Australian dwelling starts rose by 4.6 per cent in the June quarter. Private sector commencements were up 5.0 per cent in the quarter with house starts down 1.7 per cent and apartment starts up 19.0 per cent. House starts stood at the lowest levels in 11 years in the June quarter.
• Over the year to June, 139,349 dwellings were commenced down 2.7 per cent on the prior year.

What does it all mean?
Welcome to the multispeed economy. Top-line consumer sentiment recorded a modest rise in the latest month, however that is a far as the good news goes. In fact delve into the data a little further and the rest of the results look disappointingly weak.

The recent high-profile cost-cutting measures taken by the mining sector seem to have weighed on consumer psychology, especially when coupled with the ongoing weakness in across other parts of the economy. Given the extent of the fiscal and monetary stimulus over the past couple of months you could argue that sentiment levels should be far higher, but the average Aussie is still not convinced that the outlook is all that rosy.

In fact the latest readings on what consumers would do with any additional savings suggest that consumer conservatism is going ahead in leaps and bounds. Almost two thirds of Aussies believe the wisest place for new savings is in the bank or paying off debt, marking the highest reading since the mid-1970’s.

In addition the amount of respondents that believe that spending any additional savings is the wisest action fell to the lowest reading in six years. It is clear that the ongoing global economic concerns, weakness across an array of sectors and a sluggish labour market are seeing households retreat further into their shell.

Encouragingly real estate is still in favour (although less so than last quarter) – and with rates stable, the jobless rate low, no oversupply of properties and lower house prices over the past year, there are plenty of good reasons to be looking at property.

Why is Generation Y so glum? In the space of a month, sentiment in the 18-24 age grouping slumped by almost 13 per cent while sentiment was flat or a little bit more upbeat across other age groupings. There is no seasonality in the result to suggest that any one reason was responsible for the more downbeat view. But it may be the ongoing sluggishness in the job market is making it more difficult to find part-time or full-time work. But a large portion of the 18-24 age group attend universities and other education centres, so it is difficult to get a handle on the pessimistic result, however it will be interesting to see if the view is portrayed in coming months.

Viewed over a longer-term perspective it is still more the case that confidence is not getting much worse, but also not getting much better. It will take a longer period of global financial stability to calm the jangled nerves of Aussie shoppers.

If anyone has a reason to be glum in recent times, it’s builders, tradespeople and housing dependent business operators. Over the past year it seemed like people preferred to rent, live at home longer or buy existing properties rather than to build. In fact over the year to June just over 139,000 dwellings were commenced – marking the weakest annual result in three years. However there maybe signs that activity levels are starting to turn. Dwelling commencements rose by just shy of 5 per cent in the June quarter, marking the first increase since March last year. And looking forward, the lower interest rates on offer, the best housing affordability in a decade, rising migration and population growth as well as grants and incentives provided by some state governments should support a stronger period of residential building over the coming year.

What do the figures show?
Consumer sentiment:

• The Westpac/Melbourne Institute index of consumer sentiment rose 1.6 per cent to a reading of 98.5 in September after sliding by 2.5 per cent in August. The index is 1.3 per cent higher than a year ago.
• The current conditions index fell by 0.1 per cent, while the expectations index rose by 2.9 per cent.
• Only one of five components of the index fell in September:
  The estimate of family finances compared with a year ago rose by 0.3 per cent;
  The estimate of family finances over the next year rose by 4.8 per cent;
  Economic conditions over the next 12 months rose by 0.6 per cent;
  Economic conditions over the next 5 years rose by 3.4 per cent;
  The measure on whether it was a good time to buy a major household item fell by 0.4 per cent.

Gender & demographics:

• Men (index reading of 101.7) were more optimistic than women (94.7). Young people (18-24 years) were less optimistic in September (index down 12.9 per cent to 95.3). Across the other demographics: 25-44 years, (index 105.1, up 11.5 per cent); 45 years plus (index 93.1, down 3.2 per cent).
• The time to buy a dwelling index fell by 0.3 per cent in September and the time to buy a car index rose by 1.1 per cent.
• Aussie consumers believe that bank deposits are the wisest place for savings (39.0 per cent of respondents) –the highest reading since 1974, followed by paying debt (20.4 per cent), real estate (19.8 per cent), and shares (5.5 per cent).

Dwelling commencements

• The number of dwelling commencements rose for the first time in five quarters, rising by 4.6 per cent in the June quarter, but this was still 10.8 per cent lower than a year ago. Private sector houses fell by 1.7 per cent to 11-year lows while apartment starts rose by 19.0 per cent.
• In the June quarter starts rose the most in the Northern Territory (up 68.1 per cent) followed by NSW (up 25.9 per cent), Queensland (up 8.1 per cent), and Victoria (up 2.8 per cent). Starts fell the most in South Australia (down 9.3 per cent), followed by Western Australia (down 6.1 per cent), Tasmania (down 5.0 per cent) and the ACT (down 1.0 per cent).
• Over the year to June 139,349 dwellings were commenced down 2.7 per cent on the prior year.

What is the importance of the economic data?

• Westpac and the Melbourne Institute release the Index of Consumer Sentiment each month. According to Melbourne Institute: “The survey of consumer sentiment was first undertaken in 1973 and was conducted on a quarterly basis until 1976, a six-weekly basis from 1976 to 1986, and has been conducted monthly ever since.” Confident consumers may be more inclined to spend, especially on major items.
• The ABS figures on dwelling commencements are compiled on the basis of returns collected from builders and other individuals and organisations engaged in building activity. The data is useful in highlighting activity levels in residential construction.

What are the implications for interest rates and investors?

• The Reserve Bank will probably be a bit disappointed at the latest consumer confidence results. There are plenty of good reasons for Aussies to be encouraged by the state of their economy, but we are still seeing the glass as half-empty rather than half-full.
• CommSec expects the Reserve Bank to maintain its easing bias but it may not follow through with another rate cut until later in the year. Europe, the level of the Aussie dollar and the Chinese economic recovery are the key issues affecting interest rate decisions.
• The outlook for retailers is mixed. Consumer confidence is OK without being great, but wages are rising at a faster rate than prices. Add in the fact that unemployment is low, interest rates could be cut again, home prices are lifting gradually, the sharemarket has stabilised and the Aussie dollar is strong. Overall, consumers need to be positive about their finances before retailers can become more confident on future spending.

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The key points are as follows:

• Global growth is likely to be in the process of bottoming ahead of a pick up next year. The risk of a Euro-zone meltdown is receding, more monetary easing is also likely to keep the US recovery going and at the same time Chinese growth should soon pick up a bit.
• While shares may see short term volatility the combination of a stabilising global growth outlook, cheap valuations and easy global monetary conditions point to further gains by year end and into next year.
• Meanwhile, Australian economic data released today showed a slight improvement in both consumer confidence and dwelling starts. However, the trend in both is soft.
• Consumer confidence rose 1.6% in September, but the level of 98.2 remains sub-par relative to longer term averages and is little different from when interest rates started to come down late last year.
• Dwelling starts rose 4.6% in the June quarter, but this followed a sharp fall in the March quarter and was driven by a rebound in volatile multi unit approvals. Housing starts continued to soften.

Our view remains that interest rates in Australia remain too high to drive a decent pick up in non-mining activity at a time when the mining boom is starting to lose momentum. As a result we continue to see the RBA resuming rate cuts in the months ahead. 

To read the full report, click here.

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Bendigo and Adelaide Bank’s Executive Retail, Dennis Bice, said the report shows there has been growth across a number of market sectors.

“The results underscore the old property adage that there really are ‘markets within markets’ both at different levels in different cities and in regional centres around the states and territories where good value and solid returns can still be found,” Mr Bice said.

The report also revealed an increase in the number of loans to first home buyers, which increased by 5.9 per cent to 25, 101 over the June quarter 2012, up from the June quarter of the previous year by 11.8 per cent.  

“People have been putting the big decisions, such as upsizing or downsizing their housing preferences on hold for some time now but there is evidence to suggest that activity in the property market is beginning to build again, said Mr Bice.  

“Investors are also seeing strong demand for rentals in the major centres with tight vacancy rates.

“The positive impact this has on rental returns, coupled with lower borrowing costs, should see a more active spring real estate season,” he said. 

“The report also finds that around Australia, residential investment property returns for three bedroom houses and two bedroom ‘other dwellings’, such as apartments and townhouses  show an average annual return over the past five and 10 year periods in the range of 6.6 per cent to 16.2 per cent*,” Mr Bice concluded. 

To read the full report, click here.

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