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Another year is with us but 2012 hasn’t ushered in an end to the unrelenting uncertainty which has prevailed for more than four years. So with no clear end to the world’s financial problems in sight what should savers and investors be thinking about financially for 2012? Where will interest rates go? What will the share market do? What about superannuation and, especially, Self-Managed Superannuation Funds - what’s in store for these areas?
When will it all end?
First of all, let’s get straight to the really tough stuff. When will the world turn the corner, financially? The brutally simple answer is: No one knows! It could still be a few years before we start to see some consistently comforting numbers but you need to keep in mind that these difficult times will one day end. The world is going through an enormous economic transition and with that comes uncertainty making accurate asset valuations very difficult – hence the price sensitivity to every piece of negative news which emerges. That said news of the otherwise successful auction of Italian government bonds in late December was somewhat encouraging.
As part of the 2011 article These 3 things a successful investor maketh! I wrote about Supply and Demand as well as Risk versus Reward and how they are the basis of everything financial in the world. Right now, across the world, a minority of investors are keenly searching for investment opportunities underpinned by Supply and Demand factors while simultaneously running Risk versus Reward assessments. Remember that whenever, for example, you see news bulletins reporting on falling share prices, while there might be a lot of sellers that day on the other side of those transactions are buyers who see good value in buying at the lower prices. In order to sell an investment, a seller must find a buyer. Quite simply, if there were no buyers, assets could not be sold.
In the current market conditions buyers could be buyers of long term value or short term speculators. Either way, buyers see potential for profiting by buying at reduced prices. Make no mistake, these are difficult times for most of the world’s economies – it’s a very long time since there has been such synchronisation of suppressed economic growth across the world. But it will – little by little - get better over the longer term.
In Australia, we stand well positioned to cope with a slow-down in our Gross Domestic Production (GDP) with further interest rate declines if deemed necessary to stimulate growth. With official interest rates at 4.25% the Reserve Bank of Australia (RBA) has plenty of room to further lower rates if it sees the need to stimulate the economy.
Of course that’s not good for investors living entirely off interest from fixed term deposits if the RBA needs to further lower interest rates. So having some capital invested for longer fixed terms makes good sense in the current environment as those rates and terms could prove to be very advantageous if rates go lower to boost the economy.
As for superannuation, one thing is certain – if we are to see more Australians retire with meaningful levels of superannuation capital and income, we will need to see a higher level of contributions. While the government has had recent success in legislating an increase in the compulsory Superannuation Guarantee (SG) to 12%, it’s over an inordinately long period – through to 2020. Given the state of world economics and Australian politics we shouldn’t hold our breath waiting for further increases in the SG so it will be up to individuals to lead the way on increasing their contributions.
Super Salary Sacrifice
One way to achieve higher contributions is the so-called ‘salary sacrifice’ which sees employees forego part of their salary via a direct contribution to the super fund of their choice – ‘off the top’ of their gross salary. While the salary sacrifice is taxed at 15% in the super fund, there can be substantial tax savings with this strategy. That said, you must be able to live on the remaining salary after normal tax and if you run short of cash later on, you’re not allowed to withdraw it from the super fund until you’re retired. We’ll look at salary sacrifice in more detail in a later article.
For young super members, ironically, one of the fortuitous aspects of the financial problems of the world is that their monthly contributions to super funds buy more units because unit prices have declined in line with markets. For Self Managed Superannuation Fund (SMSF) members, the flexibility the fund structure affords them allows them to accumulate cash in the fund and buy assets such as shares at reduced prices.
Super Fund Returns?
In terms of returns for super funds for 2012, it will all come down to two key issues. Firstly, the state of the world economic conditions and markets and, secondly, the asset allocation of funds. In other words, what assets have the trustees of a super fund chosen to invest in? Looking ahead, I suspect that most trustees would be delighted if they could report high single digit returns through calendar year 2012 – but there’s a lot of water to flow under that bridge yet.
Lessons abound for individuals, businesses and governments in the events of the last few years but prudent investors are not all running for cover – many are assessing their portfolio, looking at ways to shore up some stability, while also keeping an eye out for the opportunities which sit embedded in all the mayhem. 2012 most likely won’t be a smooth sail – the undercurrents are too strong for that outcome – but we are getting closer to a point when investment markets can see clear ‘weather’ ahead.