HEWISON Financial news, our views AND other issues Issue 40 ~ June 2012
Understanding the terms we use Eurozone The collective group of countries which use the Euro as their common currency. The Eurozone came into being in 1999, and originally consisted of 11 countries. As of 2009, 16 countries were part of the Eurozone. European Union The economic association of over two dozen European countries which seek to create a unified, barrier-free market for products and services throughout the continent, as well as a common currency with a unified authority over that currency. The European Union was established in 1993 by the Treaty of Maastricht, and was based on the European Economic Community. Superannuation Taxable Component Amounts placed into super before they attracted personal tax and taxed at 15% on arrival into super. At death, these amounts will attract tax of 16.5% before they can be paid out, unless paid to a dependent of the deceased. Superannuation Tax Free Component Amounts placed into super after personal tax has been paid, resulting in no further tax payable. When these amounts are withdrawn from super, no further tax is payable. Accumulation phase Is the period of time that a member is amassing a superannuation investment portfolio in the anticipation of funding their retirement at some point in the future.
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uarterly • Economic update • From the CEO’s Desk • Multiple Pension Strategy • Five Financial Tips for Young People
• Have you checked out Hewison Live? • Introducing Hewison Private Wealth’s Wealth Series • Future2 Foundation 2012 Wheel Classic
Economic update Story by Simon Curtain DIRECTOR/PRIVATE CLIENT ADVISER
What a tumultuous quarter it has been! Looking back three months ago, global markets seemed to be gaining momentum. Greece had agreed to abide by the harsh austerity measures put in place by the Euro-zone, China was consolidating its growth and the US was beginning to pick up steam. Over the first five months of the year the Australian markets increased by around 9-10 percent with the ASX200 (Australian stock market) peaking at around 4,436 points in early May. Newspaper headlines were even starting to focus on good news stories, with Australia’s unemployment level around 5.2 percent and inflation around 2 per cent. The media was focusing on when, not if, the Reserve Bank of Australia (RBA) would lower interest rates. And then on May 6, Greece held its legislative elections and failed to elect a majority Government. This news sent markets into a tailspin with the ASX200 shedding ten percent over the next four weeks as rumors circulated that Greece would exit the Euro. As we all know, these fears were unfounded and in mid-June Greece held another round of elections, putting in place a coalition government that has vowed to comply with the austerity agreements and remain in the European Union (EU). During this time, the RBA slashed interest rates by 75 basis points, reducing the cash rate to 3.5 per cent. It is thought that the cash rate may be even further reduced if things in Europe do not pick up over the coming months. While it would seem Greece has side-stepped yet another catastrophe, they are not the only struggling member of the Euro-zone. Spain has recently asked for a bail-out of 100billion Euros to prop-up its struggling banks. Is there a solution to the Euro Debt crisis? While there is no doubt this crisis will sort itself out eventually, there are bound to be more
Image by Kym McLeod
hiccups along the way. It seems everyone has an opinion on what the Eurozone should do to fix the crisis. While there is certainly no silver bullet, one possible avenue that seems to be gaining momentum is for the EU to begin issuing Eurobonds. Eurobonds involve the Eurozone as a whole issuing debt, as opposed to the current situation where individual countries issue their own debt. The problem with individual countries, like Greece, issuing their own debt is that investors demand a high interest rate to compensate them for the risk of lending money. At the moment, investors demand interest of around 26 per cent per annum to lend money to Greece which is clearly not sustainable and is a large reason why Greece needs to obtain cheap funds elsewhere (i.e. a bailout). Bond yields in other struggling Euro members are quite high with Spain and Italy paying around 6 per cent on their borrowings, compared to Germany, widely considered to be a safe-haven, paying only 1.3 per cent. The thought behind the Eurobond is that Eurozone members could pool a large portion of their debt, resulting in lower interest rates for struggling countries and allowing them to meet interest payments and not default. While the Eurobond solution has many supporters, Germany in particular is vehemently opposed to the idea. Unfortunately it seems that the Eurodebt crisis will continue to dominate headlines for the foreseeable future. This will no doubt result in uncertainty and volatility in share markets around the world. While it is impossible to predict what will happen to markets on a day to day basis, we at Hewison Private Wealth continue to take a long term view; choosing to invest in companies that have sound balance sheets and good corporate management and who pay reliable dividends to underpin the cash flow of our clients portfolio’s.