Spring 2015

Inside...

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Market update
The China syndrome:
Whats next?
Unpacking the dollar
Start now to give your
children the best start

Welcome
In this edition, we analyse the recent drop in Chinese equity
markets and how that may impact investments over the short,
medium and long term.
We also look at the recent fluctuations of the Australian dollar
and how it can affect not just the holidays you may be planning
but your investment portfolios as well.
Our regular Market Update from Piers Bolger, Head of
Diversified Portfolio Management at BT Financial Group,
looksat the performance of overseas and local markets.
Finally, we share six valuable steps that can ensure your
childseducation is heading in the right direction.
Until next time happy reading.

WealthCare Financial Solutions

Shaun Thatcher Certified Financial Planner
03 9439 9977
[email protected]
www.wealthcarefinancial.com.au

2 | Insights

Market update
BT Financial Groups Head of Diversified Portfolio Management,
Piers Bolger, looks at whats happening in investment markets at
home and around the world.

The outlook for the global economy

remains mixed, with growth through
the second half of 2015 likely to be
below average. Australian economic
growth is also expected to be subdued
thanks to slower growth from China.
As such financial markets are gyrating
around multiple and divergent themes.
Global overview
The June quarter proved challenging
and equity and bond markets
struggled to deliver positive returns.
There continues to be significant
challenges for the global economy
andfinancial markets.
The economic slowdown in China is
producing volatile equity markets and
in August the Peoples Bank of China
(PBOC) devalued the Chinese Yuan
to support the economy, particularly
exports. This highlights the fragile
nature of Chinas growth outlook.
In Europe, the decision by the Greek
parliament to meet creditors demands
enabled the country to receive funding
to avoid a collapse of its financial
system. But there is still the potential
for Greece to exit the European
Union at some point. Its debt burden
remains perilous and the country is
experiencing a massive recession, so
long-term challenges remain in place.
The US economy continues to
improve, albeit at slightly below trend
levels. However, a broader recovery is
still taking place, highlighted by solid
jobs growth and an improving wage
environment. This should mitigate any
potential drop in consumer confidence
once the US Federal Reserve begins
to normalise cash rates.

At home
We believe the domestic economy
will continue to moderate further.
The medium-term outlook remains
challenging and will be linked to global
macro events.
The RBA maintained cash rates at
2.0per cent over the June quarter.
The Reserve Bank of Australias
(RBA) most recent minutes contain
scant commentary around the
Australian dollar, which may indicate
it is comfortable with the value of the
currency. While the RBA has not ruled
out the possibility of future rate cuts it
seems it is going to take a wait and see
approach as the economy transitions.
We continue to expect the RBA will
reduce rates by at least 0.25 per cent
in the second half of 2015 given the
current domestic outlook.
House prices in both Sydney and
Melbourne continue to show good
growth compared to the rest of
Australia, although recently residential
prices have started to stabilise. While
the low interest rate environment is
supporting higher house prices, we
remain concerned about a potential
medium term imbalance that could
occur, given the current debt levels,
should the economic outlook continue
to deteriorate.

The local market continues to be

buffeted by weaker data out of China,
along with demand/supply imbalances
across a number of key commodity
markets including iron ore and oil as
producers look to maintain high levels
of production.
While any further domestic interest
rate cuts are likely to provide a
positive tailwind across the higher
yielding sectors, investors need
to remain focused on the quality
and sustainability of company
fundamentals. In August all eyes were
on reporting season. As anticipated,
cost and expense management
remained core themes, consistent
with prior reporting season updates.

Earnings growth is set to

be relatively modest at 5
to 6 per cent, which does
make it a challenging
period for the market to
move materially higher
inthe near term.

Its been a mixed bag for the equity

market, with the ASX 200 down
6.6 per cent for the June quarter,
although it is up by 1.2 per cent yearto-date, which highlights the volatility
challenges facing the market.

Insights |3

The China syndrome:

Whats next?
Although the troubles in Greeces economy have been the main
event in global share markets in recent times, theres a more
pressing worry in international markets thats closer to home.

The past couple of months have seen

the Chinese share market lose more
than 20 per cent of its value, which
equates to around US$2 trillion. As it
is Australiaslargest trading partner
Chinas fortunes have a range of
implications for investors.

Today, the renewed interest in

the stock market again reflects a
switch out of the property market by
households. There is also a perception
the government has supported the
stock market by allowing more trading
accounts and margin lending.

China has seen extraordinary

economic growth over the past 20
years, driven by aggressive investment
in infrastructure and population
movement to urban areas.

These factors have seen retail

investors in China dominate the share
market. This is in contrast to share
markets in other countries, which tend
to be led by institutional investors.

The stock market, however, has been

volatile over this time. It underwent
one boom-bust cycle between 2006
and 2009, with share values rising
five-fold between 2006 and 2008,
before most of those gains were lost.
The stock market was then relatively
subdued until late last year when it
started bubbling again.

This is an important consideration

given retail investors tend to speculate
more than institutional investors and
have a poorer understanding of what
they are investing in, which can make
for a more volatile market.

Before 2006, Chinese households

directed most of their investments
towards the property market. But
thisfocus shifted to the equity market
when the government introduced
measures to curtail property
investment.

4 | Insights

The current situation

As the share market rose rapidly
thanks to the flood of retail investors
entering it, the Chinese government
became concerned about the potential
for a bubble and introduced measures
to control it. Here are some examples:
January

Minimum amount of cash required

to trade on margin loans was raised.

Strict enforcement of margin trade

regulations.
April

Ban introduced on brokers helping

clients to evade limits on margin
trading using specially designed
financial products.
June

Volume of margin lending stock

brokers can do limited.
Ban on using financial products
to get around the limits on margin
trading reinforced.
The Chinese share market has rapidly
declined following the introduction
of new regulations. There has
been atrickle-down effect to other
markets,with commodities in
particular affected by the Chinese
share market sell down.
Government intervention
Following the decline of the share
market, the Chinese government
responded by introducing a number of
interventions to restore share market
confidence.

 If the Chinese government is not successful in managing

the slide in the share market, volatility globally is likely to
remain elevated as investors seek safe assets.

One of the most significant initiatives

has been a $US42billion investment
by the Chinese government in the
share market via brokerage firms. This
has been in addition to the Securities
Association of China pledging money
to invest in the Chinese market. In
addition, the government reduced
the official cash rate to encourage
borrowing to invest in equities.
On top of this, China reduced limits on
margin lending and allowed investors
to use their houses as collateral for
investing in shares. At the same
time, a cap was introduced on shortselling of shares to help reduce the
downward trend. Additionally, pension
funds and social security funds have
been encouraged to invest more
money in shares.
Other temporary measures
There have also been other measures
introduced on a short-term basis to
help support Chinese share prices. For
instance, a number of new initial public
offerings have been postponed and
companies have also been allowed
to suspend trading in their shares. To
stabilise the market the government
also ordered all large shareholders

with stakes of more than five per cent

in a company not to sell their shares for
up to six months.
These measures have not completely
stemmed the flow of funds out of
shares. But there are tentative signs
the downward trend is slowing and
China is likely to continue to introduce
new measures until the market does
stabilise. This is because it recognises
fully functioning capital markets are
critical to the countrys economic
outlook and further development.
Implications of intervention
If the Chinese government is
successful in managing the slide in
the share market, in the short-term
volatility across markets should ease
and commodity prices should recover,
which will benefit Australia. Longer
term, the support measures will need
to be rolled back otherwise they could
eventually cause another surge in the
equity market.

can be challenging. But it can also

create opportunities for alternative
investment strategies. It might also
produce buying opportunities for bluechip shares whose prices have fallen
with the market.
However, its worth noting
Bloombergs figures for July indicate
the Chinese share market has risen by
more than 80 per cent compared to 12
months ago. So the current downturn
could be a correction to true value, and
the market may begin to stabilise from
this point.
Its important for investors who wish
to gain exposure to the Chinese
market to seek advice before taking
adecision to invest. So talk to us today
about the dynamics of the Chinese
market and how it could impact your
portfolio over the short, medium
andlong-term.

If the Chinese government is not

successful in managing the slide in
the share market, volatility globally is
likely to remain elevated as investors
seek safe assets. This sort of market
Insights |5

Unpacking the dollar: How the

falling AUD may affect more than
just your planned overseas trip
Keeping an eye on the value
of the Australian dollar has
always been a sensible
approach for travellers and its
something investors should
also keep sight of too.
Anyone who invests in international
assets, from shares to commodities,
is exposed to foreign currencies, and
feels the impact of how these are
valued against the Australian dollar
and against other assets. This can add
or remove value from your portfolio
depending on market activity.
The value of a dollar
The Australian dollar can be influenced
by a number of factors:
Inflation
Commodity price levels
Financial market sentiment
Volatility in asset markets
Global investment flows
Movements in interest rates
Speculator positioning
All these factors work together to
determine a price for the Australian
dollar, which fluctuates against other
world currencies.

High or low
Australias economy typically benefits
from a lower Australian dollar
compared to the US dollar (though
online shoppers may dispute this).
A lower Australian dollar assists in
supporting our export markets as
countries can purchase more for a
lower cost, and can offer a welcome
boost to tourism as a travellers coin
extends further.
While the Australian dollar rose over
the latter part of the global financial
crisis, it has started to return to
lower levels. This is welcomed, and
supported, by the Reserve Bank of
Australia.
But while it may be positive on the
whole for the state of the economy,
the sentiment may not be same for
investors in overseas assets.
Currency and the value of
international investments
When making overseas investments,
you can take two approaches.
1. Invest wholly into the investment,
for example, 100% into international
shares.
2. Invest into a hedged investment
which means that a portion of
your investment is allocated
specifically to manage the risks
that the currency of the investment
decreases against your own
currency.
Investors generally select an option
based on their view of whether the
Australian dollar is likely to increase
ordecrease.

6 | Insights

For example, if you think the Australian

dollar is going to decrease, you
may choose the first option, to be
completely invested. This would
mean that, assuming consistency in
value of other global currencies, if you
redeemed your investment you would
hope to gain extra value from the
currency conversion, aside from any
growth in the investment.
On the other hand, if you thought the
Australian dollar was going to increase,
you may choose the second option.
This would mean you are seeking to
minimise value loss from the currency
conversion.
Which option is correct is not
necessarily as simple as the direction
of the Australian dollar given its
relationship with other global
currencies. Currency fluctuations
can be short or long term depending
on market activity and the domestic
situation of a country. The constant
changes mean it can be difficult
to manage currency in your
investments and having expert advice
or investment managers can be
invaluable.
Combining approaches for the
best of both worlds
Some investors use both approaches
in their investment portfolios. This
means they might receive extra
returns from currency conversion as
well as helping to reduce losses if the
currency goes in the other direction.
Its worth talking to us about how
currencies impact your portfolio, so
give us a call today, were here to help.

Start now to give your

children the best start
Everyone wants the best for their children. Providing a good
education is a huge part of preparing them for the best
possible future. But as education becomes more expensive,
planning and budgeting for these costs becomes essential.
If youre planning to send your
children to a private school, you are
probably already juggling a mortgage,
ongoing household expenses and the
day-to-day costs of raising children
such as sports and other activities.
Its not easy to save extra while still
maintaining the lifestyle that you enjoy.

5. Make the most of gifting

Here are some steps to help you

get on the right track to fund their
education.

If you already have children at school,

check if the school allows you to prepay fees at a discounted rate. If you
areable to pay upfront, it may help
reduce the worry about rising costs
into the future.

1. Start now
The sooner you start saving the better.
Consider a regular investment plan
to take advantage of compounding
interest.
2. Make sure your insurances are
adequate and up-to-date
Think about income protection, life
insurance and cover for extended
illness.
3. Pay as much as you can afford
into your mortgage with an offset/
withdraw facility
This will help reduce the interest and
then have the option to redraw to pay
for school fees.
4. Work out how much you need
to put aside
The table shows a rough guideto
the costs of primary and secondary
education. These figures represent
the upper ranges that parents can
reasonably expect to pay, although
fees vary across states, agesand
schools.

For grandparents and those wanting

to give something special, a savings
account could be a great way to give
a new baby something that will grow
with them.
6. Pre-pay education expenses

Primary

Secondary

Government primary school:

$500 $3,000

Government secondary school:

$900 $4,000

Systemic primary school:

$3,000 $6,000

Systemic secondary school:

$8,000 $11,500

Private primary school:

$9,500+

Private secondary school:

$13,000+

Source: Australian Scholarships Group (ASG)

Take a moment to make sure youre
on the right track. Get in touch with us
today about what you can do straight
away to ensure your childs education
is the best it can be.
Source: http://www.asg.com.
au/assets/files/asg_edcosts_
schoolcosts_2012_nat_metro.pdf

Insights |7

Disclaimer
This publication has been compiled by Magnitude Group Pty Ltd ABN 54 086 266 202 AFSL 221557 (Magnitude) and is current as at time of preparation, August 2015. Past
performance is not a reliable indicator of future performance. Any outlooks in this publication are predictive in character. Whilst every effort has been taken to ensure that the
assumptions on which the outlooks given in this publication are based are reasonable, the outlooks may be based on incorrect assumptions or may not take into account known or
unknown risks and uncertainties. The results ultimately achieved may differ materially from our outlooks. Material contained in this publication is an overview or summary only and it
should not be considered a comprehensive statement on any matter nor relied upon as such. The information and any advice in this publication do not take into account your
personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. This publication may contain
material provided directly by third parties and is given in good faith and has been derived from sources believed to be reliable but has not been independently verified. Magnitude is
not responsible for such material. To the maximum extent permitted by law: (a) no guarantee, representation or warranty is given that any information or advice in this publication is
complete, accurate, up-to-date or fit for any purpose; and (b) neither Magnitude, nor any member of the Westpac group of companies, is in any way liable to you (including for
negligence) in respect of any reliance upon such information or advice. It is important that your personal circumstances are taken into account before making any financial decision
and we recommend you seek detailed and specific advice from a suitably qualified adviser before acting on any information or advice in this publication. The tax position described
is a general statement and is for guidance only. It has not been prepared by a registered tax agent. It does not constitute tax advice and is based on current tax laws and our
interpretation. Your individual situation may differ and you should seek independent professional tax advice. Magnitude Group Pty Ltd 2011. BTSCB13814A-0815gs