• major sharemarkets vs emerging markets
• Greece and the debt markets, and
• the RBA’s decision to leave the cash rate at 4.5%.

View the July market update video here.

Download Brian Parker video script.

In this update, MLC Senior Investment Strategist John Owen looks at:

• the impact of ongoing soverign risk concerns in Europe
• in contrast, the encouraging news coming out of company earnings reports, and
• how MLC funds have fared

View the May MLC Fund Performance Update video here.

Download John Owen video script.

Summary of key proposals
The key proposals announced by the Government include:

• the minimum super guarantee (SG) contributions you can receive from an employer will increase gradually from 9% to 12% of salary, starting from 1 July 2013
• the age to which you could receive SG contributions from an employer will increase from 70 to 75 from 1 July 2013
• if you earn up to $37,000 pa, the Government may make a super contribution of up to $500 pa from 1 July 2012 to refund the tax payable on concessional Includes SG, salary sacrifice, personal deductible contributions and certain other amounts.
• the cap that applies to concessional super contributions from 1 July 2012 will no longer halve from $50,000 to $25,000 pa, if you’re aged 50 or over at that time and your total super balance is below $500,000
• the company tax rate will gradually reduce to 28% by 1 July 2014 (and two years earlier if you have a small business), and
• generous depreciation rules will apply to small businesses from 1 July 2012.

MLC’s summary of the Government’s response to Henry review (PDF, 175KB)

• monthly and one year returns for the MLC Australian Share Strategy
• the performance of the bond markets, and
• what it means for the MLC Balanced and Growth Funds

View the April MLC Fund Performance Update video here.

Download John Owen video script.

• MLC Australian Share Strategy performance in February
• the outperfomance of MLC Australian bonds managers, and
• what it means for the MLC Balanced and Growth Funds

View the March MLC Fund Performance Update video here.

Download John Owen video script.

• the associated risks of the sovereign debt issues in Europe
• the RBA’s decision to keep the cash rate at 3.75%, and
• what it means for investors.

View the February market update video here.

Download Brian Parker video script.

• the recent performance of the MLC Australian Share Strategy
• the outperformance of manager Sands Capital, and
• what it means for the MLC Balanced and Growth Funds

View the February MLC Fund Performance Update video here.

Download John Owen video script.

How the Reserve Bank of Australia controls interest rates and economic growth

The past 18 months haven’t been easy, but the consensus among Australian economists is we avoided a serious recession. The sharemarket dipped, unemployment rose and business and consumer spending fell, but compared to other developed countries, we got off lightly.

There are various theories as to how and why our economy weathered the global financial crisis (GFC); demand for our exports from China, Government stimulus packages, bank guarantees and our strict banking control system have all been cited.

In any scenario, monetary policy played a major role.

We spoke to three experts about the Reserve Bank of Australia (RBA); what it does and why, and its reaction to the GFC.

Alan Oster is the Group Chief Economist at NAB. Mr Oster is a former Adviser to the Federal Treasury in monetary policy and now looks after NAB’s global economic and financial forecasts.

Peter Switzer is one of Australia’s leading business and financial commentators. Peter regularly contributes to The Australian newspaper, he’s the finance commentator on Vega FM and he hosts his own TV show, Switzer, on SKY News Business Channel.

Brian Parker is an Investment Strategist at MLC.

How much influence does the Governor of the RBA (currently Glenn Stevens) have over the setting of interest rates?

AO: The monthly monetary policy decision is ultimately decided by the RBA board, which is made up of a few senior RBA officials and a group of prominent Australian business people and academics. With the help of RBA economists, the Governor recommends to the board the appropriate movement in policy. As far as we can ascertain, since RBA independence, the Board have never rejected the Governor’s recommendation. Hence, the Governor’s influence in setting interest rates can’t be understated.

PS: There’s a lot of input from research done by the bank’s staff plus there is surveying of around 1500 businesses to get a feel for the economy. The other eight directors put their twopence worth into the debate but they would listen to the RBA Governor. Like a CEO of an organisation, he listens, but the buck stops with him.

How much influence does the Government have over the setting of interest rates?

AO: These days the government has little influence over movements in the cash rate. This is in line with other countries and prevents the manipulation of interest rates for political ends. The independence of the RBA was clearly exemplified by the RBA raising interest rates during the 2007 electoral campaign.

How do you think the RBA handled the GFC? Given we seemed to have escaped a major recession, do you think the RBA deserves credit for that?

BP: I think you’d have to say they handled things pretty well. The economy has weathered the storm so far, and monetary policy has to take a big share of the credit. The Government’s budget measures have helped, but when the RBA needed to change course in 2008, they didn’t stand on ceremony. Rates were cut further and faster than ever before, and that did provide a huge boost to disposable incomes at a crucial time. Because Australians tend to have variable rate mortgages, and the bulk of the rate cuts were passed on, monetary policy in Australia has been extremely effective.

What about the Government’s fiscal stimulus measure? Was the impact of this equal to the heavy interest rate reductions of the RBA?

PS: It’s hard to say; both lower interest rates and the stimulus have helped. There’s no measure to prove it, but the massive rate cuts have helped to repair household balance sheets, cut total debt and helped both business and consumer confidence. My guess is the rate cuts were more important, but it is only a guess. Both policies, plus China’s growth and demand, have helped us avoid a technical recession.

With Australia now moving towards recovery, what key areas will the RBA watch?

PS: Inflation and unemployment are the biggies but that means they’ll look at indicators for economic growth. The whole range of indicators will be watched such as retail sales, car sales, building approvals, job ads, business and consumer confidence as well as the health of the stock market. If some surprise curve ball comes out of left field, they could cut rates but, on present calculations, it’s not expected.

What impact would inflation have on the economy at this point in time, and how likely is it to return as a problem?

PS: Inflation in the short term doesn’t look likely and the RBA would be acting now if they thought inflation was a clear and present danger. Monetary policy works with a lag and that’s why the Bank is moving on rates now. The more inflation we get now, the higher interest rates will go and that will slow up, or even choke, the recovery, though I don’t see this as a big issue now.

After the small rate rise in October, is the cash rate likely to go higher? And by how much in the next two years?

AO: Following a series of consecutive 25bp rate rises (having already begun in October 2009), we expect the RBA to push the cash rate up to 4.25% by early 2010. From there, the Board are likely to pause as they view the flow of economic data and gain confirmation that the recovery is unfolding as expected. We then expect around 50 points in late 2010, bringing the cash rate to 4.75% at the end of 2010.

PS: I think the cash rate of interest is heading to 4% by early to mid-2010 and the RBA will then play the game of wait-and-see. Then in 2011, if the global recovery is on track then the cash rate could track to 5% but I hope there is no rush to this level. We’ve gone through monetary madness and our dollar is very high, which also slows down the economy. We live in new and unusual times, and so I think the RBA’s monetary or interest rate policy might also need to be ‘unusual’. This could mean a lower normal cash rate of 4% or so instead of 5%. Let’s keep our fingers crossed on this one!

• the implications on world sharemarkets by the debt freeze in Dubai
• the mixed bag of economic numbers in Australia, and
• what it all means for investors.

View the December Economic and Market Update video here.

Download Brian Parker video script.

With 2009 coming to a close, Market Watch examines the key economic indicators, what changed over the year and what could happen in 2010.

Australian sharemarkets
After a terrible start to 2009, the subsequent rally of the Australian sharemarket has lifted investors’ spirits and gone some way to repairing their loss of faith.

Back in January, the mood was extremely different. The Australian sharemarket suffered crippling blows following the lead of the US where the effects of the GFC were in full swing.

On the back of fears the economic downturn had deepened, $40 billion was wiped from the value of the Australian sharemarket in one day and the S&P/ASX 200 plunged 4.27%.

Investors ran for cover with many choosing safe havens like cash and bonds as capital preservation became the main priority.

And while history shows that the sharemarket always bounces back, fear had taken hold. No one knew when we’d hit the bottom or what shape the recovery would take.

Now eight months on now from the March low, the speed and strength of the recovery has surprised even the most bullish investor. The sharemarket rally saw gains each month for seven months in a row, vindicating those who maintained their Australian sharemarket exposures.

Surprisingly, Australian banks were the standout performers for 2009. The Reserve Bank of Australia (RBA) recently reported that the four majors – NAB, ANZ, Westpac and CBA had recorded total headline net profits of around $8.6 billion in the latest half year with the annualised net profit on equity at around 13.5%.

It was only at the end of October that the sharemarket fell for the first time in eight months. For the September quarter alone Australian shares returned 22% – the strongest quarterly result since 1987.

Interest Rates
The cash rate in Australia has also enjoyed its fair share of record breaking moments in 2009.

In an attempt to prevent a seemingly inevitable recession in Australia, the RBA lowered the official interest rate in February to 3.25% and then to 3% in April.

These drastic measures were aimed at relieving pressure on household incomes and also proved the RBA feared the worse, with a view that the economic scenario could get considerably darker.

Eight months later and the cash rate stands at 3.75% following raises in October, November and December. This is the first time the RBA has lifted the cash rate three months in a row since it began announcing its decisions on monetary policy in January 1990.

More significantly, Australia was the first developed country to raise interest rates.

While not exactly good news for mortgage payers, this latest rise at least confirms the belief the economy has improved substantially and the ‘economic emergency’ that would justify an interest rate of 3% hasn’t materialised.

Australian dollar
The other remarkable story of 2009 has been rise of the Australian dollar- up more than 40% from January’s US66cents mark.

Its rise against the US dollar is thought to be due to a combination of investor sentiment, risk appetite and ‘carry trades’ – borrowing in low interest rate currencies and investing in higher yielding currencies.

Having said this, the continued weakening of the US dollar has seen it fall against oil, gold, copper and the Euro, not just the Australian dollar.

Our dollar is now near 15 month highs, around US92 cents- another indicator that our economy is performing better than our northern hemisphere big brother.

While there’s been talk of the Australian dollar reaching parity with the US dollar, the general consensus suggests it will remain in the low 90s in the foreseeable future.

Where to from here?
What will happen in 2010 is anyone’s guess. Will the RBA lift the cash rate again? Will the sharemarket continue its recovery or will there be a pullback? Can the Australian dollar reach parity with the US dollar?

While these questions remain unanswered until next year, 2009 will be remembered as the year the Australian economy excelled it’s global counterparts.

And whether or not you choose to agree with their policies, the Government and RBA, should be acknowledged for doing their part in providing a solid foundation leading into 2010.

“The apparent resilience of the Australian economy reflects a number of factors,” says MLC Investment Strategist Brian Parker.

“The policy response from both the Government and the Reserve Bank was swift and substantial. The RBA reduced interest rates faster than ever before, and to levels not seen in decades. The Government’s fiscal measures, particularly those directed towards households, did contribute to economic growth during the first half of 2009. Our banking system, through a combination of good management, sound regulation, and good luck, has not experienced the difficulties seen elsewhere”.