Insights

In your twenties it can be difficult to think about issues affecting your financial future like superannuation and retirement.

However good planning and financial discipline now is important for your financial security - whether it's buying your first car, travelling overseas or saving for a house deposit.

Budgets

Establishing a budget and sticking to it is the best way to manage your day-to-day living costs. It helps to ensure you always have funds available to meet your regular expenses, such as rent, phone, electricity, groceries, fuel, car insurance, registration, for example.

Step 1: Write down your net (after tax) income and then list your regular outgoing expenses. This is your basic cashflow system - that is, inflow less outflow equals net cashflow. Doing this will help you determine what surplus cash you may have left over which can be put towards a dedicated savings plan.

Step 2: Work out how much you can save on a regular basis (each week, fortnight or month), and how long it will take you to reach a specific goal. Organise for this money to be debited directly from a nominated bank account into a chosen investment strategy so it makes saving that much easier.

If you don't have surplus funds left over after the bills are paid, use your budget to review what outgoing expenses you are paying and determine whether these can be reduced. Simple methods include:

• Consolidating debt
• Making your lunch instead of buying it
• Shopping around for better insurance rates and credit card interest rates

Regular savings plans

Regular savings plans enable you to invest any surplus income you may have while still allowing you access to funds if required.

You generally make an arrangement with a fund manager to invest an initial lump sum followed by regular investment instalments; the most common instalment period being monthly.

Minimum monthly investments usually start at $100. You can nominate your own amount above this according to what you can afford to save.

This monthly payment is then invested on your behalf by the fund manager in the same manner as the initial investment.

Debt management

If you have a credit card – as many people in their twenties do - you need to be able to effectively manage the debt on these cards. It is so easy to get into financial trouble using credit cards

We recommend you:

• Choose the appropriate credit card limit for your income. Students and low income earners who do not pay off the card each month should choose a budget card with low interest rates. Interest rates can vary from 7% to 24%, so shop around for a budget card.
• Meet your minimum monthly payment, or better still, clear the balance to avoid higher interest rates or excess penalty fees. Meeting the minimum monthly repayment won't clear your debt - ever - so try to repay as much as you can over the minimum limit to reduce the outstanding balance.
• Don't accept offers from the credit card providers to increase your credit limit. This is the next step to financial disaster. Stick to a limit you can manage.
• Never use your credit card for investment purposes. If you want to start investing there are far more appropriate investment loans, where the interest is not only lower but also tax deductible.

Superannuation

Superannuation is a savings vehicle where the main purpose is to provide funds in retirement.

If planned well, you can enjoy a comfortable lifestyle throughout retirement without having to rely too heavily on government pensions.

Funds are built up via contributions over your working life and you can increase these contributions at any given stage.

Even though retirement may be a long way off if you're in your twenties, it is still important to understand the role superannuation will play in your future financial security.

Contribution options

Superannuation Guarantee Contributions: Your employer is obliged to make contributions of 11% of your salary to superannuation on your behalf.

You may be eligible to request your employer to direct these contributions into your own nominated superannuation fund. This depends on the type of award or industrial agreement that you are employed under.

Government co-contributions: If you are a low or middle-income earner, you can take advantage of the super co-contribution payment by making eligible personal super contributions to your super fund. The government will then match up to $1,000 of your personal super contributions ($500 from 1 July 2012).

Wealth Protection

Accidents and illness are often the last thing on your mind when you're in your twenties, and the idea of protecting your wealth against these can seem a little over the top.

You may not have a mortgage or dependants, but personal loans for credit cards, holidays, cars and HECS or HELP are still financial commitments, as is paying rent.

Personal insurance allows you and your family to cope with these obligations should anything happen to you.

Income protection

Income protection will provide replacement income if you are unable to work due to illness or injury. It will help you continue to meet your financial commitments and daily living expenses, such as rent, food, bills, and loan repayments.

Life cover

Life cover provides your beneficiaries with a lump sum that can be used to clear any debt you may have, should your assets not be sufficient to clear it.

Seek advice before choosing your cover because there are many different personal insurance products on the market. You need to think about everything from insurance levels to ownership structures and funding arrangements.

Our best ideas are those that we think offer the highest risk-adjusted returns over a 12-month timeframe supported by a higher-than-average level of confidence. They are our most preferred sector exposures.

Additions: This month we add Superloop (ASX:SLC).

Removals: This month we remove Mineral Resources (ASX:MIN).

Large cap best ideas

Treasury Wine Estates (ASX:TWE)

It may take some time for the market to digest TWE’s acquisition of Paso Robles luxury wine business, DAOU Vineyards (DAOU) for US$900m (A$1.4bn) given it required a large capital raising. The acquisition is in line with TWE’s premiumisation and growth strategy and will strengthen a key gap in Treasury Americas (TA) portfolio. Importantly, DAOU has generated solid earnings growth and is a high margin business. It consequently allowed TWE to upgrade its margins targets. While not without risk given the size of this transaction, if TWE delivers on its investment case, there is material upside to our valuation. The key near-term share price catalyst is if China removes the tariffs on Australian wine imports.

CSL Limited (ASX:CSL)

While shares have struggled of late, we continue to view CSL as a key portfolio holding and sector pick, offering double-digit recovery in earnings growth as plasma collections increase, new products get approved and influenza vaccine uptake increases around ongoing concerns about respiratory viruses, with shares trading at 25x, a substantial discount (20%) to its long-term average.

ResMed Inc (ASX:RMD)

While weight loss drugs have grabbed headlines and investor attention, we see these products having little impact on the large, underserved sleep disorder breathing market, and do not view them as category killers. Although quarters are likely to remain volatile, nothing changes our view that the company remains well placed and uniquely positioned as it builds a patient-centric, connected-care digital platform that addresses the main pinch points across the healthcare value chain.

QBE Insurance Group (ASX:QBE)

With strong rate increases still flowing through QBE's insurance book, and further cost-out benefits to come, we expect QBE's earnings profile to improve strongly over the next few years. The stock also has a robust balance sheet and remains relatively inexpensive overall trading on 8x FY24F PE.

South32 (ASX:S32)

S32 has transformed its portfolio by divesting South African thermal coal and acquiring an interest in Chile copper, substantially boosting group earnings quality, as well as S32's risk and ESG profile. Unlike its peers amongst ASX-listed large-cap miners, S32 is not exposed to iron ore. Instead offering a highly diversified portfolio of base metals and metallurgical coal (with most of these metals enjoying solid price strength). We see attractive long-term value potential in S32 from de-risking of its growth portfolio, the potential for further portfolio changes, and an earnings-linked dividend policy.

Pilbara Minerals (ASX:PLS)

We view PLS as a fundamentally strong and globally significant hard-rock lithium miner. The company has successfully executed on ramping up the expansion of Pilgangoora, while progressing plans to expand output (P680 and P1000). Supported by a strong balance sheet, with net cash at ~A$2.1bn at the end of December, PLS’ expansion plans remain uniquely undeterred by the significant weakness in lithium prices. For PLS, the best form of defence against lithium prices is to stay on the attack, with its medium-term plans to continue expanding its production aimed primarily at building greater economies of scale and a more defensive margin.

Woodside Energy (ASX:WDS)

A tier 1 upstream oil and gas operator with high-quality earnings that we see as likely to continue pursuing an opportunistic acquisition strategy. WDS’s share price has been under pressure in recent months from a combination of oil price volatility and approval issues at Scarborough, its key offshore growth project. With both of those factors now having moderated, with the pullback in oil prices moderating and work at Scarborough back underway, we see now as a good time to add to positions. Increasing our conviction in our call is the progress WDS is making through the current capex phase, while maintaining a healthy balance sheet and healthy dividend profile. WDS still has to address long-term issues in its fundamentals (such as declining production from key projects NWS/Pluto), but will still generate substantial high-quality earnings for years to come.

Morgans clients can download our full list of Best Ideas, including our mid-cap and small-cap key stock picks.

Investing is a personal issue and individual needs vary greatly. Any investment decision should be based on rational and logical reasoning as to what you need and hope to achieve.

Determine your investment objectives

The first thing you should do before making an investment is to determine your investment objectives. To determine this, ask yourself the following questions:

• How much money do I have available to invest?
• What do I want to achieve from the investment?
• Over what period?
• What risks am I prepared to take to achieve this?
• What rate of return do I require from the investment?
• What other investments do I have that should be considered as part of my overall strategy?

Risk and returns

The balance between investment risk and investment return is particularly important. Your risk/return profile needs to be determined, in conjunction with your adviser, to determine an appropriate investment strategy that meets your objectives.

Risk

Risk is the chance that the return from an investment will be significantly different from what you expected. There is an element of risk in every type of investment and it can show up in various ways:

• There is a risk that you may not get the earnings (or return) you expected from your investment
• There is a risk that you may lose some or all of your capital
• There is a risk that changes in the value of money, due to inflation, mean that you are not compensated adequately for your investment
• It is important to determine the degree of risk which is acceptable to you and have your adviser match it with appropriate types of investments.

Return

Some investments promise a fixed rate of return (such as fixed interest investments) while others have a variable rate of return (shares). Return can also come in the form of income (via interest or dividends) or capital gain (realised when an investment is sold for a profit), both of which have different tax implications.

Your needs or preference for types of returns will determine the type of investments selected.

Finding a balance

Risk and return are directly related. Higher risk investments often produce higher returns (or higher losses). Lower risk investments may mean lower returns. It is often quite difficult, if not impossible, to produce high returns with low risk.

The balance between risk and return will form the basis of your investment strategy.

Investment strategy

Diversification is a fundamental principle of wise investment and is a key element of your ability to reduce risk while achieving suitable returns.

Investors have a better chance of achieving consistent performance over the medium to long term by spreading their investments across a range of asset classes including cash, fixed interest, shares and property, and by having exposure to local and international markets.

The exposure levels to each of these asset classes will be determined by your investment objectives and risk/return profile. Your needs may change over time so it will be important to regularly monitor and update your investment strategy to account for these changes.

Your investment choices

There are four main classes of assets in which you can invest:

Cash

Cash covers deposits with banks, building societies and credit unions, and overnight market investments. Cash has the advantage of being relatively secure and easily accessible. Inflation has an adverse impact on its value.

Income investments

In a basic sense, income investments involve lending money to a financial institution or company. In return, you receive regular interest payments for the term of the loan. Returns are usually higher than cash and fairly predictable. Most fixed interest products are reasonably secure but vary depending on the issuer and terms. In addition to the traditional range of securities, there is a growing pool of new and innovative investments to consider.

Shares

Shares represent your part ownership (or share) in a business which can be traded on the Australian Stock Exchange. Capital and income usually rises with inflation. Liquidity (ability to trade the shares) is usually good and gains are historically superior over the longer term. Volatility can affect returns over shorter time frames.

Property

Property investments are in real estate whether it be residential, commercial, retail or industrial properties. Property can be held directly or indirectly through a listed or unlisted property trust. Capital and income usually rises with inflation. Liquidity can be an issue and direct property often requires more maintenance than other types of investments.

Do you want to invest directly or indirectly?

Investing directly has the advantage of control, but the disadvantage of requiring hands-on management. Buying units in an investment trust (often called a managed fund) is an indirect way of making investments in shares, property, fixed interest or cash.

Investing indirectly enables you to achieve diversification more easily by pooling your funds with other investors and using the expertise of a professional manager to make investment decisions. The disadvantages are that fees may be higher than investing directly as they are ongoing rather than one off. The returns are also largely dependant on the skills of the fund’s management team which can be difficult to measure, except on an historical basis.

Investors can also choose to invest directly in some areas while using managed funds in more specialist investments such as overseas shares.

Do you want to be geared or ungeared?

If investment monies are borrowed, in whole or part, the investment is geared. By borrowing funds to invest, you considerably increase the risk associated with your investment but also increase your profit potential when returns are positive.

Gearing can be a very successful investment strategy but needs to be carefully considered as to whether it is appropriate for your needs.

Managing your investments

A somewhat cumbersome but essential part of investing is the collection of all of your investment documentation, such as share trades, dividends or interest payments.

Many investors are time poor or have no wish to administer their investment portfolio and deal with all the paperwork.

Morgans has created a service that takes the hassle out of investing by collecting and recording all of your investment documentation. This service, called Wealth+, also provides you with regular reports to help you monitor your portfolio valuation and forecast income.

An SMSF is a personal or family superannuation fund that is managed by the members of the fund, who are also the trustees.

They can tailor their own investment strategies and select specific assets such as listed securities, managed investments, cash and term deposits, international equities, instalment warrants and so on.

Generally an SMSF has the following features:

• a personal or family super fund with no more than 6 members
• each member of the fund is a trustee
• no member of the fund is an employee of another member of the fund, unless those members are related
• no trustee of the fund receives remuneration for his or her services as a trustee
• the SMSF must have a written Trust Deed and Investment Strategy that meets all members' objectives

Advantages of SMSFs

• greater investment choice – direct and indirect investing
• greater control over investment strategies
• access to investment gearing opportunities not available in retail super funds
• cost effective over long term
• offers preferable tax arrangements
• allows you to look after your family

How an SMSF works

As the flow diagram below illustrates, the trustees of an SMSF are responsible for the operation of the fund, including; establishing the fund’s trust deed, arranging the ongoing administration/audit of the fund, managing the investments, receiving member contributions, paying member benefits, and reviewing the member's insurance policies. Life insurance polices may be tax deductible if certain criteria are met.

Is an SMSF right for you?

There is no doubt there are advantages to SMSFs, however you need to consider if an SMSF is appropriate for you. In trying to answer this question, consider these four questions:

• Is the fund strictly for retirement benefits?
• Do you have the time to manage your own fund?
• Will the benefit be worth the cost?
• How will switching to an SMSF affect your current superannuation benefits?

We have a number of services to assist with setting up and administering your SMSF. Contact your adviser or nearest office for an obligation-free discussion.

It’s gonna be alright

Even the Australian Bureau of Statistics (ABS) appears to have fallen under the spell of Pennsylvania’s favourite daughter. In its latest retail sales release, the ABS implied that Taylor Swift’s seven concerts in Sydney and Melbourne boosted retail sales by 20 basis points in February 2024. Overall retail sales were 0.3% higher in February than in January (consensus was 0.4%). In trend terms, looking past the positive effect of Miss Swift on spending, underlying growth was 0.1% month-on-month (mom). Compared with February last year, sales were up 1.6%.

Clothing and Footwear was the strongest category by far, up 4.2% mom, which the ABS sees as largely a function of demand for ‘Taylor Swift inspired outfits and related do-it-yourself accessories’. This seems a little hyperbolic to us, but even if it’s true, we believe the strength in this category provides a positive signal about the underlying consumer behaviour. Young (and no so young) shoppers appear to have adjusted to higher prices. It seems the initial shock of the cost of living crisis has eased into a more stable, but selective, approach to discretionary expenditure. Good news for fashion businesses like Universal Store (UNI, ADD) and Accent (AX1, ADD) perhaps. Despite the cancellation of Splendour in the Grass.

Retail sales were up 0.3% mom

On a seasonally-adjusted basis, retail sales were up 0.3% mom in February and up 0.1% in trend terms. Total retail sales in the month were $35,869m (trend: $35,799m). The best performing categories were Clothing & Footwear (+4.2%) and Department Stores (+2.3%) – a positive for Myer (MYR), alongside UNI and AX1. These are highly discretionary categories and, Taylor Swift notwithstanding, positive growth is a good signal that the consumer is not distressed. Compared with January, there was a minor pullback in Household Goods spending (-0.8%).

The year-on-year growth was 1.6%

Clothing & Footwear was also by far the strongest growth category in February on a year-on-year (yoy) basis, up 4.0%. Overall retail sales were 1.6% higher yoy. Eating Out continues to do well. It’s been the best performing category yoy on average over the past 12 months. Household Goods was the worst performer, down 2.2% yoy, having also been the worst performer in January 2024 and December 2023.

What this all means for the sector

After a period of volatility towards the end of CY23, retail sales appear to have stabilised since the beginning of CY24. Consumer sentiment remains well below historical averages (with the latest index data showing a retreat after the strong jump in February). Sentiment is an important factor driving the performance of consumer discretionary shares and the conditions do continue to look favourable for this index to pick up – unemployment is down to 3.7% and real wages are in positive growth territory. Much will depend on what the RBA does next.

Figure 1: Australian retail sales (A$m)

Morgans clients receive access to detailed market analysis and insights, provided by our award-winning research team. Contact your Morgans adviser to access the full research note or begin your journey with Morgans today to view the exclusive coverage.

• Morgans research analysts re-set their sector views, strategies and best ideas as dynamic forces continue to challenge markets.
• Our approach in equities currently favours stocks with compelling risk/reward profiles among quality cyclicals, small-cap growth stocks and A-REITs.
• Preferred equity sectors include staples, healthcare, financials, retail, travel, resources and energy.

Result season snapshot and 2024 outlook

February results again showed that Australian listed companies remain in good shape. Earnings expectations for FY24 actually ratcheted 0.5% higher led by the Banks, Healthcare and Retail. This suggests ongoing conservatism in market forecasts, offering some margin of safety against rising share prices.

The market’s surprise rally since late 2023 appears a bigger hurdle to further market upside than earnings or economic fundamentals look to be. The implied risk premium (earnings yield) and dividend yield premiums in equities has compressed to historical lows, manifesting in narrow discounts to consensus price targets among the market leaders (ASX20) and narrowing the path for further upside.

So we’re not calling the start of another bull market, but we do think there are plenty of reasons to be optimistic. A likely reduction in interest rates later in the year, cooling inflation and plenty of dry powder should offer solid tailwinds for equities. Below the ASX20, we think the best opportunities lie among smaller caps and those positively leveraged to declining interest rates and stickier inflation, including select cyclicals, small-cap growth and A-REITs.

Small/mid-cap growth and cyclical stocks were the big story in February. They provided a higher proportion of results beating expectations, with a higher-than-average number positively surprising on margins and revenue. Earnings forecasts also held up well in key cyclical segments.

Notably, cyclicals (Retailers, Industrials) represent a larger proportion of the small cap index than for large-caps. So, if the economic slowdown proves to be milder than anticipated and earnings hold, then valuations provide plenty of support here. We expect plenty of ongoing opportunities in small-caps as the segment continues to re-base. Fresh small-cap opportunities being called out by Morgans analysts include Helloworld, NextDC and Universal Stores.

In this note, Morgans sector analysts have upgraded their ASX sector ratings on Consumer Discretionary to Overweight (from Neutral) and Agriculture to Neutral (from Underweight). Downgrades have been applied to sector ratings on Telco to Strongly Underweight (from Underweight) and the Banks to Underweight (from Neutral).

ASX sector & size returns: February trading demonstrated the ongoing rotation away from expensive defensives and into growth and cyclical stocks (Small-caps, Retail, IT, Industrials) as risk appetite recovers

Morgans clients receive access to detailed market analysis and insights, provided by our award-winning research team. Contact your Morgans adviser to access the full research note or begin your journey with Morgans today to view the exclusive coverage.