Insights

When you start a family, your focus is on financial stability – wealth creation and wealth protection. The big changes in life – a young family, a home, a change at work, windfalls – provide the perfect opportunity to review your financial situation.

Debt management

When you are in your thirties and forties, debt can play an important role in helping you achieve your lifestyle and financial goals. It must, however, be managed effectively as some debt structures are more efficient than others.

Efficient Debt

Any debt used to purchase assets that generate an income can result in the interest costs being tax deductible. Where these assets also grow in value, this form of debt is considered to be efficient.

Inefficient Debt

Loans taken out to purchase non-income producing assets or services (for example a car or holiday) do not qualify for a tax deduction in relation to the interest cost. This form of debt is considered to be inefficient from a wealth creation perspective and is often a drain on accelerating your long-term wealth accumulation if not managed properly.

Wherever possible you should try to accelerate the repayment of inefficient debt, and consider replacing it with more efficient debt structures that can be used to create wealth, tax effectively.

Ways to reduce inefficient debt

• manage and understand your cashflow to ensure you are making the maximum possible loan repayments
• choose the loan that has the best structure for you. A lower interest rate does not necessarily mean that you will pay less interest over the life of your loan. Often it is the flexibility and the features offered in a loan that will determine how well various strategies can be put in place to reduce the outstanding loan as quickly as possible (and hence reduce the amount of interest payable)
• making use of the interest free component of your credit card for everyday expenses allows your money to reduce your average daily loan balance and as a result your interest bill and the loan term

Investing

Borrowing to Invest

With plenty of years left to retirement, many thirty and forty-something investors borrow funds to build their wealth. The long term view on this strategy allows them to increase their investment portfolio and manage their tax deductible debt in an effective way. Be very mindful, however, that borrowing can also magnify capital losses. Any borrowing strategy should therefore be approached with caution. Understanding the risks involved is very important.

Margin Lending

A margin loan lets you borrow money to invest in shares and other financial products, using existing investments as security. Commonly, borrowing limits are set to a certain value or percent depending on the type of asset (eg shares) you are buying, with the difference made up from your own cash or existing investments. This difference is referred to as the 'margin' - hence the name 'margin lending'.

Property

Property investors can choose to invest directly into a property, or via a listed or unlisted property trust. Your Morgans adviser will be able to help select an appropriate strategy for you, depending on your personal circumstances and investment objectives.

Shares

Regardless of whether you borrow to invest or not, it is still a good time to think about investing in shares, either directly via the sharemarket, an ETF, or via an unlisted managed fund. Most share prices are at a reasonable value. Your adviser will be able to help select the most appropriate method of investing to suit you.

Franking credits

Companies paying Australian tax keep a record of the amount paid in a franking account. When the company declares a dividend it is able to attach all or some of that franking account to the dividend as a franking credit.

Most companies listed on the Australian Stock Exchange pay dividends to shareholders that include franking credits. The franking credit and resulting tax benefit available from the dividends means the actual return from that particular stock needs to be "grossed up" to reflect its true value.

The following table highlights the grossed-up effect of various dividend yields, as well as the equivalent after tax yield based on flat 15%, 32.5% and 45% tax rates.

Fixed interest

Portfolio diversification is an essential element to a successful investment strategy. This applies equally across a portfolio and within asset sectors.

When investing in fixed interest, a spread of investment helps provide both capital certainty and regular income. As part of your planning you will most likely require some component of liquidity i.e. ready access to cash, some longer term investments as well as attractive levels of regular income.

Cash management accounts

Liquidity within a portfolio can be achieved by maintaining an “at-call” cash account which is linked to your investment account for easy settlement. You can also have your dividend payments credited directly back to the account and make regular payments from it.

Term deposits

A term deposit is a deposit held at a financial institution that has a fixed term. Term deposits continue to remain attractive to investors looking to maintain a balanced portfolio with exposure to low risk non-equity investments.

You can use a term deposit to enhance the returns on surplus cash balances or to build a dedicated income portfolio.

Government and corporate bonds

Government and corporate bonds also help reduce portfolio risk while providing a stable income.

The yields on government bonds will generally be lower than most other interest rate investments but provide absolute security when held to maturity.

Hybrid investments

Hybrid investments generally deliver higher levels of income, paid quarterly, along with benefits of franking. You should discuss with your adviser which securities will suit your risk profile and meet your income needs.

Other investment ideas

If you stick to the basics of investing you will have a much better chance of getting through any period of high volatility and uncertainty.

It's not all about market timing and stock selection as they only play minor roles in the performance of your investment portfolio. It is about asset allocation, active reviews, professional advice, and sticking to your long term strategy.

Wealth Protection

Greater financial responsibility – such as mortgages, marriage, and children – means the impact of illness, injury or death is greater.

Protecting your family and assets through insurance has more of a sense of urgency, especially when the family is reliant on your income.

Things you need to consider at this stage in life are:

• the elimination of debt (mortgage, car loans, or even credit cards)
• provision for daily expenses for you and your family in the event you're unable to provide income
• education expenses
• medical costs

Due to the vast range of products on the market, in order to get the right features for your situation, you need specialist advice.

Some things you need to consider:

• the level of insurance
• ownership structures
• funding arrangements

Protecting your wealth in this stage of life is more complex so it is crucial you speak with a financial adviser before committing to a decision.

Your options

Life, Trauma and Total and Permanent Disablement (TPD) protection can provide a lump sum payment to cover debts and secure your financial future or that of your loved ones. Trauma insurance will provide a lump sum in the event you're diagnosed with a serious illness, while TPD protection covers you in the event you’re permanently unable to work due to injury.

Income Protection will help continue to meet your financial commitments and daily living expenses.

Business Expense Insurance should be considered if you have a business or are self employed and injury, illness or premature death would cause financial problems. Consider – if you were unable to meet expenses such as electricity, rent, telephones and staff salaries would your business survive?

Superannuation

This is the time to really get serious about your superannuation savings. Laying the groundwork for retirement now will help you reap the rewards when you finally give up work. As they say "failing to plan means planning to fail".

Salary sacrifice

A common strategy for employees is to forego a portion of salary in lieu of increased contributions to superannuation. Contributing pre-tax salary into super not only reduces your income tax, it increases your savings within super. Over the long term, these additional savings can make a significant difference to your account balance for retirement.

Regular savings plan

Don't forget the benefits of "dollar cost averaging" via a regular savings plan to help save for future goals such as your children's education costs, or home renovations, for example. Your money will buy more shares or unties when prices are low, and as prices eventually rise your investment will also grow proportionately.

ESG (Environmental, Social and Governance), Socially Responsible Investing, Greenwashing and Corporate Responsibility are all becoming common terms and areas to consider for both Australian investors and Corporates.

Although the use of the term ESG has only occurred within the last 20 years, sustainability has been considered by investors as far back as the 1960’s with the use of socially responsible investing.

Socially Responsible Investing or ESG Investing involves socially conscious investors such as Not-For-Profits using ESG criteria to screen potential investments and assess whether they fit their values, mission or sustainability mandate.

With the announcement of new climate reporting requirements, the focus has shifted from Corporates voluntarily considering their ESG and sustainability positions, to now being faced with mandated reporting requirements, audited sustainability reports and potential director penalties for non-compliance.

Australian companies will need to be carefully considering their ESG strategy, climate related risks and plans, with stakeholders including investors placing more interest in companies that have a sustainable, climate aware businesses.

The recent 2023 ASX Investor Study found that 31% of investors are ESG conscious, with those investors focusing on companies that make a positive impact and avoiding companies that create social and environmental harm.  This view was more prevalent in younger generation investors (18 to 25 years) and those in wealth accumulation phase aged between 25 to 49 years.

Although the Environment or ‘E’ in ESG has been a high focus, it is now becoming common for companies to be closely considering their social impact and governance strategies as these have a wide impact across all stakeholders including investors, suppliers, customers and employees.

Morgans has a specialist Not-For-Profit and ESG team that can assist you on all your ESG and negative screening questions. Get in touch with your Morgans adviser to find out more.

The landscape of consumer discretionary stocks is ever evolving, shaped by economic indicators, company performances, and broader market trends. As we wrap up another year, it's crucial to revisit our projections and recommendations based on the latest data. Following the recent Annual General Meetings (AGM) season and shifts in foreign exchange (FX) rates, we've conducted a comprehensive review of our earnings estimates and target prices for companies within the consumer discretionary sector.

Updated Earnings Estimates

On a median basis, our Net Profit After Tax (NPAT) forecasts have been adjusted downwards by 1% for both FY24 and FY25. This adjustment primarily reflects our expectations for lower gross margins and increased operating costs across the board. Despite these reductions, our revised FY24 estimates stand 3% above the Visible Alpha consensus, indicating a slightly more optimistic view compared to the broader market expectations.

Strategic Recommendation Changes

The Reject Shop (ASX:TRS): We've upgraded our recommendation from Hold to Add. This decision reflects our reassessment of the company's growth prospects and its ability to navigate the current market dynamics.

Key Picks in Consumer Discretionary

Lovisa (ASX:LOV): Renowned for its fast-fashion jewelry offerings, Lovisa continues to exhibit robust growth potential, underpinned by aggressive international expansion and resilient consumer demand.

Super Retail Group (ASX:SUL): As a leading retailer catering to outdoor, sports, and auto enthusiasts, Super Retail Group has demonstrated commendable resilience and growth, making it one of our top picks in the sector.

Conclusion

As we navigate through fluctuating market conditions, our updated models reflect a cautious yet opportunistic stance on the consumer discretionary sector. The adjustments to our earnings forecasts and the strategic changes in our stock recommendations aim to capture the evolving landscape and identify opportunities for investors. Lovisa and Super Retail Group, with their distinct market positions and growth strategies, exemplify the potential for outperformance in this dynamic sector.

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.

Following the Federal Reserve's latest meeting, Morgan's Chief Economist, Michael Knox, provides an update on the Summary of Economic Projections, stating that rates will continue to fall until 2027.

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ESG stands for Environmental, Social and Governance; it refers to three main factors that investors consider with regard to an organisation’s ethical impact and sustainable practices. Socially conscious investors such as Not-For-Profits use ESG criteria to screen potential investments and assess whether they fit their values, mission or sustainability mandate.

According to the Responsible Investment Association Australasia (RIAA), 9 in 10 Australians expect their investments to be responsibly and ethically invested. This means investing funds in a way that does no harm, and ideally leaves the world in a better place.

Of particular interest to NFPs is the use of negative screening (also known as values-based or ethical screening). Negative screening is used to exclude companies from an investment portfolio on the basis of the industry in which they operate. This could involve screening for religious, ethical, moral and other social and environmental criteria (e.g. tobacco, gambling, weapons, animal testing). The other side is positive screening, where NFPs utilise ESG research to identify companies with superior ESG performance relative to industry peers.

In addition, incorporating ESG factors into an investment decision may even result in an outperformance effect.

It is important to be aware that particularly in the Australian context, there is a risk that imposing a large number of negative screens on a portfolio, can reduce the ability to diversify your portfolio. It may also deliver performance outcomes that differ from traditional market benchmarks.

Morgans has a specialist Not-For-Profit team that can assist you with all your ESG and negative screening questions. Get in touch with your Morgans adviser to find out more.

Examples of ESG issues

Environmental

• Climate change
• Waste and pollution
• Clean water and sanitation
• Affordable and clean energy

Social

• Supporting local communities
• Human rights
• Employee relations and diversity
• Quality Education

Governance

• Bribery and corruption
• Board diversity and structure
• Executive compensation
• Data security and customer privacy

Morgans Chief Economist Michael Knox's outlook for the world economy in 2024 is that growth will slow; inflation will fall; and money will flow into Stock Markets.

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