Insights

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.

• Rate cuts expectations are firming. Recent months have seen some mixed economic data but we are seeing clearer guidance from central banks. Major central banks are on track to start their cutting cycles in June which will further support risk assets.
• Moving to a risk-on strategy. We continue to put our cash to work and move to a risk-on stance with a overweight position in global equities, fixed income and real assets (real estate, infrastructure). The US remains our favourite equity market, supported by the prospect of Fed rate cuts, resilient growth and rapid tech innovation.

A favourable backdrop for investment returns

In recent months, debate has shifted away from ‘recession risks’ towards a ‘soft landing’ or even the possibility of ‘no landing’ in the US; inflation has remained on a mild downward trend; and China’s increased stimulus is reducing downside risks both domestically and globally. The US election does not materially change this outlook as it remains a 2H 2024 story, and either continuity under a Democratic President or expected tax cuts under the Republicans could support risk appetite. We therefore see opportunities to put cash to work, and we recently adopted more of a risk-on bias by moving global equities, real assets, and fixed income to mildly overweight.

We continue to prefer the US market, as US earnings and margin resilience, its innovative tech sector and North America’s Re-industrialisation all provide support. This should also continue to provide support for the US dollar. While strong employment conditions in Australia should underpin consumption, high prices for the ASX 20 will mean investors will need to look beyond large-caps for returns. However, the favourable investment environment goes beyond equities. Bond yields remain elevated, and we continue to believe these should be locked in. There was some volatility in bond markets earlier this year as rate cut expectations were pushed out, but they are now in line with ours. We continue to expect rate cuts and falling real yields to bring down bond yield in coming months.

Of course, risks remain in our complex world, but as we have seen, markets are happy to take some uncertainty in their stride as long as the earnings and rate fundamentals remain constructive. We agree with this attitude and believe risks should be managed rather than keep investors away from the market. We believe our investment priorities find the right balance between exploiting the opportunities while focusing on quality and limiting exposure to areas where risks are mispriced (e.g., unlisted commercial real-estate, growth private markets or lower-rated credit).

What’s not to like?

We are underweight cash in our tactical asset allocation and are overweight in both bonds and equities, so we have a clear risk-on strategy. But that doesn’t mean that we are indiscriminate. Across our portfolio we continue to focus on quality. In the bond market, this is principally because credit spreads are too tight to compensate even for a small pick-up in defaults. In equities, we think the cyclical and structural forces continue to support the winners. We also expect a broadening out of performance in asset classes that have lagged (Real Estate, Infrastructure and developed market small-cap equities).

Q2 2024 asset allocation update

We continue our recent trend of putting cash to work to increase our real assets (REITs and listed infrastructure), global equity, and fixed asset allocation. We move to a neutral position in Australian equities. See our asset class views for more (page 2). Expect market narratives to shift rapidly so prepare for shorter cycles. A volatile macroeconomic environment demands vigilance.

Figure 1: Q2 2024 Asset Allocation – Tactical Tilts

Morgans clients receive access to detailed market analysis and insights, provided by our award-winning research team. 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.

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.

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.

Morgans Chief Economist Michael Knox uses the Chicago Fed National Activity Indicator to model the US economy and explain why there is no incoming US Recession.

Watch

Listen