Economic Update – September 2012

Following consecutive cuts in April and May, the Reserve Bank of Australia (RBA) left the overnight cash rate unchanged at 3.50% in July and in August.   Many economists are speculating that rate cuts will now be seen in the race towards Christmas. 

The Reserve Bank Board was of the view that global GDP will grow at average pace for the remainder of 2012 but believes there are clear potential downside risks that need to be monitored. The key concerns cited were contracting growth in Europe and weaker economic indicators in China.

Locally, it has been commodities that have caused the greatest short term pain for our economy and financial markets, with iron ore spot prices falling to below $US90 and coal prices having slumped by up to 30% in some categories during the month of August and in early September.

Bond markets were volatile during August but most markets reversed intra-month trends to end close to their starting values. The Australian 10-year government bond yield was a strong case in point, increasing sharply in the first half of August hitting a high of 3.44%, before falling back to its starting value of 3.01% by the end of the month.

Equity markets generally continued to rise through August on rising hopes for another round of Quantitative Easing from the Federal Reserve and bond buying from the ECB. The Materials sector underperformed its global counterparts and was one of the worst performing sectors domestically due to the sharply falling iron ore price.

The best performing Australian large-cap stocks during the month included Bluescope Steel (+26.4%), Primary Health Care (+23.5%) and Resmed (+20.8%). The worst performers came from commodity and resource services sectors, Boart Longyear (-38.4%), Atlas Iron (-21.7%) and Lynas Corporation (-20.5%).

U.S. and European stock markets posted strong returns in August, with investors gaining confidence that the ECB will intervene in government bond markets to stabilise the region.

Chinese stocks were weaker market performers in August, falling 3.10%, as the government continued to deploy mechanisms designed to slow the economy. Asia ex-Japan also declined as a result of the slowing trade links, to end the month 0.41% higher, underperforming the global benchmark by 4.91%.

The Australian dollar fell against most major currencies, largely due to the falling price of iron ore, of one of our major commodities. In particular, the AUD declined by 3.93% against the Euro as investors garnered some confidence due to the increasing possibility of ECB stabilisation mechanisms.

The S&P/ASX 200 Property Accumulation Index was down 0.14% in August underperforming the broader Australian sharemarket.

At a stock specific level Goodman Group (6.12%) was the strongest performer on the back of the corporate restructuring by adding Goodman Logistics (HPK), the Lend Lease Group (4.81%) also performing strongly. The Aspen Group (-23.29%) was the poorest performing security, with the resignation in August of their managing director being a contributing factor to this loss. The Stockland Trust (-5.07%) also fell due to poorly received 2011/12 Financial Year results.

Gold (+4.81%) and Oil (+9.55%) were up strongly in August, while the more broad CRB Spot Commodity Index was up 2.05%.

Volatility fell in August by 1.46% as measured by the VIX Index.

 

Looking Ahead

Our Advisers are looking for the following activity in coming months:

– Financial Markets have rallied on (fulfilled) expectations that major central banks would take action to stimulate their economies, further progress will require a confirmation of recovery. It could take several months for economic data to do this.

– The European Central Banks proposal to buy the bonds of troubled countries reduces the risk of disaster in the Eurozone. This financial support has however only come in return for increased austerity.

– Commodity prices did surge on the long awaited QE3 announcement however the long term resources prices will be determined more by China QE3.
Article by John Manuel, Director, Prosperity Wealth Advisers Pty Ltd. John and our other Advisers provide Financial Planning and Family Office services to our clients from offices in Brisbane, Sydney and Newcastle.  

Succession Planning for Professional Services Firms

It takes years to build up a strong, partner-led professional firm, but many businesses can destroy this value quickly by failing to plan for the succession of senior staff.

What is your plan?

Have you considered how you will exit your firm or manage the exit of one of your partners should they get ill, seek retirement, or face an unexpected change of life?

Have you identified the likely successors for your role? What is in place if one of the principals is removed by illness or death? Will your business have ongoing viability if you are no longer part of the team?  Do you know what your firm is worth?  What will be the taxation consequences of a sale of your equity?

If you can’t answer these questions you could be exposing your business to risk should you have a principal of the business retire, resign or confront health issues.

Often professionals are so busy working in the business they don’t work on the business and succession usually isn’t an urgent consideration. It is, however, important to work through the process and develop a plan that will deal with the succession of your business in all circumstances, including an unplanned exit.

Considering your succession options

Consideration should be given to the outcomes for your business if you were to get ill or have to step away from the front line.  Then, once understanding the impact, you should consider the options available for succession and the issues and merits of each option.

Where the firm has multiple principals there should be equity/shareholder agreements in place which identify the roles and responsibilities of the parties can also identify the steps to follow to buy out an exiting party.

It should also outline the method to value the equity interest and what terms will apply to the payment.

A buy/sell agreement that deals with unplanned exits is often funded by an underlying insurance policy that is triggered when the events in the buy/sell occur.

It is better to put these documents in place when there is no immediate requirement to negotiate an exit as they can then be done with no specific agenda in mind.

Business Structure

Other considerations for the succession plan is reviewing your business structure to allow for easy entry and exit of parties and access to any asset protection and taxation concessions where available during operation of the business and in the event of sale.

Financial Review and Improvement

There should also be a financial due diligence to identify the areas for improvement in the practice, including financial reporting programs, growth planning, profitability improvement, systems development and risk management.

When these areas are improved they enhance the value of any business and will result in greater profitability of the business and a smoother transition.

Identifying your successor

It is also important to consider whether there will be an external sale of the business or whether a potential leader can be identified within the current team.

The knowledge and experience that resides in a principal often forms a substantial proportion of the firm’s intellectual property and capital. That knowledge and experience needs to be passed on to potential successors.

Internal succession may also need to be backed by appropriate recruitment of staff who aspire to being a principal, leadership and management programs to provide development, and growth in the practice that facilitates progression of team members to principal.

Well planned succession

Ultimately succession of a principal can be best managed where the business is transition ready, there is a process in place to manage an exit and the process is clear for all parties involved.  That way, when succession becomes an issue, it is not a reason for unnecessary conflict or stress.

 

Debbie Matthews is an Associate Director of Business Services and Taxation at Prosperity Advisers.