Economic Update: Zigzagging markets looking for some summer confidence

World markets took a hit last quarter with a myriad of negative or concerning news, ranging from Scotland’s independence referendum, Hong Kong’s pro-democracy protests and the US and several other nations’ air forces entering in to Syria to fight against ISIS. These events lead to a shift in sentiment towards uncertainty that saw share market and consumer confidence fall initially before rocketing back to record highs in some markets in recent weeks.

The big stories are however, the deflation of the Yen that is underway to stimulate the Japanese economy and the on-off speculation that the US Fed may start raising interest rates sometime next year as it moves toward the end of quantitative easing. Risk assets were served up at severe discounts in the months of September and October, but have regained ground of late.

Domestically, interest rates have remained on hold this month, steady at 2.50% for the 13th consecutive monthly period. Whilst the RBA has warned previously that it may look to employ a strategy to rein in bank lending to keep house prices under control, this month, Governor Glenn Stevens barely acknowledged that concern, saying “Credit growth is moderate overall, but with a further pick-up in recent months in lending to investors in housing assets. Dwelling prices have continued to rise over recent months”.

Australian equity markets fell in September then bounced back in October, with the S&P/ASX 300 Index rising by 7.2%. September saw the ASX experience its worst month since May 2012, with around $90 billion sold off in the period, and Australian shares losing almost all the gains since the start of the year in a single month.

The pressure on commodity prices has been relentless, with Iron Ore prices continuing to fall and disappointing Chinese data weighing on sentiment.  We have seen a decline in the Australian Manufacturing PMI Index by 0.8 points to 46.5. Australian exports also deteriorated in September, however the fall of the Australian Dollar should see this sector improve in the months to come. Australian Manufacturing PMI measured exports sub-index declined by 11.0 points to 42.2 points, bringing Australia’s international competitiveness down by 4.17%.

Looking to international markets, concerns are rearing their head that Europe remains at risk of moving into a recession. ECB chief Mario Draghi weighed in on concerns saying “without reform [in the eurozone], there can be no recovery”… “I cannot see any way out of the crisis unless we create more confidence in the future potential of our economies”. In China the MSCI Local Currency Index underperformed, posting a loss of -6.20% in September before recovering confidence to achieve a 17.7% increase in retail sales and a 13.8% upturn in industrial production in October. The Hong Kong pro-democracy protests impacted on investor sentiment, resulting in the Hang Seng Index dropping by -7.31% over the month of September. Manufacturing activity in Mainland China has slowed as retail sales continue to decrease.

Gold and Oil pricing continued to fall in October. The downturn in Gold coming on the back of an appreciating US Dollar and rising expectations of the US tightening monetary policy.

Over the coming months we will be carefully watching the following:

  • The rising prices of property markets in Melbourne and Sydney and the concern of investors entering the markets chasing short term gains.
  • Geopolitical unrest and the threat of global terrorism destabilising the international economy, causing a decline in consumer confidence.
  • An increase in Australian employment market impacting local consumer confidence, impacting on small businesses.
  • Outcomes from the G20 meeting in Brisbane.

 

New South Wales fights for a bigger share of Significant Investor Visas as the Federal Government tries to curb leverage

New South Wales (NSW) has introduced measures to increase its competitiveness in attracting Significant Investor Visa candidates. The NSW Government has recently removed the requirement for NSW bound significant investor visa applicants to invest $1.5M of their $5M investment for residency into NSW Treasury Bonds.  At the same time the Federal Government has also flagged likely changes to remove the current practice where many SIV applicants borrow against their $5M investment in Australia and essentially recycle money back offshore.

The NSW Treasurer Andrew Stoner in announcing the changes recently said, “From 1 September, overseas investors considering NSW nominations will be able to choose how to invest every dollar of their complying investment.

“This change will further consolidate NSW’s globally competitive position as a preferred investment destination for investor migrants.

“NSW is more than Australia’s business headquarters – it’s the State that’s driving Australia’s economy. “Rich in business opportunities, with a stable and strong government, and an economy that is robust, diverse, dynamic and easily accessible to the rest of the world, there has never been a better time to invest in NSW.”

It is evident that NSW is keen to increase it’s share of significant investor visa candidates that choose NSW as their preferred place of investment. Of the 1,650 expressions of interest registered at 31 August 2014, Victoria (VIC) represented 846 of the candidates and NSW 550. In terms of granted visa’s again VIC leads the way with 193 granted as against 146 in NSW.

The change in the requirements around investing a portion of the investment in a lower yielding investment is only likely to enhance the share of SIV applicants seeking out Sydney and NSW as their destination of choice. The Federal Government has plans to grow the program to approximately 700 SIV approvals per year, with the view to attracting $3.5 Billion of inbound investment in the Australian economy through the program and it is clear that NSW wants a larger piece of the action.

In further changes to the scheme on 10 September 2014 Immigration Minister Scott Morrison, in a media release stated will no longer be able to recycle their investment funds offshore by using products that allow them to borrow against their SIV compliant investment. Minister Morrison referred to concerns with the significant investor visa scheme, which requires foreigners to invest a minimum of $5 million for four years, as money was being invested and subsequently borrowed against and recycled offshore again. The intention of the scheme is to attract foreign investment and enhance economic activity through longer term investment in Australia.

Mr Morrison flagged changes to the investor rules which would require investments to remain unencumbered or without a debt against them, for the entire four years duration of the visa. This change should only be a positive for the economy in allowing funds to remain in Australia unencumbered over the four years.

Don Lee, Luke Malone, Martin Zhao and Gavin Fernando are Directors of FountainguardProsperity’s Asian Business Desk team who provide a full range of accounting, financial and wealth management advice to the Chinese market.