Great news on inflation + is your super fund any good?

Happy Friday everyone,

This week:

• Great news from overseas on inflation

• How to benchmark whether your superannuation fund is any good

• The best dividend payers on the sharemarket

• Is the rental crisis easing?

• And is buying a home unit better than a house?

Some really big news on the inflation front from overseas this week and it’s all good – with big falls in the US and China. Hopefully Australia can follow that trend… I have my doubts following the recent wage rises and 1 July price rises, but fingers crossed

In the US, inflation cooled to its slowest rate in two years, with the annual CPI up 3 per cent in June; down from the 4 per cent in May and the 9.1 per cent peak in June last year. The last time US inflation was 3 per cent was March 2021.

As the US Federal Reserve has an inflation target rate of 2 per cent, there’s likely to be one more interest rate rise, but most economists are predicting that could be the end of the cycle.

As you can see in these charts from IFM Investors, US prices are trending down right across the board.

 If you thought the US inflation rate was good, China’s is even better: no inflation in June, 0 per cent, and down from 0.2 per cent in May.

China is not only our biggest export customer, Australia is a big import customer of China, too. So if inflation in China is zero, then you’d hope there’d be no price inflation in our Chinese imports. This should be passed on to Australian consumers which, in turn, will help bring our own inflation figure down.

Hopefully our importers don’t use this to increase their profit margins rather than pass the benefit through.

How inflation erodes your wealth

I know it can be a bit monotonous, this constant focus on inflation and bringing it down. To put it into perspective, I loved this comment from Gary Brode of Deep Knowledge Investing in the US.

So many think 2 per cent inflation is fine. Here's what I'd love everyone to understand.

In a 40-year working life:

• 2% inflation destroys 55% of the value of your money

• 4% is 79% loss

• 6% is 90% destruction

That’s why investing and managing your money is important. To fight the inflation erosion your money has to earn at least more than inflation (after tax) to protect its purchasing power or value.

A bit later I’ll cover the latest superannuation fund returns and whether they are beating inflation and protecting your wealth.

Sharemarket rebounding nicely despite rate rises… and gloom of recession

The quickest, steepest rise in interest rates has shocked economies and consumers around the world and pushing some into recession and many others teetering at the prospect of recession. The media is full of doom and gloom.

So, would it surprise you to know that the US sharemarket is now back to the same level it was when the interest rate cycle first started in March 2022? It’s an interesting perspective.

Granted the US market has been led by the share surge in the seven monster tech companies. But over the last couple of weeks the gains have been more widespread across transport and utility stocks.

Here in Australia our ASX-200 index has recovered from the lows around 6400 points and is back around 7300 points, and not far off the 7700 point peaks we saw just before our rates started to rise.

It seems share investors are looking beyond any near-term economic weakness and getting set for the upturn which will follow.

Your superannuation benchmark… are you in a dud?

Superannuation is the third most important weapon you have in your ability to build wealth, behind your capacity to earn income and owning your family home. The issue is that because it gets compulsorily deducted from our wages each month, we often don’t give it the attention it deserves.

It grows almost by stealth. But it deserves better attention from us… so let’s do it right now.

This week the end of financial year superannuation fund performance figures were released. So very soon you will receive the annual or bi-annual (depending on your fund) performance figures from your super fund manager.

Promise me you’ll open the letter or email and read how the fund has performed.

To give you a benchmark on whether you’re in a dud fund or not, leading superannuation research house SuperRatings estimates that the median balanced option returned 1.2 per cent over the month of June, for an annual return of 8.5 per cent for the year to 30 June 2023. Note that in the previous financial year balanced funds went backwards -3.4 per cent.

If you’re in a balanced super fund option you’re looking for an average return of 8.5 per cent on your statement. If it’s higher, great, you have a fund doing better than the average. But if it’s lower, you need to find out why and, if it’s consistently lower, maybe you need to switch to a better fund.

According to SuperRatings if you’re in a growth oriented super fund it should have produced a return of at least 11.1 percent for the financial year and 4.5 per cent for a conservative capital stable fund.

Accumulation returns to June 2023

Pension returns also ended the financial year strongly, with the median balanced pension option up an estimated 1.3 per cent over June. The median growth option rose by 1.6 per cent, while the median capital stable option is estimated to deliver a 0.3 per cent return for the month.

Pension returns to June 2023

While it’s important to check the annual performance, as we all know superannuation is a long-term investment. A fund needs to be measured on how consistent its returns are over the long term, during both good and bad investment markets.

The chart below shows that the average annual return since the inception of the superannuation system is 7.1 per cent, with the typical balanced fund exceeding its long-term return objective of beating inflation by more than 3 per cent.

That’s pretty good… a “real” return of 3 per cent.

The power of dividends: Shares that pay the best dividends

At this time every year I remind share investors that an increasing share price is not the only way to make money in equities. The power of dividends is often overlooked by investors to their financial disadvantage.

Major Australian companies are paying dividend yields of up to 11 per cent fully franked which, when you consider many fund managers are only expecting single digit returns from share prices, is a powerful addition to your returns.

The list I’ve included are the top dividend payers amongst our 50 biggest sharemarket listed companies.

Remember, a fully franked dividend means your payment comes with a tax credit equal to the company tax rate of 30 per cent. It means the company paid its full level of company tax, so shareholders receive a tax credit with their dividend… if they didn’t it would be a case of double taxation.

A good dividend yield can often indicate a company has good cash flow, financial strength, a low share price, or a combination of all three.

While most of us follow the fortunes of our share portfolio each day via their share price movements, that dividend cheque twice a year often goes unnoticed… it shouldn’t.

With many top companies paying a dividend yield of 5-6 per cent, add the impact of franking credits and that yield can jump to an impressive grossed up 7-8.5 per cent.

During the profit reporting season, the focus of the tidal wave of results is usually on the earnings and at times the dividend policy only receives scant mention.

The theory is a top 50 company is usually blue chip, would have strong cash flow to be able to pay the dividend, but for traditional growth stocks it usually means the market has marked them down for some reason and that’s why their dividend yield is so good.

The potential is that when market sentiment changes, selected growth stocks will move up with the cycle and you’ve locked in a decent dividend yield at these prices.

Beware of the fact that while the dividend yield is good now, you have to be confident the company has the capacity to maintain dividends into the future.

Could home units be the forgotten property investment?

While all the attention is on the increasing value of Australian residential homes, did you know apartment prices are now back to their 2022 peak, having barely fallen last year?

And over the past 12 months, unit growth has been the same as house price growth. In fact, in Brisbane unit prices are now growing faster than houses and across the country and rents for units are increasing twice as fast as houses.

According to Ray White chief economist, Nerida Conisbee, the old adage that houses always do better than apartments is not currently playing out.

What has driven this, and will it continue?

Part of the reason that apartments are back to their peak so quickly is because they didn’t increase as much as houses during the pandemic.

Apartment living wasn’t much fun during lockdowns. Living in smaller spaces with restricted movement was difficult and a lot of the best things about urban living were not available. Cafes were closed, CBDs were deserted and there was no night life. It was also less necessary to live close to workplaces, leading people to move to outer suburbs and regional areas.

Now that things are pretty much back to normal, apartment living is again attractive. Most of us are going back to the office more frequently and all the best things about living in higher density suburbs are back. We have moved quickly from a situation where there were too many apartments to not enough. Demand is exceeding supply, driving up prices and rents.

And that situation is unlikely to change anytime soon. Fewer apartments are being built. Building approvals are currently at low levels not seen in more than a decade. According to Nerida, even if approved the likelihood of many projects being imminently constructed is low. Construction costs are at record highs and the rate of increase is now only starting to come down. The timing between approval and completion can be several years.

The one positive is that strong price and rental growth will make more projects viable.

But maybe the rental crisis is easing…

As covered before, the property crisis is not just a shortage of stock for sale but also a shortage of properties to rent.

According to SQM Research, national residential property rental vacancy rates continue to rise and now stand at 1.3 per cent at the end of June.

The total number of rental vacancies Australia-wide rose by 2,809 dwellings to stand at 39,716 properties. The rise was driven by a jump in Sydney rental vacancy rates to 1.7% per cent (1.5 per cent in May).

Melbourne, Canberra, and Hobart also recorded an increase in rental vacancy rates during the month to 1.3 per cent, 2.1 per cent and 1.9 per cent respectively.

Rental vacancy rates in the Sydney CBD and Melbourne CBD also increased rapidly to 5.7 per cent, and 4.3 per cent, respectively.

Rental vacancy rates were steady in Brisbane, Perth and Darwin at 1 per cent, 0.6 per cent and 0.9 per cent, respectively.

The majority of regional areas recorded stable rental vacancy rates during the period.

Ummm… Could Philip Lowe have a point?

I know he is the scapegoat (and justifiably so) for everything bad about rising interest rates, but remember when the RBA Governor was roundly criticised for suggesting that if you couldn’t afford rapidly rising rents then move back home with your parents or rent a room?

In hindsight, could he have been making a valid point?

It got me thinking when I read a report from Tarric Brooker that there are 13 million empty bedrooms in Australia – that’s 46 per cent of total bedrooms.

Would you believe 10 per cent of households have three or more empty bedrooms? And the number of empty rooms continues to grow – up 300,000 in the last two years of data.

Maybe, Philip Lowe had a valid point.