My thoughts on the budget + A warning issued on this popular investment

Hi everyone,

The federal budget was released on Tuesday, the Reserve Bank’s interest rate decision is being made next Tuesday and a federal election was called this morning. 3 May is the election date after the Prime Minister visited the Governor General this morning.

Plus this week we welcomed grandchild #9, Heidi, to Australia for the first time. She, Georgie and Alex are visiting from London.

There is a bit going on at the moment.

In this week’s newsletter:

• My thoughts on the federal budget.

• The inflation rate is slowing nicely.

• A warning on investing in private credit funds.

• Car vs public transport vs ride share - which is cheapest?

• The art of investing in alternatives.

• Where Australia rates on the World Happiness Index.

My thoughts on the federal budget … and Dutton’s reply

We’ve been bombarded by coverage of this week’s federal budget, which is likely to only remain relevant for a couple of months in light of the upcoming federal election. But here are my quick thoughts on it:

• The economy seems to be bouncing back with Treasury forecasts seeing economic growth accelerate from the current anaemic 1.5 per cent to 2.25-2.5 per cent.

• But inflation is forecast to rise from the current 2.5 per cent to 3 per cent and we still don't know the full impact of any tariff changes from the global trade war instigated by Donald Trump. The big question is whether this inflation rebound will delay, or even cancel, the three more rate cuts predicted by the end of the year.

• The $5 a week tax cut seems piddling at best when you add in the perspective that income tax revenue collected by the federal government is at record high levels. You would have thought it could be a bit more generous. But government spending is also at record levels, so the government needs the tax revenue to pay for yet more infrastructure outlined in the budget.

• The $150-a-year energy rebate is a welcome cost-of-living relief, but I still contend it should be means tested. Still spend the $1.8 billion but more should go to those families struggling with financial pressure rather than to richer Australians. The government argues that energy retailers don’t know customer income levels and therefore can’t differentiate. The alternative is for the ATO to pay the relief direct into people’s bank accounts, like they do with childcare. The only problem with that is the impact wouldn’t be seen in the inflation figures which the government wants to artificially reduce.

• Assistance to encourage more GPs to bulk bill is a good move. I’d previously suggested the GP “gap” be covered by private health insurance. But the budget measure is a good solution.

• Scrapping the instant asset write-off will be a big blow to small business owners wanting to invest in their business. Seems a silly move and could come back to bite the government and hurt its election prospects, particularly after last night’s budget reply from Peter Dutton. He promised to not only make the instant asset write-off permanent, but also to lift it to $30,000 a year. As well as the proposed $20,000 per year deduction for business-related meal expenses, it’s a significant boost to the struggling hospitality sector.

• The budget also confirmed the new tax on superannuation balances above $3 million. This will tax unrealised capital gains on an annual basis. Usually, capital gains tax (CGT) is imposed on gains when an asset is sold, but with superannuation fund balances over $3 million, assets will be valued each year and CGT imposed on gains whether assets have been sold or not.

• Dutton’s budget reply also confirmed the Coalition’s plan to allow first home buyers to access their superannuation to help build a deposit to buy a home. Naturally the superannuation industry is complaining that it will reduce a person’s retirement payment and send house prices higher. Superannuation funds obviously want to keep that money so they can earn fees on it. My view is that it’s the customer’s money so why shouldn’t they have the flexibility to use it as a deposit? But, if they do, then they should agree their future annual compulsory superannuation contributions need to rise to a level which means their retirement payout isn’t affected. Best of both worlds.

The latest inflation figures look good

Australia’s headline monthly consumer price index (CPI) was unchanged in February and the annual growth rate slowed from 2.5 per cent to 2.4 per cent, slightly below economists’ estimate of 2.5 per cent.

The Reserve Bank’s preferred trimmed mean gauge, which smooths out volatile items, slowed from 2.8 per cent to 2.7 per cent. So both the headline and trimmed mean inflation rates are now within the RBA’s 2-3 per cent target band.

A fall in electricity prices and slowing housing inflation generally eased household price pressures in February.

Despite the good inflation rates, financial markets are pricing in just a 7 per cent probability for a follow-up interest rate cut by the RBA next week ... but the probability of a rate cut lifts to roughly 70 per cent on 20 May.

Within the latest monthly CPI figure, the highlights were:

• Education costs jumped 5.1 per cent last month as school and university course fees soared at the start of the academic year. Education costs are up 5.6 per cent on a year ago, reflecting a 7.6 per cent jump in pre-school and primary school fees, driven by higher operating costs. Tertiary education fees lifted 3.8 per cent in the 12 months.

• Financial and insurance services prices rose 0.2 per cent in February to be 4.5 per cent higher on a year ago. Insurance prices rose 7.6 per cent in the 12 months, down from 11 per cent in January and a peak of 16.5 per cent a year ago. The ABS said, “Increases in motor vehicle insurance, in particular, have slowed reflecting an easing in costs for spare parts and labour for motor vehicle repairs, as well as lower second-hand vehicle prices.”

• Holiday, travel and accommodation prices slid 7.6 per cent in the month of February and are up just 1 per cent on a year ago, as travel demand dropped after the summer holiday peak.

• Prices for building and renovating a home fell 0.1per cent in February and rose just 1.6 per cent from a year earlier, sharply down from the double-digit growth seen in 2022.

• Rents still rose by 0.5 per cent in February and were 5.5 per cent higher over the 12 months. It was the softest annual growth rate for rental prices since March 2023.

• Food and non-alcoholic beverages prices were flat in the month and up 3.1 per cent in the 12 months, with fruit and veg, dairy, bread and cereal prices all falling. Non-alcoholic beverages, meat and seafood were all up in price, though.

• Electricity prices fell 2.5 per cent as state and federal government subsidies lowered power prices by 13.2 per cent from a year prior.

Record wealth for Australians

Household wealth rose by $143.6 billion during the December quarter, up 6.5 per cent year-on-year, new data from the Australian Bureau of Statistics shows. Net worth was boosted by a record level of residential dwellings and land totalling $10.60 trillion, up around 5 per cent from a year earlier while cash investments also hit a record at $183.85 billion.

Household cash and deposits investments jumped 8.3 per cent from a year earlier despite falling interest rates.

A warning on private credit funds

SQM Research has placed the private credit sector on ‘watch’, in response to increased issues being identified by financial regulators, ASIC and APRA.

A ‘watch’ issued by SQM Research means they are increasing their active monitoring of the sector and have adjusted their ratings scoresheet to place a greater emphasis on governance.

The hugely popular private credit funds pool money from investors and then lend it directly to businesses or property developers, usually at higher interest rates than what the banks are offering.

Unlike traditional bank loans, private credit loans don’t come from deposits but from capital raised by the fund. It’s a structure that allows for much more flexibility for borrowers, while investors have the chance to earn much higher returns.

The appeal of private credit is simple: you’re lending your money at a higher interest rate, which means a higher return. While term deposits might have a fixed rate of 4 per cent, private credit is returning up to 10 per cent or more. That’s a big difference, especially when compounded over several years.

While SQM Research expects the bulk of its existing ratings to not be impacted by this watch, it is not ruling out downgrading or discontinuing to recommend some funds over the next 12 months. SQM Research has current ratings on approximately 70 private credit funds, covering both retail and wholesale funds, representing approximately $33 billion of funds under management.

The issues SQM Research is worried about include:

• Lack of transparency on who borrowers actually are.

• Questionable categorisation of asset holdings (illiquid/liquid/fixed income/convertible equity/equity).

• Lack of transparency on sub fund holdings.

• Lack of transparency on group financials.

• Highly leveraged balance sheets.

• Overall inadequate disclosure within information memorandums.

• Information memorandums that give too much latitude to the manager in terms of asset allocation weights.

• Elevated loan-to-value ratios, calculated on end of completion developments.

• Vertical and horizontal-related party structures that may give rise to a conflict of interest.

• Increased loan arrears and an increasing frequency of refinancing of existing loans that were scheduled to be exited.

• Sizeable interest rate margins not being passed onto investors.

• Lack of independence at board/investment committee level.

• Dubious marketing strategies involving advisers.

• An increasing number of products being offered with a mismatch between stated liquidity and the underlying liquidity of the loan assets.

SQM Research stresses these issues are not endemic within the sector but do appear with more frequency within wholesale funds and in particular, newer fund products offered to the market.

So, while returns from private credit funds look attractive, be careful about the fund you invest in.

Car versus public transport or ride-share: What are the real costs?

Owning a car has long been a rite of passage for Australians. We start thinking about it just as soon as we start studying to get our L’s.

But I reckon with the cost of living and sky-high fuel prices, as well as having more getting-around alternatives, it’s time to ask yourself a question: is owning a car - especially a second one - really worth it?

In regional towns having a car is usually essential. Public transport isn’t always an option, and the sheer distance between places makes driving a necessity. But if you can easily take advantage of car-sharing services and public transport, then it might be time to crunch the numbers and see whether keeping that car in your driveway is really the smartest financial move.

The real cost of owning a car

If you’re thinking about buying a car, you’re not just paying for the car itself - there are a stack of other costs that quickly add up.

The RACV’s most recent Annual Car Running Costs Survey found that even the cheapest car to own - the MG3 Core - costs nearly $9,000 per year to run ($746.01 every month). That includes fuel, maintenance, rego, insurance and depreciation (but doesn’t even count financing costs if you have to take out a car loan).

If you drive the average distance per year (which is 15,000 km), you’ll be spending thousands of dollars on fuel alone - and that’s before rego and insurance, which could very easily add another few grand a year. Plus, the larger your vehicle, the higher the running costs.

Public transport vs owning a car

It’s easy to assume that public transport is always cheaper, but let’s put that theory to the test.

According to the Transport Affordability Index, from January to March 2024, the average Australian household in a capital city spent $41.10 a week on public transport, compared to $154.17 per week on fuel and tolls alone. That’s a saving of nearly $6,000 over the course of a year!

Now, there are some caveats here. Public transport is much cheaper for the individual, but if you’re ferrying your whole family around every day, those costs will start to really add up. Plus, let’s be real - even our major city’s public transport system isn't always reliable, and in some suburbs you can be left waiting longer for a bus than for an Uber.

A case for car- and ride-sharing

If you only need a car a couple of times a week, this might be a smarter alternative to owning one outright.

A pretty interesting ABC article cited an American university study that showed every shared car on a car-sharing platform removed between nine and 13 private cars from the road. That’s not only good for your wallet - it’s good for the environment.

So how much does Ubering everywhere actually cost? One study compared owning a car with taking an Uber for all daily trips. If you drive five days a week, the total Uber cost was around $9,285 per year - cheaper than the $11,000 yearly cost of car ownership.

That’s more than $1,700 in annual savings, plus no stress about rego, insurance, parking or servicing. But if you regularly take long trips or live in a suburb with a general lack of ride-shares, it’s worth factoring in those costs too.

Do you really need a second car?

Some families have to ask not just the question of “Do we need a car?” but also, “Do we need TWO cars?” For some, the answer is a definite yes - especially if you have multiple drivers working different schedules or kids with packed extracurricular activities.

But if one car is sitting in your garage not being driven for most of the week, cutting back to a single vehicle could save you thousands every year. That’s a decent holiday fund right there.

What about EVs?

If you’ve got an electric vehicle and solar panels, you can cut your fuel costs dramatically by charging at home. But if you’re thinking about getting a second car and making it electric, make sure you’re factoring in the full cost - including installing a charging station, potentially more expensive insurance and higher upfront costs.

For city dwellers, an EV might still be overkill if you rarely drive. In that case, a mix of public transport, car-sharing and the occasional Uber could be a smarter financial strategy.

Let’s be clear

For many Australians, owning a car is non-negotiable. If you’re in a regional part of the country or work a job at odd hours, a car is - for better or worse - a necessity.

But if you’re living in a major city, especially one with a reliable public transport system and plenty of car-share options, I reckon you could cut down on car ownership and potentially free up thousands of dollars a year.

It’s certainly worth doing the sums for your circumstances ... you could get a nice surprise.

The art of investing in alternative assets

I admit that there have been a few times over my married life that I may have bought a unique car, classic photograph or even a small ownership stake in an NBL team that I have justified to Libby that, “It will be a good investment”. Usually, her response is a roll of the eyes and a bit of head shaking.

Maybe I should buy her a copy of a new book called The Passion Portfolio: Investing in style by University of Auckland finance lecturer, Gertjan Verdickt, and Jürgen Hanssens (senior manager at KPMG Belgium and an avid LEGO collector). The book details the mechanics behind the world of 'passion' investing.

Verdickt and Hanssens discuss the pros and cons of various investments such as: wine, LEGO, whisky, watches, bags, jewellery, art, stamps, instruments, vintage cars, precious metals and baseball cards.

They provide average historical annual returns by examining at least 20 years of data for each object.

Of all the investment options, whisky comes out on top with an average annual return of 17.52 per cent. In second place is baseball cards, which posted an average annual return of nearly 13 per cent compared to the stockmarket's 10 percent.

Verdickt says research suggests that adding collectibles like whisky, baseball cards, or LEGO to an existing stock portfolio can reduce overall portfolio risk.

Each chapter of the book follows a structured approach, examining the advantages and risks of different asset classes, their historical returns and key factors that influence their value. Readers can learn about the authentication process, assess long-term investment potential, and gain insights into platforms that track pricing.

But while passion investing can be lucrative, it's also less regulated than traditional markets, increasing the risk of fraud.

Unlike stocks, which can be sold at the click of a button, luxury assets are illiquid. A work of art is resold only once every nine years on average. Wine appreciates over decades. These are long-term investments that demand both knowledge and time.

It seems like the whole world is grumpier - but not us

The latest country happiness scores from the World Happiness Report 2025 are out. This is an annual publication that ranks global happiness based on life evaluations, social support, freedom, GDP per capita and other wellbeing indicators using data from the Gallup World Poll and other sources.

The report averages the score from life evaluations per country over a three-year-period (2022-24 for this year’s result) and ranks them from highest to lowest.

Nordic countries continue to be the happiest in the world, with Finland ranking first for the eighth year in a row.

Australia is in the orange as ‘happy’, so that’s good.

Have a great week, everyone.