In the last week or so, we have seen an escalation in volatility in the Australian sharemarket. This follows a month of significant volatility in global equity markets, resulting in price declines of between 7% and 10%.
A perfect storm to blame
Elevated geopolitical risk, persistent issues in Europe, US monetary and fiscal policy, slowing growth rates in China, falling commodity prices and large moves in foreign exchange rates have had a marked impact on investor sentiment recently.
These factors in isolation can affect markets to varying degrees but the recent interaction between all of them has been a strong negative influence on investor sentiment, and has created the recent increase in sharemarket volatility globally.
Geopolitical risks have increased markedly over the past couple of months.
In particular, the rise of the Islamic State (ISIS), the increased pandemic risk from Ebola and the ongoing tension between Russia and Western Europe over Russia’s active support for the Crimean separatist movement in the Ukraine, have dominated news-flow and soured investor sentiment.
This perfect storm of negative global events has resulted in a loss of confidence in sharemarkets around the world as investors ask if things will get worse.
Of course that’s possible, but more bad news has already been factored in to many sharemarkets to some extent.
In fact, we believe, based on current valuations, that now may be a good buying opportunity both here and selectively overseas.
The positive news is that, globally, inflation is contained and US growth, while modest, remains positive.
And China is still looking at around 7% p.a. growth (albeit that being a little lower than expected).
Further, corporate profitability is strong with balance sheet improvement post the Global Financial Crisis increasing the stability of corporates.
So, looking through this recent volatility, the foundations for a return to more stable sharemarkets are in place.
Impact of US Interest Rates
Global markets have for some time placed significant emphasis on the Federal Reserve (Fed) and the continued wind down of its bond buying program called Quantitative Easing (QE).
The likely timing of the next increase in US official rates continues to be a dominant driver of investment markets.
The QE program is due to end this month after being wound back consistently and predictably over the past year.
With the end of QE the market has speculated that the logical progression for the Fed is to increase official interest rates.
To address this speculation, Fed chairperson Janet Yellen has committed to low interest rates for the time being and has intimated that it will be a considerable time before interest rates rise, making it clear that rate changes will be data dependent rather than calendar based.
Despite these assurances, and US inflation and growth rates remaining subdued, the ending of QE along with a ‘flight to quality’ buying by risk conscious global investors in light of recent events, has seen the $US strengthen against most major currencies.
In Australia’s case the $A has depreciated by approximately 9%. The relative decline in the $A has occurred in part due to the expectation of eventual rising rates in the US which would narrow the difference between their interest rates and ours, which in turn puts downward pressure on the $A.
The $A has also come under pressure as a result of the weaker than expected economic data from China.
Given the strong trade links between China and Australia, particularly given their demand for our iron ore and coal, any weakness in expectations for Chinese growth should result in a poorer outlook for Australia’s export sector which is dominated by resources.
For this reason, offshore investors wishing to maintain their $US purchasing power have sold $A-denominated assets, key among these being Australian listed company shares.
This created something of a vicious circle as more selling of equities by foreign investors acted to push both the share market and the $A lower.
Europe Continues to Struggle
Elsewhere on the global front, European data over the past month has been far from positive, forcing the European Central Bank (ECB) to cut interest rates to all-time lows of 0.05%, placing pressure on ECB President Mario Draghi to honour his previous commitment to do ‘whatever it takes’.
Adding to this, sentiment indicators from Germany (Europe’s largest economy) sank into negative territory for the first time since November 2012, lending support to the IMF and World Bank cuts to global growth projections for the remainder of 2014 and 2015.
In our view, while Europe continues to deal with its economic issues, the valuation of its equity markets remains relatively attractive and should present selective buying opportunities after this recent bout of volatility.
Falling Commodity Prices a Contributing Factor to global volatility
Commodity prices in general have responded to the weaker global growth expectations and fallen.
And, contrary to the usual situation at times of elevated tension in the Middle East, the oil price has been falling dramatically.
This has in turn been detrimental for the Russian economy with oil being Russia’s largest export (around 58%).
This has acted to elevate Russia’s interest in the Ukraine as the majority of the natural gas Russia supplies to Western Europe is transported in pipelines traversing the Ukraine.
Clearly control of these pipelines is significant in gaining surety of the revenues for natural gas sales.
This conflict, and the sanctions the EU has imposed on Russia for its active support of the Crimean separatists, further serve to increase geopolitical tensions and global sharemarket volatility.
Australian Banks and Resource Companies Back to Fair Value
In the Australian sharemarket, we have witnessed a decline of close to 10% over the past few months, which has effectively eroded the gains for calendar 2014 to date.
Bank shares and mining shares, the two largest sectors in the Australian equity market, have suffered the largest falls for differing reasons.
The banking sector, which has experienced very strong returns over the past few years, has recently been faced with the prospect of regulatory changes to bolster the strength of Bank balance sheets to bring them in line with higher global standards and strengthen the domestic banking system to withstand shocks in times of crisis.
The Murray inquiry is currently considering these changes and speculation around the likely outcome has negatively impacted Bank share prices.
That said, the major banks are trading at valuations as low as 12-13 times current earnings and with fully franked dividend yields between 5.6% and 6.1%.
With net interest margins remaining steady (or possibly more favourably following reductions in term deposit rates), bad and doubtful debts remaining at very low levels, lending growth at about 5% sector wide and earnings per share expected to be at around 7% p.a., the sector now looks relatively attractive.
Resource companies have been significantly affected by Chinese economic data released in mid-September.
The data indicated that Chinese industrial production growth was the lowest since the 2008 global financial crisis, which has increased doubts that China’s 7.5% p.a. target annual growth rate will be reached.
As China is Australia’s largest export destination, this news was not good for Australian resource companies.
Over the past few months, there has been a massive increase in export volumes of Australia’s key commodity, iron ore.
Steep declines in iron ore prices have resulted and these falls coupled with the aforementioned decline in Chinese industrial production, have hurt domestic sentiment.
As a result, resource companies are also looking more attractive from a valuation perspective for investors than they have for a while.
Australian shares look attractive
Despite these global and domestic issues, from a valuation perspective Australian equities are generally not expensive and are tending toward being attractive relative to the 20 year trend of the price multiple of current earnings.
Interestingly, a declining Australian dollar favours a number of sectors that will aid Australia’s transition from being a mining led economy to a more broadly based economy.
For example, Australian manufacturers and exporters are more cost competitive under a lower $A.
Tourism operators are likely to experience a boost in profits as Australia becomes a cheaper destination for foreigners.
Further, the retail sector, which suffered heavily from the high A$ and adapted by reducing costs and providing online offerings, will also be a beneficiary.
A Time to Buy? We think so.
It is important to remember that sharemarkets are bound to go through periods of higher volatility from time to time, and that investment in quality assets is a long term endeavour.
As a consequence, we believe clients should stay the course during periods of higher volatility.
Particularly when, as is the case now with current earnings suggesting that sharemarket valuations are attractive, the risk of a major equity sell off is low (in the absence of an unforeseen external shock, of course).
In fact, at these current valuation levels, it may prove to be opportune to review portfolios in a positive light.
Financial Planning Services are provided by Scott Millson, Authorised Respresentative of Australian Unity Personal Financial Services Ltd AFSL: 234459
As we all know, risks cut across different industries. Fortunately, you can lessen these by predicting possible cash flow challenges before they become a major issue. This is exactly where a cash flow forecast comes in handy. But did you know that these forecasts can do more than just help you anticipate money management challenges? Here are more reasons why your business should prepare a cash flow forecast:
1. It helps you in budgeting.
A cash flow forecast gives you a clearer understanding of how much cash your business owns and how you can use these resources to fund your daily business operations. Managing your business finances through a cash flow forecast also helps you map out the wise use of your money.
2. It showcases your financial viability.
A cash flow forecast is valuable if you are considering a sale of your business or admitting business partners. Since it asserts the financial viability of your business, a cash flow forecast is extremely valuable in proving the worth of your business to your would-be shareholders or purchaser.
3. It measures business performance.
Is your business doing well? A cash flow forecast is vital in measuring business performance. Since these financial statements provide accurate figures for your cash inflows and outflows, you can use it to ensure improvements in business performance.
4. It improves goal-setting initiatives.
At this point, can you name the specific goals that you want your business to focus on? Failing to set your business goals may compromise your business direction. The ideal approach: Use a cash flow forecast to set your targets and have better chances of hitting those targets as accurately as possible.
5. It simplifies your financing options.
When businesses struggle with their cash flow, availing loans becomes essential in keeping your business capital on track. A cash flow forecast helps you determine a) if there is a need for loans as well as b) the frequency of loan repayment.
To say that a cash flow forecast is extremely valuable for your business is an understatement. In a nutshell, you can prepare these financial statements on a monthly or quarterly basis – depending on the phase of your business and its level of stability. The more volatile your business performance is, the more frequent your cash flow forecasts should be.
By closely monitoring the movement of money in your business through a cash flow forecast, you will make more informed business decisions.
Can’t get enough of cash management tips for your business? Click on the button below to download a copy of our FREE cash flow management eBook.
HTA Advisory has a broad spectrum of clients across many industries. Often, it's only the business advisor who gets to hear about the exciting things our clients are doing. Our Client Conversation offers an opportunity for us to present our clients to our readership in a way that shares their passion for what they do.
Today I had the opportunity to sit down with Matt Knuppel from Pride Athletic Clifton Hill...I think his clients were thankful for the 10 minute breather.
Matt, as a new client of ours I thought this would be a great opportunity for us to learn more about you and how you came about starting this business.
I originally took my PT course when I was waiting to be a fire fighter... by the time I got through to the MFB final interview I had opened up my first CrossFit gym and was loving it too much to stop! Three years on, I've sold out of the first one, which I owned with partners, and opened up Pride Athletic/CrossFit Clifton Hill, which I'm proud to own 100%!
So tell us about your business and the service you provide.
We run (as far as I know) the only CrossFit gym in the world that specialises in women and women's health. While we aren't an exclusively female gym, we currently don't have any male clients and Ben (one of my coaches) and I are the only fellas in the whole place! This has created an amazingly tight-knit female community, which really thrives in and out of the gym.
We are also starting to run online nutrition and well being programs that focus on the mental side of implementing a quality health and well being program, that can be done either locally or completely remotely! We are getting amazing results with this so far and we think it's going to be a real game-changer for women around the world.
In starting this new business and achieving its growth, what hurdles have you tackled to get where you are today?
When I started, I had no staff and ran the whole show myself. This involved running 9 hours of classes per day, the first at 6am and the last finishing at 8:30pm! I also lived about 40 minutes away (Cheltenham) from the gym, so I moved my bed into the office and slept there quite a lot. It was pretty brutal to begin with, and I'm very relieved to be able to employ three coaches and an admin now!
Wow that's dedication! So to assist with building your business what tools have you put in place to ensure it is profitable?
Facebook marketing has been huge for us, and I have hand-picked amazing staff. What I truly believe has made us profitable is our commitment to service - when this is exceptional, everything else falls into place!
What sets your business apart from other gyms?
- Exceptional service that truly goes above and beyond
- One of a kind CrossFit gym that specialises in women's health, fitness, nutrition and happiness!
- The best staff in the world!
If anyone has questions, they can check out your site, but can they email you too?
Of course! We're closing in on capacity but would love to have more quality members that are committed to their health and fitness. You guys can email me personally at email@example.com any time.
Thank you so much Matt, is there anything else you'd like to mention?
Even if you aren't near Clifton Hill, we can legitimately help you. We care about our clients and are truly committed to their results. If you're looking for a fitness and nutrition program that is well and truly above the rest, drop us a line and we'll see if it's a good fit!
If you’re an employee, this is a cost effective way to purchase a new (or used) car. You don’t have to pay GST on the purchase price, you can use your car for both business & personal use & your running costs can also be included in your arrangement. Your employer pays the vehicle payments and running costs for you from pre-tax salary, which means you will also pay less tax.
As an employer, the benefits are simple. You get to claim the GST back on the purchase of the car, increased deductions throughout the year including interest on repayments, depreciation & running costs of the car & this arrangement can have a great impact on employee satisfaction. However, please note that a novated lease is considered to be a car benefit & a fringe benefits tax liability may arise.
Finally, a benefit for both parties is that in the event that employement ceases, the obligations and rights under the lease revert back to the (former) employee. This benefits the employee as they get to keep their car (with no tax consequences), but also the employer as they are not left with an extra vehicle or a financial commitment for it.
Specifically, a novated lease is an arrangement where an employee enters into a lease with a finance company & the employer enters into a deed of novation with both the employee & the finance company. Under the deed of novation, the employer may agree with the employee and the finance company to take on all, or some, of the employee’s rights & obligations in the original lease agreement. Under a full novated arrangement, the empoyer is responsible for guaranteeing the risdual value of the vehicle at the end of the lease. As the effective life of a motor vehicle is 8 years, here is a table to guide you in calculating the minimum risidual value for your novated leases’;
Would you like to learn more about how a novated leases could benefit you? Give your accountant at HTA a call to discuss.
Customer service should be at the top of the list of priorities for every business. Unfortunately, it is often neglected. Once you realise how customer satisfaction affects your business, you will want to adopt some of the methods below to help keep your customers coming back.
Have you noticed that customer service is losing its way in business these days? Some businesses just don’t seem to care about keeping their customers happy. If only they knew how damaging this is to their business!
Consider the following statistics from the White House Office of Consumer Affairs:
For every customer who bothers to complain, there are 26 others who remain silent
The average ‘wronged’ customer will tell 8 to 16 people
91% of unhappy customers will never purchase services from you again
It costs about five times as much to attract a new customer as it costs to keep an old one
Each one of your customers has a circle of influence of 250 people or potential customers who hear bad things about you
Lack of quality customer care could be costing businesses thousands of dollars! Kelly Sims in her article ‘5 Ways to Keep Your Customers Coming Back For More’ (Source: Free Articles from ArticlesFactory.com) has these suggestions for improving customer care:
Say Thank You
This is the simplest possible way to keep your customers happy, but it is all too often overlooked. A customer who feels appreciated is much more likely to bring you repeat business and/or refer you to a friend. Your clients are the reason for your business’ continued existence, so they should be appreciated.
Respond to enquiries promptly
People simply don’t like to wait. If a customer has to wait days to have questions answered by you, they will likely take their business to a company that responds to their enquiries quickly. This situation could be rectified by...delegating this task to an employee.
Know when to say sorry
Learn to be accountable, not only for your own mistakes, but for those of your employees as well. When you consider that it is estimated that 35% of dissatisfied customers would not go to the competitors if they received apologies, you realise the true value of “I’m sorry”. We all know that there are difficult people who will never be pleased, but the vast majority of your clientele are not these people. Being sincere and genuinely trying to make a disappointed customer happy will undoubtedly help you to retain more clients.
Give your customers a little extra
Value your customers by giving them a little extra. This is a small step that doesn’t have to cost you a fortune. It can be as simple as a small, unexpected free gift after a purchase, or providing a little extra service above and beyond that for which you were hired. Going the extra mile for your customers will make them feel appreciated and might even generate some referrals.
Personalise your service
Call your customers by their names and ask them how their day is going. Even if your business is conducted over the Internet, there are ways to personalise emails to let your customers know that you care about them. If a client feels you know them, even a little bit, they are much more likely to show you loyalty and not move on to your competitors.
Some other ideas
Your customers will be happier if you promise less and deliver more. They’ll also likely tell their friends about the good service if you keep your word.
Customers feel great when they save money unexpectedly. From time to time, slip in some unadvertised sales to give your customers a pleasant surprise.
Make sure your employees are properly trained in how to handle a customer complaint. Give them guidelines and make sure they know what to say and do to make that customer’s experience a positive, pleasant one.
Without your customers, you don’t have a business. Therefore, customer service should be your top priority. Your customers will really appreciate being shown respect and sincere gratitude. In return, you will likely receive their loyalty.
When customers walk away from dealing with you with a smile on their face, they'll be less likely to take their business to an unknown competitor.
This emphasises the fact that going solo compromises the ideal level of productivity as well as the potential success of your business. Fortunately, you can seek professional advisory services, in the form of a virtual cfo or a virtual management accountant to make things more manageable.
A virtual CFO is a professional bean counter, compliance consultant, and business adviser rolled into one. Although these professionals take on the role of the traditional CFO, there is more to these professionals than meets the eye. You can start discovering these by taking a look at the advantages of hiring one:
One of the major reasons why business owners hire a virtual CFO is to cut costs. Since these professionals are not working with you on-site everyday, you can significantly save on personnel and technological resources. Do the math and you’ll easily figure this out.
A factor that is directly linked with the cost reduction benefits of hiring a virtual CFO is the staffing flexibility that it brings to your business. Seeking the services of a virtual CFO gives you access to high-calibre talent right when you need it – during tax season or business and strategic planning.
A virtual CFO takes great pride in their experiences and proficiencies in handling business accounting functions. Through the services of these professionals, you can easily anticipate better outcomes from your critical business numbers.
The working arrangement with a virtual CFO varies depending on the requirements of your business. This way, you can easily choose which tasks you want your virtual CFO to focus on. You can focus on the biggest issues for your business in a systemised and structured manner.
Improved cash management
Reviewing profits and putting your revenues to work could be a challenge for first-time entrepreneurs who have just dipped a toe into running their own business. By hiring a virtual CFO, you can rest easy, knowing that your financial resources are being put to good use.
As a small business owner, you constantly have to deal with decision-making processes. But obviously, when your plate is too full and your mind is always occupied, the tendency for miscalculations is very palpable. This is where hiring a virtual CFO comes in handy. When you have a virtual CFO to assist you in making strategic and profitable business financial decisions, you’ll have fewer problems to worry about.
The plus sides of having a virtual CFO are innumerable. Want to explore your options further? Click below to download a FREE copy of our eBook on virtual CFOs.
Have you received your most recent activity statement?
If you are used to receiving your activity statements in the post, you may have noticed that you haven’t received it.
From 1 July 2014, once an activity statement is lodged via an electronic channel (this includes any online lodgement including lodging through us at HTA) the ATO will stop sending paper activity statements. Instead, all future activity statements will become available in an electronic channel.
For you, this means no more paper! All your lodgement obligations for activity statements can be completed easily online using the Business Portal. You can lodge your activity statement through the Portal & receive instant notification that it has been lodged. The Business Portal also allows you to:
View activity statements
View business tax account details
Access online tools & calculators
View payment options
Obtain an electronic funds transfer (EFT) code
Obtain a payment slip
The only requirement for using the Business Portal is an AUSkey. You can register for one here, just by following the prompts. Once you receive the AUSkey automatically via email, you can get access to the Business Portal.
There are some exclusions to which activity statements are moving to electronic only, these include:
Q (Annual GST Report)
R (Quarterly PAYG Instalment notice)
S (Quarterly GST Instalment notice)
T (Quarterly GST and PAYG Instalment notice)
If the above has come as a little surprise to you & you need assistance in lodging your next activity statement, please give your accountant at HTA Advisory a call.