Economic Risks for Australia and the World

The Federal Budget & Australia

  • A key underlying risk to the recent budget is the sustainability of the government’s revenue base.
  • The capacity to raise revenue is undermined by one such trend of the composition of growth away from wages and towards corporate profits.
  • The government collects 41% of its revenue from personal income tax and is the largest contributor to government revenue. This can be compared with the average 24% tax across wealthy countries.
  • Maintaining the path to surplus which is expected to be achieved by 2021 will require a disciplined approach to expenditure.
  • The level of public debt will need to be monitored closely as well to ensure that Australia does not “fall behind with an unsustainable and uncompetitive tax system” – John Fraser. It was only in the last few weeks that ratings agency Standard and Poor’s affirmed Australia’s AAA credit rating in response to the Federal budget although it noted that the government’s strong budget condition continues to deteriorate due to numerous years of fiscal deficits.
Source: John Fraser, Secretary to the Australian Treasury

Global Outlook – Risks

  • North Korea’s nuclear aspirations and tensions with South Korea and US is currently the main geopolitical issue and incredibly problematic for the United States government due to lack of viable solutions.
  • China’s main risk would be a financial crisis and the collapse of the renminbi. These risks are low but it is expected that there will be a continued economic slowdown. This is unlikely to materially affect the US as they are in a trade deficit with China (imports > exports) and therefore don’t depend on them as much as other countries. By comparison, Australia is in a trade surplus with China (exports > imports).
  • Europe continues to be in a state of political instability, where Britain, Germany and Italy will be going to the polls in the next 12 months. A key risk would be the break-up of the Eurozone, with other nations following Britain’s example of voting to leave the EU. The probability of this happening is very low as these nations are anticipated to steer away from doing so until they see what will actually happen with the UK economy. For others in the EU, it is certainly not an option without adverse consequences. Countries looking to leave the EU will need to re-domicile their assets and liabilities into a currency that is likely to devalue and dramatically reduce the wealth of its citizens.
Source: Hamish Douglass – Chief Executive Officer and Chief Investment Officer, Magellan Financial Group
*Attended the Stockbrokers and Financial Advisers Association Conference (SAFAA) 2017

Innovations for the Stockbroking Industry in 2017

  • MFunds – Launched in March 2014 as an easy way to access unlisted managed funds by going “paperless” and reducing AML requirements. From February this year, products with long-form PDS such as hedge funds and derivative products were allowed on MFund for the first time. Until now, only products with short-form PDS were allowed on MFund.
  • New ASX futures trading platform – In March 2017, the ASX replaced ASX Trade 24 with an upgraded derivatives trading platform that permits more dynamic combinations for option strategies and has new order type features. The new platform is more flexible and scalable than its predecessor.
  • Replacement of CHESS System – The CHESS system was developed by ASX over twenty years ago. It is a core system for the stock market in that it performs the processes of clearing, settlement and asset registration. In January 2016, ASX partnered with Digital Asset Holdings to develop, test and demonstrate a working prototype of a post-trade platform that could replace CHESS using distributed ledger technology (DLT, which is more commonly known as “blockchain”). A key decision is expected to be made by ASX towards the end of 2017 on whether to commit to implement DLT with the purpose of replacing CHESS.
  • Chi-X Launch of New Indices* – Chi-X is planning to launch new indices in the near future, including the Chi-X 200 Index that will cover the top 200 Australian stocks. It is unique in the sense that it will not include chess depository interests (CDIs) and international stocks. Consequently, the index will exclude stocks that are listed on the S&P/ASX 200 such as Fletcher Building and Resmed. This index will be launched in conjunction with other benchmark indices and they hope to follow that up with an ETF based on the Chi-X 200 index. *Subject to final regulatory approvals
  • Chi-X TraCRs – Expected to be launched sometime this year, transferable custody receipts (TraCRs) will become available for trading on Chi-X. A TraCR is based on an underlying asset that is located on the primary index of an overseas market (e.g. NYSE and NASDAQ). It is an investment vehicle that can help diversify portfolios and offer exposure to overseas stocks. TraCRs offer the advantages of being listed on an Australian stock exchange, receiving dividends payments in Australian dollars and being protected by Australian regulations.
Sources*:
Dominic Stevens – Chief Executive Officer, ASX Limited
Dr Shane Miller – Director, Chi-X Australia
Blythe Masters – Chief Executive Officer, Digital Asset Holdings
*Attended the Stockbrokers and Financial Advisers Association Conference (SAFAA) 2017

WWN#20 – Manchester Bombing: UK Terrorism Threat Raised to Critical

 

Theresa May - UK Manchester Bombing.jpeg

Credits: Telegraph UK 

What’s Been Happening?

22 people were killed in an explosion that occurred in Manchester Arena in England after an Ariana Grande concert as people were leaving. Around 59 others were injured, with some in a critical condition.

This was Britain’s deadliest attack since four suicide bombers killed 52 London commuters on three subway trains and a bus in July 2005.

Authorities have identified the suicide bomber responsible as 22-year old Salman Abedi. Unverified images published by New York Times show various elements that were photographed at the scene suggest the bomb was designed for maximum impact. The bomb appeared to have been concealed in a backpack that contained a high velocity charge with carefully shrapnel. ISIS has claimed responsibility for the attack but has provided no evidence and neither U.S. nor British officials have corroborated that.

Police have so far arrested eight men who they believe may have been a part of Abedi’s “network”. Searches continue as detectives believe there could still be more people at large who are a part of a terrorist network as bomb-making materials have been uncovered through raids in the south of the city.

Ariana Grande has reportedly returned to her hometown in Florida, United States following the terror attack with the remaining two concerts scheduled in London being cancelled.

What Now?

The UK has raised its threat level from severe to the highest level of “critical” for the first time since 2007. UK Prime Minister Theresa May concluded on the basis of investigations following the attack, the assessment is that “not only an attack remains highly likely, but that an attack may be imminent”.

Armed police officers will be replaced by members of the armed forces which will allow deployment of increased police presence at key locations. Military personnel will also be at public events such as concerts and sports matches to keep the community safe. This well-established plan is known as Operation Temperer.

What’s Next?

Further arrests are likely to be made over the Manchester terror attack as investigations and raids continue. The intelligence leaks to the US media (e.g. New York Times) is likely to have complicated ongoing investigations and Theresa May has vowed to raise these concerns with Donald Trump when they meet at the Nato summit. May has said that she would “make clear to President Trump that intelligence which is shared between our law enforcement agencies must remain secure”.

The UK Prime Minister and her opposition Jeremy Corbyn both agreed to have their general election campaigning suspended until further notice following the tragedy but the deadline is fast approaching – June 8. It’s expected that the focus will inevitably shift from this event to the election that is taking place in next few weeks.

At this stage, it is also uncertain whether Ariana Grande will resume her “Dangerous Woman” tour. A shortened schedule is expected for the pop star and the tour to resume in Paris on June 7.

References:
http://www.news.com.au/world/europe/ariana-grande-concert-in-manchester-bomb-designed-for-maximum-impact/news-story/b3ea266cc0ccb4a8327c307c1018e876
http://www.nbcnews.com/news/world/deaths-injuries-confirmed-after-explosions-heard-u-k-concert-featuring-n763286
https://www.theguardian.com/uk-news/2017/may/25/two-more-men-arrested-over-manchester-bombing
http://edition.cnn.com/2017/05/23/europe/manchester-terror-attack-uk/
http://edition.cnn.com/2017/05/24/europe/manchester-us-leaks-investigation/

WWN #19 – Undeterred by French Open Snub, Maria Sharapova Continues Her Comeback

What’s Been Happening?

On the 26th of January 2016, Maria Sharapova had a drug test at the 2016 Australian Open which came back with positive results. As a result, she was initially banned for 2 years by the International Tennis Federation (ITF) which was later reduced to 15 months.

She returned this year in April to the WTA tour and was given wild cards to compete in the Women’s Stuttgart Open, Madrid Open and Italian Open. She has successfully used those wildcard entries to get her world ranking up to a level where she can automatically enter anywhere again.

What Now?

Unfortunately, she was refused a wild card into the French Open on Thursday last week. Two hours later on the same day, a left thigh injury forced her to retire early out of the Italian Open.

The French Tennis Federation president Giudicelli announced the decision was made by him as it is his “duty to protect the high standards of the tournament, the high standards of the game”. He further said that “there can be a wild card for return from injuries, (but) there cannot be a wild card from doping”.

Sharapova reacted positively to the news, despite not being given the wild card –

What’s Next?

Wimbledon is coming up in late June and the tennis star has already made it clear that she will not be requesting for a wild card into the main draw. Some say that is because she has no chance of getting one. In any case, she is currently ranked World No.171 with 310 ranking points. Any player ranked up to 110 automatically go into the main Wimbledon draw whereas the next 88 win a place in qualifying.

Sharapova has reacted positively despite Despite not being given a French Open wildcard

Key Considerations for Sharapova:

  • How quickly she can recover from her thigh injury as she has a bit over a month before Wimbledon qualifying starts on June 26.
  • Unlikely but possible withdrawal from her next tournament which is immediately before Wimbledon: the Aegon Classic in Birmingham, England. The tournament starts on the 17th of June and it recently awarded her a wild card entry as well.
References:
http://www.telegraph.co.uk/tennis/2017/05/16/maria-sharapova-denied-french-open-wild-card/
https://au.sports.yahoo.com/tennis/a/35572659/sharapova-wont-request-wimbledon-wildcard/#page1