William Buck Australia
As a fully integrated firm of Chartered Accountants and advisors, William Buck provides a complete solution. Putting you at the core of the business, our advisors work together to ensure that careful consideration is given to your business and personal wealth affairs.
Working closely with you and your team, our Business Advisors can help you plan and implement contemporary business strategies and practices to meet your business’s full potential.
Our commercially minded tax specialists offer clear, responsive advice to manage your tax risk, address local and international issues, and develop strategies to optimise your tax position.
Our audit team has extensive experience in a range of engagements, giving stakeholders independent and objective assurance on financial information, transactions and processes.
Our Corporate Advisory team provides objective, strategic and commercial advice across a broad range of business issues. Our work spans the breadth each engagement from the origination of ideas to managing the transaction process, valuation and structuring.
Our highly experienced team of liquidators and trustees use their extensive expertise to assist in times of financial distress, achieving the best outcome for all stakeholders.
By understanding not only what you want to achieve but why it’s important, our wealth advisors can create strategies attuned to your key priorities. The end result is a plan focused on your life goals.
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William Buck has a team of professionals with specialist experience and know-how on a range of industry sectors.
Our advisors understand the risks and opportunities unique to the agribusiness sector. Taking a strategic view of your operations they provide relevant guidance and advice.
Assisting public and private schools, vocational colleges, universities and private training providers, our education specialists provide timely and valuable assurance services together with strategic, financial and management advice.
Our Government and public sector team has substantial experience in assisting all levels of government to review their structures and develop strategies, in line with relevant legislative requirements and accounting and audit standards.
Working with over 1,600 clients in the health sector, our advisors help practitioners and health care corporates achieve their business and personal goals
Our hospitality and tourism team has a working knowledge of the industry which, when combined with our technical knowledge, can assist you in reaching your commercial goals.
By staying on top of changes in the manufacturing sector, our industry experts provide relevant and timely guidance to a broad range of manufacturing business.
Our mining and energy team has the experience and resources to help start-ups, developing businesses and well-established companies to meet their commercial goals.
Integrity and transparency are at the heart of the best Not for Profit organisations. These values re shared by our dedicated Not for Profit team, which helps entities to establish to improve performance and develop strategies for long-term growth.
Our advisors understand the challenges and opportunities facing the professional services sector first hand. This experience together with our expertise helps to determine your strategic objectives and provide concise, relevant advice to help you achieve your goals.
Our property and construction team assist on a wide range of assignments from property development to construction and large infrastructure projects. Their diverse experience, technical expertise and commercial know-how to help you tackle the important issues.
Our retail and wholesale team works with a variety of businesses from family owned operations to franchises and larger chains, to provide advice and guidance on the issues that count.
With the skills to help tech companies grow from startup to exit – we provide tailored tech company solutions, supported by access to a range of specialists across numerous service lines and industries.
Our transport and distribution team works with businesses to review their operations, improve efficiency and productivity and ensure compliance with the latest regulatory developments.
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We work with individuals, businesses and community organisations with a particular focus on the mid-market. Drawing on our extensive experience, our advisors will challenge your thinking and re-frame problems to understand their root-cause.
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Life as a CFO can be complex, exciting and demanding. Combining technical excellence with decades of working closely with and listening to the needs of CFOs, our advisors understand the competing demands of your role.
Whatever your needs, we have the expert resources to create the best outcome for you and your business. As our client, you’ll benefit from our integrated services model that puts you at the core of its business.
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Established in 1895, we’re more than just advisors; offering a full range of services and 360 degree support, we aspire to create a positive change in the lives of our clients and our people.
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By CHRIS RYLANDS
RESEARCH MANAGER, WEALTH ADVISORY
The Reserve Bank of Australia (“RBA”) kept interest rates on hold during October and November. Economists now believe the RBA has greater scope to lower interest rates given the major banks have increased variable interest rates to cover the cost of higher capital requirements. The RBA had previously been reluctant to cut again given long held concerns regarding an overheating residential property market.
Whilst the RBA appears content with the current level of interest rates, the bias towards lower levels in the future remains. RBA Governor Stevens recently stated that if interest rates were to change in the near term, the direction would almost certainly be lower.
Recent economic data released in Australia provided no compelling reason for the RBA to act prior to the end of the year. Recent inflation data was softer than expected, indicating slack in the Australian economy. However, the release of employment data for October indicated economic strength. Australia’s official unemployment rate dropped to 5.9% as employment surged, beating economists’ expectations by a wide margin.
The RBA is likely to maintain its “wait and see” approach given the contradictory messages being sent by the economy. It will continue to monitor the implications of higher mortgage rates on consumers, incoming economic data and developments in China. The RBA does want a weaker Australian dollar (“$A”), however it seems content to let this occur via United States dollar (“$US”) strength rather than engineering an immediate fall via an interest rate cut.
Term Deposit rates remain largely unchanged since our last update. The highest term deposit rates currently available are 2.85% across 3 months, 2.8% across 6 months and 2.85% for 12 months.
Demand for “safe haven” government bonds continued during September and October as uncertainty remained over China and the timing of United States (“US”) interest rate hikes. Australian and global bond yields fell and prices rose as investors sought safety by rotating away from equities into the sector.
Recent moves in fixed interest markets highlight the diversification potential during times of uncertainty in global share markets. The Australian fixed interest index1 has increased by a total of 0.55% during September and October, whilst the global index2 has risen 1.24% over the same period.
November has seen a modest reversal in the “safe haven” theme. Investors have become more comfortable with the ongoing economic transition in China and the continued strength of the US economy despite the prospect of rising interest rates. The increase in confidence has seen investors rotate back into equity markets at the expense of their fixed interest holdings.
The yield on the sector continues to be attractive in a low interest rate environment. Australian fixed interest is currently providing a yield of 4 – 4.5%, whilst international fixed interest is yielding 5 – 5.5%. Like all asset classes, diversification across both domestic and international markets is important.
We will discuss the outlook for the sector and our current investment strategy in the final part of our “Fixed Income Focus” later in this update.
The Australian market3 finished -2.96% lower in September, led by Energy and Resource companies. Energy recovered in October, supporting a 4.37% rebound in the market, however the major resource companies remained under pressure due to falling commodity prices.
The market has attracted buying interest in November, with investors pushing up banking stocks and other high dividend paying companies. Resource stocks have found little support as commodity prices continued to weaken.
The persistent weakness in commodity prices appears driven by institutions such as Hedge Funds seeking to profit from falling prices rather than a fundamental lack of demand by end users. Demand should not be plunging if China is still growing and the US is in the process of an economic upswing. Commodities are also priced in $US, meaning their value falls whenever the $US dollar strengthens. This has been the case over the last twelve months.
In a period of falling commodity prices it is prudent to limit exposure to leading companies with diversified operations, low cost production and low debt levels. Leading diversified miners such as BHP Billiton (“BHP”), Rio Tinto and S32 are good examples. Whilst these companies can withstand a period of lower commodity prices, they are still responding with large scale cost cutting.
These measures will create leaner more profitable businesses when the eventual upswing in commodity prices occurs. BHP has also signalled that its balance sheet is more important than maintaining its dividend, which makes sense given the cyclical nature of its earnings and overall business.
From a valuation perspective the November bounce leaves our market4 trading on a Price Earnings (“PE”) Ratio of around 15.6x (see chart below). Whilst this is above the long term monthly average of 14.4x, there are a number of factors which are likely to provide support to the market going into the end of the year.
SP/ASX 200 Price Earnings ratio vs long term average
Source: JP Morgan
The sell off in banking stocks looks to have run its course for now. Whilst concerns remain around earnings and dividend growth, recent employment data suggests that there is no imminent sign of bad debts increasing. The banks have also successfully raised interest rates to cover the initial costs of higher capital requirements.
The continued fall in the $A also makes many of our listed companies potential takeover targets. Many foreign investors see the strategic long term value in Australian companies which is often unappreciated by local analysts.
Dividend yields can also provide an indication of “value” in the market. Dividend yields on the 20 largest stocks have reached levels not seen since the Global Financial Crisis. Data from Morningstar shows the average gross yield (including franking credits) is 7% , compared to a peak of 7.5% during the Crisis.
Whilst a stock or index should not be purchased purely on dividend yield alone (given dividends can be cut if earnings drop) it is another useful indicator to determine what value is on offer from a historical perspective.
Australian equities have notably underperformed international equities during the course of the year. We will discuss some of the fundamental reasons for this underperformance in the next section.
Investors often question whether it is necessary to invest outside of Australia. Australian investors traditionally have a strong “home country” bias, referring to the tendency by an individual to invest more in local shares because they are more familiar with the companies they are investing in.
There remains a strong case for the average investor to increase their weighting to international equities. The Australian share market represents only 2 – 3% of the global investment opportunities. Investing internationally increases diversification and also provides the opportunity to benefit from a fall in the $A.
International equities5 have outperformed Australian equities materially over the last six months. International equities have increased by 7.50% during this period, while Australian equities have fallen by -7.30%. There are two main reasons for the large performance gap: a falling $A and a rally in sectors globally which do not feature heavily in our market, such as technology stocks.
Technology stocks only make up 0.8% of our market6, meaning Australia has lagged during the recent rally in global share markets. Our market provides a large exposure to banks and resources companies, two sectors which have recently struggled. The big four banks and BHP make up over 34% of the our market, meaning any movement in these key stocks will largely determine the direction of the overall market.
The international equity index7 is far less concentrated. The top 10 holdings only represent around 8% of the total index, with the technology, industrial and financial sectors well represented. The table below provides a summary of the top ten holdings in each index, confirming the concentrated nature of our market.
Top 10 Index Weights at 30 September 2015
Index: S&P/ASX 200
National Australia Bank
Source: MSCI, ASX
The fall in the $A against the $US has also materially contributed to the return received by international investors. The move in the currency has provided around half of the outperformance delivered by international equities over the last six months. Over the longer term we expect the $A to continue its fall against $US as US interest rates move higher.
In conclusion, an allocation to international equities increases diversification by providing exposure to world leading companies in industries which are difficult to access domestically. Further sources of return and diversification are also possible when the $A falls against the $US.
1. Bloomberg Ausbond Composite 0 YR Index AUD
2. BarCap Global Aggregate TR Index (AUD Hedged)
3. SP/ASX 200 Index
4. SP/ASX 200 Index
5. MSCI All Country World Index
6. SP/ASX 200 Index
7. MSCI World Index