In our last market update we asked the question as to whether the effect in Australia of the global financial crisis will only be delayed or whether Australia will prove more resilient to the global credit crunch than other economies. If the later is true then Australian companies could prove to be havens from the international storm.
In Australia, we seem to be holding up particularly well compared to other developed countries around the world.
As of September 2009, our unemployment rate has not yet reached 6% whereas the U.S. unemployment rate is approaching 10%. It appears that employers are reducing working hours for their employees rather than retrenching their workers. This can be seen from the increase in part time jobs at the expense of full time jobs over the last few months.
Australia has so far avoided a ‘technical recession’ (two consecutive quarters of negative economic (GDP) growth), thanks largely to the Federal Government’s stimulus payments which have helped boost retail spending and also the First Home Owners Grant which has kept the housing sector humming along.
All this has led to a strong rebound in consumer confidence and even business confidence has turned positive for the first time since December 2007.
With the Government’s infrastructure spending due to begin impacting the economy in the second half of 2009, there is growing evidence to suggest that Australia's economic downturn may turn out to be a lot less severe than many of the ‘experts’ predicted.
Since the Australian share market hit its low point at 6th March 2009, the share market has rebounded by more than 50%. Had you decided that ‘enough was enough’ and had moved your super investments away from shares and into cash, you would have missed this 50% rebound in the Australian shares component of your super investments.

The volatility in share markets both here in Australia and around the world is almost unprecedented. The speed in which the markets can rise and fall are a new experience for investors, even those who remember the October 1987 crash!
Markets do eventually recover and when they do the recovery can be quite sudden. A recovering share market can also have a number of stops and starts before it develops into a sustained recovery.
What we need to remember is that share markets are forward looking and often driven by market sentiment. History shows that most downturns are followed by a recovery, with share markets eventually recovering to post new highs.
If we take the Australian share market, even if the All Ordinaries Index recovers to 5,500 points in the next 12 to 18 months, that will still be a rebound of more than 15% from its level at the time of writing (around 4,700 points).
This will still leave the Index at some 20% lower than its November 2007 all time highs.
As you can see, we do have a fair way to go, however, even a partial recovery in the share market over the next year or two can produce returns significantly higher than leaving your investments in cash (the current RBA cash rate is sitting at 3.25% per annum).
Let’s hope that despite the likelihood of a few stops and starts over the next few months, by the end of this year, we may be seeing continued upward movement in Australian and global share markets.
Enough to give us hope for some strong growth in our super investments from 2010 onwards.

The Pension Bonus Scheme (PBS) is a government initiative that encourages eligible people approaching retirement age to continue working (and thus defer claiming the age pension).

The Pension Bonus Scheme provides a tax-free lump sum to eligible Australian residents who defer claiming the age pension and continue in gainful work for at least 960 hours each year.

For a bonus to be payable, clients need to register as members of the scheme within 13 weeks of becoming eligible for the age pension. For men this is currently age 65, while for women the qualifying age for the age pension is currently 63 years and six months, gradually increasing to age 65 by 1 January 2014.

However, from 20th September 2009, the Pension Bonus Scheme will be closed to new entrants. An income test concession will be introduced instead. Those of you who are registered or who will be eligible to register before 20th September 2009 will continue accruing entitlements as previously.

To compensate for the closure of this measure, the Government will introduce a new pension income test concession for people of Age Pension age. The concession will mean that only 50% of the first $500 of employment income per fortnight will count for income test purposes.

A person may need to evaluate whether the bonus or the concession is more beneficial to them. This may depend on how long you intend to keep working, the amount of time you have already accrued under the Pension Bonus Scheme, or the percentage of Pension Bonus to which you may become entitled to.

Women approaching age 63 or over and men approaching 65 or over, may be eligible for the pension bonus scheme which will be closed to new applicants from 20th September 2009. If would like further information on the scheme, please contact us on 1300 859 643 or at mail@kouterisfs.com.au.

To put it simply a bond is a promise to pay interest on borrowed money and return the borrowed money after a set period of time.
Interest rates change over time, based on a variety of factors, particularly rates set by the Reserve Bank in Australia. The demand for these types of investments can also determine the interest rate payable on bonds.

Movements in interest rates can have a positive and negative effect on the value of a bond. For example, if you have purchased a bond with an interest rate payable of 6% per annum and six months later you can buy a similar bond with an interest rate payable of less than 6% per annum, then the perceived value of your initial investment has gone up because it is paying a higher interest rate than those currently available. Similarly, if the interest rate payable on a similar bond is greater than the 6% per annum your bond is paying you, then the perceived value of your bond has fallen because investors can access similar bonds with a higher interest rate.
Following is an extract from Kaplan Professional* that explains how Bonds work…

The bond market is driven primarily by interest rates, although there are other drivers that affect bond prices. Apart from interest rates set by central banks in applying monetary policy, there are categories of risk that contribute to setting the price and liquidity of fixed income products in Australia. The predominant factor affecting bond prices apart from official interest rates is the creditworthiness of the bond issuer and this is expressed through the debt premium.

The price of debt is given by the risk-free rate plus the debt premium. The debt premium represents the additional price of debt represented by the specific risk of the bond. The debt premium can be gauged by the credit ratings assigned by credit agencies in appraising a particular bond issuer’s exposure to micro and macro economic risk. Both private and public debt is susceptible to risk and it is the debt premium that encapsulates this risk and ultimately sets the bond price.

The Australian Federal Government, for example, can issue bonds to investors with an interest rate that is significantly lower than a corporation, as the likelihood of the Federal Government defaulting on the interest payments and failing to return the initial capital is negligible compared to a company offering a similar investment.

If you would like further information on Bonds or any other investment product, please contact us on 1300 859 643 or at mail@kouterisfs.com.au.

*Reproduced with permission from Kaplan Professional, “Debt premiums on fixed interest”, July 2008.

Running a small business can be quite challenging as it is completely reliant on your ability to provide a service to your clients.

Michelle Duncan has worked as a self employed beautician since 1996. A couple of years ago, Michelle realised that she did not have any insurance cover in place to protect her if she couldn’t work due to injury, illness or a disability.

Michelle had worked hard for the last 13 years as a beautician culminating in her move to her current premises at 54a Carrington Road, Randwick in 2006.

She realised that if she couldn’t work for a prolonged period of time, not only would she miss out on her current income, but she couldn’t afford to keep her Salon running whilst she recovered.
Kouteris Financial Services worked with Michelle to put together an insurance package that would meet her immediate needs was affordable for a small business owner. There are two elements to her cover – insurance for her business and insurance for herself.

By purchasing some Business Expense Insurance, Michelle is able to protect her business by having insurance that covers her business expenses including rent, electricity, gas, phone, leasing costs, interest on business loans and some employee wages, if she cannot work for up to 12 months.

In addition, Michelle has taken out income protection insurance that will pay her a monthly benefit if she was injured, became ill or disabled until such time as she could return to working as a Beautician or until she reached age 65.

Michelle was able to obtain this insurance cover for less than $20 per week giving her peace of mind and the confidence to continue to build her beauty salon clientele.
A further benefit to Michelle is that the cost of this insurance cover is fully tax deductible. This means the real cost of the cover is significantly less when you consider the tax deductibility of the insurance premiums.

For more information on insurance for small business owners, please contact us on 1300 859 643.

Michelle’s Beauty Salon is situated at 54a Carrington Road, Randwick.
Michelle’s Beauty is a relaxing, tranquil and professional salon that provides many beauty services including Facials, Waxing, Massage, Spray Tanning, Manis, Pedis and Tinting.

Please call Michelle on (02) 9314 7000 to make an appointment.
*Michelle has kindly given KFS permission to use her story for this newsletter. KFS will never disclose client details without express permission from the client.

Have you considered how you would pay the mortgage and bills if you or your partner were unable to work? Income Protection insurance provides you with a regular source of income should you be unable to work for a period due to sickness or injury. You can generally insure for up to 75% of your earned income. There are a number of options available relating to waiting periods and benefit periods.

Waiting periods- this refers to how long you can be off work before you need the benefit to be paid. Generally this is 30, 60 or 90 days with the 90 day waiting period being the cheapest option. The waiting period you choose depends on your personal circumstances, including your cash reserves, expenses and any other policies you have.

Benefit Period- this is how long the benefit will be paid. Some common time frames are 2 years or up to age 65. Again, the right benefit for you depends on your personal circumstances and the longer the benefit period, the higher the premium.

Income protection insurance is available either through your super fund, as a stand alone policy or you may need a combination of both. Income protection cover as a separate policy to your superannuation can be the most tax effective way of purchasing this cover as you can claim a tax deduction on the premiums that you pay when you lodge your tax return each year. However, cover through super can be a more convenient method of obtaining this cover as the premiums come out of your super rather than your personal cash flow. Many super funds only offer a 2 year benefit so you may need to purchase a second policy outside of super to cover you after the 2 years is up. This may change, however, after a recent tax ruling that means clients can now claim a tax deduction for their income protection within super for cover up to age 65. Prior to this ruling, super funds could only claim this deduction for 2 years. The Aon Master trust now offers cover to age 65 however if you have super with other funds, it’s worth finding out if they too offer this cover.

Income Protection is a valuable asset to have and is something everyone should consider, regardless of age or income. If you don’t already have income protection, Kouteris Financial Services can provide you with advice and a quote to suit your personal circumstances.

While you hope you never need to claim, it’s best to be prepared just in case…