Sorting out the key elements of your investments in any given year means doing a review of your tax and super along with an assessment of how much you have in cash, property and shares.
If you get those ‘allocations’ right, then the chances are you have optimised your money-making possibilities.
But there is another factor that must be examined afresh at the start of each year: the sentiment across the investment sector, what is known inside investing as the current mood of ‘Mr Market’.
As we kick off 2024, Mr Market’s mood is unmistakably bullish: interest rates appear to have plateaued, inflation is falling – though not perhaps in a straight line as this week’s US figures demonstrate.
The conditions for an extended market upswing are strong and – if we use bitcoin activity as the proxy for speculative energy – investors are clearly ready to go for a run.
Just as you should be aware of this renewed optimism, you should also take note of why volatility remains elevated – wars continue in Ukraine and the Middle East and the US-led Coalition, including Australia, has carried out strikes in Yemen. China tensions with Taiwan continue and elections are looming in Taipei.
Separately, there are more prosaic fears, which can just as easily drag markets down – such as the return of Europe to recession.
Meanwhile, some of the key trends of recent years are now fading.
The outstanding example would be the decline of ESG (environmental, social and corporate governance) considerations as an investment principle.
The lack of clear harmonised standards for ESG and constant ‘greenwashing’ has tarnished the issue to the point that major global players such as Blackrock and Coca Cola are stepping back from ESG as we know it.
This does not mean environmental concerns are removed, but as the mood changes on how to engage with environmental risk, the investment variables will change in tandem.
In turn, new megatrends are emerging, especially the excitement – and concern – around artificial intelligence (AI).
Last year’s AI boom largely overlapped a rebound in US tech titans such as Apple and Amazon.
But it also brought huge rewards to the manufacturers behind the AI boom such as semiconductor maker Nvidia.
In our own market, AI has put a rocket under tech stalwarts such as NextDC, which is currently sitting on a one-year return of nearly 50 per cent.
This year should see the AI boom accelerate and widen to offer more opportunities in the market.
Keep in mind that no two years are ever the same for investors.
The fundamentals for investing have recently improved, but the mood of Mr Market will be the swing factor in your returns next year.
Now let’s get down to what to do now to make sure you are ship shape for the year ahead.
Your tax bill is coming down
If you are on a salary then most years you have to take risks to improve your tax position.
Nine times out of ten this means negative gearing on property, where the tax deductions are automatic but real profit is hard to come by.
This year, you get to improve things without doing anything: On July 1, the government is set to bring in the key phase of the personal tax cut program.
First, plan around these tax cuts where both the 32.5 per cent and 37 per cent tax brackets are removed and replaced with a new flat 30 per cent tax bracket for salaries between $45,000 to $200,000. The changes will mean someone earning $200,000 this financial year will pay $60,667 in tax, but this will decrease by $9075 to $51,592 next financial year – that’s a very handy pay rise.
Second, if you do anything to get a tax deduction this financial year they are likely to be more effective pre-July than they will be going forward when your personal rates come down automatically. So go ahead, pre-pay interest on investment loans or income protection policies before June 30, 2024, or anything else that comes your way: Next year, the deductions will not be as good.
Super changes again: catch up
Superannuation settings never stop changing and 2024 will be no exception. For anyone on a salary, the key item to know is that the Super Guarantee Charge – the compulsory amount that must be contributed to super from your salary – goes up again, this time to 11.5 per cent per cent on July 1.
As you can see, that SGC is getting to be a very substantial item in your money plans. For higher salary earners, the effective outcome of the higher SGC is that the amount they can voluntarily put in super (or salary sacrifice) shrinks again.
Be careful to keep under the pre-tax (or concessional) cap of $27,500 per annum if you contribute to super.
If a person is on $150,000 a year, then their SGC in the new financial year will be $17,250: As a result, the amount that could be voluntarily contributed pre-tax will now be $10,250.
The other issues to watch out for in super are Division 293 and the imminent arrival of Division 296 – better known as the government’s plan to squash super savings above $3m.
Division 293 is an extra charge on anyone earning over $250,000 which effectively claws back access that taxpayers have had to super concessions.
Just like the pre-tax super contribution cap, the Division 293 is not expected to change this year: As such it is a ‘bracket creep’ style tax that steadily gets sharper every year.
Separately, Division 296 is looming: this new tax – the 15 per cent over $3m – is controversial because it breaks a core tax principle by taxing unrealised (or paper) gains.
To be precise, the so-called Division 296 tax will be 15 per cent on earnings on superannuation balances above $3m) – it kicks in on July 1, 2025, but anyone with long term plans – especially property investors – need to plan for it now.
Cash: Last chance for the best deposit rates
The official cash rate is now sitting at 4.35 per cent, while inflation is now dropping and the latest consumer price index reading, released a few days ago, shows we are sitting at 4.3 per cent.
We are getting close to the point that you may actually make some real money on savings deposits (even after inflation). Risk free, government guaranteed money in approved deposit taking institutions is always hard to beat, especially for older Australians who want more security and less volatility.
The cash rates in the market remain healthy for term deposits and if the economic forecasters have it right, the outstanding risk for rates is that they might begin to drop in the year ahead. Take advantage of the best term deposit deals in the market now as they are unlikely to be at these levels in a year’s time.
Property – Is Melbourne the bargain?
The residential property market rose around 9 per cent last year and the expectation is that in the year ahead, it will rise between 3 and 5 per cent. Unlike equity markets, the local property market forecasts would seem to be on firmer ground especially since we are facing one per cent vacancy rates in the rental market along with the continuing challenge of accommodating more than 500,000 new arrivals in the country over the last year.
The absolute laggard last year was the city of Melbourne where a surprise package of tax increases aimed squarely at Victoria’s property investors further cooled a market where the supply of stock remains substantial.
No wonder then that Sydney beat Melbourne out the door for property investors in 2023 with a 10.4 per cent return versus 2.7 per cent for Melbourne – extending a pattern that goes back for decades.
Believe it or not, median values in Brisbane have now surpassed Melbourne, the nation’s second largest city. If any market has the chance to rebound this, it is Melbourne – it is now in a similar position to Perth at the start of last year where the lag in price growth should ultimately trigger investment activity.
Shares – True believers will always be rewarded
Late last year, it became clear the ASX was once again going to get across the line with a reasonable – if not spectacular – return. The ASX 200 returned 7.8 per cent. Total returns were more than 12 per cent with dividends added.
If you were lucky enough to have a portfolio stuffed with fully franked shares, then the overall return was perhaps 14 per cent.
Of course, our market is always underpinned by a dividend yield of more than 4 per cent, but this is a double-edged sword – we get some security, but we do not get the knock returns they get on Wall Street where the dividend yield is less than half the Australian return.
The S&P 500 did 24 per cent in calendar 2023, the NASDAQ did 47 per cent.
So what are the forecasters telling us in January 2024?
A look at market history will tell you that the ASX will return 9 per cent a year on a long-term basis.
There is also a growing cheer squad backing locally listed healthcare stocks along with a near consensus that lower rates will drive an above-average year for small-cap stocks.
For the wider market you can get forecasts from top brokers which range from 1 per cent (yep 1 per cent) to 14 per cent and all points in between.
The tea leaves suggest it could be a good year, but hey nobody knows!
Assume your ASX percentage returns will be around nine and you should be fine.
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