TW3 – A Brave New World

Stanford Brown’s Royal Commission Response

Justice Kenneth Hayne has released his final report into misconduct in the Banking, Superannuation and Financial Services Industry. We hope that the report will bring about the cultural reforms that are long overdue in the Australian Financial Services Industry. Our note on how the report will affect the Financial Planning Industry, Stanford Brown, and our clients can be found here.

Market Wrap

Global markets trended upwards to begin the week, before slumping overnight as reports emerged that Donald Trump would not be meeting with Chinese President, Xi Jinping, prior to their trade war truce expiring on the 1st of March.
In local news, Kenneth Hayne submitted his final report following the Royal Commission, with his 76 recommendations being surprisingly mild. The Big Four banks held what is known as a relief rally, whereby investors respond to news that wasn’t as bad as previously anticipated, adding almost $20b to the value of bank shares in one day. Mortgage brokers didn’t fare so well, as the report recommended the abolition of trail commissions.
Also of significance for local investors was the meeting of the RBA board on Tuesday afternoon. RBA Governor, Phillip Lowe, had previously indicated that their next move would be a rate hike, however in a mid-week speech, Lowe explained that the chances of a rate hike or rate cut were now “evenly balanced”. The Australian Dollar slumped in response to the news, as domestic currencies tend to fall in value when rates are cut.

Finance 101 – Fads in Fitness and Finance

In many ways, seeking financial advice is like getting advice on health and diet. In both fields, consumers are often unable to make informed decisions due to a lack of education, meaning they often copy what everyone else is doing and perpetuate fads.

Much like fad diets (juice detoxes, alkaline diet, etc), there are fad investments (cryptocurrencies, technology stocks, etc). Fads will only become more popular as the rise of the internet grants a platform for anyone with an internet connection, irrespective of their qualifications, to share advice on everything from investing to intermittent fasting (sometimes both!).

Consumers who fall prey to these fads in fitness and finance often share a common flaw: they’re looking for an easy way to achieve something difficult. There is little difference between a get rich quick scheme and a workout routine that will give you killer abs in one month. Both are promising wonderful results with minimal effort, both often involve paying a fraudster a fee, and both rarely pan out.

When it comes to fitness and finance, the simplest strategies are often the best ones. You will achieve most of your health goals with a balanced diet and regular exercise. Likewise, you will achieve most of your financial goals with a well-balanced diversified portfolio and sensible spending habits. Most people don’t follow these strategies because they require discipline and patience. The value of a quality adviser is to work with you to set goals and to keep you on track.

Stanford Brown Top 5

In need of some weekend reading? Never to fear!
Stanford Brown’s Top 5 for February delves into active portfolio management, bank share returns and how Brexit is of little significance to Australian investors.

Marks vs Marx

Legendary distressed debt investor Howard Marks has released his first memo for 2019, taking aim at populist politicians and their dystopic view of market economies. A few edited highlights below:

On protectionism
– One study of the Obama tire tariffs found that in a single year, 2011, Americans spent an extra $1.1b on tires as a result of a tariff that preserved, at most, 1,200 jobs. That is almost $1m per job, for jobs paying an average of about $40,000

On capitalism
– Capitalism is the worst economic system, except for all the rest (referencing Winston Churchill’s description of democracy)

On the promises of politicians
– We shouldn’t take actions – like imposing tariffs – just because they offer potential benefits, without considering their costs. And we shouldn’t condemn things – like capitalism – solely because they’re imperfect, without considering their benefits.
– Winston Churchill described a nation trying to tax its way to prosperity “like a man standing in a bucket and trying to lift himself up by the handle”

Mortgage Broken – Noel Nails New Reform

One of the more controversial recommendations of commissioner Hayne’s report was to ban trail commissions for mortgage brokers, whereby banks pay mortgage brokers a fixed percentage of the loan they’ve originated. Hayne suggests that the current system is perverse: “Why should a broker, whose work is complete when the loan is arranged, continue to benefit from the loan for years to come?”. The report recommends that borrowers should pay mortgage brokers rather than lenders.

As personal finance guru Noel Whittaker wrote in Cuffelinks this week, the banks are going to have a field day. Mortgage brokers act as an intermediary between banks and borrowers, instilling competition which keeps the banks (relatively) honest and reduces mortgage rates. The Royal Commission heard little, if any, complaints regarding mortgage brokers, so it is perplexing as to why Hayne is giving the banks this free kick.

Residential Property Not Rosy in Roselands and Ryde

Property prices have continued their slump into the New Year, with Sydney homes falling a further 1.3% in January. Ryde (which covers Gladesville up to Pennant Hills) and the Inner South West (which covers Kogarah to Bass Hill) were the two worst performing Sydney regions over the past year, down 13.4% and 12.1% respectively.

Dr Stammer’s 3 Golden Rules

Dr Don Stammer, lauded economist and member of Stanford Brown’s Investment Committee, has written an excellent article in The Australian explaining how investor sentiment is often misguided.

Don provides three thoughts that investors should keep front of mind during bumpy rides like we have seen in the last few months:

– Over time, patient investors are well-compensated for the discomfort of the bumpy ride that comes with share ownership.

– Investors need to allow that the prevailing sentiment in markets can at times turn out to be wrong

– Whether a sharemarket sell-off is reasonable or an overreaction, it can provide opportunities to buy quality shares cheaply

The Most Powerful Cities In The World

A Japanese think tank has ranked the most powerful cities in the world, with London taking out the top gong for the 7th consecutive year!

Sydney managed to scrape into the top 10 for the second year running. To the surprise of no one, Sydney’s weakest categories were culture and accessibility (i.e. infrastructure). Fortunately, our beaches and natural environment are amongst the best in the world (provided you can access them).

Source: Mori Memorial Foundation

Name That Line!

In our new weekly segment, readers have to match a picture with the famous quote associated with it!
For example, the correct answer to the image below would be “go ahead, make my day”

As always, the quickest correct response will receive a bottle of red! Here’s our first photo!

Pic of the Week

Video of the Week – When You’re Overqualified For Your Job!

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