ECONOMY

Banks seek to stave off more aggressive regulatory intervention in the housing market as property investors with interest-only loans from Commonwealth Bank of Australia have been hit with a second interest rate rise in six weeks.

Investor and interest-only borrowers will bare the brunt of the latest out-of-cycle rate increases, with CBA, ANZ Banking Group and Westpac Banking Corp all announcing higher interest rates for various categories of borrowers. National Australia Bank has also lifted rates in the past week.

Despite the Reserve Bank of Australia holding the official cash rate and reflect banks using pricing to cool demand for loans as regulators consider whether additional controls are needed to protect the financial system from being destabilised by surging house prices in Sydney and Melbourne.

 The standard variable rate for interest-only investment loans will increase by 26 basis points to 5.94 per cent from May 8 after last month raising rates on the same category of loans by 12 basis points.

The nation’s largest lender was one of nine banks to announce increases in lending rates with investment loans copping the biggest hikes.

To slow investor demand, Banks are increasing the price of investor loans. This is a win-win. The price increases are a net positive for banks earnings and margins even as investor growth slows.

“This change reflects the bank’s view that recent ultra-competitive mortgage pricing needs to return to levels that better reflect the current market funding and capital costs.

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Traditional retail is under serious threat. People are gravitating towards alternatives like Amazon for one primary reason…to buy more for less.

Amazon is high-volume and low-margin, and it doesn’t have the property overheads that brick-and-mortar retailers do. But life is never one-dimensional, There are other factors at play. Factors that could cost yield-starved investors serious money.

Warren Buffett believes in America’s future but seems more doubtful about that of Walmart and other traditional retailers. As recently as last summer, Buffett’s holdings in Walmart were worth $3 billion, and are now down to less than $100 million. He started investing in the company in 2005.

Buffett himself seemed to take a dimmer view of traditional retail’s prospects at Berkshire’s annual meeting last year when he said of Amazon, “It is a big, big force and it has already disrupted plenty of people and it will disrupt more,” adding that many companies “have not figured the way to either participate in it, or to counter it.”

According to the Business Insider, ‘Nearly every major department store, including Macy’s, Kohl’s, Walmart, and Sears, have collectively closed hundreds of stores over the last couple years to try and stem losses from unprofitable stores and the rise of ecommerce. But the closures are far from over.

‘Macy’s has already said that it’s planning to close 100 stores, or about 15% of its fleet, in 2017. Sears is shuttering at least 30 Sears and Kmart by April, and additional closures are expected to be announced soon. CVS also said that it’s planning to shutdown 70 locations.  

‘Mall stores like Aeropostale, which filed for bankruptcy in May, American Eagle, Chicos, Finish Line, Men’s Wearhouse, and The Children’s Place are also in the midst of multi-year plans to close stores.

‘Many more announcements like these are expected in the coming months.’

Aussie retailers are next in the firing line… The Australian, Fears build as Amazon seeks warehouses. The group’s entry could cost local retailers as much as $4 billion in sales.

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An agreement was signed between Australian BBI Group and the China State Construction Engineering Corporation following Chinese Premier Li Keqiang’s bilateral talks with Prime Minister Malcolm Turnbull recently.

An estimated 3300 construction jobs are expected to flow from the $6 billion new Balla Balla iron ore mine, rail and port project in Western Australia.

The project includes an iron ore mine of between six and 10 million-tonnes-a-year, 162 kilometres of railway and a purpose-built export facility.

There will also be 900 permanent jobs after the project becomes fully operational.

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There can be further regulations in retail power prices as Prime Minister Malcolm Turnbull formally launched a review into the sector by the Australian Competition and Consumer Commission.

The ACCC will look at the drivers of electricity prices, barriers to competition and large profits being made by retailers, as the government intervenes in the energy market to try and ensure supply and affordability.

According to Malcolm Turnbull, options should be left open as there is already a lot of regulations in the electricity market.

The Australia Energy Council hit back by saying, “We don’t need an inquiry to tell the federal government why electricity prices are increasing. They are increasing because we are running out of electricity.

“We are running out of electricity because for the past decade we haven’t had clear, consistent national energy and climate policy,”

Focusing on the operation of the retail electricity market won’t improve energy security nor will it bring down the rising cost of electricity.”

The ACCC announcement follows Mr Turnbull threatening gas chiefs to free up supply for domestic use or face export bans, to announce the Commonwealth would spend $2 billion upgrading the capacity of the Snowy-Hydro scheme, and to examine competition constraints within the gas pipeline network

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FINANCE NEWS

 

In a recent paper released, the government has flagged a policy change in which the treasury has set out options for removing the tax advantages of stapled arrangements. Treasurer Scott Morrison may use the May federal budget to announce any changes.

The federal government is considering doubling the tax rate applied to more than $199 billion worth of so-called stapled structures, in a move that could scare off foreign investors.

Separate securities, such as a share in a company and a unit in a trust, can be stapled together to create a tax-advantaged financial instrument that has long been used in the property and infrastructure sectors.

This structure is particularly attractive to foreign investors because, when combined with rules for managed investment trusts, it allows tax to be paid at 15 per cent or lower. That compares to the normal company rate of 30 per cent.

But the government and Australian Taxation Office are worried that stapled structures have been adopted beyond the traditional property and infrastructure sectors by entities seeking to convert active business income into tax-advantaged passive income.

The Tax Office issued a taxpayer alert in February. The revenue authority said it had seen more than $10 billion in non-compliant structures over the past 12 to 18 months, with $300 million estimated to be in dispute. ATO officials were “discouraging these type of arrangements”, which would be subject to increased scrutiny, including audits and potential litigation.

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It will be a “massive achievement” if the government can get Senate support for small business tax cuts, but there will be no relief for big business said Treasurer Scott Morrison.

Laws should be drafted to reduce the corporate tax rate for small businesses with a turnover of less than $10 million to 27.5 per cent, and gradually get to a 25 per cent rate for businesses of all sizes by 2026/27. The government is only expected to get the numbers in the Senate for the small business tax cut, before parliament rises for the pre-budget break.

“That is a massive achievement that is the biggest change to small business taxation that we have seen in a long time.” said Mr Morrison. However the government is still aiming for a 25 per cent rate to keep Australia internationally competitive, which is estimated to cost $50 billion. “We want the broader change,” he said.

Crossbench senator Derryn Hinch said he expected the government would split the bill “to get something through this time” and come back to the broader cuts later.

The draft laws are expected to come on for debate shortly after an inquiry report is tabled.

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As regulators consider tightening bank lending, ANZ has given itself one month to test changes being made to its technology systems to allow it to price new interest-only loans at a different interest rate to loans repaying principal and interest for the first time. It will take a further three months to allow the changes to apply to existing interest-only customers, however rates for owner occupiers paying interest and principal will remain unchanged at 5.25 per cent.

RANZ Banking Group has joined the other major banks in lifting interest rates for property investors, its variable interest rate on investor loans will rise by a quarter point to 5.85 per cent from March 31 – and by an additional 11 basis points for loans where investors only repay interest.

The changes made in home lending will affect investors and borrowers who only repay interest on their loan. The changes reflect a need to closely manage regulatory obligations, portfolio risk and the competitive environment,” said ANZ group executive for Australia, Fred Ohlsson.

New owner-occupiers on variable rates repaying interest only will pay an additional 20 basis points to 5.45 per cent from April, 22. The rate for new investor loans repaying interest only will increase by a further 11 basis points to 5.96 per cent. Interest loans are popular with many property investors because they allow for larger tax deductions to be made under negative gearing policies.

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COMPANY NEWS

Oracle reported better-than-expected quarterly profit and adjusted revenue as the business software maker benefits from its transition to cloud-based products.

Oracle’s shares rose 5.2 percent to US$45.30 in extended trading. Sales of the company’s cloud-computing software and platform service rose nearly 62 percent to US$1.19 billion, while its software licensing business fell nearly 16 percent.

The company’s shift to cloud-based products to tackle the shrinking licensing business was strengthened with its US$9.3 billion NetSuite acquisition in July. “The growth in revenue from our cloud business has overtaken new software license declines on an annual basis,”

Oracle’s net income rose to US$2.24 billion, or 53 cents per share, in the third quarter ended 28 February, from US$2.14 billion, or 50 cents per share, a year earlier.

Oracle’s total adjusted revenue rose nearly 3 percent to US$9.27 billion, marginally beating estimates.

The company forecast current-quarter earnings of 78 cents to 82 cents per share and revenue to grow between negative 1 percent and positive 2 percent.

Analysts are expecting fourth-quarter profit of 78 cents and revenue of US$10.62 billion.

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Microsoft has expanded its board of directors by adding LinkedIn founder Reid Hoffman, the company announced.

Hoffman, a former PayPal executive, founded LinkedIn in 2002. The announcement comes three months after Microsoft closed its blockbuster US$26.2 billion acquisition of LinkedIn. Hoffman has been a partner at venture capital firm Greylock Partners for the past seven years. The addition of Hoffman expands Microsoft’s board by one member, to 12.

When Microsoft bought LinkedIn, Microsoft chief executive Satya Nadella noted several integrations that would occur between LinkedIn and Microsoft’s productivity applications and operating system. Nadella wrote that Microsoft’s “top priority is to accelerate LinkedIn’s growth, by adding value for every LinkedIn member”.

Adding Hoffman to the board appears to be a tangible step in that direction, since he’ll be able to offer guidance on how to best blend LinkedIn’s vast network of connections with Microsoft’s collaboration efforts and its various cloud computing products.

Meanwhile, Microsoft’s recent launch of its Teams collaboration tools shows that the company is fighting a multi-front war for the attention of enterprise workers as it uses LinkedIn and Skype to provide competitive responses to Salesforce Chatter and Amazon Chime.

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SUPERANNUATION

 

Australians enjoyed a healthy boost in superannuation fund returns in February, although gains noticeably undershot the strong performance of the local share market.

For the month, the return for the average balanced fund was 1.1 per cent, according to figures from Super Ratings, a return to the black after a modest negative reading in January.

“There has been some stability this year in  superannuation returns following what was potentially a bit of hype at the end of 2016,” Super Ratings ( A research firm) chairman Jeff Bresnahan said.

“Investors do not want to see markets getting too carried away, especially when there is still a fair amount of political and economic uncertainty globally.”

Despite the subdued start to 2017 as a whole, the 12-month rolling return to February 28 has reached 11.3 per cent, the highest mark in two years.

Equities have been key, with global share markets rallying through a period of significant geopolitical uncertainty.

“Looking over the past 12 months, only three months have seen negative returns, and these have been small, especially compared to the larger positive gains we saw at the end of 2016.

While turbulence may be on the horizon, 2017 is still seen likely to be another year of positive returns.

“Overall, we remain broadly positive for 2017,” Mr Bresnahan added. “We saw a very promising GDP figure for the fourth quarter of 2016, driven by consumer spending and a turnaround in export volumes, and this appears to have continued into early 2017.”

As housing costs and home loans expand in size, Superannuation is increasingly being used to pay off mortgages.

According to a new report commissioned by the Australian Institute of Superannuation Trustees (AIST).The decline in home ownership rates among older Australians is posing a significant threat to the adequacy of Australia’s retirement income system, the decline in home ownership among younger Australians can also be seen among the 35 to 55 age bracket.

Many people think, it is an intelligent and rational decision for older Australians to use their superannuation to pay off their mortgage, however this is going to be much more common now as more people still have mortgage debt outstanding when they get to retirement.

One of the biggest concerns is the increase in the proportion of people aged between 55 and 64 who own their own homes but still have mortgage debt outstanding, which has more than tripled to 45 per cent.

This is significantly higher than those aged 65 and over who are still paying off their mortgages, which sits at just 10 per cent.

People will increasingly use their super to pay off their mortgage debt which means they won’t be using their super to fund their retirement incomes and instead will be relying on the pensions.

In order to address this issue, more needs to be done about why home ownership is out of reach for most people. The housing affordability crisis is putting pressure on future generations and the Government’s budget. A recent report suggests the budget is at risk from an increased number of retirees on the age pension, more aged care costs and higher demands for rental assistance.

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GLOBAL NEWS

 

The abrupt announcement of the proposed new laws on April 8 last year prompted a sell-off in China-focused consumer stocks listed in Australia, as investors worried that many products would be blocked from entering the mainland. Sentiment was further damaged when dairy producer Murray Goulburn had its long-life milk products removed from China’s biggest e-commerce site.

 

But heavy lobbying by the big e-commerce players appears to have killed off the changes, after being delayed twice previously. China has delayed indefinitely tough new-cross border e-commerce laws that had threatened to disrupt the flow of Australian vitamins, milk powder and cosmetics into booming markets on the mainland.

 

The surprising backdown by Beijing comes ahead of Chinese Premier Li Keqiang arriving in Australia for talks on upgrading the free trade agreement and how to eliminate other non-tariff barriers.

 

The indefinite delay is a big win for vitamin makers Blackmores and Swisse, which were facing complex new licensing and labelling requirements in China. The back down should also benefit infant formula makers a2 Milk Company and Bellamy’s Australia, which have been hurt by uncertainty on how the new regulations would be implemented.

 

 

China’s Commerce Ministry said goods coming into the country via cross-border e-commerce platforms would be classified as “personal” rather than “common” trade, meaning there would be no additional requirements for local registration or labelling.

The statement also said the number of pilot free trade zones, which can house cross-border e-commerce operations, would be increased from 10 to 15.

 

While Australia companies will be applauding the back down it will also be welcomed in Japan, South Korea, Europe and North America, which have all benefited from surging Chinese demand for consumer goods and food coming into China via cross-border e-commerce platforms. The cross-border trade into China was estimated to be worth 6.3 trillion yuan ($1.18 trillion) last year, double the level of three years ago, according to research firm.

The goods are either sent directly from a third country via courier or come onto the mainland via free trade zones across China.

 

It allows companies that have not gone through the expensive and time-consuming local registration process to sell their goods into China. This update is a very positive policy,” said Livia Wang from Access CN, which promotes Australian products to merchants selling into China.

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