Dealing with Financial Uncertainty – 2020

Uncertain times, understatement.

Firstly, our thoughts are with all the people and businesses affected, either physically or financially, as a result of the events of this year.

What follows is a view of what it might mean from a financial perspective, and how we can best prepare both our balance sheets and our mindsets too.

There is varying relevance for households and businesses but the issues are similar.

FINANCE – STATE OF THE NATION

The vulnerability of the Australian economy to world events is significant; the current "deviation" in our behaviour to comparative information is wider than before. I won't pretend to understand or comment specifically on equity markets but there are some strange behaviours there.

Locally, the RBA is currently scheduling an emergency meeting for Thursday 19 March, where it is expected that an out of cycle rate cut of 0.25% (25 basis points) will be announced. This follows the U.S Federal Reserve's "emergency" slashing of rates by 1% to 0%. There is nowhere now for central banks to go and in some respects that might be a good thing.  

Our banks are now focused on what "is good for the country" and I expect the intense pressure will be to pass this rate cut on in full.

The conflict here is that bank funding costs are on the rise. Like all crises, bank wholesale funding costs (i.e. outside of internally generated deposits) are going up in response to risks. Banks will either have to absorb these or pass these on. 

So, we may have to pick our poison, lower interest rates on borrowings or lower returns for superannuation.  Perhaps there is discussion from this longer term, to decide where our banks fit in between commercial and social responsibility.

Macro Economic Downturn

At the risk of sounding too clinical, Australia's prosperity and obsession with avoiding a recession has been both a blessing and a curse.

Year on year positive growth whilst great, hides inefficiencies inside both businesses and Government alike.  It is when the tide goes out, that these inefficiencies get exposed. Very sadly, this can manifest in a number of negative ways in the short and medium term, including labour market pressures.

As hard as it is (and sympathy to those impacted by short term circumstances), corrections are part of the cycle of economic life and a very tough but necessary evolution for business in particular.

The recovery is where opportunity to innovate can be found and hopefully where new employment opportunities can be created too.  

The "R" Word

I have never liked the definition of a recession - technically defined as a situation where growth in output, as measured by "Gross Domestic Product", is "negative" for two successive quarters.  For example, ABS data showed that Australia produced goods and services valued at $480.4 billion in the last quarter (December 19). 

Whether the next number ends up being $478 Billion or $482 Billion for example, we will need the analysts to tell us well after the event.  So one perspective is that it is really only material in mindset.

MONEY STRATEGIES & OPPORTUNITIES

Our deepest sympathy to those whose employment or income may be impacted by these events.  

For households, the time is now, if possible, to look at your own financial situation.

  • Build Equity
    With interest rates so low and falling, take the opportunity to repay or keep your mortgages at the older (higher) interest rates.  This will both accelerate debt reduction and build a buffer in the event you need to access it.

    One thing seems certain, we will be in a low interest environment for quite some time yet though don't take it for granted!

  • Superannuation & Investments
    Falling asset prices may be a time to take advantage of the opportunities that may be relevant for your own risk profile. Seek advice of course.

  • Review & Prepare
    The lack of discretionary spending now, whilst hurting the economy in the short term, is a chance to review your “P&L” and build your "Balance Sheet". This is something that long term thinking economists have been advising households need to do for years.

    In some respects, not being able to spend on discretionary items is forced savings, can you quantify the amount of these and where will it can be directed? 

    It is therefore a great time to create a Budget and/or set some financial goals. There are several on-line tools that can assist so take the chance to improve your financial literacy.

For businesses, the challenges and opportunities will vary from industry to industry.

  • Communicate
    If you are having financial pressures, communicate as early as you can.

    Talk to your banking connection, there are already some relief measures being communicated (loan deferral, interest only payments etc.) that could be available. Do this before you breach financial covenants or worst still fall behind on repayments.

    This goes for the ATO too, lodge BAS statements and communicate any financial shortfalls.

  • Innovate
    We are hearing about stories from our community about how they are innovating their businesses, principally around reaching their customers.  Whilst this may be out of reach for some, talk you people in your industry about ideas to maintain the rage. 

  • Tax Incentives
    There are some Government incentives for SME's in the form of cash boosts (to offset against employee costs), that may be quite material. In addition, the immediate Asset Write-Off Threshold has been increased from $30,000 to $150,000. 

    The latter I remind is not a cash offset, but a tax deduction.  Whilst it may be tax effective it is important to only buy assets that you really need.

Final Thoughts

For our communities, these hardships will accelerate the innovation and speed of change in our worlds.  

Take technology and the removal of the reliance on face to face connection as one small but significant example. Once businesses make changes and investment into their processes to affect this, they won't be turning back to the "old" ways.

Think about your ability to prosper in that environment.

Our best wishes to you, your families and whatever matters to you.

The Team at MCP
www.mcpfinancial.com.au
enquiry@mcpgroup.com.au

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