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Carbon Emission Assessments

Nelson Wheeler Nexia has recently teamed up with Carbon Planet Pty Ltd, a leading Australian carbon management & consultancy company, to assist clients with their carbon emission assessment requirements. Reporting GHG emissions became law in July 2008 for all large corporations and tracking of such carbon emissions is now essential.

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Is it time to gear?

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Many investors will be looking at the current fundamentals of investment markets and asking themselves, “Is now the time to gear?” There are several reasons why it may appear to be an attractive proposition at the moment.

On the local scene, the All Ordinaries Index dropped below 4,000 points. Even if this isn’t the bottom, the market still looks fundamentally cheap.
As a result of the fall in share prices, many quality companies are offering high dividend yields. Although they’ve taken a bit of a battering, the major banks are likely to maintain current dividend payouts. After allowing for franking credits, some blue chip shares have been selling at dividend yields of over 10%. This alone is sufficient to cover the interest costs that currently apply to many investment loans.
Interest rates are falling. After the unexpected 1% cut in rates in October and further cuts since, there are expectations rates could fall further, possibly down to less than 3%.

Of course, it’s critical to remember that gearing magnifies investment risk, and at the moment, risk is extreme. Markets are highly volatile for the simple reason that no one knows how the current financial crisis will develop. Those fundamentally cheap share prices need to be looked at in the context that, for many of the world’s largest financial institutions, we don’t know what the fundamentals are.

For property investors, the Australian housing market still looks over-valued. Falling interest rates may give the sector a bit of a kick, but if the world slips into a long and deep recession, it’s difficult to see why our homes should maintain their inflated prices.

This means that, at present, gearing remains the preserve of those with a high appetite for risk. If you are tempted to dip your toe into the water, be prepared to take the long term view – seven years or more. Retain access to ready cash to ensure that geared investments don’t need to be sold if markets weaken further. With markets capable of moving more than 10% in a single day, shares have become something of a gamble. The old adage of not betting more than you are prepared to lose has taken on greater significance lately.

It’s also important that a gearing strategy be undertaken for the right reasons.

Gearing is often promoted as a way of obtaining a tax deduction. Some unscrupulous advisers also recommend gearing because it can boost their commissions. Gearing should only be undertaken when it offers genuine prospects of increasing wealth, and for this to occur the after-tax returns from the gearing program must exceed the after-tax costs. Investors must therefore make a realistic assessment of the return they are likely to receive from their chosen portfolio, look at current interest rates, and decide if there is a good chance that they will come out ahead.

Gearing needn’t be an “all or nothing” strategy. It’s possible to start cautiously, and build the geared portfolio as the outlook improves. Good advice is essential, so talk to us to see if gearing might be right for you.

Market data sourced from CommSec.

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The contents of this Bulletin are general in nature. We therefore accept no responsibility to persons acting on the information herein without first consulting us.