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Episode 32

Market update - COVID 19, elections and the federal Budget

October 2020

Want the latest on the economic impact of COVID-19, government support measures and the federal Budget? Don't miss Sunsuper's Chief Economist Brian Parker and Head of Advice and Retirement Anne Fuchs in conversation about the most recent financial market response, Sunsuper's investment performance, and the outlook for financial markets.

Hello and thank you for tuning in. Welcome to Sunsuper’s webcast and podcast series covering investment markets, money matters, your super and helping you achieve your retirement dreams. My name is Anne Fuchs and I am Sunsuper’s head of advice and retirement. The team and I know that our members who get financial advice as early as possible are the best prepared to live a financially secure and comfortable retirement. A retirement that they so very much deserve. Now, with me is my partner in crime, who I haven’t seen forever, and I miss him terribly. Today we are talking again through the power of technology, our chief economist extraordinaire, who has quite a cult following because those fans know what this man doesn’t know about financial markets and economies is not worth knowing. His name is Brian Parker. Hello, Brian. How are you, sir?

Ms Fuchs, it’s wonderful to chat to you again. Maybe we could do this in person sometime in the next millennia. That would be wonderful.

That would be wonderful. I think about when we did our last New School of Super podcast together at the start of the year and we were ‑ I think we sang each other a happy New Year song. Little did we know what a year it was going to be. If I’d have known, I would have just stayed in bed on the first of January and put my head under the blanket and not come out.

I think everybody feels that way. This is ‑ I’ve been doing this line of work for nearly 30 years. This has been the toughest year in an investment sense, but just in an all‑round sense I think this has been the toughest year in really any of our lifetimes in most cases. I think ‑ that’s why what we’re talking about today, to give our members a sense of what’s been going and help them have comfort that their retirement savings are in safe hands. Before we do that, as always, we know what we need to do to stay good with the compliance people.

You mean a quick word from our sponsors?

Yes indeed.

Yes, everybody, it’s important to remember that what we’re going to talk about today is just general advice. You know, it doesn’t take into account your particular circumstances. If you need to act on anything that you’re hearing today, it’s a good idea to actually seek personal advice. If you need to get in contact with Sunsuper to discuss getting personal advice or to get a copy of our PDS you can call us on 13 11 84 or you can go to our website,

I would say, just a plug for our financial advice capabilities at Sunsuper, Brian, we’ve got very accessible and affordable financial advice. So I encourage our members to take up that advice from Brian. So, Brian, where do we start? We’re sort of getting to the tail end of the year. The Christmas decorations are up in the shops. Last time we spoke the markets were mildly recovering from the shock of what was the start of the year when COVID really hit. How would you surmise what has happened and where we are right now in the economic cycle?

Yeah, look, Anne, I don’t think there’s any point in trying to sugar coat what is going on. This has been the worst global recession in any of our lifetimes. This is the kind of downturn which, you know ‑ if you think about people on the call, people listening in today, think about what their ‑ not so much their parents perhaps but their grandparents and great‑grandparents went through during the Great Depression. That experience actually changed their lives. It actually changed the way they view their lives, their financial lives in particular. It changed their attitude to saving and spending and taking on financial risk. I think this crisis is, in many ways, that kind of event, that I think we’re going to see the repercussions of this play out for many, many years to come in terms of people’s behaviour. It has been a very, very deep Australian and global recession. Certainly, you’ve seen, you know, massive falls in employment and output and spending, but there is a recovery underway. That recovery was always going to be very patchy and very gradual and vulnerable to lots of setbacks. And you’re also going to see a recovery that’s highly variable across different economies, different regions and particularly different industries. That’s really what we’re seeing play out right now. So there is a recovery, but it is very patchy. As we have seen with events in Victoria in recent months but also what’s happened in the UK and parts of Europe and in parts of the United States that the recovery is vulnerable to setbacks, particularly setbacks that are related to infection control. But it’s becomes so important to actually ‑ whenever you see an outbreak of this virus again ‑ to clamp down on it very, very quickly so that we can continue to drive this economic recovery I suppose.

So were you there ‑ saying there, Brian, that there is a link between how well countries have managed their health situation and their economic recovery? Is that what you just said?

It’s kind of it. Put it this way, that’s a nice implication to what I said I suppose.


It’s a really good question because this has been the subject of enormous debate, not just here in Australia but around the world, this idea that if we were ‑ if we relaxed the lockdowns and just let the disease not so much run its course but accept that we’re never going to fully control it, that maybe we would get a better economic outcome and you’d get less economic pain as a result of that. I have some sympathy for that view, but when you look at the data it doesn’t really stack up. The poster child here around the world is really Sweden. The Swedes certainly took an approach where they said, ’Look, let’s just protect our most vulnerable people, so let’s protect the elderly, let’s protect people in aged care. Let’s tell the community to practise some social distancing and be a bit sensible, but other than that we will let things run their course.’ What you ended ‑ the aim of that was to really try and yes, protect the most vulnerable, but try and minimise the damage to the economy and to society. What you’ve ended up with, though, is you’ve ended up with a very, very high number of cases. You’ve ended up with a very high number of fatalities per head of population, one of the highest fatality rates in the world, at least in the developed world. But at the same time you’ve had an economy that hasn’t really done any better than any of its neighbours. So you’ve actually ended up with more Swedes passing away from this virus and an economy that’s still been in a very deep recession. So I’m not sure locking down ‑ I’m not sure this idea that you can avoid the economic damage by letting the virus run its course. If you wanted to avoid major economic damage, you really needed to be Vietnam or Taiwan. If you look at the way the Vietnamese and the Taiwanese have handled this they have been able to actually ‑ they really clamped down on this very, very quickly. When they saw what was happening very early in the piece, the authorities in those economies basically said, ’You know what, we’ve seen this movie before. We didn’t like it the first time and we know what to do.’ So they saw what happened, for example, with the SARS, which also emanated from China. They basically slammed down on things very, very early, got the virus under control really early, minimised the case numbers, minimised fatalities and allowed their economy to, you know, perform relatively well. So if you didn’t do that, well, the alternative was really some form of lockdown and some form of significant economic damage.

Brian, I mean, I think our members would know ‑ would have certainly been across the sectors that have been hurt by COVID, and tourism is one that comes to mind. But you speak about the pockets of recovery. Are there particular sectors ‑ you’ve spoken about some nations that have done quite well ‑ but the sectors in particular, where do you see some bright shining lights and investment opportunities out of this mess?

Well, I think there’s clearly been a number of industries that have really not drawn breath during this that have continued to ‑ that have actually been beneficiaries of COVID. We have seen some of this play out in our portfolio. For example, we have some exposure to some data centres. With everybody shopping online, for example, the fact that we are doing this call on Zoom, there’s a whole range of businesses that have actually benefitted from the way we’ve gone about living our lives and doing business and sort of facilitating those businesses through owning things like data centres have actually done things quite well. Owners of industrial warehouses have done very well. Again, distribution centres, helped along by the boom we’ve seen in online shopping. Some of those assets have done well. We’ve seen relatively little impact on things like financial services where activity is continued, where you’ve seen job losses have been relatively minimal. The hardest hit industries really stand out. So it is tourism, it’s accommodation and hospitality. It’s parts of retail, face‑to‑face retail have really borne the brunt of this. Sadly, the biggest brunt of this has been borne by disproportionately younger people, disproportionately lower paid and also disproportionately women.

Which is very sad. Maybe we jump to the federal budget and your thoughts if we drill down to Australia and we as a nation ‑ personally I’m sitting here in Brisbane and I wouldn’t want to be anywhere else, but I am a proud Queenslander and I know you were born here, Brian, and you are a proud Queenslander too, though you may not admit it. Will you admit it?

Oh look at least on three days of the year.

Three days of the year.

Four ‑ maybe eight days if we make the Sheffield Shield final. I’ll admit to that. Exactly and Queensland in particular but also other states have done very, very good.

Where’s the connection? We’ve fared really, really well. So I think I’d be curious to know from an economic perspective with all of ‑ and some states have fared better than others. But the federal government budget this week, what are your reflections from an economic perspective and the stimulus that has been put forward to get the economy really cranking up again?

Okay. I think there’s a few things to bear in mind. I think if you look at the way the Australian government has responded in terms of the support that’s been provided from the budget really since this started, yes, it has been really substantial and they’ve actually kept that support going longer than they originally planned to do and that was very, very sensible. Compare that, for example, to the United States where they’ve allowed a lot of their support measures to really turn off like a tap at the end of July. That’s actually going to have ramifications for the performance of the US economy and the US labour market over the coming months. So we’ve already seen massive support here in Australia, which has certainly done a very good job of supporting a wide range of households and businesses through this. The budget does add to that. So you are adding a meaningful amount of new stimulus. It’s not just, you know, re‑announcements of previous measures. There is genuinely new stimulus coming out of this budget. By and large, most of the stimulus really does rely on the ability of businesses and consumers to go out there and invest and to hire and to spend. So a lot of the stimulus that’s provided in the budget, whether it’s bringing forward the tax cuts, whether it’s providing financial incentives to take on apprentices or to hire people who have been unemployed, particularly young people, all of that relies very, very heavily on confidence. You need to ensure that businesses and ‑ businesses that have enough confidence about the future to actually make the decisions to hire and invest. So if businesses are confident in the future, then financial incentives won’t really work. You need to see that confidence about the future to enable them to hire and even things like the ability write off against your tax the full cost of new assets, for example. Again, you might be able to write it all off against your tax, but if you take on this equipment and you’re not actually going to be able to use it for anything because the economy’s terrible, it’s not all that helpful. It comes down so much to people’s confidence about the future. To what extent has the budget helped to boost that confidence? That is really the big unknown at this point. If you do see a continued recovery in household and business confidence, then a lot of this money will genuinely flow through into economic activity. If people decide to basically save most of the tax cuts or if businesses decide not to take advantage of the incentives put in place, then the impact is going to be very greatly reduced. I’m fairly confident that a decent amount of the tax cuts are going to be spent, not saved. Because the tax cuts that were brought forward generally flowed ‑ a very, very big chunk of it do flow to people in sort of low to middle income, prime spending territory. So I do think a fair chunk of that money is going to be spent and it’s going to be spent, a lot of it is going to be spent in the lead‑up to Christmas and that’s a good thing. The other thing I just wanted to point out is that I think there is at least some chance that the government may end up needing to do more and I think it’s important not just here in Australia but governments around the world need to stay flexible, need to stay nimble and not be too dogmatic about when they turn off the tap because it may well be that the economy ends up being weaker for longer or if labour markets end up being weaker for longer then more people are going to need further support. So nimbleness at this point, especially with fiscal policy, is going to be really crucial I think.

If we bring this to superannuation ‑ and people would have received their annual statements about now thereabouts. I hope our members have opened them up and not thrown it in the junk mail or in the bin. Very important to read your annual statement, isn’t it, Brian?

It is, absolutely. We certainly put a lot of effort into trying to make our annual statements and our annual communications as accessible and as plain English and upfront as possible. So please open the email and have a read.

Yes, open that email. If you’re still receiving paper, let us know to stop that paper and we can email it to you. But what does all of this mean for our investment performance? I guess talking ‑ maybe starting with our older members and what they would be seeing when their statements have come through and then maybe dialling it down or working back to the younger people.

Let’s think of it ‑ clearly, there’s been a very, very challenging year. So the year to June ended up, from Sunsuper’s perspective, with a small negative return for our balanced option. So we had a negative return of about 1.7 per cent for the year, which was disappointing from our perspective.

But how did that actually...

Sorry, if I can interrupt, so did ‑ how does that compare to our peers?

Yeah, we were a little behind our peers over the year. We remain comfortably ahead of our peers over the medium to longer term.

Okay, and that’s important because superannuation is a long‑term investment, is it not?

Absolutely. So we have very little control as to where we’re going to sit in the performance surveys over the short term. By short term, I really mean anything from sort of a month to a year. We had a very, very challenging period, obviously, during March for reasons I’ll talk about shortly. We were a little behind our competitors over the year to June. We have seen ‑ a lot of that was really during the March quarter and particularly the month of March. We have seen a recovery since then, which is pleasing. But also over the longer term, three, five, seven and 10 years, our performance remains in excess of the typical or median competitor. And more importantly, if I look at the real after fees and after tax returns over three ‑ over five, seven and 10 years in particular, the returns are well in excess of the sort of real return objective that we put into our product disclosure statements, for example, because that’s really most crucial. Superannuation’s prime function is to deliver long‑term real returns after inflation, after tax and after fees and we need to meet those return objectives. Despite the fact that we’ve seen this massive crisis in financial markets during March, the funds that we managed on behalf of members are still meeting those objectives, which is really, really pleasing. If I go back to the worst of this crisis, this was kind of unique in many ways. We didn’t ‑ our portfolios didn’t do as good a job as we wanted them to do in terms of defending members during the worst of the downturn and there were a few key reasons for that. One is we don’t tend to hold as much in government bonds as some of our peers, and the reason is because the interest rates going into this crisis were so low that we just really didn’t want ‑ we just didn’t think that those bonds were going to provide as much protection as they perhaps normally would. They did actually do well during the worst of the crisis. So not having as much in government bonds wasn’t all that helpful. The other thing which is quite unique is if you think about the typical recession, even during a typical, even a very deep recession, people still shop and, crucially, people still fly.

Well, I shopped too much, Brian, but anyway, that’s another story.

The economy thanks you, Anne. One of the unique things about this is that we tend to find that a range of our unlisted assets tend to still provide us with an income and still provide our members with an income and a revenue stream even during the worst economic downturns, whereas this time around, because of the nature of the crisis, this was very much a recession by design. A famous former Treasurer once said ‑ talked about a recession we had to have. This really was in many ways the recession we had to have, a recession that was deliberately engineered to deal with a health crisis. As part of that engineering, you couldn’t fly. You really couldn’t go out. You couldn’t go to shopping centres. We’re still seeing a large part of that play out. So the volumes of traffic going through major airports around the world is still a fraction of what they were pre crisis. So that’s tended to disproportionately impact on some of our unlisted assets. We have seen a recovery of sorts starting to emerge and so we think that over the coming years you will see a gradual improvement in the performance of these assets. I suppose the other thing to bear in mind is there’s been a lot of stuff spoken about the unlisted assets held by funds such as Sunsuper. We’ve not been in any kind of difficulties when it comes to liquidity. It’s important that our members know that during the worse of this crisis we maintained a very strong liquidity position, but we were able to meet our members’ demands for liquidity both in terms of some of our members moving into cash but also members that needed to take advantage of the early release scheme from super. So we were able to meet those demands very, very comfortably because we were well prepared for it. We certainly haven’t been forced to sell any of our unlisted assets to try to meet those demands. We maintain a very, very strong liquidity position all through this. So, very, very poor performance during March, we have seen a recovery in June and this financial year you’ve seen share markets ‑ even though in recent weeks you’ve seen more volatility, the recovery in investment returns has generally continued this financial year so far, at least as we record this podcast.

Brian, I guess some of our older members in particular ‑ and I guess I’d love you to speak to them directly about ‑ should they be worried about the nature of unlisted assets? If you’re a 60‑year‑old with five years left to work and you’re sitting in Newcastle or Geelong or Mackay, and you’re worried and losing sleep about your superannuation because you’re worried about the economy and tourism and what impact it’s all having on your future retirement savings, what would you say to those members?

I would say to those members, I would look at how they are invested. If those members are invested relatively cautiously ‑ so let’s take, for example, those members invested in our retirement option or our conservative option. Did you see some negative returns during the year to June? Yes, we did. But those negative returns were even smaller than the negatives we saw from our balanced and growth options. That’s because those portfolios are already invested more conservatively because we acknowledge that members who are approaching or in retirement, you need to be, you need to do what you can to try and both protect what you’ve got, protect your retirement nest egg but also we need to ensure that we’ve got enough growth that we’re ‑ in a way that we’re taking enough risk to generate decent long‑term returns because we all hope to live a long time. We don’t ‑ ideally, we do not want our superannuation nest egg to run out before we do. And so that means we need to protect capital, but we also need to ensure that we benefit from the recovery in the economy and the recovery we’ve seen in share markets. If you are in retirement or are approaching retirement and you are worried because you may ‑ you’re looking at what’s happening in markets and you’re worried about what it might be doing to your portfolio, firstly I’d encourage you to please give Sunsuper a call to talk to one of our advisers to make sure that the investment option you have is appropriate for you and appropriate for your risk appetite. But I also think that if you are invested fairly conservatively and you’re not losing sleep at night, really you don’t need to do anything. There is always going to be ups and downs in markets. We are always going to have periodic episodes where markets are going to be volatile, where we are going to see markets fall. But provided you’re not overly exposed to that sort of market volatility, then there’s no particular reason why you should change your investment strategy, even during a crisis as severe as COVID was ‑ or sorry, COVID is, because the disease is obviously still with us.

I think I reflect on the huge engagement in superannuation really ever since the royal commission and people have got their app on their phone and they’re logging in sometimes multiple times a day to check their balance. I think what, Brian, your message about superannuation being a long‑term investment around the right asset allocation and then I think about people’s other big investment in their life which is their family home. We don’t value our family home until such time as we want to move out one day. If you had your family home valued daily it would be a sure fire way to insanity I suspect.

Absolutely, yeah.

You’re really encouraging our members to, if they’re worried, to call us on 13 11 84 and we can give them comfort around how they’re invested. And for the younger members, any sort of words of advice, because we do have some young members that are so very interested in their superannuation, which is wonderful. What’s your advice to them?

Again, for those young ‑ one thing I’d say to younger members, let’s say you’re 25 or 30 years of age. Between now and when you retire it’s highly likely that you’ll go through a number of crises such as ‑ maybe not as bad as COVID‑19 ‑

Let’s hope not, Brian.

Let’s hope not. I don’t think anyone wants to go through anything.

Let’s hope not. Once‑in‑a‑hundred‑year event.

Correct. This really has been a once‑in‑a‑hundred‑year event. But we will go through inevitably a series of crises. You will go through, I don’t know, maybe four, five, six or seven major market downturns such as the GFC or such as the Asian financial crisis or the tech boom and bust that we’ve seen. I’ve been doing this for a long time so this is not my first rodeo. So crises are a normal part of how the economy works and how markets work. The long‑term reward for putting up with this stuff, for actually riding out this volatility, the long‑term reward is higher long‑term returns. So we don’t have to put up with this volatility for no reason. The reason we accept this volatility is because in order to take this ‑ in order to get rewarded for taking this risk, the reward we get is higher long‑term returns.

That’s what I would say to young people is that if you want a higher long‑term return, if you want to really grow your retirement nest egg, you need to accept a certain amount of risk. By that, I mean you need to accept the fact that from time to time markets are going to go through really, really difficult periods. But every crisis, every recession, every downturn, every bear market comes to an end bar none, even COVID‑19. I think that’s really the lesson. Higher long‑term returns are the reward for putting up with this kind of stuff.

If I can just ask you for a specific number, what should a member over a 10‑year time frame be expecting ‑ what sort of return should a member be expecting to receive from their superannuation over that 10‑year period?

It’s a really good question, Anne. I will go back to what we put in the product disclosure statement. We put ‑ what did we put on the box? We tell our members that for a balanced option investor we expect to deliver 3 and a half per cent plus ‑ 3 and a half per cent above inflation over rolling 10‑year periods. That’s after fees, that’s after superannuation ... a net real return of 3 and a half per cent above inflation. We think that’s a realistic and achievable long‑term return. Now, if ‑ and it’s our job as an investment team to meet and preferably exceed that objective. That is what we do on a daily basis. Our job is to build portfolios comprised of the kind of assets that will deliver those long‑term real returns. If markets end up being much kinder than that, then we’ll comfortably exceed that objective. But we need to ‑ everything we do on a daily basis is focused on achieving that return. That took me as a realistic return objective over the longer term for members in our balanced option, which is really ‑ for those members in our default life cycle option, that is any member up until the age of 55 is invested in that portfolio.

Anecdotally I know ‑ and I guess this is my closing reflection more than a question ‑ I know there are some members that have pulled money out of super because of early release and being able to, that have put their money into ‑ on to their mortgage because they’re very worried, to your earlier point, Brian, about people just feeling nervous and feeling a bit financially insecure at record low interest rates. So I think again talking to a financial adviser around whether paying down your mortgage or putting more money into super, what is the best strategy to be able to fast‑track to make sure you get the best possible outcome at retirement, because this money is your money and you need to make it work for you. So, Brian, it has always been a pleasure and now we’re, you know, we used to do it just kind of in a room ‑ podcasting. Now it’s this multimedium sort of phenomenon. I think we’re doing okay.

I think one of the things that’s really struck me about this whole episode is human beings are remarkably innovative and crises ‑ I often say that crises create opportunities, but also crises lead to innovation. If you think about how much better we are at Zoom or Teams meetings or how we’ve learned to adapt to interacting over using technology, I think it really has been phenomenal that we are actually gradually getting better at this.

Well, thank you so much, Brian. It’s been a pleasure as always. To our members, thank you so much for tuning in. We hope this episode has given you the confidence and the peace of mind that your hard earned retirement savings are very much in a safe pair of hands with Sunsuper. We look forward to you joining us together in another episode of the New School of Super. Thank you very much.

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