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the new school of super podcast series

Episode 36

Vaccines, housing booms and financial markets

April 2021

Don't miss Chief Economist Brian Parker and Anne Fuchs, Head of Advice and Retirement, as they discuss Brian's insights into the latest financial market performance and what it could mean for your super.

Hello, and thanks for joining us. Welcome to the New School of Super. Sunsuper is webinar and podcast series covering investment markets, money matters, superannuation and making sure you achieve your retirement dreams. For those of you that don't know me, my name is Anne Fuchs and I head up Advice and Retirement at Sunsuper. And the team I love coming to work 'cause we get to help all of our members plan for their best possible retirement, with great quality financial advice. Now with me today is the fabulous Brian Parker, our Chief Economists here at Sunsuper. Who's the best chief economist in the world, in my opinion. And we're gonna be talking today about COVID vaccines, property, housing prizes, JobKeeper, it's going to be the most exciting episode of the New School of Super ever. So Brian, I've really talked this up, no pressure whatsoever.

Yeah, no pressure at all. Actually it's a packed programme tonight and absolutely and thanks very much for the kind introduction.

Look, well, before we get into it, we know what we need to do and I'm gonna hand over to you because you just do it so artfully and craftily and you know what I'm going to suggest.

Yes, that's right Anne, I know what you're gonna suggest. As always before we start, I need to let everyone on the call know that what we're gonna talk about today is really general information only. Any advice we give or any information we provide on this webinar, really cannot take into account your personal situation. You should consider your circumstances and preferably seek professional financial advice before you act on anything we talk about today. You can also get a copy of our product disclosure statement from Sunsuper's website or you can call us on 13 11 84.

Marvellous, so I'm gonna start Brian with the vaccine because it is literally on the news, morning news and night. And I guess I'm gonna start with that because why should members be paying attention to that? And how does this vaccine rollout, impact member's retirement outcomes at the end of their working life?

Look, I think the main thing to take away from the vaccine use we've seen is that, firstly, the discovery and now the rollout of the vaccine is a game changer for the medium to longer term outlook for the world economy and for the Australian economy. In other words, we can be more confident that the economic recovery is gonna be real and it's gonna be durable and that's really important. Now that's not to say there aren't gonna be setbacks along the way. And that's not to say that a vaccine rollout is gonna happen uniformly across the globe. For example, if we look at Australia, Australia has clearly been somewhat slower to rollout the vaccine than other countries. If we look at parts of the emerging world for example, they've really seen nothing in the way of a vaccine rollout yet. So this is gonna take a lot of time, the speed of the vaccine rollout is gonna vary from country to country and region to region. But the vaccine rollout is real, it's ongoing and it is a bit of a game changer for that medium to longer term outlook and that's important. And in the case of Australia, it's also important to bear in mind that while some people that have been disappointed with the speed of the vaccine rollout, at the same time we've done such a great job at containing the virus. That even though we've had our setbacks along the way, they've been relatively small, that there've been tiny compared to what we see happening in large parts of Europe, in India and even more recently in Japan and still in parts of the United States. So even though the vaccine rollout has been somewhat slower here in Australia, we are still pretty well-placed. We've seen an economic recovery that's well underway. We've seen a very strong recovery in our jobs market and it means that as the vaccine rollout progresses, we can become even more confident that in the durability of the recovery both here in Australia and globally. And that that's that's good news for financial markets ultimately.

So it creates stability, certainties that businesses can start investing again, people can stop flying and all of this leads to profits for companies that Sunsuper invested in, is that ultimately the end game there?

I think that it does and it feeds through into a whole range of our assets. And again, we invest in Australian and international shares and the recovery is very much good for company profits and good for share markets. But it's also very good news for a range of our unlisted assets, including the most obviously things like airport assets. So as we see domestic and then later international travel start to gradually improve, you'll see some of our transport assets most notably airports benefit from that. You'll see retail assets benefit from that. And so it doesn't just apply to our share market, to our share portfolios but it really does benefit a whole range of assets that Sunsuper has in their portfolios.

So if we take a leap from the vaccine to JobKeeper, and particularly flying around and the end of JobKeeper, I'm here based in Queensland, which is a tourism mecca of Australia. And obviously there are other places all around Australia that have really been hit hard because of tourism was their main sort of source of income. How do you think the next, I mean, looking at it like asking you to do the crystal ball but what should our members be looking for over the next 6, 12, even 18, 24 months with this end of JobKeeper and the economic signals as this all, as we find this new normal?

Look, I think it's important that I would distinguish between what I call the macro or the economy-wide you use that we're likely to see. And also some of the sort of more micro some of the regional and industry specific implications of this. At the macro level, we have seen a very solid improvement in the labour market. We've seen all the jobs we lost during COVID we've got them all back. Now that's not to say that the labour market is 100% healed, it's not, unemployment is still too high. Underemployment is still too high. In fact, even though we've seen an improvement in those two key measures, we're not quite back to where we were pre-COVID, so we still have a way to go. But nevertheless, the strength of the recovery we've seen thus far has been pretty pleasing. Now, JobKeeper coming to an end at the end of March. Give or take a million people were still on JobKeeper by the end of March. Will all of those people lose their jobs overnight? The answer to that is no. But we'll see a substantial number of people, perhaps maybe 100,000, maybe 200,000. We don't know, nobody knows but we will see people in the short term lose their jobs, post the end of JobKeeper. And we will see an increase in the unemployment rate, but is that likely to prove long lasting? And I think at the economy-wide level maybe not because if I look at a whole range of other, what I would call leading indicators of the labour market, if I look at things like job advertisements, evidence from the business surveys, there's a good deal of underlying demand for labour. And that gives me a fair amount of confidence that at the economy-wide level, a lot of people who may lose their jobs after JobKeeper will actually find work quite quickly. But that's gonna vary a lot across regions and across industries. And hospitality and tourism you've already talked about which is really crucial. The Melbourne CBD is not recovered as robustly as say CBD activity in Sydney. And you've seen that in hospitality, in restaurants and bars, et cetera in Melbourne, but at the same time, while some people may end up losing jobs in those CBD hospitality establishments, further out in the suburbs, hospitality is doing much, much better. And so I think you're likely to see people in those kinds of industries able to find work relatively quickly elsewhere in the city. And however, on the other hand, if I look at areas such as final the Queensland, which is very, very heavily international tourism dependent it's gonna take a lot longer for the region such as Far North Queensland and also parts of the Kimberly NWA to recover because I think international tourism is gonna be the last cab off the rank when it comes to recovery. So there is gonna be still be paying out there at the end of JobKeeper. Even if the overall economic numbers might actually look relatively good.

So do you think consumer spending I guess what's going through my head it's a bit schizophrenia at the moment in terms of the signals, because you know, many people and we'll jump to this in a tick, haven't been impacted at all in fact, I haven't been able to go anywhere so they've got plenty of money and they're renovating their houses and that's you know, our next thing. But our wages have been low for such a long time now. And because of this recent turn of events it's reminded people of the importance of saving for a rainy day. And so I just wonder with the suppress wages and future economic uncertainty but that impacts consumer spending and, you know has consequences that combined with JobKeeper. Yeah, it's not a great economic environment. Yeah, and that's I guess me being playing devil's advocate with you there, Brian, just what's your view on that?

Look you're exactly right. And certainly there is still gonna be a substantial number of people who are gonna feel ongoing economic pain especially with the end of JobKeeper, there is no doubt about that. But as you rightly point out many, many more people actually had relatively little financial impact from the COVID crisis. They were able to keep their jobs. They may have worked from home, but they remained employed and they continue to earn their income. What we saw during the first half of 2020 was that it wasn't the case that people didn't have money to spend, they simply weren't allowed to spend it on the things they normally spend it on. And that produced two effects. One is they spend it on other things. So renovating their home, online shopping, a whole range of things like that, but that didn't account for all of it. What you also saw was people actually restocking their savings. And so if I looked at the household saving rate, that really saw during during COVID. Now, has it come back? Yes, it has. So in other words, after parking a lot of money and saving in the first half of last year, people are spending a greater share of their income today than they were in June last year. But are they back to pre-COVID levels of spending and saving? And the answer is no, they're not. So people are still saving a much higher percentage of their income than they were pre-COVID. Now the trillion dollar question is, do they go back to the same sort of saving rates that we saw pre COVID? I think the answer to that is no. Again, for the reasons you've mentioned I think you'll see a more long lasting impact on consumer spending and saving behaviour. People will become more cautious and perhaps more willing to provide more for the rainy day than they were pre-COVID. Again, but if I put that to one side I still think there's a lot of dry powder out there. There's a lot of excess saving that will be put to work. So I still think we can be confident that the vast majority of people who were fared relatively well during COVID and into the COVID recovery, will actually start to spend a greater share of their income and will help to drive the recovery. I think that's the way it works out at the macro level.

Do you think some of these excess savings are a part of the reason why housing prices are just blowing up pretty well everywhere around the country? What is driving that? And is this something that's structural or is it kind of just one of these events that happen that are irrational, you know, market event?

I'm not sure it's a rational at the end of the day. If I look at a few things, firstly as you rightly point out you're seeing a higher house prices really across the board but it's not just the Sydney-Melbourne phenomenon for example, or it's not just a regional phenomenon. You know, we've seen a lot of talk about regional real estate markets benefit from people leaving the city and moving to the country, moving to regional areas. And there certainly has been quite a bit of that but you've seen all the major capital cities participate in this improvement in property prices. And it really comes down to the fact that if I look at measures of housing affordability, you know if I look at the combination of house prices, incomes and mortgage interest rates that housing affordability cocktail, if you like, it's about as attractive as the navigates to be very honest. So even though we've seen house prices come up, houses are still relatively affordable compared to a long run of history. This is a bad as good as it's gotten in the last 20 odd years because interest rates are really just so low. It's also partly government incentives for first home buyers. But one of the other interesting things is that, you know first time buyers are really participating in this. Now, yes government incentives have helped but whether it's a combination, I think it's a combination of government incentives, their own saving but also that great intergenerational transfer of wealth otherwise known as the 'Bank of Mum and Dad' whole combination of reasons meant that first home buyers are back with a vengeance. And if I look at the total number of loans being approved here in Australia, the share of those loans going to first home buyers is pretty much the highest we've seen in over a decade. And that's good news. A lot of people worrying about how to first home buyers get into the market? Well, the short answer is they are.

Hmm. Well, so again, drawing it back to members 'cause ultimately, you know, how does this, our job is to communicate how all this stuff that happens out in the world that you see on the news and here. And so bring it to real life in terms of people's retirement savings 'cause that money in your Sunsuper account is your money. It's like sitting in the bank or sitting in shares, it's your money. What does all of this matter ultimately for members and their retirement savings?

I'd go back and do some of the messages that we were delivering to members last year, especially during the worst of the COVID crisis. I think the lesson of last-

You're like talking about last year Brian-

I know, look and let's be honest. It was a very, very scarring experience to so, so many people. But it's also a reminder, last year and what we've seen this year is a reminder that every crisis, every downturn, every recession comes to an end by an arm. Even a crisis as severe as we saw with COVID. And what does, you know so what? It means that for long-term investors in superannuation and remember superannuation is the longest term asset that any of us will ever have. And because it's that long, it's a long-term investment. We need to be aware of the fact that as we go through our investment journey, we're likely to face many sort of crises of different magnitudes. And again, COVID was an absolute doozy, don't get me wrong,. But we are likely to experience through our working life, a multiple, you know many sort of financial or economic crises, which at the time are gonna cause a lot of stress and a lot of angst to a lot of our members but every crisis comes to an end. Now, again for longer-term investors why do we say you should invest for the longer term? Because longer term investors end up getting higher long-term returns. If you want safety and you're worried about and you only want to invest for the short term, the trade off for that is that you tend to get much lower returns. In order to get higher long-term returns, the kind of returns that our members need to live on in retirement, in a way the price we pay for those sort of long-term returns is that periodically we have to accept and tolerate periods of financial market and economic stress, but those periods come to an end. And I think that's the enduring lesson of even the last 12 months.

Well, certainly I know though Brian and whilst that's true money is makes people very emotional and those emotions can lead to sort of quick sort of sudden decisions. And certainly one of the anecdotes from last year was those members during those really dark days, the ones that had an advisor whether it was their own financial advisor or they'd called Sunsuper as much as they were wanting to switch to cash because they would thought the world was ending, they didn't. And I buckled in and I've been able to experience, you know the upside because there has been some very good performance, has there not Brian? And so that's, yeah, that's ultimately what you're talking about here.

Yes, absolutely. In fact, if I look at the returns to the end of March you know, for the March quarter, Sunsuper is a balanced option for accumulation members super savings accounts. We had a 3.8% return for the March quarter over the year to March, you're talking over 21%. Now-

It's pretty phenomenon when you link to that.

It's pretty spectacular but it does really highlight the speed and the strength of the share market recovery we've seen since the end of March last year. And you're quite right to point out that, you know now pleasingly, it was a relatively small number of Sunsuper members that made what were, with hindsight, poor investment choices at the depths of the crisis. They chose to sell out of their growth and balanced investments and put it into cash, save it or capital guaranteed investments. And so they just didn't experience the recovery that staying the course would have delivered. And I think there is another lesson in that and that is the importance of staying the course. If you've got an investment portfolio which suits your particular needs and your stage of life and your financial goals and your appetite for risk then there's no reason why any particular market downturn should lead you to make a change. Even a crisis as deep as COVID-19. We can never know the short term. We don't base the investment decisions on our forecast or anybody else's forecasts of how markets are going to play out over the next three, six or 12 months. We don't believe anyone can, and we don't believe anyone can do that successfully in any sort of reliable long-term way. And I don't think anyone successfully predicted the turnaround restore in share markets since the end of March, but again, the returns have been very, very great.

No one knew what was happening the day after it was literally a 10-day proposition news. You know, this was unprecedented territory. We had no idea what was happening.

It was, and the way I described it to someone the other day was that you think about if for those of you that remember the GFC which it was another cathartic experience for all involved. This was almost like having a GFC compressed into three weeks. And that was really very, very intense. I've certainly in nearly 30 years of doing this line of work, hav experienced across remotely like that in my entire career. But it did cause a lot of stress for a lot of people but thankfully, we saw relatively few members make disappointing investment choices during the worst of the crisis. And so the vast majority of Sunsuper members have been able to benefit from the recovery we've seen in markets over the last year. And that's very pleasing.

Now, I think about the purpose of The New School of Super and ultimately it's about providing finance education, financial literacy to members on mass that are, you know in a really accessible and affordable way, no matter where you are you can download this or watch this. And the more you educate yourself around your money and understand these principles that Brian is talking about around risk, investments, timeframes, different asset classes, this stuff matters so that you can make good choices when an event occurs either in your life or in the financial markets. So financial literacy isn't I think particularly great in Australia and that's something that we all have a role to play. And certainly at Sunsuper, we believe deeply in the importance of education for our members which is why we have the wonderful Brian that talks to members all the time and Joshua van Gestel our National Education Manager. So Brian, you know, I think we've covered it all. Have I missed anything sir?

I don't think so. It's a pretty wide range in discussion, but again, I can only re reiterate to our members if you still have any residual concern post COVID 'cause again, it's still a very, very uncertain environment. We put a lot of value on financial advice and we would encourage our members that if they are feeling uneasy about the environment they're in, or if they just want to find out whether the investment option they have is the right one for them. In other words, as I mentioned before, does it suit your stage of life? Your appetite for risk? Are you sleeping at night? I often refer to this as the sleep at night test. If you're doing something with money which is causing you to lose sleep at night it may well be that your body is telling you something, your body is telling you that you're taking too much risk. So if you are feeling those if you do have any of those concerns please don't hesitate to give us a call again on 13 11 84

Or talk to your financial advisor too. You know, I think the last four or five years there's been over 100% increase in members getting personal financial advice from somewhere. And that's really fantastic.

Absolutely.

Because we know those vendors that do twice as likely to consolidate and make voluntary contributions and make those great investment choices. So Brian, ♪ One day we'll be together again ♪ ♪ Together again ♪

I'm not gonna sing, you know I may be sing. ♪ Together again ♪ Is one day we will be. One day we will be.

We will be.

I look forward to it, thanks Anne.

Before we finish on that new haircut you have you haven't aged a day since I saw you in person last.

I feel like I've aged a lot.

All right, well, thank you to our viewers and listeners. We hope you enjoyed this episode of The New School of Super and we look forward to joining us again soon. See you.

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