Super Insider podcast: Episode 17

Anne: Hello and welcome to Super Insider, all things superannuation, investment, and retirement.

 

Our listeners, Australian Retirement Trust’s 2.3 million members, welcome, welcome, welcome. My name is Anne Fuchs and I'm the Executive General Manager of Advice, Guidance and Education at Australian Retirement Trust.

 

Now before we begin this podcast, I'd like to acknowledge the traditional owners of the lands and waters where we're recording this podcast today and remind you, of course, that this is general advice only. So, anything you're listening to you will need to think about if it's right for you.

 

Now, with me today is my partner in crime, Brian Parker, who brings the showbiz and celebrity into economics. And we are talking all things 2024, and what members and the community need to think about when it comes to superannuation and investing, the economy and resulting performance.

 

Brian: G'day Anne, good to be with you again.

 

Anne: Well, it's nice to see you, the start of the year. You look very refreshed.

 

Brian: Absolutely.

 

Anne: But not a new tie. You haven't been shopping?

 

Brian: No, I haven't, no, no. But I haven't worn this for a while. So, I do try and wear a different tie every time.

 

Anne: It's good to see you making an effort for the Super Insider podcast.

 

Okay, so, let's start, I think at the very beginning, as Maria von Trapp would say. Interest rates, it's a very good place to start.

 

Brian: Yes, it is. It is a very good place to start. And I think there is, if I think about interest rates, it's very much good news and bad news, depending on where you sit. So, the good news is that it seems quite likely that interest rates here in Australia have peaked.

 

Anne: Yes.

 

Brian: That there may not be any further need for interest rate increases, and so if you have a mortgage and you're worried about the stress of your mortgage and meeting your repayments, that's clearly very, very good news. So, there's some chance that interest rates may start to go down over the coming year or so, or over the coming months, it's not clear yet. But certainly, it seems likely that interest rates may have peaked.

 

But, it also means that for those people who rely on deposits, for example, for a big share of their income, it means that things are about as good as they're going to get, because at some point interest rates may start to go down over the coming months or over the coming year, which could put a bit of a dent in some people's income.

 

So, you know, interest rates are very much a two-edged sword. I remember the former RBA governor, Glenn Stevens used to say that, you know, he actually got more complaint letters when interest rates went down than when interest rates went up.

 

Anne: So, interest rates and that they might potentially go down this year. Other economic factors - obviously there's unemployment, the risk of a recession, and there is a whole new governance construct for the Reserve Bank that I think we'll see play out this year with the two-day meetings and they're doing a media...

 

Brian: Every 8 weeks or so, press conference, changes in communication, absolutely.

 

Anne: Yes, all of that, to provide that transparency. So, what I guess for our listeners, what would be the key economic markers that the Reserve Bank consider when they're looking to adjust the interest rates?

 

Brian: Look, there's two main ones. What's happening to inflation and what's happening to the labour market. Because, you know, inflation is certainly heading in the right direction. It's very, very clear. Inflation peaked some time ago and we are seeing inflation continuing to move lower, and that's very much part of a global trend. You're seeing inflation rates across most of the world also start to come down, and that's great.

 

There's still some stickiness, as they say, in service prices. So, you know, the price of goods has tended to come down a lot faster. But certainly, if I look at the price of domestic services, they're still growing at an uncomfortably fast rate, and the Reserve Bank has acknowledged that. But even they are heading in the right direction. So as long as inflation keeps heading in the right direction, then that's also going to be welcomed by the Reserve Bank.

 

The other thing to watch is the labour market. You know, if you want to see inflation return to its longer- run objectives, what the Reserve Bank basically wants to see is it wants to see the very, very tight labour market conditions we've seen in the last few years start to soften. So, we need to see things like a slowdown in employment growth, you probably need to see the unemployment rate actually rise a little bit from what is historically very low levels. So, the Reserve Bank basically, you know, it doesn't want to see millions more people unemployed or anything like that, but it just needs to see that sort of excess demand for labour start to come back, and that's very hard to engineer. So, labour market and inflation are the two key markets for the Reserve Bank.

 

Anne: I think, is it right to say then, the fallout from the COVID supply chain disruption and the impact it had on inflation, concerns of war in Ukraine and all of that inflation, that that then created, are we out of the woods with, you know, all of these things that were feeding into everyone being terrified of a recession? I know that's a very big, sort of, statement and question I'm putting to you, but what's your reaction to that?

 

Brian: Okay, well, firstly, let's talk about the risk of recession, because obviously, you know, interest rates have gone up aggressively, even if they're not, you know, even if they've stopped going up, the reality is you've seen interest rates rise not just here in Australia, but in Europe, in the United States and the United Kingdom, and that is going to act as an ongoing drag on the economy.

 

You know, it takes time for the full impact of interest rate increases to flow through to the economy, and so, we're still feeling the effects of previous interest rate increases. And so, what I think it means is that the economy here in Australia, but also elsewhere, is probably going to slow down quite considerably over the coming 12 months or so. So, I think it is going to be a challenging year from that perspective as the economy responds to those interest rate increases of the past. And even if interest rates start to go down over the coming months, it'll take time for that to take effect as well. So, I think 2024 could prove to be a challenging year from the economy's perspective.

 

But on the inflation side of things, you're right, I mean, those COVID-related disruptions and the initial disruptions from the war in Ukraine, a lot of that is washed out of the system, but are we out of the woods yet? Probably not, because don't forget, you know, geopolitically, the world is still a very, very uncertain place and there's still plenty of risks out there that could actually provide more disruption. You know, what's happening in the Middle East, and the disruption in the Red Sea and ships from Asia having to divert around South Africa to deliver stuff to Europe rather than go through the Suez Canal. So that's causing disruptions to, you know, manufacturing exports and imports in the Northern Hemisphere. It's not so much a big deal for us, but it does have global implications.

 

So, yes, that first wave of COVID, Ukraine etc, is probably washed out of the system, but we're not out of the woods in that sense. There's still potential for shocks and disruption is, I suppose is what I'm saying.

 

Anne: And you know and I know that whenever there is a bit, there's a shock, a big sort of geopolitical event, the Contact Centre is flooded, people are worried, particularly people who might be 5 years out, or so, from retirement.

 

So, for our listeners who might be 5 years out from retirement, who are watching the news and are really worried about, oh God, is there going to be a big stock market crash and then half of my super's going to get wiped out and I'm going to have to work another 5 years to catch it up. What would you what would your messages be to our listeners in that demographic?

 

Brian: I think to put it, put it simply is to make sure, or firstly take an interest in how your money's invested. Make sure that the investments you have are right for you and right for your particular phase of life. The last thing you want is, if the stock market falls 20 or 30%, if that is going to cause you massive changes to your retirement plans, it probably means you're taking too much risk with your investment portfolio.

 

So, for example, those of our members who are in default options, the various life cycle strategies we employ for our default members as you approach and then enter retirement, we gradually reduce the amount of risk in your portfolio. We basically reduce your exposure to the risk of the stock market crash. Which means that if stock markets go down by 20 or 30%, your portfolio is not going to experience anything like that. And I think that's really, really important.

 

I suppose the other thing I'd say is that even if you have 5 years to run or 3 years to run, yes, it is important to make sure that you're not taking too much risk. But it's also important that you can't hide money under the bed. That we all hope to live a very long time, and we need to make sure that our money is invested appropriately for that reality, that we are actually going to live a lot longer, or at least we hope to. And so that means we want to have, we don't want to have so much exposure to the share market and to growth assets that we could ruin our retirement plans in the short term. But we don't want to have none. Most people still need to have at least some exposure to these growth assets so that your wealth will last as long as possible as you go through retirement.

 

Anne: Yes, that's right, because we're all absolutely living longer and longer and longer. And I guess what I heard you say was, look, if you're not if you're not paying attention, we've got it covered in terms of that de-risking of the with the default strategy. And equally, though, if you're really engaged and you want to pay attention to how your money is invested, then you can obviously contact us at Australian Retirement Trust for that simple advice, or equally have your own financial advisor. But I do think there is there is an element, and there's a degree of sophistication that you just pointed out there around portfolio construction and the role different assets play. So, what do you think, you sit amongst the investment team and advise our portfolio managers that are constructing these portfolios, what are you telling them in terms of the thematics for this year and things they need to consider as they put together these default, and you know, and all of the different portfolio options?

 

Brian: Well, I think the thing is when we think about building portfolios, and designing investment strategies, we can't design strategies, we can't build portfolios based on, you know, my ability or anybody's ability to forecast exactly what's going to happen in the next 3, 6 or even 12 months, because no-one knows that with any certainty.

 

But what we do, however, focus on is can we build portfolios that actually deliver what's on the box? So, if we tell our members that this particular strategy is designed to deliver X, we need to deliver at least X. And so that's really very much what we focus on, focus on delivering those long-term return objectives. But also making sure that when we're doing that, that we're using assets that make sense, we're using assets that are capable of delivering the kind of returns our members need, but also and again, this has been very, very topical in the last few years, making sure we've got access and are investing in the broadest universe of investment opportunities we can. In other words, not just investing in stock markets, not just investing in bonds, but investing in a whole range of alternative or private, or unlisted assets. Things like private equity, infrastructure assets, real estate assets. And the reason I highlight that, is that if you do think the next 12 months is going to be challenging, or if you are worried about what the impact of a stock market correction could do to your retirement, if you are with ART, we have a range of those unlisted assets that over many, many years now have helped smooth the ride for our members, that they do tend to hold up much, much better during major market downturns than the stock market does, for example. So, the way we construct portfolios using the fullest range of assets we can find, especially unlisted assets that actually helps cushion the blow for our members during the, you know, if stock markets prove to be a bit nasty.

 

Anne: Diversify, diversify.

 

Brian: Absolutely.

 

Anne: They all have a different role to play. It's like a high performing team. There's no point having everybody think the same. There's no role, there's no point having a portfolio that acts the same in markets is what you're, is what you're saying.

 

Okay, so then how does this play out, so, with what people should expect from their superannuation in terms of returns and performance this year? You know, I can't believe it's already, we’re talking about Easter holidays soon and you know, where does the year go? So, what can people expect?

 

Brian: Look at the end of the day, making these sorts of forecasts for the short term is pretty much impossible. All we can say is that financial year to date, returns have been pretty solid.

 

Calendar year to date, we've started reasonably well, although market conditions remain very volatile. We have no clarity as to where or how returns are going to play out over the coming months. Even though economic conditions could prove to be a bit challenging, when we look at the universe of assets we could conceivably invest in, you know, are we still finding opportunities? Are we still finding assets that are capable of delivering those medium to long term returns that our members actually need, even our more conservative members or those members who are approaching retirement? Yes, we are.

 

We're, you know, and I suppose the other thing I'd highlight is that, and it's something we touched on before, the fact that we have seen this sharp rise in interest rates and we have seen the yields on offer, or the returns on offer in bond markets or in fixed income markets rise sharply over the last few years. While that has meant that returns from, say, fixed income investments have been negative for the last few years, future returns now look a lot better. So, for those members who are in more conservative investment options, especially those options that have a reasonable allocation to cash and bonds, the future return prospects actually now look considerably brighter than they did, say, 2 years ago.

 

Anne: Okay, well, look, I look forward to coming back during the year, as this all plays out. We've got a US election this year, which Taylor Swift apparently is going to determine.

 

Brian: Absolutely. And I think it does highlight and I often get asked questions about, well, I'm worried about the US election, what should I do? I'm worried about what is happening in the Middle East or, you know, the tensions in the Taiwan Strait etc.,

 

Anne: Yes, yes.

 

Brian: And can we, can we invest members money based on how we think these events might play out.

 

Anne: When one single thing happens, yes.

 

Brian: No. We can't. Our best defence against not knowing how these things play out is to make sure we're as well diversified as possible, investing across different assets, different regions, different industries, not just here in Australia, but globally. That's really our best defence against not knowing how the future plays out.

 

 

Anne: And as you always remind me, if you had a crystal ball, you would not be my partner in crime here on Super Insider. You would be…

 

Brian: Or if I were, I'd be dialling in from my farmhouse in Tuscany. You know, where I'd be drinking my own body weight in chianti.

 

Anne: And I'd be looking to come over and stay with you some time.

 

Brian: And you would be most welcome.

 

Anne: But anyway, you don't have the crystal ball. It's been wonderful having you on the podcast and hopefully our listeners have a really clear understanding and are feeling confident about 2024 and what it means for their very precious retirement savings.

 

So, to our listeners viewers, thanks for joining us. If you like it, please subscribe. Tell your family and friends and we'll see you again soon.