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Anne: Hello and welcome to Super Insider where we chat about everything you need to know to make the most out of your super. I'm Anne Fuchs and I'm the Executive General Manager of Advice, Guidance and Education at Australian Retirement Trust. I'd like to acknowledge the traditional owners of land and waters where we're recording this podcast today, and pay my respects.

And just a reminder too, that what we're discussing today is general advice only, so you'll need to decide if this is right for you.

Now with me, on the show, Super Insider, one of our regular, and I would describe celebrity guests with a cult following, Chief Economist Brian Parker.

Brian: Thank you, Anne, good to be with you again.

Anne: Oh, my goodness gracious, Sir, since we were together last, it feels like so much has happened. So much. So, the Middle Eastern crisis, sadly, an interest rate rise, going up, sadly, if you're a homeowner. Maybe happily if you have money in the bank and you're retired.

And then, of course, to the thawing of relations with China, and what that means, and how all of this, I guess, applies to people's very precious retirement savings. So where should we begin?

Brian: Look, it's been a wild old ride the last few months, I mean, certainly this financial year started pretty unhappily, you know, and really, the war in Israel and Gaza, it's just a timely reminder, too, that you know, we live in a very, volatile world geopolitically, and frankly, even if peace were to break out in Israel and Gaza and in Ukraine tomorrow, we would still be living in a very, very uncertain world geopolitically.

In terms of the other drivers of volatility in markets, ongoing worries about inflation, ongoing worries about interest rates, we saw another interest rate hike from the Reserve Bank. So, you know, the key question really the markets are grappling with, I think just in terms of the economy, is, you know, can you actually bring inflation back under control? Can you bring inflation back to target in a reasonable timeframe? And can you do that without actually inflicting serious economic pain? And the jury is still well and truly out on that.

And that's not just an Australian story, that is a story of Europe, it's a story for the US and the UK and elsewhere. And I think it's pretty clear that, you know, we are going to see a weaker economy both here in Australia and in the US and Europe over the coming year and that is going to be, you know, that's a pretty challenging environment for markets.

Anne: I mean if we compartmentalise because it was interesting, I was listening to the news about the impact on the economy that the, I guess, the recommencement of trade relations between Australia and China has had. I think the number being referenced was 6 billion dollars from 85 million, to 6 billion dollars of revenue to Australia off the back of that.

So, it's kind of interesting when you're listening to thematics around inflation, petrol prices off the back of the Middle Eastern crisis and an export market that is starting to kick into life again with our biggest trading partner, but then also infrastructure projects being paused to slow the economy down, it's so confusing!

Brian: It is. Look, at the end of the day, you know, and let's look at the issues in China at the minute. What was really, really interesting about the trade disputes we've had with China is that they deliberately targeted things that were a damn nuisance to us but have no strategic value to them. So, they certainly weren't, you know, they certainly, for example, they certainly decided we're not going to stop buying Australian iron ore.

Anne: So, they didn't need wine as much as, say, for example, you might, or I might.

Brian: That's correct, absolutely. They clearly have a different sort of set of spending preferences.

Anne: Okay, alright.

Brian: So that's the thing, I mean, they deliberately targeted things in Australia to send a signal, but they certainly didn't target things that were strategically important to them, like iron ore. And so, the fact that there is this thawing in relations, that's an unambiguously good thing. I mean, you can't be, you know, you can't be persona non grata at the diplomatic level with your major trading partner. And so that's an unambiguously good thing in terms of the economic impact, yes, 6 billion dollars sounds like a big deal, but don't forget, we're an economy that's two, two-and-a-half trillion dollars.

So, what my point is, that the direct economic impact of those trade restrictions wasn't necessarily that bad for Australia, but it certainly sent a very powerful signal. The fact that those restrictions have been relaxed, that's a really, really good thing.

But let's talk about sort of interest rates and inflation, because that's still very much the main game. So clearly the Reserve Bank still has concerns about just how fast inflation is coming down. Is it coming down in a reasonable timeframe? And clearly, Michelle Bullock has decided that, from her perspective, it's not coming down fast enough and they needed to take a bit more insurance.

So, another quarter-of-a-per-cent yesterday, or at least at the time we’re recording this, it was another quarter-of-a-per-cent on Cup Day. There's still the risk of another one out there, but certainly that just depends on how the data pans out over the coming months.

Anne: You sit in a, what, I mean, obviously with my very biased lens, but, generally, the Investment team at Australian Retirement Trust are an exceptionally talented group of investors, so when you're sitting around the table with them, advising them on the macroeconomic issues to inform their asset allocation decisions, to meet the different investment objectives of all the different investment options, are there any sorts of things you could share with our listeners about what they're considering around how they're building portfolios in the context of this inflation challenge that we’re facing into, not just here but around the world?

Brian: Yeah, look, I think one of the things we've done of late is we've certainly taken advantage of the increase in interest rates that we've seen over the last couple of years. So, the fact that the yields available, for example, on government bonds, you might recall, you know, it was only about 2 years ago that the yield on government bonds internationally was pretty close to zero. Or in some markets, it was actually negative.

The fact that you've seen higher yields on offer, while that's caused a lot of grief for fixed income investors and has caused grief for those portfolios that have a significant allocation to bonds, what it also means is that the future returns from bonds now actually look a lot better. And so, we've actually taken advantage of that by buying into bond markets on that weakness. But I think one of the things that we also think about when we're designing portfolios, is that we can't design portfolios based on anyone's ability to forecast exactly what's going to happen.

Anne: Like between when you and I catch up between podcasts.

Brian: Exactly, yeah. Because it really is unknowable.

You know, we live in very uncertain times, very volatile times. We take advantage of volatility when it throws up opportunities, absolutely, but we can't, you know, we just don't think that the short-term forecast for the economy, or for markets, are of any great value in making investment decisions, especially when you're thinking about super.

This is the longest-term investment that any of us are ever going to have, so we will design portfolios that are as widely diversified as possible with the aim of achieving the return objectives that we tell our members we're shooting for, while also trying to be very competitive about it as well. That's really what we're aiming to do.

But we can't predict what's going to happen in the economy in the short-term, just as we can't design portfolios based on anybody's views of how the geopolitical landscape is going to pan out. Often, I get asked this by members, and by clients on the road is, you know, "I'm worried about what's happening in Israel”, "I'm worried about what's happening in Ukraine, what does that mean for my super?" And the answer, really, is not a great deal. There is very, very little we can do about this kind of environment. If it throws up volatility, we'll take advantage of that volatility. But our best defence against not knowing what's going to happen in the short-term, either economically or geopolitically, is just to make sure that we're as well-diversified as possible. And we've got really robust, well-constructed, diversified portfolios.

Anne: And I think, just reminding our listeners around the de-risking process and so when you're not paying attention to your super, or if you're a Default member, we've got your back.

There's actually a deliberate approach to how we de-risk you as you lead into retirement, so that if there is a big economic shock that we're managing that risk proactively for you.

Brian: Absolutely, and I think this is really important for those people approaching retirement, or in retirement, and if they're in the Default and they're seeing what's happening in share markets and what's happening in bond markets and they're worried about it, rest assured that if you are in the

Default, we've already reduced the amount of risk in your portfolio, and so you're not going to be as exposed to the volatility of share markets as perhaps some of our younger members, or those members who are more fully invested in shares.

So, we've already done the work to actually reduce your risk as you approach, and enter, retirement. But what I think the other thing that's worth highlighting as well is especially when you look at the volatility in financial markets, is that we don't just limit ourselves at ART. We're not just limiting ourselves to what we can buy on stock markets and bond markets.

Anne: And because, it's interesting, and you rightly pointed out before we started recording this podcast about the correlation, the weird correlation at the moment between equities and bonds and the power of unlisted assets.

Brian: Absolutely, so especially during a higher inflation environment, you know, having assets in your portfolio such as the unlisted assets, so this is real estate, this is private equity, private debt, infrastructure, these are assets that actually they don't just help smooth the ride for members, they also deliver higher, long-term, real returns. And I deliberately choose the term real returns because what we've also found is that, especially in a higher inflation environment, having assets in the portfolio where the revenue you get from the assets is linked to inflation, that's also been a very, very powerful line of defence for our members in the last few years.

Anne: And our listeners probably wouldn't have thought of that, but that's actually one good thing that comes from inflation, if you're an investor in a fund that invests in unlisted assets that are linked to these types...

Brian: Absolutely, because it's the real returns, it's the after inflation, after fees, after tax, returns that matter. And, you know, the more assets we can have in the portfolio, that generate those sorts of real returns that members need to live on when they retire, that's really going to make the big difference.

And that's why, you know, ART and both predecessor funds to ART have long had significant exposure to unlisted assets because you get a return premium out of them, but you also help to smooth the ride for members on their retirement journey.

Anne: I reflect on some of the good things that came from COVID, you know, a bit of work flexibility, TEAMS, is TEAMS good, I'm not sure. But you know, the ability to, you know, work from home every now and again, and also too, I think Australians are more engaged in their super probably off the back of COVID than they were pre-COVID.

And I know a lot of our listeners, and I have to say, thanks to all our listeners, because the number of listeners continues to rise, which is just awesome to see Australians really engaged in their super, but I think, too, off the back of that, there could be some risky behaviour and you know where I'm going to go here.

If you're really paying attention to your super, really closely and you're watching the news, you might be thinking about switching and doing something quite reactively because you're so engaged and listening to the news, and it is a bit worrisome. So, I think, we did want to have a conversation about that today, Brian.

Brian: Yeah, absolutely, and I think what we do find is that, you know, in volatile times like this, and times where, you know, share markets and I think since we last spoke, share markets are down somewhere between, say, two-and-a-half and four per cent, or so you know, and it has been very, very volatile.

There's always a danger of making poor investment decisions at the wrong time. I often say, you know, that investing is like driving a car, the rear-view mirror is useful, but the windscreen is much more useful. You don't drive a car by just looking at the rear-view mirror. You know, when we see share markets fall sharply, we do find that some of our members, they do respond badly to that, and they potentially make poor investment choices.

By that I mean moving to a more conservative portfolio or moving their portfolio to cash after share prices have fallen.

Anne: And we saw that during 2020, in that March to June 2020, people locking in losses at the worst possible time.

Brian: And sadly, it happens every time we see a significant downturn.

But I think the overriding lesson we really want to leave our members with is, look, super is the longest-term investment any of us are ever going to have. Over the course of somebody's working life, you're probably going to experience, I don't know, maybe 4 or 5 recessions you're going to experience, pick a number, 10, 15 major market downturns, all of which are going to cause stress.

You could be, you know, how many major or significant conflicts around the world are we going to see over the course of anyone's working life? A number. It's part and parcel of being a long-term investor, but one thing we also know is that, you know, while we can't predict when they start and when they end, we know they end. That every crisis, every recession, every downturn, every bear market, whatever, comes to an end, bar none.

There is always a light at the end of the tunnel, and it's not a train.

Anne: Yeah, I think, too, for any of our listeners that are literally logging in more than is healthy to the App or waking up at 3am, thinking about this, the question I would ask for you to think about is are you worrying about that because you need access to that particular capital? Are you a pre-retiree or are you retired, and you're worried about the money lasting? You know, because ultimately, if that's what you're worried about, please, please, please get financial advice.

Yeah. Listen, obviously listening to this is very beneficial, but being able to pick up the phone and talk to us about that, or if you have your own financial adviser, having a conversation, because ultimately it might be a case of, no, the investment strategy is right for you, put the phone away and turn the radio or news off. But equally, it might be a result of just a different investment strategy.

Brian: Absolutely, and that sleep at night test, I think, is always a valuable one.

You know, if you're doing something with money and not just your super, if you're doing something with money with your mortgage or small business loan or whatever, or in the case of this conversation, super, if you're doing something with money which is causing you to lose more than about 3 minutes of sleep at night, it's probably your body telling you something. Your body's telling you perhaps you're taking too much risk.

Now, in order to work that out, yes, absolutely, get some financial advice, because especially before you make a significant change to your investment strategy. Good financial advice can stop, you know, otherwise sensible people from making poor investment choices.

Anne: Yeah, and we've said it in the past, but just, you know, people maybe don't think about their superannuation as one of their biggest assets, like the family home. You wouldn't sell your family home at the bottom of a property market crash unless you really, really had to. So thinking of it with that long-term mindset.

So, Brian, I think probably when... you've never made a prediction I don't think ever.

Brian: We try not to. Look, I think, one thing I would say is that we're certainly expecting inflation to continue to fall, not just here in Australia, but globally. We do think inflation pressures overall are probably going to keep on falling. That's not to say we're not going to get the odd shock. Energy prices, for example, you know, if we do see, God forbid, a wider conflict in the Middle East, you could see sharply higher oil prices. That's going to have an impact on inflation. But over time, we think inflation does return to something more manageable.

Does that rule out another interest rate increase? No, it doesn't. But I think it's pretty clear from the Reserve Bank statement yesterday that, you know, if as long as they can continue to see inflation falling, I think there's a good chance they might not have to do any more.

I wouldn't rule out another move, but I think the Reserve Bank is at least nearly done here. Internationally, probably the Europeans are finished. The Fed in the US maybe has a bit more, maybe one more interest rate increase up their sleeve, but certainly globally we think inflation pressures come off and that's a good thing.

But it is going to be, I think, a challenging year. Like I said at the start, the war in Israel and Gaza is a timely reminder that, you know, this is a very unsettled world, and I don't think that's not going to get a great deal better any time soon, sadly.

Anne: Well, we might leave it there, and look, if you enjoyed this episode, if you found it useful for you, please tell your family and friends. I'm trying to encourage my son, who's in Grade 11 Economics, to apply it in his Economics class, because I think this is a fantastic way to provide accessible financial literacy for Australians. But recognising that I'm biased. So, tell your family and friends, subscribe to us wherever you get your podcasts, rate us. We really appreciate you joining us today and make sure you dial into the next episode of Super Insider.

Thank you, Brian.

Brian: Thank you very much, Anne.