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the new school of super podcast series

Episode 21

Is more investment market volatility on the cards?

September 2019

Chief Economist Brian Parker is back to give us the skinny on how and why political events are front and centre for financial markets. Brian trades tips and quips with Anne Fuchs, Head of Advice and Retirement, about how Sunsuper's investment managers are helping ensure members can still sleep soundly at night amidst the ongoing volatility. Listen out for Brian's explanation of why: "Predictions are really hard, especially about the future"!

Intro: Welcome to the New School of Super. A fresh look at money matters, your super and the things that could affect your financial dreams now and in future with Sunsuper's Chief Economist Brian Parker and Head of Advice and Retirement Anne Fuchs.

Anne Fuchs: Anne Fuchs: Hello and thanks for listening. Welcome to the New School of Super, Sunsuper's podcast series covering investment markets, money matters, your super and most importantly of course, making sure you live your retirement dreams. My name is Anne Fuchs, for those of you who don't know me and I head up the Advice and Retirement team at Sunsuper and the team and I come to work every day to help our members access great quality financial advice they will live their best possible retirement. Now, with me today is my partner in crime, our chief economist extraordinaire if I might say so, Brian Parker. Hello, sir.

Brian Parker: Hello Miss Fuchs it's wonderful to be with you again.

Anne Fuchs: It is always fun. We've had some different guests and I have to say I've. missed you on the New School of Super, I have missed you.

Brian Parker: I have missed you too.

Anne Fuchs: Look, I've had to do the general advice warning in your absence, and I just don't do it as well as you. Can you show our listeners what a wonderful job you do?

Brian Parker: Thank you so much, Miss Fuchs. As always before we start, I do need to let you know that what you're about to hear is general information only. Any advice does not take into account your personal situation. You should consider your circumstances and think about getting personal advice before acting on anything we discuss. You can also get a copy of our product disclosure statement from our website or by calling the team on 13 11 84.

Anne Fuchs: Well, that was beautiful, Brian.

Brian Parker: Thank you very much, I'm a bit out of practise.

Anne Fuchs: Well speaking of practise, you are very well practised though, in giving our members great comfort - the 'sleep at night' factor - when it comes to their money. And it doesn't pay to turn on the news at the moment, Brian, because between Boris and Donald, there is chaos everywhere. And I think many a member are worrying about the impact this is gonna have on their retirement savings.

Brian Parker: Yeah, that's a very good point, actually. And it's kind of interesting that I've been doing this for nearly 30 years. And while politics was always something you need to keep a weather eye on, it was never usually the main game. So, you know, geopolitics and politics was very rarely sort of front and centre. Where as now what's been unusual about this is that really the state of world politics and the quality of political leadership is really front and centre at the moment. It's almost that it's almost like every market commentator is becoming a geo politics expert.

Anne Fuchs: And, you know, I think it's really hard actually today recording this episode because it is moving so quickly in relation to what's happening in Europe and the UK. Because there are a couple of scenarios whether we- the hard Brexit now seems unlikely, based on what's going on in parliament and the delay, but equally too the likelihood of an election but also too the possibility of a referendum. Is there anything that investors in Australia, any outcomes or things or signals we should be looking for as to indicate how this may turn out?

Brian Parker: I think with Brexit I don't think anyone has a clue how things are going to pan out from here. Let's be honest about this. It's fair to assume that Brexit is going to be an ongoing source of volatility for financial markets. There's one thing I would point out, though, in the list of things that we worry about, Brexit is probably not as big a deal in terms of its impact on the global economy, as what's happening with the US and China and the trade tensions there, for example. So to me, Brexit is yes, it's important. And Brexit is clearly a source of worry, and a source of volatility. There's a whole list of other things to worry about as well.

Anne Fuchs: But before we get to China, don't Sunsuper own some airports in the UK - we've got some important investments over there.

Brian Parker: Yeah we do, and it's not just our investments in airports. I mean, any superannuation fund is going to have a substantial amount of their portfolio allocated to global shares and the UK share market is one of the major share markets of the world. So to that extent, everyone is going to be impacted to some extent by what happens in the UK economy and in UK shares. But with the airports, what's interesting is-

Anne Fuchs: Which airports do we own?

Brian Parker: We own some equity in the Bristol and Birmingham airports. We acquired them towards the end of 2017, when Brexit was well and truly on the horizon. And there's a few things I'd say about that. One is that we think we paid a very, very fair price for equity in those airports, including a price that reflected the uncertainty around Brexit. The second thing is that these are very long term assets. No one buys shares in an airport expecting to sell them in two or three years time. We'll be holding these in the portfolio for many years to come. And so even if you do get some severe disruption around Brexit - and frankly, if there is a hard Brexit at the end of all of this, the disruption could be quite severe to the UK economy - in terms of the long term outlook for these assets, it's not the sort of thing that derails the whole reason for investing. I suppose the other reason is that, let's be honest, the weather in England is terrible and the British are still going to fly, so airports are still going to make money.

Anne Fuchs: It's not like gods own country here in Queensland.

Brian Parker: Apologies to those of our members who are citizens of another country. But I'm sorry, your weather is rubbish. Which is why you live here.

Anne Fuchs: That's correct. That is correct. Okay, so if Brexit is something that we should not be losing sleep over, the risk elevates when it comes to the trade war and the impact this is having. And I guess with China, Australia has a greater dependance than probably most because of our proximity and where we are in the Asia Pacific region.

Brian Parker: Absolutely. And let's be honest here, Australia is a trading nation. We are very open economy. And so anything that actually adversely impacts on global trade and global economy is going to impact on Australia. Let's make no bones about that. In terms of the direct impact on the Australian economy of these trade tensions, though, it's very, very complex. The sort of things that we export to China are overwhelmingly the sort of things that - take coal and iron ore for example - I mean we're basically providing the raw materials that help build China's modern economy. We don't tend to supply the raw materials that go into exports to China then sells to the United States and elsewhere. So if you think about it, I would rather be exporting the kind of things that we sell to China than selling them components, for example, that go into an iPhone.

This is why I think a lot of economies in Asia such as Korea, Thailand, Singapore, Taiwan, these economies are probably going to feel the adverse impact of the trade war more severely than we will here in Australia, for example. The way I would describe is that we feed China's domestic economy, whereas the rest of Asia tends to feed China's export industries. And those export industries are really what Trump is targeting.

Anne Fuchs: Look and if we move to Australian equities and the last quarter in terms of economic growth was very subdued. The treasurer said that we're a very resilient economy, but certainly that media has portrayed it as the worst economic performance in two decades. You're our chief economist. What's your assessment of the performance of the Australian economy, and are we heading into any significant headwinds that our members need to be aware of?

Brian Parker: Look, there's a few things to unpack there. One is that clearly the economy has slowed down. But this has not been just in Australia, it's not just an Australia phenomenon. The global economy in general has slowed down significantly over the last 12 to 18 months. Australia has not been immune to that. But if you look at the domestic factors which have really helped drive the slow down here, we've clearly seen a fairly sharp fall in building activity, residential building activity. We've seen very, very anaemic growth in consumer spending. Consumers are not getting the kind of income growth that would allow them to really propel the economy. So even though jobs growth has been reasonably solid, wages have been growing at a very, very anaemic pace, which means overall household income has been growing very modestly. And all other things being equal, that tells you that consumer spending is only going to be growing very modestly and consumers are, you know, 60% of the economy.

Anne Fuchs: And I think certainly it is cause for reflection around the types of returns our members should be seeking to achieve in times like this, because to your point earlier, this is not just an Australian phenomenon. It is a tough environment to invest in overall. What are the expectations of our investment returns in the long term? And what is our investment committee seeking our investment team to achieve?

Brian Parker: Well, that's a really good question, and one of the messages we've been trying to get across at various public forums that we've been holding and various member presentations is this idea that investment returns over the next decade are going to be substantially weaker than the investment returns we've seen in the last decade. The last decade has been a phenomenal time to be an investor. Why? Because share markets around the world have performed extremely well, and that's really turbocharged everybody's superannuation returns. The next decade, I think it's going to be a more challenging time because shares are not cheap. It's very, very hard to find genuine value out there. If I look at interest rates around the world, government bond yields are in most countries at all time lows or are very close to it. In some countries, government bond yields are negative. Now let's think about that. It means you are literally paying Angela Merkel for the privilege of having her look after your money. That's a little bit insane. No disrespect, but the reality is this means that for conservative investors, these sort of typical assets that conservative investors tend to focus on - things like cash, term deposits and bonds - the future returns from those asset classes are going to be very, very low indeed, and it's going to be a much more challenging environment. I think the best way I can answer your question in a less long winded way is that when you pick up a product disclosure statement from Sunsuper or indeed any major superfund and look at the return objective, look at the return objectives that we quote. So for example, for our balanced option we say that over the next decade we're trying to achieve 3.5% above inflation after fees and after taxes. Now that, I think, is going to be a very, very challenging target to hit because we are in a slower growth world. We're in a world of very, very low interest rates, and so the reasoning behind that return objective we're trying to communicate our members what sort of returns are realistic and achievable over time and our best guess and the best judgement of the Sunsuper board and the investment committee is that we think a real after tax and after fee return, after inflation return, 3.5% is going to be achievable. And that's markedly lower than the returns we've seen in the last decade.

Anne Fuchs: But equally to it's markedly greater than putting money in a term deposit. And I know this to be true in talking to members that because they are scared about the challenging times out there in investment markets, that there is the perception still that either putting your money under the bed so to speak, or in the bank is safer and can help you sleep at night. But in fact, in that environment that you're explaining around low returns on cash and fixed interest, your money is going backwards.

Brian Parker: Effectively it is. It's not going to get any better any time soon, especially with the reserve bank clearly signalling that they have a bias to actually reduce interest rates further. Certainly, they haven't ruled out the likelihood of interest rates going to close to zero. I don't think that's going to happen quite frankly, but why would I rule it out? No, I wouldn't. But one of things I would also argue is that over time do you get rewarded for taking risk? And I think the answer to that is still yes. So in other words, for those investors that are worried about the sort of global environment we're in, to me it's about making sure that we take enough risk to generate the returns that we need and generate the returns that our members need, but not so much risk that we are losing sleep at night. And we talked about this before and on these podcasts - the sleep at night test, And one thing I always tell members is, 'Look if you are doing something with money -whether it's your super or your mortgage or whatever - if you're doing something with money which is causing you to lose more than about three minutes of sleep at night, it means you're probably taking too much risk. It's like your body telling you something.

Anne Fuchs: And look, money does make people emotional and whether they want to spend it or squirrel it away. But certainly I think there are many of our members that choose to stick their head in the sand, because they're terrified of having an uncomfortable conversation or they feel embarrassed that they feel they have too little. But the point is to actually reach out to Sunsuper for trusted financial advice no matter what your balance is, we can provide you that comfort so you can sleep at night and we can maximise those hard earned retirement savings that you've worked. You deserve to maximise what you have with us at Sunsuper. So, Brian we've talked about some really big issues and it's been a bit of a heavy episode there. Any sort of finishing comments you'd like to make to our members?

Brian Parker: Look, I think apart from that point about sleeping at night, and if you are losing sleep at night, I think your point about getting advice is crucial. Please call us and speak to one of our advisors who can help talk you through the issues and explain about the trade offs between between risk and return. And what sort of returns you need to achieve to live your retirement dreams. But also how much risk you might be prepared to take in order to do that. Look, we live in a very, very uncertain world, and I often get asked, Will there be another recession? Will be another crisis, etc. On my response is always the same. Will there be another recession? Yes, there will be. Will there be another crisis? Yes, there will be. Do we know when either of those two things are gonna happen? No, we don't. Someone said predictions are really hard, especially about the future. We don't know with any certainty about when the next recession we're will be or when the next crisis will be. But one thing we do know every crisis, every recession, every downturn, every bare market comes to an end, bar none. And the reason for that is simple. Because despite what happens in London or what Trump does etcetera, life and business and the economy goes on and a whole bunch of companies and a whole bunch of assets in Australia and all around the world will still be working to ensure that our needs as consumers are met and they will make a profit, and they'll pay dividends and generate wealth.

Anne Fuchs: And look it's our job as a fund too, and we have the expertise, and there are many an episode on the New School of Super where you can hear more about our investment expertise. to find those opportunities to make sure your money is secure and growing so it can last you in retirement. Brian, it has been a pleasure as always, to have you.

Brian Parker: Thank you, Anne. Much appreciated.

Anne Fuchs: I look forward to our listeners joining us again on the New School of Super.

Outro: This has been the New School of Super. For information and inspiration to help you plan your future, manager Super, and enjoy your retirement, visit sunsuper.com.au/thedreamproject. Or if you've got a superannuation or investment question, you'd like Brian and Anne to discuss, then get in touch at newschoolofsuper.com for it feature in one of our future New School of Super podcasts.

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