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the new school of super podcast series

Episode 23

Financial market volatility and performance – Brexit, the US and what's next

December 2019

Laying down the latest on geopolitical developments, Chief Economist Brian Parker gives us his take on what it all means and what's likely to happen next. Brian chats Brexit, the US and Australia with Anne Fuchs, Head of Advice and Retirement, delving into the unpredictable business of elections and discussing how Sunsuper's long-term investments aim to protect members from short-term volatility. Tune in for all this, as well as a spot-on impression of "the Donald".

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: 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, making sure you achieve your retirement dreams. My old buddy is back with me today, so the good times are about to roll. Brian Parker, our chief economist here at Sunsuper. This man knows everything about economics, money markets and he's so wonderful, our members absolutely love him because he makes these can be a bit drab subjects so, so, so engaging. Brian, it's wonderful to have you back here.

Brian Parker: Thanks Anne, you're too kind as usual.

Anne Fuchs: I know I am, too kind. I retract it all. Now, for those of our listeners that don't know me, my name is Anne Fuchs and I head up advice and retirement here at Sunsuper. And the team and I love coming to work, because we get to help our members visualise and achieve their retirement dreams. So, Brian, are you going to be sucking up to our compliance team? Are you going to be goody two shoes? Or shall I do it?

Brian Parker: I think it's my turn. It just makes up for my other failings.

Anne Fuchs: Okay right.

Brian Parker: As always before I start I need to let you all know that what we're going to be talking about today is general information only. Any advice doesn't take into account your personal situation. You should consider your circumstances and think about getting personal advice before acting on anything we discuss. You also get a copy of a product disclosure statement from our website or by calling us on 13 11 84.

Anne Fuchs: Bravo. Well, look, I think this is gonna be a really hard podcast, Brian, because, you know, today could be different to tomorrow, could be different to next week; when we're thinking about the financial markets' performance and geopolitical issues - like it's just nuts at the moment!

Brian Parker: Oh, absolutely. And even the last few weeks we're trying to write quarterly reports and trying to write something about Brexit, where you don't know whether anything you write is gonna have a shelf life of a longer than about 48 hours.

Anne Fuchs: How do you deal with that challenge as an economist?

Brian Parker: Well, you try and leave it as open as possible and try and say, look, no one really knows how an issue like Brexit is going to evolve. It's safe to say that, given the political developments over the last few weeks, and given that a revised deal has been agreed with the EU, it seems likely that, firstly, Boris Johnson is gonna win the election and secondly, that he's probably gonna get his revised deal through. Which means that, you know, over the coming months we will actually have to face the reality and not just the fear of Brexit and what it might mean.

Anne Fuchs: But I'm confused and look I am easily confused to be fair, as you stare at me.

Brian Parker: Mm it's an occupational hazard.

Anne Fuchs: But didn't Boris say he was gonna die in a ditch over this deal? And then now all of a sudden he's done a deal. Is he not back flipping?

Brian Parker: That's a polite way of putting it. "Back flipping" gives it a credibility that perhaps it doesn't deserve, but he certainly has walked away from that. And look, to be honest, that was a really dumb thing for him to say, because there was simply no way he could actually - it's just a promise he really wasn't in a position to make, let alone keep. But what's, you know, what's happened is that there is a revised deal. It's still far less than ideal. It's still likely to cause some short to medium term damage to the UK economy. But it's at least better than having no deal and having Britain crash out of formal arrangement with its largest trading partner.

Anne Fuchs: But if I could be so bold though, to suggest Brian, the one thing I think we know to be true over the last couple of years when it comes to politics, whether it was with Brexit, whether it was with the U.S. election and actually, in fact, the last Australian election, is everyone's got it wrong all the time. What they think is gonna happen doesn't happen. And so I'm going to just challenge you and say these certainties that you think are gonna happen, what if they don't happen?

Brian Parker: Yeah, look, that's a very, very fair point. One thing, and especially in the UK, where they have a first past the post electoral system, which can throw up all manner of different surprises. But if Boris-

Anne Fuchs: Yeah, the liberal democrats could do well, for example.

Brian Parker: Well, they could do. But they're just not really registering enough in the polls to be a serious contender. When you've got a situation now where the Tory party are somewhere between 15 to 78 points ahead, that's such a healthy margin that it's hard to see how the Tories could lose. But I take your point though.

Anne Fuchs: You know, many members would have been saying before the last national federal Australian election, and the pollsters were completely wrong. Sports bet paid out the day before and got it completely wrong.

Brian Parker: Yeah, but even there, the polls were still quite close. If you think about, these polls, have a margin of error of at least, you know, plus and minus one or 2% points in, probably in some of them even bigger than that. And so the polls in Australia, even right to the very end, were a lot closer than the polls we're seeing, for example, in the UK. So even allowing for a margin of error and the various vagaries of polling, you'd have to say that something really disastrous would need to happen to Boris between now and then for him to not get up.

Anne Fuchs: So if something is-

Brian Parker: Of course I've just broken my rule, because I've just made a fairly strong statement about what I think is gonna happen.

Anne Fuchs: Well I know!

Brian Parker: Which could prove to be rubbish.

Anne Fuchs: I can hold you to account when we record the next School of Super episode.

Brian Parker: Yes, I'm sure. It's a risk I'm going to take. But I'm an economist, so it's my prerogative to be wrong more than just occasionally.

Anne Fuchs: Not just any old economist too, you're the Sunsuper chief economist. So what are you saying to Andrew Fisher, who heads up our strategic asset allocation? If you've got all of these factors, taking into account Brexit and the like, are you giving him any sort of strong advice from a macroeconomic perspective around asset allocation?

Brian Parker: Well, I think the important point to note is that by nature, we are a long term investor. You know, when you're managing superannuation funds for 1.4 million members, whose average age is something like 36 or 37, we are gonna be investing their money for many, many years to come and hopefully many decades to come. And so, the kind of volatility you see in markets around things like Brexit are really kind of- they're very short term phenomenon; they ad volatility, they add uncertainty. But should we change our long term investment strategy based on anything we hear about Brexit? Probably not. What we should be doing, and what we do, in fact, do is make sure that we have portfolios that are as wildly diversified as possible across many different countries, not just the UK or Australia. But we invest across many different countries, across many different industries and asset classes, so that if something goes wrong in one particular country or one particular industry, or even asset class, it's not gonna be fatal to someone's long term investment strategy or long term retirement dreams.

Anne Fuchs: And I guess, too, I think if you think about the investments that we own in the UK and also on the continent of Europe, they are unlisted, long term investments.

Brian Parker: Well exactly. I often get questions from members because of the end of 2017 we acquired an equity stake in two airports in the UK and the question was, well, with Brexit coming up, why would you want to own airports in the UK? And there's really two answers to that. One is that no one buys an airport expecting to hold it for a year or two. This is a multi-year investment. We'll be holding this investment for many years to come. Secondly, that uncertainty was at least to some extent reflected in the price that we paid for those assets. And thirdly, and perhaps, you know, and I hope my English listeners will forgive me, but the reality is in England - you've seen the weather it's rubbish, which means the winters are still gonna be terrible. Winters lasts about nine months of the year, the Poms are going to fly basically so airports will still be in a position to make money.

Anne Fuchs: I think that's important to know, that no matter what happens when the general election occurs and Brexit and the like, is that our members, our job is to make sure they can still sleep at night, which you always talk about can never be underrated. And certainly they can always call us too on 13 11 84 if they are worried about any of these, and speak to one of my team within our member advice centre to make sure they're invested in the right assets for them. Now, Brian jumping from crazy to crazier: Donald. The Donald. I'm hoping Brian, would you just do a little impersonation for our listeners.

Brian Parker: [Impersonating Donald Trump] Is there a quid pro quo?

Anne Fuchs: There's always a quid pro quo when it comes to Donald.

Brian Parker: Look there's gonna be a quid pro quo, if you make me do an impersonation, I'm going to need a favour.

Anne Fuchs: What is happening with our favour - will he be impeached?

Brian Parker: Look, I think the odds are that he will be impeached. In other words, the lower house, the light house of Congress, the reps will vote to actually put him on trial in the U.S. Senate. But in order for him to be actually removed from office, you need 20 Republicans to actually say the evidence is so overwhelming that we need to put country over party and actually vote to remove him from office. I think that's a very, very large hurdle to jump over. Frankly, I can't see 20 Republicans turning. What I can see, though, is that if he does get sent to trial in the Senate, even if you saw three or four Republican senators actually say 'No, this is- this is really not good. We are gonna vote to remove him.' the signal that would send I think it's still kind of powerful, even if he does actually remain in office. So my best case is that he does remain in office. In other words, US politics and Trump in particular, remains an ongoing source of volatility and uncertainty for financial markets and for the economy.

Anne Fuchs: Okay, and so again, going back to, I guess, the same principles. Do we apply the same principles as we did before around Brexit that we do with what's happening because it's not just impeachment for the Donald, there's also this, you know, one day he and Xi Jinping are friends, and the next day they're not. And then he's moved on to little rocket man. This constant moving face of geopolitics between the US and China and North Korea.

Brian Parker: Well exactly right. And one thing in my career I've always remembered, is that you always need to keep a weather eye on politics, but politics was never really the main game. It was much more about how's the economy faring, what's the long term prospects for things like inflation and growth and profits. What are the central banks doing. These things mattered so much more than anything you heard in politics. Politics was really a source of, you know, short term noise in a way. But now politics, if not the main game, is certainly risen dramatically in importance and geopolitics in particular. And I think that it's fair to say that politics and geopolitics is going to remain a source of uncertainty and volatility. I particularly do worry about trade because I do think that these trade tensions between the U.S. and China in particular and the U.S. and other economies as well, including Europe, these tensions are not going to go away. And partly the reason that they're not gonna go away is that we have a U.S. president who frankly doesn't understand the issues, he doesn't understand world trade, he doesn't understand how tariffs work. And it's very, very hard to see how a really strong, long term solution to these trade issues can be formed. But also it's important to bear in mind that it's not just Trump who's concerned about China's behaviour in world markets. Trump's concerns about China actually have very strong bipartisan support in Congress, for example. And so you might say, 'Well, if Trump's removed, we go back to situation normal with trade with China.' - I don't think that's the case.

Anne Fuchs: Well, so if we can finish off and this is going on a little bit longer than I think we're supposed to, hopefully they don't pull out the plug and turn it off.

Brian Parker: But I just quality stuff Anne. How could this end up on the cutting room floor?

Anne Fuchs: Well exactly, just ask us. But Hong Kong, I can't begin to imagine the impact - and I don't know whether it's been quantified - that the civil unrest in Hong Kong has had on the region's economy and whether there's any flow on effects for Australia and our members. What are your thoughts on that?

Brian Parker: Look, I think my answer at this point would be probably not. The events in Hong Kong are deeply worrying. Look, that sounds obviously very trite, but the events are very deeply worrying and it's very difficult to see how this ends well. But in terms of the direct economic impact, it's relatively minor. Is it- does the turmoil in Hong Kong and its economic impacts - is that big enough to seriously derail prospects for regional and global growth? On balance, I think the answer to that is no, but clearly it's not helpful in an economic sense. But in terms of things to worry about trade tensions with China are a bigger deal, if you like, for markets and for the economy than events in Hong Kong.

Anne Fuchs: I think for our members and our listeners, this is why high quality financial advice and making sure you're invested in the right assets and also to our life cycle approach, Brian, which if you could just remind our listeners about that and why these types of things are so important to make sure that these bigger world events are not causing you to lose sleep at night.

Brian Parker: Well, that's absolutely important. If you think about the way we construct our default option for members, our life cycle investment strategy, as you approach and enter retirement for the decade leading up to age 65 we are very gradually, gradually, gradually reducing your exposure to world share markets, in particular to growth assets. And the reason we do that is that we don't wanna have our members retirement plans unduly damaged by a major market downturn just before they retire or just after they retire. We want to make sure that people have enough exposure to grow their assets so that their investments will last as long as they do, but not so much exposure that a big fall in markets - because of some of the events we talked about today - could cause serious damage to the financial plans.

Anne Fuchs: Yeah and prevent them having the holiday, or buying the apartment that they dreamed of buying. When they finally finished the end of their working life.

Brian Parker: Correct. Or planning to retire at a certain date and then saying, 'well, my plan has been stuffed up, I need to delay my retirement for a year or two'.

Anne Fuchs: Look, it's a crazy world. We're living through extraordinary times, and we really appreciate your ability to communicate to our members what's really going on and what to worry about and, most importantly, not worry about because we do have things well in hand here at Sunsuper. Brian, it's always a pleasure having you on the show.

Brian Parker: Thanks Anne, it's been great to be here.

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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