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the new school of super podcast series

Episode 3

The world economic wrap

July 2018

We're living in strange and interesting times, but what does it all mean for you and your super? Sunsuper's Dream Team takes a look at economic growth since the GFC, how current geo-political and other events are shaping the world economy, and what it all might mean for your super investment.

Voice-over: 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 Retail Distribution, Anne Fuchs.

Anne: Hello and thanks for listening. Welcome to the New School of Super – Sunsuper's podcast covering all things investment markets, money, and you know that thing that helps you achieve your retirement dreams – superannuation. My name's Anne Fuchs and I head up financial advice at Sunsuper and sitting opposite me is the Chief Economist of Sunsuper who knows everything when it comes to the economy and investments. Brian Parker, it's so wonderful to see you today.

Brian: Thanks Anne, good to be here.

Anne: So Brian, we're going to be looking at the world and the economy and how it impacts members' money, but before we start having a bit of a natter about that, the people in compliance upstairs want us to say something don't they?

Brian: Yes, they do, Anne. Every time. This is just general advice – but if what we say prompts you to think about taking some action with the way you're investing money either within your super or outside of it, then please seek personal advice.

Anne: Great financial advice can change things for the better. That's my little infomercial in this podcast today. So, Brian, we're living through extraordinary times, I think about 2008 and they were dark, dark, days but it seems like a lifetime ago and we've experienced this extraordinary growth. What's happened?

Brian: It's a really good question. And I remember 2008 and early 2009 well, and back in early 2009, let's make no mistake about this. We really were standing on the edge of financial abyss. We really were on the edge of Great Depression part 2. The world financial system was going into meltdown and policy makers at that point seemed to be clueless. However, they did actually take steps which not just brought us one or two steps back from the abyss, but many steps back from the abyss. You know, just when you think things couldn't get any worse, they don't, they actually get better. And it's worth remembering that if you look at the history of these things, every crisis, every downturn, every bare market, every recession bar none comes to an end without exception. At the end of the day, life and the economy and business goes on – the only uncertainty is the timing. And clearly since the end of that time, we have seen some very, very strong returns from world share markets in particular and that's really helped propel superannuation fund returns over the past 5 to 7 years.

Anne: So what have been the themes in terms of those bright pockets of growth, where I've got my superannuation statement and I've seen year upon year is growing and growing, what are the themes underlying that? What are the sectors, what are the countries? Where are those bright pockets?

Brian: Let's talk more broadly. Back then, if you started your investment journey in February 2009, you were starting from a point where global share markets looked unambiguously cheap. Where there was so much bad news, not just in the headlines, but so much bad news factored into the price you paid for shares here in Australia and all around the world. And a lot of the future returns you generate from any asset you buy is really determined from how much you pay for it upfront. And if you overpay for an asset, any asset, the future returns are almost by definition going to be lousy. But if you buy cheap assets that deliver you a reasonable income then your future returns are probably going to be pretty good. and that was one of the overarching lessons, I think, in February 2009, that there was so much bad news factored into share prices already. In addition, a lot of the steps that policy makers took during 2008 and early 2009, both the world's major central banks, but also governments, actually did bare fruit. They did actually help drive a recovery in the world economy. That recovery helped drive a recovery in things like employment and corporate profits and share prices, and that really helped underpin very good returns over the last 5 to 7 years.

Anne: The growth in particular, if I can ping you, and say looking at the emerging markets versus developed countries, the European Union, the USA versus Brasil or China, how has that played out over the last 5 years and are you game enough to make a prediction about the next 5 years?

Brian: Look, a lot of what I'm about to say, it really does depend on where markets have gotten to today. If I look at valuations, if I look at what I am being asked to pay to buy assets in a range of markets, in particular to buy shares in major world share markets, there are very few bargains to be had. Back in early 2009, there were plenty of bargains to be had. You know, we were in crisis and so there were plenty of good quality assets, good quality businesses trading at very, very cheap prices. And so, when prices return to what you might call fair value, and in many cases beyond fair value, you made a great return. Today, if I was starting from scratch and putting money to work today, I'd look around and say well, where are the bargains? And there are not many out there. Because past returns have been so strong so it's very, very hard to buy quality assets at a genuinely cheap price. Now what does that mean? It means that overall, future returns are probably going to be lower than the returns we've seen from share markets in general and super funds in particular in the last 5 to 7 years. And you mentioned emerging markets.

Anne: I was going to say I wasn't letting you run away

Brian: You thought I was going to avoid that, no. Look, emerging markets are interesting. If I look at the rate of growth in emerging markets as a group, so these are markets in Asia, in Latin America, in Eastern Europe, and parts of Africa and the Middle East, generally speaking these economies have grown faster than economies in the developed world. And that's what you'd expect to see because they have more upside, I mean, they are developing, so you'd expect them to grow faster. But another lesson we've learned from a very long span of history is that just because an economy is doing well does not mean that the share markets will do well. There's not a lot of linkage between the performance of an economy perse, and the performance of their share market. Now, for most of the last 6 or 7 years emerging share markets have done alright, but they've tended to actually lag the performance of the major developed markets, in particular the United States. That's changed in the last 12 months. In the last 12 months, emerging share markets have performed very, very strongly. In fact, if we were recording this podcast about a year to a year and a half ago, and if you asked me, where do you see value, where do you see opportunities, I would say look, you know what, emerging share markets look to be one of the few places that offer real value. In other words, where I could buy quality assets at cheap prices. The trouble is, that was about 30% ago, because that's the kind of returns we've seen from these markets. So, even there it's hard to find value.

Anne: So Brian, you said that there might be some grey clouds out there on the horizon. As a super fund, that's incredibly important that we manage that, worry about that, and protect our members from those grey clouds. What are we doing?

Brian: Look, that's a really good question. Let me rephrase your question a little bit if I may.

Anne: Yes.

Brian: Where the hell are returns going to come from? If you look at our product disclosure statements, you know, we tell our members that over the longer term we expect to deliver returns that are CPI plus 3 and a half or CPI plus 4 depending on the particular investment option. What assets are going to deliver those sort of returns, or at least, where can we be most confident of achieving the kind of returns that our members need to fulfil their retirement dreams.

Anne: But also where are we avoiding as well.

Brian: Well partly that too. Firstly, where are we avoiding? We're tending to avoid, at the moment, sovereign government bonds in particular because if you look at the level of interest rates around the world, you look at the level of bond yields around the world. In other words, future returns from fixed income are lively to be quite low. So we actually tend to have a lower allocation to those assets to many of our competitors. What are we favouring? I mean, I suppose if I go back to my question before, where can we be most confident of generating the return members need? Look, there's some chance the share markets will still do ok. I'm not saying that the share markets are going to fall into a heap tomorrow, I'm simply saying that future returns are going to be lower, but I need to do what I can and Sunsuper needs to do what it can to maximise the chances our members have of living their retirement dreams – and that means, where can we get the most reliable returns? And the short answer is, it's in the alternative asset space. It's investing outside of traditional assets like shares, and by that I mean carefully selected hedge funds or absolute care orientated strategies, but also unlisted asserts. Things like direct property, infrastructure, private equity. We're still seeing opportunities coming across the desk every week. We're still seeing deal flow come into our office where we do the math and say yes, this investment is capable of delivering more than adequate returns to justify the risks involved and justify the costs incurred. And more importantly the returns that members actually need to meet their objectives, but I must say that even the returns from those assets classes in the clast 5 to 7 years have been very, very strong, which means it's very hard to find bargains even in that space. So, future returns there, while still very very attractive, especially when I compare it to the returns from traditional markets like shares. But, future returns from there have also come down. If I looked at say, an infrastructure deal or a property deal 5 years ago and if I did the math it might have said I can get 15% per annum out of this. Well if I looked at exactly the same deal today I might do the math and come up with a return of 9%. Now, I'll still take 9% every day of the week, it's just that 9% is not 15. Even in that space we've seen returns come down because a lot of money has forced up the price of these assets.

Anne: But I think that there's this other thing that we haven't spoken about, and I know we don't have much time Brian, but I think we've got to say the word. It starts with ‘T'.

Brian: And it ends in ‘rump'.

Anne: Yes, Trump. But there are a lot of investors, where it's just the sheer…

Brian: The unpredictability.

Anne: Yeah, unpredictability and one minute he's meeting with Mr rocket man, and then he's not. And it makes people very nervous. And I wondered what is Sunsuper doing to manage that risk?

Brian: Let me take it more broadly. Geo-political risk, if I can use that kind of term, is elevated and it's going to stay elevated. Geo-political developments are going to remain a source of volatility for markets. But if you think about a longer span of history, geo-politics has always been a source of uncertainty for markets. Trump is just the latest manifestation of it. But I think it's important to realise that regardless of what happens in the Whitehouse, regardless of what happens in North Korea, or in Italy or in the Middles East, it's a very uncertain and volatile world. There's lots of awful stuff happening out there, but I have to say there almost always is. And yet, life and business and the economy goes on. From Sunsuper's perspective we take the view that, yes, this is a source of volatility, but regardless of that, people are still going to land and take off at Brisbane Airport and we will make money. A whole range of companies listed on the stock market will still make money by meeting our everyday needs as consumers and we will benefit from them making money. People in Finland will still need to turn on an electricity switch to light their homes and we will make money. People will still, in the Czech Republic need to use gas to cook their evening meal on their stove. It's about investing in a wide range of assets which generate income that we can pass on to members. That doesn't change regardless of who is in the Whitehouse.

Anne: Ok, so Brian. Final question before we wrap up. China and Australia and the impact China has on our economy, and the impact that China as a country has on our portfolio of investments. Any thoughts? Any advice for our members? Because I know certainly lots of people worry about that.

Brian: Look I think that the worry is real. I mean, China will remain a source of uncertainty and China's emergence as an economy has been an unambiguous positive for the Australian economy, for the world economy, for global trade and for the hundreds of millions of Chinese that have been lifted out of poverty. But that doesn't mean that China is not going to be a source of uncertainty, both geo-political and economic. It's fair to say that the Chinese authorities, certainly in the region, have not been behaving terribly well. And I don't think that's a terribly controversial view. And so China will remain a source of uncertainty, but it's just one of many sources of uncertainty. Now what do you do about it as an investor? It means that an investor, I certainly don't want to put all my eggs into one basket labelled ‘China' and I certainly don't want to put all my eggs into a basket labelled ‘Australia', because the Australian market and the Australian economy, yes, is quite heavily dependent on the performance of China among other things. I just want to make sure that our best defence against an uncertain world is to build portfolios that are as widely diversified as possible, and that's exactly what we do.

Anne: Brian, I think for our listeners today what we've spoken about, it's so important that maybe they overlay that with a former podcast we've done where we spoke about all the investment options out there, and if you look at the political landscape, the economic landscape and then look at the options that Sunsuper has available, to consider what is the right investment for you. We've got a great team of people here to help. You can jump online, visit us at Sunsuper.com.au/newschoolofsuper. There's a wealth of information to help you make the right decisions about where your money's invested, make informed decisions after listening to Brian, assessing all those things he's spoken about, you have to remember, this is your single biggest asset. Think of it like your home, think about what Brian said. Come and have a chat to us if you need to. Brian, thank you so much for talking today. Always a pleasure.

Brian: Thanks very much Anne.

Voice-over: This has been The New School of Super. For information and inspiration to help you plan your future, manage you 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 the schoolofsuper.com, for it to feature in one The New School of Super podcasts.

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