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the new school of super podcast series

Episode 5

Politics, financial markets and your super

September 18

From our new PM and whispers of a potential property crash, to the inexorable antics of President Trump and a fractious and fraught Brexit, Sunsuper's Dream Team looks at what it all may mean for investment markets, your super and your dreams in retirement.

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 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 superannuation, and most importantly, helping you achieve your retirement's dreams. With me today is Brian Parker, our Chief Economist here at Sunsuper, the man who knows everything about the world, the Australian economy. He reminds me all the time that he knows everything at Sunsuper, don't you, Brian?

Brian Parker: Oh, no, Anne, but as long as you think that, that's fine.

Anne: Okay. Well, look, before we get started, I should introduce myself. My name is Anne Fuchs, and I am the Head of Advice and Retirement here at Sunsuper. Me and the team, we come to work every day to help our members get good quality, trusted financial advice so that they can fulfil their personal retirement dreams.

Brian: Thanks very much, Anne. Today we just wanted to give you all a bit of an overview of what's been happening in politics, what's been happening in the Australian economy, the global economy, and also most importantly, what is it all going to mean for your retirement savings?

Anne: Because not much has been happening.

Brian: No, it's been pretty quiet really.

Anne: Very quiet. Well, we've got to do something, don't we, Brian, before we start?

Brian: Yes, we do. We need to let you all know that what you're about to hear from us is general information only. Nothing we say today can possibly 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 you can call us on 13 11 84.

Anne: Thank you, Brian. Well, Australia, have we now beat Italy as having the most prime ministers in a period of time? I mean, it's been quite extraordinary. There are certainly some problems in Canberra, to say the least. Has this had any impact on markets and investing? What's your view?

Brian: Well, it has gotten a little bit embarrassing, but what's interesting is that when you talk to global investors and you talk about political uncertainty in Australia, they kind of look at you as if you're from another planet, because relative to a lot of other places around the world, our politics looks kind of mundane. I know it's hard to believe that when we look at it from our perspective, but if you're sitting there allocating global portfolios, Australia still looks like a relatively safe investment from a political perspective.

Anne: I guess that's probably because the policy framework isn't jumping about with prime minister changes, and there is a degree of policy certainty there.

Brian: Look, that's exactly right. That's a really, really important point actually, Anne, because if you think about what really matters from the point of view of financial markets and for long-term investors is it's the long-term direction of the things like interest rates and inflation, the long-term outlook for sort of corporate profits, but even from a government policy perspective, what are both sides of politics likely to do about, say, the budget deficit, for example? Even though there's a lot of noise coming out of Canberra, those sort of broad policy settings, there's not really as much difference between the two sides as you might think. The Reserve Bank still runs monetary policy. The Australian dollar is still going to be influenced by a whole range of things, most of which have nothing to do with events in Canberra. Even when you look at the policy differences between both sides of politics, they really don't add up to much in terms of their influence on the longer-term outlook.

Anne: It's interesting, I think, when you look at developed economies that ... Pardon me, the developed economies around the world are in essence where sort of the crazy behaviour is happening at the moment, and the instability exists if we look at Trump's America and Brexit, two of the biggest developed economic blocs in the world. It just looks a bit scary right now. This morning, I turned on the news, Brian, and I need you to break this down for me and for our listeners. This prospect of a tariff war between the US and China actually looks like it's about to happen.

Brian: Oh, it's underway, well and truly, this sort of tit-for-tat increases in tariffs that both sides have engaged in, and I think there's two key messages for me. One is that the measures that have been put in place thus far, yes, they are significant, but they're not the kind of thing that could seriously derail prospects for either the US or global or Chinese economy. Yes, they are a worry, but they're not the sort of thing which could, by themselves, force the world into another recession, for example. The second thing I'd say is that the trend is clearly not your friend, that the longer this goes on, the more we do risk causing serious damage to the global economy.

Anne: One of the things I also heard on the news this morning is that Australia is choosing not to buy into the rhetoric and the tariff war, and because we rely very heavily on the Chinese economy, and we're in a bit of an awkward position because we have the strong military ties to the United States, but we also have the very clear imperative to stay good with China because our economy needs it. What's your take on that and where this could be heading?

Brian: The short answer is it's complicated, but when you look at the economic impacts potentially on Australia, firstly the bad news. The bad news is that, look, we are a small open economy, and anything that is bad news for world trade is going to be bad news for us. The second thing though is that when you think about the kind of things that we sell to the rest of the world, and most importantly, the things that we sell to China, the things that we sell to China don't tend to feed into Chinese exports. They tend to feed into what's happening within the Chinese domestic economy.

Brian: Let me explain that a bit further. Iron ore is a classic example. Out of the iron ore that we ship to China, not much of that is going to be turned into something else that ends up being sold into the United States, and therefore potentially being the kind of thing that causes Trump to get angry at us. The stuff that we ship to China overwhelmingly goes into helping to develop the infrastructure of the Chinese economy, so in that sense, our exports are not as directly vulnerable to what actually Trump might do. That's a piece of good news.

Anne: That's good news for members, but what about too ... I saw Boris Johnson on the news a lot in the last couple of weeks, and I'm worried. There was some quite dramatic language about the impact that Brexit will have on the United Kingdom and their economy. Is it as dire as that, and is that something else that could have any flow and effects for Sunsuper members and the Australian economy?

Brian: Yeah, look, I think my base case on Brexit is that firstly, yes, it's going to be in the short to medium term, a disaster, well, particularly the short term, because frankly the grownups aren't in charge.

Anne: Angela Merkel's a bit of a grownup though, isn't she?

Brian: Yes, but she's not in charge in the UK, so look, I think that ... and I do feel for Theresa May, because she really got thrown a hospital pass in being forced to deal with all this. It's very hard to see how a deal could be put in place that won't cause at least some significant disruption to the UK economy, but, and this is where the impact on Sunsuper members comes in, over the longer term, is the UK still going to be an economy that will grow and still provide investment opportunities for long-term investors? The answer is absolutely yes. In the case of Sunsuper members, do we have an exposure to the UK? Yes, we do. We will own shares that are listed on the UK stock market. A lot of those shares are in companies that actually do business not just in the UK, but all over the world. They just happen to be listed in London.

Brian: But also towards the end of last year, we acquired a small equity holding in a couple of airports in the UK, in Birmingham and Bristol. Now, you might say, "Why the hell did you do that, given that Brexit is going to be pretty ordinary?" My short answer is that firstly, we buy airports not with the idea of selling them in six to 12 months. This is going to be a multi-year investment for Sunsuper members, and also as we all know, the weather in the UK is lousy 11 months out of 12. Poms are going to fly, and every time they do, we are going to make money for our members.

Anne: Now, journalists and the media have a lot to answer for. If you turned off the TV, you'd probably be doing yourself a favor in a lot of instances, because there's a lot of bad news. There has also been some bad news about the property market here in Australia, in particular Sydney, Melbourne, and to a lesser extent, other capitals around the country. What's your interpretation of this? Because I've actually heard the term, 'we're heading into the next GFC' being thrown about.

Brian: That's a really good question. There's a lot to unpack there. Let's talk about property first. Whenever anyone asks me, "What do you think about the Australian property market," my answer is always, "Which one?" Because so much of the commentary that we read is very much Sydney and Melbourne-centric. When you talk about a bubble in Melbourne property or a bubble in Sydney property, that has not been replicated across the whole country. In fact, there are heaps of areas in the country, especially the regions that were formerly the sort of boom towns during the mining and gas boom, where you saw property prices reach ridiculous levels only to have them collapse.

Brian: If you go to some of these regional areas and talk about a property bubble, they'll look at you as if you're from another planet. A lot of the commentary, a lot of the concern, is very much Sydney and Melbourne-focused. Other parts of the country haven't seen, at least recently, anything like the kind of gains that Sydney and Melbourne have had, and so I think it's important to understand that the Australian property market is quite a diverse beast. The likelihood of getting a 20, 30, 40% across-the-board collapse in property prices is relatively low. I'm somewhat more sanguine than some of the doom-and-gloom stories out there.

Anne: Because we invest in a lot of property at Sunsuper. It's a big part of how we invest money.

Brian: Not so much residential though. Our residential property exposure in Australia is minimal.

Anne: That point you made earlier about, well, what type of property, so maybe do you want to explain? We spoke residential.

Brian: Yeah, I mean, we do have ... For example, we are Australia's largest owner and operator of holiday parks, so we own the Discovery Park network across the country. Do we have office properties? Yes, we do. Do we have industrial property exposure? Yes, we do. We don't tend to have residential exposure, although we will, for example, own shares in companies that build residential property, so that's another matter. One of the reasons we do that is that we typically find with Australian superannuation members, our members will typically already be quite heavily exposed to property, either because they work in the property industry, they own their own home, they may have investment property as well. We don't really want their super fund to be adding to their property exposure, if you like.

Brian: The second thing is that we are quite open to the idea of property investments internationally. For example, in the United States, we will own some exposure in what we call multifamily property investment. These are apartment or housing developments that are built for the rental market, where the yield you can get on those assets is actually quite attractive for Australians.

Anne: Actually, I understand too from our head of unlisted assets, Michael Weaver, that we own a property on the Königsallee in Dusseldorf where my husband is from, so I was very, very happy. I'll have to go and visit it when I go and visit the in-laws in Dusseldorf soon.

Brian: Absolutely, and point of them is that we own that building. I think that's an important point to bear in mind. We are a global investor. We build globally diversified portfolios in all the asset classes we invest in, including in property. Anne, you mentioned the GFC again, and a lot of people in the media talking about, well, is there a risk of another crisis? Look, we've now had many years of decent investment returns, very strong investment returns in fact. It's now been about a decade since the GFC. The world economy has grown at a pretty solid pace. Investment returns have been very strong. Will we see another recession? Yes, we will inevitably. Downturns happen. Recessions happen. Can we time them with any degree of precision? I would argue we can't.

Brian: Many of our members, in fact most Sunsuper members, are relatively young. If I'm sitting here, if I was in my 20s or my 30s, which is where the bulk of our members are, I am investing for 30, 40, 50 years. Now, over that period, I'm highly likely to have to experience a whole range of different crises along the way. I might end up with a major market downturn or a significant financial crisis, I don't know, maybe four, five, six times during my working life. I might experience a whole bunch of sort of miniature versions of it over that time. This is how the economy works. This is how financial markets behave.

Brian: But the key takeout for members is, if you see a major market downturn, your level of pain, how bad you feel about that, very much determines what sort of investor you are. If you're the kind of investor that says, "Look, this is a part of life. I understand that markets will have their ups and downs, but over the longer term, they deliver good, strong returns," if that is your view, that means you're likely to be a far more optimistic and perhaps a more growth-orientated investor. But if you're the sort of investor that says, "Every time there's a major market downturn, I lose sleep," that would tend to suggest that you're a more conservative investor.

Anne: I think that's a really good point, Brian. There was an episode we did recently about life-cycle investing, and timing is, I guess, everything from an investor point. As someone that's the person that heads up all things retirement at Sunsuper, our members ... Well, obviously financial advice is really important, but when you retire and where that sits within the cycle of investments and financial crisis is equally as important if you're realising or in essence withdrawing some money out of super.

Anne: I think I'm mindful of time, and I just encourage our listeners to go back to that episode around our investment options. Brian's spoken about what type of investor you are and your risk profile, how optimistic you are. Also think about, what is the timeframe for when you want to retire? If you are feeling nervous, we encourage you to pick up the phone and speak to one of our financial advisors, or speak to your advisor if you have one already. Brian, thanks. We've really covered a lot of topics today, haven't we?

Brian: We have indeed actually, and thanks very much for your time.

Anne: Thank you.

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

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