Anne: Hello and welcome to Super Insider Australian Retirement Trust podcast series on all things the economy, investing and your precious superannuation.
My name is Anne Fuchs and I'm the Executive General Manager of all things education, guidance and advice here at Australian Retirement Trust, otherwise known as ART. And it's an absolute pleasure to be the host with 2 fabulous people on the podcast today. The energy is going to be off the Richter scale; Brian Parker, our Chief Economist.
Brian: Thank you, it’s great to be here.
Anne: And Joshua van Gestel, our Senior Manager of Education.
Josh: Hello Anne.
Brian: Hello Josh.
Anne: Hello, sir. Now we’re going to be talking about the budget that has just been handed down from our Federal Treasurer and we’re going to be talking about the state of the economy.
So, for our listeners, of course, everything that you hear today is general information only. It's general advice, and you'll need to consider this information and what it means for you. And I would strongly encourage you to get some personal financial advice before acting on anything.
Now, here we are, the federal budget was the night of nights for those junkies about economics, government, policy.
Josh: Brian’s not really a budget junkie.
Brian: I'm not really a budget junkie. I mean, most economists are budget junkies.
Anne: And you’re not a budget junkie?
Brian: I’m not a budget junkie, no.
Anne: Okay, so do we need to do therapy about this afterwards?
Brian: No, no, no. It's taken me years to wean myself off being a budget junkie.
Anne: Okay. All right.
Brian: Because I just have this view that, especially given what we do for a living at ART, we're managing long term retirement money. And so, what happens on budget night, in terms of how we invest members' money, rarely, if ever, makes any great difference. We're much more interested in the very, very long-term outlook for things like interest rates, inflation, growth, profits, exchange rates, whatever. And that doesn't really change based on anything you hear on budget night. So, yes, I do pay some attention to it, just so I can help Josh write his article, really. So, I pay some attention to it. But in terms of how it impacts on our investment strategy it doesn't really make a big difference. I can say some things about the budget, but like I said, it doesn't make a great deal of difference to the way we invest money.
Josh: I, on the other hand, I'm a junkie and make up for Brian's lack of junkie-ism.
Brian: Enthusiasm. Yes, he's right.
Anne: Okay. But it looks like, I shouldn't say thankfully. I just mean thankfully, in terms of less work for you.
Josh: Dare I say it was a super budget, Anne. And it was super in the fact that there was not a lot of super. Though, what little there was, it was really important.
We saw the government announce earlier this year about superannuation on paid parental leave. That was confirmed in the budget, and I think importantly what that means is that we know that women are going to retire on considerably less than men. That's 12% on payments they receive for up to 20 weeks. It starts to close that gap. So, a very small announcement in what was a budget with not a lot on super, but I think a significant announcement.
Anne: Well, we were talking before the cameras started rolling about some of the assumptions made around interest rates and where they're going and the economic forecasts. The Treasurer did have a gloomy outlook there, as you know. There are still some clouds in the distance around unemployment and the global outlook, particularly geopolitically. What are the Cliff notes? I remember Cliff notes were very handy in high school for English. What if you're going to give the Cliffs notes version around the interest rates part and the interplay with unemployment, what would you say to our listeners?
Brian: I would say that the budget has been carefully calibrated to not give the Reserve Bank too much grief. So, in other words, does Michelle Bullock wake up in the morning, read the details of the budget, and go, ‘Oh, this is news to me. I'm going to have to change, I'm going to have to think about raising rates now’? That's not what comes out of that at all. I mean, the budget certainly if you look at the actual policy measures and their impact on the budget, there is an easing in fiscal policy. But we're talking about 0.3 or 0.4% of GDP in terms of the policy announcements. Those are not the sort of numbers that would dramatically change the outlook for the economy or monetary policy. So, I don't think we should look at this. I don't think it makes Michelle Bullock's job easier, but it doesn't make it massively harder either. I don't think we should change our views on where interest rates may or may not be heading based on what we heard in the federal budget.
Anne: But with the economic outlook, and the Treasurer was, I guess, trying to manage expectations around, you know the environment we as a country are operating in. Globalisation has happened and we're not immune from things happening around the world. Are there any takeouts from what you heard that you think our listeners might be stewing on about their retirement savings and how it could impact them?
Brian: Yes, look, I think it's fair to say it's certainly an acknowledgment that the world is a really challenging place. If you think about the economy so far, last year, the global economy held up remarkably well given that interest rates had gone up so aggressively. Interest rates on balance are probably going to come down across much of the world over the next year or so. And what that really tells us is that, if that does happen, it means, yes, inflation probably comes down a bit further and that's a reasonable forecast.
But it also probably means that the global economy is not all that strong. And I don't think we will see a very strong global economy. I think we're in for a period of weaker global economic growth. Yes, lower inflation and some reduction in interest rates, but I think it's also a very uncertain and volatile world. I mean, the geopolitical issues the world is facing do have impacts on the global economy.
Anne: And they’re not going to go away anytime soon.
Brian: No, they're not going to go away anytime soon. And the fact that the world is a very uncertain place geopolitically, makes the world economy a more volatile place. It makes it harder to do business. It means you see a lot of disruption in terms of things like global supply chains, where businesses choose to source raw materials, where businesses set up production facilities. All of that is affected by geopolitical environments. So, I think there's a great deal of analysis in the budget papers about the risk factors and the uncertainties out there, and just how hard it is to do any kind of forecasting in this sort of environment. Forecasting is always hard, but it's even more so given the uncertain world environment we're in.
Anne: Josh, as the budget junkie that you are, declared junkie, there was a lot in the budget around ‘made in Australia’.
Josh: Yes, there was, and I think it's interesting. A lot of that is being pushed forward into future years. So, thinking around hydrogen, or green hydrogen production, mineral exploration and really those rare minerals and things like that. But a lot of that was very forward thinking. And from my perspective, I'm picking up a bit of what Brian said, there were 2 things I thought about with where our members maybe need to think on.
The first is the word inflation came up a lot in both the budget but also a lot in the media afterwards. And we know that, particularly for our members who are income stream recipients, that inflation has been eating into their real return. And it's now at the hard end to bring it down further. So, as Brian alluded to, it's still a bit further to go, but it's sticky at the moment, and I think that will more affect our members' real returns day to day.
The second thing I think about is around the announcements about Future Australia. I think it talks a bit more to what Brian said that the way he thinks about members' money in very long-term terms. And so, you know, there were investment opportunities announced. Even the government talking bit more about housing. I think that's where it gives the longer-term opportunities from the way we look at investing.
Brian: Yeah, that's a fair point. And especially given the sort of inflation environment we’ve been in. Now, the good news is inflation is coming down. Interest rates are also likely to come down over the coming year or 2. But what it also means…
Anne: That’s the closest to a prediction I've ever heard from you just quietly.
Brian: It’s a minor slip. Yes, but basically one of the other interesting things, if there's a silver lining to the cloud, if you like, it's that if I was transitioning into a more conservative investment strategy around now, I'm actually better off doing that now than I would have been, say, 2 or 3 years ago. And the reason is that, as you say, if you are transitioning into getting more of your return from income, from things like term deposits, cash, bonds, because interest rates have risen, the future returns from a lot of those investments are now considerably better than they were several years ago. Even allowing for inflation and for a broader spectrum of investments. Any investments such as things like private debt or some of the infrastructure assets we invest in, or some of the property assets we invest in, the future returns from some of these assets that are at least partly linked to interest rates have also gone up a bit. So, the future for investment returns actually still looks quite reasonable. And I think the other thing to bear in mind about this is that, yes, superannuation is the longest-term investment most of us, or indeed any of us, are ever going to have. And even though the world is in a very uncertain place, every crisis comes to an end, every recession comes to an end, every burst of inflation comes to an end. You know, life in the economy and business goes on. Over someone's working life, you could have multiple episodes of geopolitical uncertainty, recession, or bursts of inflation. And it's about making sure you've got enough diversity in your assets, enough diversity in your investment strategy, so that you've got something in the portfolio which will provide you protection across a range of those different environments. And that's exactly the way we think about building portfolios.
Anne: Okay, if you're an older member, and so you're right, but I think about our members who are either in the income phase, not working anymore, or so close to it. And yes, inflation is a worry but, in the conversations, we have with members, and we have thousands of conversations every year, as you both do when you're on the road, they do worry about the volatility of the markets. So, things are, you know, we're chugging along, but November's going to come around fast. So, I’m getting at the US election is what I'm getting at. How do our investment team think about that?
Brian: We think about that again by looking at the long term and you look at, you know, for example, if Donald Trump was to take the White House back again, what would that mean? And for the world? I think it has serious implications. It is a recipe for lots of volatility, confusion and chaos because that is shown to be Trump's modus operandi. But in terms of markets, we've also seen that markets can cope okay with that. Or at least, yes, you can get periodic bouts of volatility.
But markets over the course of the, say, the Trump administration, yes, there were bouts of uncertainty. But there were also periods of market strength as well. So, yes, politics matters and geopolitics matters. But, ultimately, life, the economy, business and markets tend to move on. And again, to take your earlier point about those people in retirement or approaching retirement, there's 2 things I'd say, especially those people who are, I’ll call it ‘coming into land’, if you like, into retirement. The last decade, ironically, even though there's been plenty of things to worry about, yeah, been a period of good returns.
Anne: Well, we've had a global pandemic.
Brian: Global pandemic. You had the GFC, the aftermath of the GFC.
Anne: A war in Europe
Brian: A war in Europe. You've had a range of things happening even before that. Going back to the Euro crisis, the Greek crisis, for example. So, there's been a bunch of bad things that happened, but overall returns have been in line with, or better than, the return objectives that super funds have set. So, in other words, you're going into retirement already with a bit of a nice financial buffer. But to take your point, the last thing you want is a stock market crash or a major bout of volatility just before you retire. You don't want that to happen. And so, it's important to ensure that the amount of risk you're taking at this point in your retirement journey is right for your stage of life so that if something bad does happen in markets before you retire, it doesn't blow your investment strategy out of the water. And this is where financial advice is a big, big help.
Anne: And the lifecycle default.
Brian: And the lifecycle investment strategy. And, again, our lifecycle offerings for those of our default members, we very, very carefully and deliberately reduce your risk as you approach retirement so that we're not taking undue risk just when you're approaching, or when you're just in, retirement. And so, if you're not in the default and doing that, I think it would be a good idea to talk to a financial adviser and make sure you've got a strategy that suits your phase of life and your appetite for risk.
Josh: And I think it's an interesting point, though, Brian, that you talk about those people who have been on that journey over the last decade or so, and you're saying a lot of them who have been drawing down their retirement income but are actually now in a position where their capital is equal to or stronger.
Brian: And that's extraordinary. It’s extraordinary.
Josh: Thinking around the last few years, we've not known where the economy would go and where markets would move. But you're still seeing this benefit of long-term investing.
Brian: You are and last year, share markets did very, very well.
Anne: Yes.
Brian: We've come through a period, you saw double digit returns from global equity markets and that's certainly turbocharged returns. And so, it has been a very good period for investing1. But you know, it also it does highlight to me that trying to predict where the markets are moving in the short term is impossible. Twelve months ago, I don't think anybody would have foreseen during the state, given the state of the world, that we were going to (a) avoid recession and (b) have double digit returns.
Anne: No definitely not, no.
Brian: That was quite extraordinary.
Anne: But I think so many of our members are - going back to the budget and our older members, the ones who are in income phase - this whole anxiety around inflation is almost exasperating because we see a lot of our members, to your point, their starting balance stays intact even when they depart the earth.
Brian: Yes.
Anne: And is that a lost opportunity?
Brian: It is a lost opportunity for retirement, I think. And, you know, the markets have been kind. It's been like a magic pudding investment strategy that you've drawn down. And there it is, it is back again. It’s called the drawdown phase. And it’s called the drawdown for a reason. I remember before my mum passed away, about a year or 2 before that Mum was saying that she wanted to leave us something. She didn't live exorbitantly but she had a very comfortable lifestyle. I remember saying to her, Mum, if you shuffle off this mortal coil with more than a dollar left in your savings account, that is just bad planning on your part. Spend the money. There is this very deeply ingrained part of our psyche that we want to leave something to our children and grandchildren. We want to leave a legacy. But generally, many people can afford to live a bit more comfortably in retirement than perhaps they are.
Anne: And certainly, the budget has created a few assistance opportunities for people worrying about their electricity bill.
Josh: And we did see some other measures in the budget that I think are going to help on the periphery, even around people's mindset. There was funding put forward to help the ATO in fraud detection in the superannuation tax system. I’m very aware of how data is being used now and people trying to access information and money. So good to see that the ATO is going to have more capability there. And also, we saw that the government’s decided to freeze deeming rates on Aged Pension Means Testing for another 12 months. So, I think those 2 things, although again, not huge announcements, not major announcements. They just help give a bit of comfort or appease some of the anxieties around some of those peripheral issues.
Anne: But I think to things like, you know, the support around the cost of medication, particularly if you're an older member in retirement and you've got your cholesterol tablets, you know, all of that. If you’re in retirement and you’re worried. I've had to go on cholesterol tablets.
Brian: Oh, I feel better now.
Anne: We're all getting old. So, I guess what we're saying to our listeners is that the portfolios that we're building are constructed in such a way to manage the risk on your behalf so that you're not having to worry about cost of living and inflation.
Josh: So, can I do a bit of an advertisement, or a segue?
Anne: Yes.
Josh: I think it's just timely that we do have the end of financial year coming up, and there are going to be some changes which give more opportunity to super coming into the new financial year.
So, on 1 July we're going to see the contribution caps go up - so how much can you put into super before you have tax penalty applied. Concessional contributions, which are employer contributions, salary sacrifice contributions, contributions you claim a tax deduction on, that cap will go from $27,500 to $30,000. We're going to see the superannuation guarantee go up from 11% to 11.5%. So again, we'll see more money flowing in. And then the non-concessional cap - so contributions that we tend to make personally and not claim it as a tax deduction - we'll see that cap go up from $110,000 a year to $120,000. The other indexation will be for government co-contribution, so we'll see the amount you can earn and still qualify for that go up very slightly.
Anne: And there's the Stage 3 tax cuts coming in. And if you can afford to, if you have some additional money from these Stage 3 tax cuts, they will obviously help with cost of living but also, it’s easy to mindlessly spend money on things like subscription services and Uber Eats and coffees.
Brian: I think the main message we leave our listeners is, yes, the world is a very volatile place. We know that. But there is always a light at the end of the tunnel. And it is often, as I often say, a light at the end of the tunnel not a train. But it's the end of the tunnel. Life, the economy and markets go on. Super is a long-term investment. Make sure you pay attention to your super. If you listen to this podcast, it suggests that you’re ready, which is great to get some advice to help you decide that the investment options you're invested in suit your stage of life suit your appetite for risk. If you think you might be taking too much risk, do get some advice before you make a change. But yes, there are still a lot of return opportunities out there. And our job as a major super fund is to make sure we're capturing those opportunities.
Anne: When you talk about the train at the end of the tunnel, I always have this vision. When I was a little kid, from Sesame Street, I don't know if you remember, there was one part of Sesame Street where there was the tunnel and the train, and it always takes me back there, Brian.
Josh: Must have been after our time Brian.
Brian: I think it might’ve been.
Anne: Okay. So, thank you very much. It's been great for our listeners. If you need to know anything more about how to get ready for retirement - what happens if somebody passes away, what do you do with your super, there's just a wealth of content on the Super Insider podcast. Please subscribe, we're putting more and more episodes on there, and that way you'll never miss one. And there's more and more fab people from ART coming on the show. We’ve got such a huge array of talent.
Anne: Okay, all right. Thank you very much, Brian, Josh, and thanks to our listeners.
Brian: Thanks everybody.
Anne: Bye.
1 Past performance is not a reliable indicator of future performance.
