Anne: Hello and welcome to the Super Insider podcast series, brought to you proudly by Australian Retirement Trust. My name is Anne Fuchs, and I'm the Executive General Manager of Advice, Guidance and Education, and I'm so proud to bring you this podcast today. And look, my partner in crime, Brian Parker Chief Economist, is here. And we're going to be talking all things about why super funds have chief economists and what's going to happen with the US election and what's happening with the Australian economy.
But before we do that, our listeners and viewers would know that this is general advice only and that you shouldn't do anything off the back of this. You should get some financial advice, or call your super fund, or call Australian Retirement Trust, if you're a member. So, Brian.
Brian Parker: Hello Anne, good to be with you.
Anne: It’s so good to see you.
Anne: Okay, so I'm going to start with a higher order question for you.
Anne: Okay, so why does a super fund, like Australian Retirement Trust need a Chief Economist?
Brian: It's a good question. I'm glad they do, frankly. The best way I can describe what I do is there's sort of 2 halves to it. The first half of it is working alongside the other members of the investment team, to try and work out what is happening in the world. Not so much what's happening over the next month or 3 months or 6 months, but really to try and think about opportunities and risks over the medium to longer term. What's the long-term outlook for growth? What's the long-term outlook for inflation and interest rates and things like that. I help out on asset allocation. I help out, in some of the work we do in infrastructure, for example, just in terms of long-term assumptions for growth that underpin some of those longer-term infrastructure assets. That’s half my role. I get to sort of stick my nose into lots of areas, which is a lot of fun. The other half of my role is to act as chief translator for a lot of really smart people to explain in as plain English as I can, to our members what we're doing with their money.
I get a chance to work with a whole range of people, across the business, particularly in investments. And it's a lot of fun. I am glad that Australian Retirement Trust needs a Chief Economist, and long may it continue.
Anne: We’re kind of glad too, and I think you're particularly good at that translation. Maybe it's the boy that grew up in Queensland, that you're good at just keeping it real.
Brian: Oh, you had to bring that up, didn’t you?
Anne: The Gold Coast boy? Yes, I have to. Now, we've had Andrew Fisher who heads up investment strategy on the program talking about the role asset allocation plays in terms of investment performance. Investment performance has been stellar.
Brian: Yes, it's been a remarkable year. In fact, if you were in a room a year and a half ago with a bunch of economists.
Anne: Oh, that sounds like a hoot.
Brian: Yes, well, firstly, you'd have my sympathy. Secondly, they would have probably said to you that 2023/2024 was going to be a really challenging year, certainly from an economic perspective. But it ended up being probably better than a lot of people thought. And that also translated into markets. It was a very strong period for share markets. We saw a little bit of a better performance than previous years from bonds. What it meant was that if you take, for example, our High Growth option, which used to be called our Growth option, that’s done very strong returns over the year. And it's number one over 10 years, in the performance surveys, which is great. It’s been a very strong year for markets, but also a very strong year for some of our flagship, diversified offerings.
Anne: We know that equities have been the key reason for the performance over our one-year results. What's the economic driver behind that?
Brian: Yes, it's interesting. I'd say 2 things stand out. One is the fact that the world held together a lot better than people thought. That we didn't get a recession in the US or elsewhere, generally speaking, although it's not to say the economy globally has been fantastic, it's just been a lot better than people thought.
Also, the fact that inflation has clearly come down, it's still mostly too high, but inflation has come down. And that's enabled the world's central banks to firstly keep interest rates on hold. after an extended period of raising them. And now we've had some of the world's central bank start to cut rates. I like to think of it as a collective sigh of relief that things didn't turn out worse than people thought a year and a half ago. And it's helped underpin better returns.
Anne: That's a lovely way to describe it. I guess then when you're sitting around with the investment team as chief economist and you're then looking at the Australian economy, for example. You’re not talking about one year with Andrew Fisher and team, you're looking at the long term.
Brian: Very much so. We're more interested in long-term growth, long-term inflation, and long-term corporate earnings growth. The sort of things that feed into our assumptions about long-term returns for the different asset classes we invest in.
Anne: What's the messaging that you're feeding into the team, the asset allocation team, or also you're referencing the property investments. What are you thematically saying to them, that they need to be considering and looking for with that macro-economic lens?
Brian: I think the best way of summing it up, is that when you think about the longer term and the world, we're in now and going into over the next 5 or 10 years, it is going to be a more volatile world. It's going to be a world of slower economic growth, generally speaking, somewhat higher inflation than we've been used to, and more volatile growth and more volatile inflation. And feeding into that dynamic is the geopolitical environment, which is going to be an ongoing source of volatility and uncertainty for the economy and for markets. So, the next decade is going to look, I don't want to be all doom and gloom here, but it's going to be a very different decade to the one we saw perhaps leading up to Covid.
Anne: Is there anything in relation to the aging population? I think about Australia, a larger chunk of us is getting older, we're going to see this big tsunami of people starting to retire and start spending, spending, spending. They're going to be staying in caravan parks. Hopefully the G’Day Group caravan parks.
Brian: Hopefully the G’Day Group caravan parks, yes.
Anne: Does that have any impact on the economy, the overall changing demographics of the labour force shrinking and more people with leisure time and probably assets to spend that didn't exist in previous generations?
Brian: Yes, and there’s a whole lot to unpack in that question. If I look at the performance of the economy now, a lot of those trends are being reflected in the performance of the economy now. So, look at the overall level of consumer confidence and it's relatively depressed, where price consumers are basically looking at that as miserable as we did during the depths of Covid. And yet the economy is growing, the unemployment rate is not all that high.
Anne: Why is that?
Brian: I think it's because the cost-of-living pressures out there are real. They're disproportionately impacting on relatively young people, on people who are renting, or people who took out a mortgage in relatively recent times and don't have a massive amount of equity in their home. They are feeling the pain. But on the other hand, we've also got a whole cohort of people, especially those people approaching and in retirement, who have benefited from perhaps a better performance from markets and not just markets, but the property market as well over recent years, in fact, over the last decade. And they've ended up with quite solid retirement nest egg. You're seeing a lot of people in that pre-retirement period still out there spending quite a bit of money. And they are propping up the overall spending figures in the economy. And that's a trend that's going to continue and it's going to be compounded by that aging trend that you were talking about.
What it's also meant, and this is kind of an awkward one to talk about, if I think about people in their 20s and 30s today, your ability to cope with these cost-of-living pressures that we're experiencing, and in particular, your ability to be a first-home buyer, in many ways, depends on the genetic lottery of life - who your parents and grandparents happen to be and whether they can help you. And I think that's kind of sad because there are people out there who are participating as first-home buyers, and quite often they’re people who've benefited from grandparents’ support and parents’ support. I think that's kind of sad. But that's the country we're becoming.
The other story, just on the inflation side of things, there's a whole generation of people, or maybe 2 generations of people for whom these last few years have been their first experience of high inflation.
If you started your economic life, if I could call it that, or your awareness of money in the economy, any time after 1993, you've not really had to experience bursts of inflation like this. This is really your first rodeo when it comes to inflation. Now I'm old, so this is not my first rodeo. In fact, growing up on the Gold Coast, as you politely pointed out, I can remember my first experience of a cost-of-living shock was in 1974, when the price of a chocolate Paddle Pop went from $0.05 to $0.15 in 6 months. Now, for a 6-year-old on the Gold Coast, that's pretty much hyperinflation. But a whole generation of people, they've not experienced inflation.
Anne: Okay, but we’re super. What on earth does inflation have to do with super?
Brian: Almost everything. Our first responsibility to our members as investors is to deliver what's on the tin. If we tell our members we are aiming for a particular return, we need to hit that return and preferably beat it. And beat it without taking unnecessary risks and without doing dumb things with our members’ money. And that's exactly what we do. And we couch those returns in real terms, it's the real after inflation, after fees after tax.
Anne: So therefore, the higher the inflation, the…
Brian: The higher the nominal return that we need to achieve, because it's the real return that members get over the lifetime that determines what sort of retirement they have. So, for us, we need to make assessments about what the long-term outlook for inflation is and ensure that we're investing in assets that will deliver, not just a little bit above inflation, but a really decent margin above inflation.
Anne: If I was sitting in the room with you in the team and you're looking at international assets and asset allocation, in particular the United States and what's about to happen in a couple of months’ time.
Brian: You had to bring that up. How to put a downer on the conversation.
Anne: Sorry. Well, you know…
Brian: It’s a fair call.
Anne: Is there any sort of economic scenarios that you're feeding into our, into our team that they need to consider?
Brian: We are doing a lot of work at the minute on what a Trump 2.0 might look like. What a continuation of a Biden, well, now, Harris.
Anne: Yes, I was about to say not a continuation.
Brian: But it's a continuation. I don't think you'd see a major policy shift in that sense under a President Harris. You’d continue to see the kind of moves on infrastructure and climate change and things that you've seen Biden managed to get through. The big thing with Trump is Trump equals volatility and uncertainty. Apart from wanting to impose a hell of a lot of tariffs on day one…
But US businesses and the US economy tend to be far more dynamic, far more resilient, far more innovative than the political system seems to be. And so, I think it's the job of investors to be a little bit dispassionate about this. And to say, ‘Okay, I'm going to try and keep an eye on what’s happening politically and geopolitically, be prepared to capture opportunities that volatility throws up at me, but I'm also going to focus very much on the economic and investment opportunity longer term in a range of different countries, including the United States’, because the US economy and business sector is more resilient than its politics, in my view.
Anne: Okay, one last question around was it the US economy that was the key driver behind equities in terms of what's…
Brian: The drivers of the US equity market in the last few years have been seven names, the so-called Magnificent Sevens. You know the big seven technology names, your Amazons and Tesla and these sorts of people. And you've seen more volatility in those names more recently. These are great companies and they're mostly insanely profitable. It's not just fluff here, these are genuine, high-quality businesses that we're talking about. And so, yes, are they still dominant, leading businesses? Absolutely they are. But the US economy is more than that. There's still a much broader opportunity than just those names, or indeed just the names we see in the stock market.
One of the things that we also take advantage of is in the private assets or unlisted asset space. So, do we want to invest in US equities? Yes, we do. Do we want to invest in US sovereign bonds and corporate bonds? Yes, we do. But we also want to look for opportunities in real estate, in infrastructure, in private equity, because this is still the dominant economy in the world. And those opportunities will persist, even if politics look very worrying sometimes.
Anne: And I think that's the good news. That's the light at the end of the tunnel, as you always talk about.
Brian: Can I say it again? I say that every time. There’s a light at the end of the tunnel and it’s not a train.
Anne: It always reminds me of Sesame Street. Remember that?
Brian: Vaguely, yes.
Anne: Okay, great. Well, you're talking paddle pops. I'm talking Sesame Street. Okay. Thank you so much. BP.
Brian: You’re most welcome, Anne.
Anne: All right. Thank you to our listeners and viewers. Give us a rating on where you get your podcasts. And we'll catch you again soon.
This transcript has been edited for length and clarity.
