Anne Fuchs: Hello and welcome to Super Insider, a podcast on all things about the economy, investing, superannuation and retirement, proudly brought to you by Australian Retirement Trust. My name is Anne Fuchs and I'm your host today. And we are talking with our Chief Economist, Brian Parker, my partner in crime, as I always describe you..
Brian Parker: Hello, Annie. Nice to see you. .
Anne: Annie. I love it. Annie was one of my favourite movies when I was a kid. Annie, get your gun. Watch out. We're going to be covering all things economy, performance and the like today. It's a big episode to start off 2025, when the year's gone off with a bang. Of course, before we do that, listeners and viewers, please remember that this is general advice and general information only. You will need to decide if it's right for you.
Interest rates have just been cut Brian, silver bullet, yes, or no?
Brian: No. If anything, it was described by economists as a hawkish cut. In other words, yes, I'm cutting interest rates. And then in the written material, but also at the press conference afterwards, it was pretty clear that this was not a straightforward decision. This was very much, okay, inflation has made -- we've brought inflation down considerably. We're prepared to take out a bit of insurance here and cut rates, but a lot of the tone was, but realistically we still have inflation above target. The labour market is still very tight. Some of the more recent labour market data have just reinforced that view. I think it's quite likely that we could conceivably go for some months without interest rates doing much at all.
Anne: Do you mind if we go back in time, or step back in time, like the fabulous Cher song that I love. And when we started recording Super Insider, it was during COVID, it really, Super Insider really took off because people were stuck at home. Let's just go back in time and remind people when that was all happening and you were tuning in, listening, inflation had an 8....
Brian: You saw very high single digit inflation across much of the developed world.
Anne: And we are now at a...
Brian: We now have a 2 in front of it at the headline inflation level. The Reserve Bank's preferred underlying measure still has a 3 in front of it. Technically speaking, they're aiming for 2.5. Their own forecasts actually now show that they're expecting inflation to settle at around 2.7.
Anne: In 2025?
Brian: No, no, no, not in 2025, but further down the track. So, over the next 2 or 3 years, and that's technically speaking, it's still kind of uncomfortably high. And yet despite that, they still chose to cut interest rates. I think they'd be very reluctant to cut again soon. The hurdle they'd need to jump over to justify another cut is high.
Anne: Ok, it's a very delicate dance, is what you're saying. Is there something our listeners and viewers should look out for in terms of a signal, an economic signal that would trigger the Reserve Bank to consider cutting rates again?
Brian: The 2 most important bits of information really are the inflation rate, in particular the underlying inflation rate, but also the labour market. So, not just employment growth, but in particular measures of just how much slack there is in the labour market. And probably the best measure is something called labour force underutilisation, which is a bit of a mouthful. And that captures the percentage of the labour force that is either unemployed or underemployed. So, these are people who are working part time, they want more hours, and they can't get them. So that rate is still above 10%. That combined rate, it has been falling, which is not exactly what the Reserve Bank wanted to see. They wanted to see a bit more slack coming through in the labour market. It's stabilised a bit in the latest data, but really, it's those 2 things. It's inflation and the labour market are crucial.
Anne: And that's what people need to watch out for. How does it relate to the... there are multiple asset classes that obviously are very sensitive to interest rates. Property is one asset class that our members just love. It's an Australian obsession; we all know it. So, what's the flow on from interest rate cuts in terms of our portfolios, is there any?
Brian: I just think that, one 25 Basis point move doesn't make a lot of difference. It doesn't really move the dial in terms of our investments.
Anne: But it's been a while. It's been a while. I thought it might have caused -- created a bit more excitement?
Brian: Not really, no. You know, at the end of the day, we don't base investment decisions, we don't design portfolios based on the likelihood of a rate cut coming this month or next month or whatever. We think about it in terms of the longer term. We think about, what is the long-term level of interest rates? What's a normal interest rate for Australia over the very long term, which tells us, and that really is a bit of an anchor that basically says, okay, that means that over the very long term, what return are we going to get from cash, for example? And if we then decide, okay, we also invest in risky assets. So, property, shares, infrastructure, all of those assets have to deliver a margin above cash relative -- and that margin depends on the risk of the particular asset. That's how we think about it. But we're not really too concerned or too obsessed with trying to forecast exactly what's going to happen to rates this month, next month or the whole.
Anne: And there may be parts of our portfolio where there will be opportunities. I think about, we've just been recording Super Insider on location at Discovery Parks, one of the jewels in the crown in our property portfolio at Australian Retirement Trust. And they're wanting to grow and buy more land and upgrade their facilities. So, all of these things, I guess, have a component of sensitivity.
Brian: If you see interest ratfall dramatically and 25 basis points isn’t a dramatic fall. But if you see a substantial fall in rates, then that does mean that the cost of borrowing for a whole range of things goes down. In theory, people who are looking to borrow money to develop new property or develop new businesses feel a bit more bullish. Correct. But at the same time, even those people need to think about what is the long-term cost of my borrowing. And it's those sorts of thoughts that, those sort of projections which I think are more important from a business and investment perspective.
Anne: And these are the things that you and the team, Andrew Fisher, are thinking about in that longer term sense in terms of how we build the portfolio.
Brian: Correct. We're very much thinking about what is the longer-term outlook for the global economy, for inflation, for interest rates. How's the world likely to evolve over the next decade rather than over the next 3 to 6 months?
Anne: Okay, so global economy. I will pull on that thread and go there.
Brian: Oh no, we're going to go there.
Anne: We're going to go there. It's been a big start to 2025, in particular in the United States. And there is a lot of curiosity from our members around what all of this means for their portfolios and the safety of their portfolios. There's a lot of geopolitical instability around the world. What is your advice? Firstly, just sum up where we're at in terms of United States and then advice to members around all of the things they're going to hear on the news this year.
Brian: Firstly, the United States economy still remains very strong. You've seen very strong economic growth in the US now for some years. The labour market still remains quite strong. Certainly, we are in for a period of volatility. We're seeing that with trade policy, we're seeing it with geopolitics. It is a volatile world.
Anne: It's, it's been like this. Volatility has always been a thing, really.
Brian: Yes. I just think that this time, I think the best way I could describe it is firstly, volatility is inevitable. Volatility also provides opportunity. So, if, for example, we ever see a significant fall in equity markets for whatever reason, that's an opportunity to buy quality assets at a better price.
Anne: So, we tend to make members money.
Brian: Correct. You know, our job is to focus on the longer term, but also the more we can buy low and sell high. That is how you make money. And volatility provides you with the opportunity to do that. The other story though is that especially in the United States, we need to distinguish between the United States politics, and the United States economy, and business. And we also need to remember that the United States, regardless of what you see on the news and things like that, it is still the largest, most dynamic, and innovative economy on the planet. And there is still enormous investment opportunity over there. And it is still a very sought after destination for foreign investors going into the United States. You look at the amount of money that continues to flow into the US from foreign investors all around the world, you're still talking about a couple of hundred billion dollars a year. And that hasn't missed a beat for the last decade, despite the political instability and uncertainty.
Anne: And in my head, I can just conjure up some of the assets that we own in the United States, from the shipping containers to...
Brian: Multifamily residential assets. We own port facilities, we own industrial property facilities, we own infrastructure assets.
Anne: These just crack on. Regardless of what the politics might be.
Brian: That's actually true. And in particular a lot of, take infrastructure for example, where we invest in a number of infrastructure assets, including renewable assets. A lot of the regulation, a lot of the political decision-making that influences those assets. It's state and local, it's not Washington.
Anne: That's interesting to know.
Brian: So, we're very, we absolutely take into consideration political risk and geopolitical risk into our assessment of when to buy a particular unlisted asset or not. And in a lot of these assets, the regulatory environment is actually state and local, not federal.
Anne: So, it's quite stable.
Brian: It is much more stable.
Anne: So, okay, then the tariffs is the sort of the wild card probably that people are wondering about, whether that's going to create some kind of shock event in the economy this year. What's your view on that?
Brian: Yes, and we don't have much clarity as to where this will settle. You know, things change. It's a day-by-day proposition as to what's going to happen. As a general rule, higher tariffs increase the cost of doing business. It's a tax on consumers at the end of the day. It also means that businesses around the world rethink their supply chains. They rethink where they source product, where they produce products.
Anne: So, it could actually create, you'll have countries, countries around the world sort of reshaping their economy and their manufacturing and they may benefit from this.
Brian: Yes. And I think basically the most obvious potential losers, if you like, it is bad for, higher tariffs on countries like China, Mexico, Canada, et cetera. Yes, there is an adverse economic impact on those countries, but exactly what it means for the whole world is still decidedly unclear. It depends on how policymakers respond, depends on how businesses respond. Australia is a prime example, our direct exports. If there's a tariff imposed on Australian exports to the United States, the US is nowhere near the sort of trading partner it used to be for us. For us, it's overwhelmingly China and the rest of Asia. Would there be an impact on the Australian economy? Yes. Would it be positive? No. But it's not a big impact. It's not the sort of thing that can derail our economy.
One caveat, though, if you were to see a major downturn in China as a result of tariffs or whatever, that's more likely to have an adverse impact on Australia.
Anne: Because again, I'll go to our members who are watching the news, in particular those ones that are nearing, or in, retirement that are looking at, they're watching their number or they've got their app on their phone and they look at it and then they've watched the news or... and then they're going, all right, is that something that's going to trigger my portfolio to drop? What does that mean?
Brian: Yes, it's a good question. And it comes back to, the way I'd address it is twofold. One is for every member, the ideal investment portfolio is different. Every member needs to look at their investment strategy and say, well, is this right for me in my phase of life, my appetite for risk, my long-term financial goals.
Anne: And if my income needs...
Brian: Needs, my lifestyle needs, et cetera. And if, if the, if you're actually genuinely worried that a fall in equity markets could completely ruin your retirement, that may be a signal that you're actually, it may actually be a signal that maybe you're taking too much risk for your phase of life. How do you actually resolve these questions? Ideally you get on the phone to Australian Retirement Trust, and you talk to one of our advisers who can help you actually talk through these issues and talk through...
Anne: Or if you have your own adviser talk to them.
Brian: Or if you have your own adviser, get on the phone and talk to them. This is what they're designed to do.
Anne: I want to call out too that really it is important to actually speak to a qualified financial adviser. There's lots of stuff happening on social media and so forth and barbecues and all of that chat.
Brian: I just think that getting professional, qualified financial advice is still a much, much better way to go than going to Dr Google or whatever or the financial equivalent of Dr Google. Getting advice to make sure your investment strategy you have is right for you. But also, I suppose the other thing I would say is that if I look at the state of the world and you look at the volatility out there, there's an old adage that share markets climb a wall of worry, right? And over the past couple of years, I think it's fair to say that the performance of share markets has surprised everybody. I think that if I were, we were sitting here sort of about 2 years ago with inflation still very high, interest rates going up, and I think the general perception amongst economists was, you know what, to bring inflation down, there's probably going to be a recession and that's probably going to be really bad for equity markets. That didn't really happen. Now that doesn't mean that you're not going to get more volatility. Volatility is an inevitable part of being an investor. Markets are inherently uncertain, volatile places. But the reward for putting up for this volatility is a higher long-term return.
Anne: So, let's go to actual performance. And I'm thrilled that we are number one, over 10 years for High Growth option, high growth is growthy then takes into account, you are taking more risk, you're exposed to assets that are more volatile. But members would be thinking about, well, that's 10 years. What does the next year hold and is it the same horizon -- what is, what is the outlook? I know, I know you don't do the genie sort of...
Brian: I know this is where I say, this is where I say, ‘If I knew where the stock market was going to be on 30 June, I wouldn't be here. I'd be in my farmhouse drinking my own body weight, exactly...
We're in for more volatility and I know that, I know, I'm an economist by trade.
Anne: Yes, you said that. Come on, throw a girl a bone. .
Brian: But look, we are in for more volatility. I think the best way I can answer the question, which you're not going to be happy with, because I'm basically going to say the next decade is going to look decidedly different to the last decade. The last decade was an environment where a rising tide lifted all boats. Share markets did well. Even though there was a pandemic, there was a whole range of crises, and mini crises all of the way, including a pandemic. But...
Anne: So why do you say that?
Brian: Because, over time, I think we're going into a world where the world will be a more volatile place. Geopolitics, trade disruptions, this is all volatility. It means that the global economy, it means inflation is probably going to be a bit higher than we've been used to. Interest rates may be a bit higher than we've been used to. The next decade I think is going to be...
Anne: So, the settings are just very sensitive.
Brian: They're very sensitive. But one thing I would say though is if you ask, well, over the last decade I was rewarded for taking risk. But over the next decade, am I still going to be rewarded for taking risk? Yes, the world has not changed that much. If I'm prepared to take risk, if I'm prepared to accept market volatility, the reward for me accepting that volatility is that I'm probably going to get a better long-term return by doing that. Doesn't mean that everyone should pile all of the money into share markets. But it just means that despite the fact that the world is an uncertain and volatile place, we're not in the business of hiding money under the bed. We're in the business of taking and managing risk on behalf of...
Anne: In a very thoughtful, deliberate, well-researched way...
Brian: And well diversified way. So, your best defence against not knowing how the world is going to pan out is to be very well diversified across asset classes, across countries, industries, regions, et cetera.
Anne: Brian, it might be useful for our listeners and viewers just to remind them that the concept of the investment objectives like what's on the tin. So, when you're thinking about what you need to generate in terms of return and the CPI component, do you want to remind our listeners because we haven't spoken about that for a while?
Brian: That's good because when you pick up the PDSs and read them, you're probably doing well because most people don't read it. That's a good idea. Please read the PDSs because in there we put a real return objective. We basically say, look over the next decade this is what we're aiming to achieve. This is a return that we think is achievable and realistic over the next decade. So, to give you an example, after fees 1, after tax and after inflation.
The investment objective is after investment fees and costs, transaction costs, and investment taxes.
So, it's the real return, the real or after inflation, after tax, after-fee return that determines what sort of retirement you're going to have. Now, for example, for a balanced option, we think that's about 3.5% above inflation. That is significantly lower than the return we've seen in the past decade. It's still quite a decent return, but I just think people need to accept that the next decade I would much rather plan for a lower return. And you know what, investing is like life in general, I'd much rather be pleasantly surprised and bitterly disappointed. So, let's have a realistic assessment of what sort of returns are achievable and sustainable over time. For a balanced option that is probably 3.5% above inflation, that's after fees and tax. And if we do better than that, great. But I think that's what people should be focused on. And anyone promising you or saying to you, you know what, we can do much, much better than that without taking any ridiculous risks, that person is either a fool or a charlatan or both, run a mile.
Anne: And you're taking a lot of risk as a consequence with your very precious money.
Brian: Absolutely. There was no free lunch. Right. So, you get rewarded for risk. Anyone implying that you can get really amazing returns without taking risk, that should ring alarm bells for everybody.
Anne: Okay, so headline for 2025 and the economy and investing at large. Okay, you're going to write the headline on the newspaper?
Brian: I'm not sure about the headline on the newspaper, but I think economic growth continues. The economy continues to chug along. Yes, it's a volatile, uncertain world, but volatility is inevitable, and it provides opportunity. And stay focused on the longer term. Recognise that super is the longest-term investment any of us are really ever going to have. And if you are worried about what's going on, if you're worried about whether your investment strategy is right for you, please get on the phone and have a chat to us. Have a chat to your financial adviser, have a chat to one of our advisers if you need to, because that's what they're there for.
Anne: You are bang on. And you can also play around at our website. There's some great tools and calculators and we have a big catalogue of Super Insider episodes with some of our investment team. And also thinking about what is your number in retirement? Because that also is a really... everyone's number is different. So, thank you, Brian. Good to have you.
Brian: You're most welcome. Wonderful to be back.
Anne: It's great to have you back. To our listeners and viewers, thank you for joining us on Super Insider. Tell your family and friends and subscribe to where you consume your podcasts, and we'll catch you again very soon.
This transcript has been edited for length and clarity.
