Episode 7: Investment market update May 2023

9 May 2023

With international markets still uncertain, it’s never been more important to stay informed and take control of your financial wellbeing.

Join Australian Retirement Trust’s Chief Economist, Brian Parker, and Head of Advice and Guidance, Anne Fuchs, as they examine the latest market developments, including interest rates, the federal budget and what it all means for your superannuation investment.

Hello and welcome to Super Insider Australian Retirement Trust’s podcast series covering investments, the economy, and strategies to maximise your retirement savings. And like the title says, we have some real Super Insiders here on the program, so you can be really in the know like them. My name is Anne Fuchs. I'm head of Advice and Guidance at Australian Retirement Trust, and I'm so proud and passionate about my role. The team and I, we help our members, guide, and advise them on the best possible decisions for them and their retirement savings. It's just such a special job, when you see somebody, a member, realising for the first time they can afford to retire. It's really, really cool. Today we're on Turrbal and Yuggera country, and so I'd like to begin and just pay respects to Elders past, present, and emerging. Now, drum roll on Super Insider - the ultimate Super Insider is the Chief Economist at Australian Retirement Trust, my partner in crime, Brian Parker.

Hello, how are you?

Hello, Anne. Good to be with you.

Are you good? It's nice to see you. I don't know why I'm doing this silly voice.

I have no idea either. I will stop it.

So, we are talking, as we always do, the economy, market volatility and maybe a cool investment story if we have time. Before we do that, the general advice warning, over to you, sir.

Oh yes, absolutely, yes. Before we jump in, I need to let everyone know that what we're going to be talking about today is just general information only. Any advice doesn't take into account your personal situation. You should consider your circumstances and think about getting personal advice before acting on anything we talk about today. You can also get a copy of our Product Disclosure Statement from our website or by calling us on 13 11 84 if you have a Super Savings account or if you have a QSuper account, call us on 1300 360 750.

Yay you. Yay you.

Thank you.

Last time we sat down, Brian, which feels like 100 years ago or maybe not, we were talking interest rates, and I think we should probably start off where we were, about interest rates and what's happened over the last quarter and how have we seen this play out with investment performance.

Yes, look, I think the world's major central banks have continued to ratchet up interest rates and if you look around the world, we've seen a very, very aggressive tightening in monetary policy, obviously from the US Federal Reserve, our own Reserve Bank of Australia as well. And so, interest rates have gone up quite some way from what were extraordinarily low levels a year or so ago. And I think we can safely say that there's probably more to come certainly from the US Federal Reserve. The RBA have sort of paused with their last meeting, but in the minutes of their last meeting they also said that they're still pretty keen to actually raise rates a bit further. We still think there is another interest rate increase out there, maybe two, but certainly another one.

It's interesting. I heard some commentary around raising interest rates as a blunt instrument and the impact it will have on our most vulnerable in society. And it was just, I thought, a very powerful kind of phrase, a blunt instrument. What are your reflections on --

Yes, oh look, absolutely. It's a phrase that's often used that really the central bank under normal circumstances only has one tool at its disposal, and that is it's setting of official interest rates. And that flows through into borrowing and lending rates across the whole economy over time. And certainly, we are getting to the stage where - and the most obvious people who are affected are those people with a mortgage. So, we're getting to the stage where the percentage of household income going on servicing a mortgage is getting up to sort of previous highs. It's getting up to levels where people start to say, 'I need to pull my head in a bit. I need to rein in my spending.' We're not quite there yet, but I do think over the course of this year we're going to get evidence that consumers are going to become more cautious; that consumers are going to sort of tighten their belts somewhat in response to these higher interest rates.

How does this then feed into the Federal Budget? Now, viewers, listeners of Super Insider - we are recording this before the Budget, so we don't have - Brian just refuses to bring a crystal ball. I don't know why, sir, you're so difficult. Bring that crystal ball.

I deliberately said I had to be difficult, is what I do. So, really, the good news for people listening is that you know more about the Budget as you listen to this than I do at this point.

And if you say something, you'll know whether Brian is wise or not around his sort of commentary around the Budget potentially.

Well, I think the interesting thing about the Budget is that this is going to be a very, very challenging Budget to put together. And we have no particular insight at this stage as to what the Treasurer is going to announce in May. But I think it is going to be a very challenging Budget to put together. On the one hand, you'd like to see the government do something to address the sort of cost-of-living pressures out there. But on the other hand, if the government injects too much more money into the economy at this point, in a way it makes the Reserve Bank's task that much more difficult. The last thing you want to do is overstimulate the economy at a time when inflation remains kind of problematic. So, it is going to be a really, really challenging Budget to put together.

A delicate balance indeed. And the flow-on impact to super is? Finish the sentence ...

Not much.

Okay.

I often get asked about this, you know, 'Does the Budget really make any difference to the way my super is invested?' And the short answer is, no. It's very, very rare that anything you hear on Budget night would actually change investment decisions in any meaningful way. Superannuation is the longest-term investment any of us are ever going to have. And so, you know, when we're thinking about asset allocation, when we're thinking about how we invest members' money, the Budget doesn't make a great deal of difference. We're far more interested in the longer-term prospects for things like growth and inflation and interest rates. And that's not really impacted by anything we hear in any particular Budget.

And certainly, anecdotally I can say in terms of the calls coming in from our members, what's on their mind would be, say, things like cost of living. And I know there are some members that are feeling the stress and experiencing financial hardship, but equally, too, there are members still incredibly worried about the geopolitical environment. And certainly, we have passed Anzac Day, and there've been some announcements around Defence and what have you from the Prime Minister. So, I guess for our listeners and viewers, any particular inside observations as an economist Super Insider around where this might be tracking? Has it changed much since we caught up last?

I think the best way to sum it up is the geopolitical environment remains really problematic and I don't think it's going to get a hell of a lot better anytime soon. You know, even if peace were to break out in Ukraine tomorrow, there's still a whole range of geopolitical risks that could potentially upset the economy and financial markets. And really, we can't design investment portfolios based on our ability or anybody's ability to actually forecast how this environment's going to play out. The best thing we can do is to make sure we've got portfolios that are very, very well diversified, that are invested not just here in Australia but across the globe, so that, you know, if there is a particular economy or industry that is problematic because of geopolitical reasons, that you're not solely dependent on that, that you're invested elsewhere.

Okay, so I know that you have an investment story, and this actually, if you think about the location of this investment story, it's quite interesting in the context of NATO and the geopolitical landscape that they're in. So, I'm on train to you, Brian Parker - it's a really great investment story for our listeners to bring to life what Brian's talking about.

Yes, look, I think when you're a fund of more than $230 billion, it's important that you are able to access the broadest possible opportunity set for members that you can. So, do we invest large amounts of money here in Australia? Obviously, yes, we do, but we want to make sure that we've got access to the best and broadest global opportunity set to invest in, not just in traditional asset classes, such as shares and in bonds but also in the key unlisted asset classes. So, infrastructure, private equity, in other words, businesses that are not listed on the stock market, but also property investments. And this is one that's come up in the last little while. It's a company called Bo Coliving, it's in Norway. Now, because the Norwegian government provides very, very generous support to university students in Norway, and because the support from the government is so generous, so you effectively get paid an allowance to go to university; you don't get charged tuition fees. And it means that university students in Norway can actually afford to actually spend a reasonable amount of money on student accommodation. So, Bo Coliving is basically a business, a platform, if you will. It basically owns over 50 different residential sites across Norway, over 1,400 beds. And it's student accommodation. It's accommodation for students but also young professionals working at universities. It's the sort of investment that I don't think any ... It's hard to argue that an investment is completely recession proof, but what we've seen is that this sort of asset has really held its own and continued to generate --

[Anne] It's almost been underwritten by the government.

Effectively it is. Effectively it is. It just means that, even during recessionary environments, students are continuing to pay their rent. This is the kind of asset which we think will help deliver the sort of long-term real returns that our members need. And I stress 'real returns' here because, as you mentioned, what's the best way that we can contribute to people's ability to deal with cost-of-living pressures in retirement? The answer is to ensure that we're delivering the kind of real or after inflation returns that our members need.

I do think Bo Coliving is a name that kind of reminds me of something in Florida where the Golden Girls would've lived or Jerry Seinfeld's parents. It's just got that - but it's not Florida.

But it's not, it's student accommodation in Norway. Very, very nice solid return prospects, likely to deliver very nice reliable return prospects. And there's no Golden Girls anywhere near there.

No, you're just sitting next to one right now.

[Brian] Oh. Be careful. There's a bit of a breeze outside; the tickets on yourself may blow off, you know.

Now we are heading into the end of financial year, what's your view again around the sort of volatility? How are you feeling around the rollercoaster ride that some of our members feel that investment markets are? Should they be tightening their seatbelts?

Oh, the short answer is, no. In fact, one of the interesting things that's happened in the last little while is that, despite the sort of litany of things that we could worry about - we worry about inflation, interest rates, the geopolitical environment, all of which remains problematic. Certainly 2022 was a very challenging year for financial markets and a challenging year for investment returns. But as we went into 2023, just when you think things couldn't get any worse, well, they didn't, they actually got better. So, the March quarter, you've actually seen quite solid investment returns. You've seen a bit of a recovery in share markets, you've seen a bit more stability in long-term interest rates, which really drives the returns from fixed income portfolios. So, we've actually started the year on a fairly robust note. Now, does that mean we're completely out of the woods? I don't think we can say that. You know, it's still a very, very challenging environment. You're still likely to see financial market volatility continuing. But I think the March quarter, you know, result is a good lesson in the fact that, you know, just when you think things couldn't get any worse, they don't stay that way. Every crisis comes to an end, every downturn comes to an end. I think the way I would couch it is this, is let's remember that super is a long-term investment. It's the longest-term investment any of us are ever going to have. Over the longer term we will continue to see bouts of share market volatility. But over the longer term, the reward you get for accepting that volatility or tolerating that volatility is a higher long-term return. Let's keep our eyes on the prize, and the prize is those long-term real returns.

And for our listeners or viewers, we also have a Super Insider podcast episode around investment options. Brian often talks about 'sleep at night' can never be overrated? Correct? Yes.

Yes. And so, therefore, if you aren't sleeping at night because of what we're talking about, listening to that podcast series with Liz Kumaru, if you want to go a little bit deeper on that particular subject, would be something I highly recommend.

Absolutely, because it's really, really important - it's important that the investment option you have is the right one for you; that it actually fits your stage of life, your appetite for risk, your financial goals. And, you know, we offer a range of investment options designed to meet the needs of a range of members, all at a different stage of life. So, I think there's one thing I'd like to finish on. I'd encourage our members, take an interest in your super, take an interest in how your money is invested, make sure the investment option you have is the right one for you. And to help you do that, get some financial advice. If you have a financial advisor, call them, and have a chat. If you don't have a financial advisor, give us a call. We're happy to help or at least Anne's team is very happy to help.

Indeed. All right. Well, thank you to our viewers. You can download us on Apple, Apple Podcasts or on Spotify. We're on Spotify.

Wow! I never thought I'd be on Spotify.

With Snoop Dogg and Madonna. Who would've thunk it? And us. And us. There you go. Thank you very much and we'll look forward to you joining us on the next episode of Super Insider.

This podcast is brought to you by Australian Retirement Trust Pty Ltd (ABN 88 010 720 840, AFSL No. 228975) the trustee for Australian Retirement Trust (ABN 60 905 115 063) (the Fund).