Macro

Recently, Wilson Asset Management asked 50,000 shareholders and subscribers, “what keeps you up at night?” With their readership and shareholder base consisting primarily of SMSFs and self-funded retirees, this offered a unique opportunity for insight into the minds of these investors and identify their fears.

While most of the concerns were centered around big issues in investment markets likes low rates and long bull markets, the one that stood out to me was Concern #5 - Changes to the Superannuation system. Governments on both sides of politics have repeatedly tinkered with the Super System, creating a level of uncertainty that's bad for retirees, pre-retirees, and the economy more broadly. People are less likely to spend money if they're uncertain if they've got enough to last them through retirement.

Today they put their portfolio managers to work on answers some of these big questions. First, they each share their own personal biggest concerns. Then they address each of the top five most common concerns among respondents. Features Catriona Burns, Matthew Haupt, Oscar Oberg, and Geoff Wilson AO.

The full recording of the event is available here.

What keeps the portfolio managers up at night?

Catriona Burns: That the management teams that we entrust with investors’ capital are good stewards of that capital.

Matthew Haupt: Performing well for shareholders. The inequality of central bank interventions. The benefits are flowing to asset owners, while workers have stagnated.

Oscar Oberg: Valuations, and the “silly things” that are occurring at the moment in small and micro cap stocks. At the last presentation, the most expensive stocks were equally as expensive as during the tech bubble. Now they’re 20% higher.

Geoff Wilson: We’re at the end of one of the longest bull markets ever. How does that play out?

Concern #1 – Fear of an Australia recession

Matthew Haupt: The RBA have cut rates three times, but he doesn’t see Australia falling into recession unless the global economy does. He doesn’t feel there’s enough going wrong internally in Australia for the country to go into recession. Australia is an open, export-driven economy, and our biggest trade partners are tied to manufacturing. His base case is a recovery in global conditions, with Australia to follow, but if the world economy turns down, Australia won’t be immune this time. When monetary conditions begin to tighten, then it will be time to start worrying about the economy.

Oscar Oberg: Conditions are mixed, but there’s a lot of fear in the economy. Employment is still strong, house prices are recovering. If the economy does deteriorate, we have the tools we need.

Concern #2 – Geopolitics

Catriona Burns: Geopolitical noise has been high over the last 18 months, e.g. Brexit and Trade Wars. This does have an effect on confidence. A reduction in this noise would be very positive for management teams.

Regarding the trade war, China is playing a 20-year game, but the US is basing their game on election cycles. We may see a ‘phase 1’ deal in 2019, but China will not make major concessions. Issues around IP theft and State Owned Enterprises are not going away.

Concern #3 – Record low interest rates

Matthew Haupt: Previously, the expectation was that the RBA would not cut rates below current levels as they were concerned about the effectiveness of monetary policy at these levels.

On Tuesday, governor Lowe discussed the possibility of cutting rates to 0.25%, half a percent lower than current levels.

Rates will be lower for longer. Even when the economy does pick up, central banks will be hesitant to raise rates quickly. Due to the levels of debt, they’ll be limited as to how much they can raise rates.

Concern #4 – When will the longest ever US bull market finish?

Matthew Haupt: The economic data isn’t matching up with the stock market. We need the economy to catch up before the market can move higher. They expect this to happen, but it’s not guaranteed.

“The bull market will live on as long as there’s liquidity, and low rates… When liquidity tightens, that’s when bull markets end.”

Oscar Oberg: Despite the high prices in some parts of the markets, there are large parts of the market – up to 40% of the small caps in his universe – that are trading at big discounts.

“We’re not seeing the same excesses as before the GFC.”

He thinks an end to the bull market is around two years away.

Catriona Burns: One investment bank recently claimed to have the ‘ultimate crystal ball’, and is forecasting that March 3rd next year, at an S&P level of 3,333, the market will top. She doesn’t have quite the same level of confidence.

The key thing to watch for is inflation, which we’re not seeing currently. Central banks will need to see inflation before they move, and they’re likely to let it run for some time before they do move. Given last year’s events, they’ll be very hesitant to cut rates.

Concern #5 – Changes to the superannuation system

Changing to our super and retirement system have been a feature of almost every election campaign and budget over the last 20 or so years. It might surprise you to learn then, that there are relatively fewer changes proposed or being enacted right now compared to other times over the last few decades. However, there are still two unlegislated proposals being considered that could have an impact on SMSFs and retirees.

Firstly, the proposed new retirement income framework, which would require super funds to consider the income needs of members in retirement. This could also affect Pension means test rules.

Secondly, changes to SMSF regulations could allow up to six trustees (currently a maximum of four), while SMSFs with “a history of good record-keeping and compliance” would be able to reduce their audits to once every three years (currently every year).

While neither of these proposal looks like to become law in the immediate future, the ongoing uncertainty is unlikely to be positive for the confidence of those consumers who rely on an Allocated Pension, a government Aged Pension, or a combination of both for income.

Geoff Wilson: The population is ageing, and someone has to pay taxes to support the population. The tax burden must be equitable, and can’t just fall on the younger generation. Geoff also acknowledges that someone like Dick Smith shouldn’t receive a $500,000 cheque from the government for franking credit refunds.

What Geoff, and WAM as an organisation, objected to during last year’s election cycle, was the inequality of Labor’s proposal, and the illogical way the proposal was setup. He made the point that under Labor’s proposal, five different retirees with the same amount of assets, but allocated to different structures, would have different outcomes.

“We were trying to be bipartisan. It was about the inequality of it all.”

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