SMSFundamentals | Oct 23 2013
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This article was first published for subscribers on October 17. It has now been opened for general readership.
By Greg Peel
The latest Australian Bureau of Statistics Financial Accounts provide a picture of investor activity in the June quarter. The June quarter provided healthy stock market returns, undermined only towards the death by the Fed tapering debate. The September quarter has proved resiliently positive despite more tapering-related volatility and the arrival of the US government shutdown scare late in the month of September.
The ABS June quarter stats show further evidence that super funds are chanelling less money into cash and instead buying domestic equities and fixed income securities. Deutsche Bank points out Australian super funds have every incentive to take on more risk in their portfolios for several reasons.
Firstly, while having already begun shifting out of the safety of cash and into higher risk, higher return investments as the GFC hangover has waned, super funds still hold an average 17% of their portfolios in cash deposits compared with an historical average of 11%. Secondly, super fund inflows remain very strong at an average $30bn per quarter over the past year, and that money has to be invested somewhere. Thirdly, foreign investors have been significant buyers of Australian equities over the past year, providing added strength to potential stock market returns and incentive not to dawdle.
Outside of super funds, households are also starting to lose interest in term deposits, the stats suggest, which Deutsche assumes reflects lower interest rates. Interest in financial asset investment has subsequently increased, but direct share investment remains unpopular. Australian households have jumped into property investment but continue to sell equities as individuals. Instead they are looking to super funds as the best way to invest for retirement outside of bricks and mortar, given the healthy level of discretionary, rather than compulsory, superannuation contributions. This equates to an indirect increase in stock market investment, Deutsche Bank notes.
Deutsche notes household deposit levels also remain high compared to history, suggesting scope for a greater share of savings to make its way into the stock market.
On a sector level, Deutsche Bank warns on the conundrum that is Australian bank stocks. The analyst jury is still out on whether Australian bank shares, which are overpriced compared to historical multiples, deserve to be overpriced in today’s low interest rate, high risk world. Foreign investors have decided they don’t, and have affected a heavy Underweight stance on the sector. Domestic institutions, on the other hand, are substantially Overweight compared to historic portfolio allocations. If a growing risk appetite finally results in other sectors being preferred to what typically should be a more defensive banking sector, bank share prices will be vulnerable, Deutsche warns.
MLC has found evidence supporting the ABS stats from the fund manager’s inaugural Australian Wealth Sentiment Survey.
Presently, Australians remain very cautious on the outlook for the economic environment, the survey finds, with the focus still squarely on investment in bank deposits and a reduction in household debt. However looking forward, three-month intentions suggest a reduction in investor cash deposits. The question then becomes: where to reinvest the cash?
Paying off debt remains the top priority, the MLC survey finds. Thereafter, investment property and superannuation contributions rank evenly. The losers in the preferred portfolio stakes are direct share investment, fixed income investment, and investment in diversified balanced funds (non-super).
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The MLC findings corroborate the ABS stats. Macro and micro economic uncertainty has kept average Australians away from volatile direct financial investment markets and in the safety of cash, but with cash returns declining the preference is for traditional bricks and mortar (no doubt this market is feeding on itself given the level of media attention and regulatory scrutiny) and superannuation contributions – both longer term investment choices.
It is unsurprising longer term considerations are front of mind for Australian investors given Australians are very concerned about saving for their retirement, the MLC survey finds.
“With people living longer, having extended retirements and being much more active in their retirement, the harsh reality is most people won’t have enough savings to fund their retirement,” NAB Wealth Group Executive and MLC CEO Andrew Hagger says. “For women this especially rings true, as women retire with 40 per cent less super than men because they take time out for children, are more likely to work part time and typically earn less than men.”
National Bank economists also find Australians are concerned about their ability to fund retirement, along with the current cost of living, but that Australians also measure their absolute quality of life in broader terms.
NAB’s quarterly Australian Wellbeing Index shows national wellbeing deteriorated in the past three months, falling to 6.4 out of 10 in the September quarter from 6.6 in the June quarter. Consumer anxiety rose slightly to 6.1.
Australians remain happy and satisfied with their lot overall, with 57.3% of those surveyed rating their happiness as High or Very High. However they are concerned about being able to maintain their lifestyles in financial terms in the future. The cost of living is the predominant concern, with 35.5% suggesting High anxiety on this front, up from 34.1% in the June quarter. The ability to fund retirement comes in second, with 27% expressing High concern, up from 22.6%. Job security is also creeping in as an issue, with 35.5% of respondents suggesting Medium or High concern.
Job security appears to be an issue in particular for 18-29 year old males, as one might expect. The fading mining boom is also evident in the state breakdown of NAB’s survey, with those in WA suggesting the highest level of anxiety and lowest level of wellbeing. The election has also played its part, as has been assumed, with 30.9% of respondents expressing anxiety over government policy, down from 36.0%.
If you want to be among those least anxious with the greatest feeling of wellbeing in the country, the NAB survey implies you should be retired, live in the bush, or at least a rural town, live with your partner and have no children at home. Any one of those four elements will boost your happiness.
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