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A mixed Australian investment environment (and annuities)

Broker reports editor |  01 November 2013  | 

 AuInvestmentsCitigroup has released a report on the Australian investment environment that is of interest to SMSF investors. They looked at the future of super, including a range of demographic challenges:

"Although the mandatory superannuation contribution rate is set to rise from 9% to 12%, the panel deliberated whether the debate should shift to considering even higher rates (across mandatory and voluntary contributions). Comparing to the US experience, Peter Orszag highlighted this is partly being addressed in the US via 401k plans which feature automatic escalation of contribution rates over time.
"Concerns around the withdrawal phase are also emerging. With only a minority annuitising their superannuation balances on retirement, in both Australia and the US, the panel agreed that longevity risk will need to be addressed, potentially via a deferred annuity. Deferred annuities may be one tool in the portfolio (rather than seeing annuities as a binary tool, annuitising all or nothing of a portfolio). "Purchased at retirement for an income stream commencing, say, 20 years later would enable easier financial planning. Geoff Lloyd pointed to “life stage advice” as part of the solution across the accumulation and withdrawal phases, with the new limited advice model allowing for broader access and potentially targeted advice."

Of course Citigroup would be front and centre offering such financial products. Also of interest was Citi's take on the Australian investment environment. Three sectors were considered. Retailing:


"In the retail industry discussion, there was a general sense that conditions could get a little better, but also an acceptance that participants had to evolve with the changing landscape. In the grocery sector, in response to food price deflation in recent times, attributed to the high AUD and the competition among the supermarkets, the grocery suppliers had focused on efficiency and cost saving, along with product development. Though the deflationary pressures were expected to abate, customers remained price conscious, leaving little option other than to manage costs and improve products. In the discretionary retailing space, with the growth in online sales and the arrival of more global brands in Australia, particularly in clothing, differentiating the offering was considered critical, e.g. with unique designs, refreshing formats, and creating a shopping “experience”. Tired formats were thought vulnerable, store locations with the wrong demographics, and unfocussed offerings, with the observation that some of the world’s successful department stores had specialized strengths and limited stores."

Property, which is deemed to be recovering:

"In the property industry discussion, it was agreed the residential market had clearly picked up, but that it was uneven across cities, and that the strength in inner Sydney was not representative of the national picture. It was contended that the overall pick up had been relatively moderate compared to earlier recoveries after falls in interest rates, but it was also noted that house prices and household debt were still relatively high, which could be containing the upswing. Two significant sources of demand were felt to be self-managed super funds and Asian investors, who were driving the strength in investor activity. Generally it was expected that the recovery would extend, likely gathering momentum in other capital cities. Interestingly, although building conditions are also a function of non-residential activity, constructions materials producers also acknowledged reasonable demand, with cement and plasterboard sales better than expected although, again, the picture was uneven across cities and regions."

And mining, which is considered to be mixed:

"The mining company presentations highlighted the varied conditions across commodities, with iron-ore producers outlining their rapid development plans in the context of resilient iron-ore prices, while the gold producers offered their approaches to dealing with the low gold price environment, from cost cutting to growing production. The mining services companies indicated some easing in pressure from resource companies to cut costs and scope of work in recent months, pointing to some stabilization in the contracting sector, but the companies continued to focus on reducing their own cost base and lifting efficiency."

All three sectors have problems. It is an indication that the Australian investment environment is at best mixed, and with the $A high there is perhaps reason to look overseas. Interestingly, the head of strategy at Citi, Matt King, thinks central banks are creating an asset bublle, as the AFR reports:

“What the global central banks seem to be doing is saying, ‘We are struggling to generate growth; I know, let’s create a new house price bubble – that worked last time around, maybe it will this time around too’.”

King believes that central banks and governments are using stimulus measures and low interest rates because they are popular with voters, rather than alternative measures such as raising taxes, which in the long run would ensure more sustainable growth.

“The central banks feel that their only choice is to keep plugging away. They have only got one lever and they intend to keep on pulling it, even if that ends badly.” His comments come in a week when the RBA’s governor Glenn Stevens suggested that the property market was not overheating but called on lenders and borrowers to take due care, given the attractiveness of record-low borrowing costs."

King then gives advice that would be good for all SMSF investors to take note of:

“Don’t do what the central banks want. Don’t reach for yield with the whole of your portfolio and buy something that turns out much more risky that you thought it was later.”