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How do you plan for an uncertain future?

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By MLC

The problem with the good times is that they make it easy to forget the hard times. The past decade, and indeed the past four months, have seen the major US share market indexes hit all-time highs despite the uncertainty surrounding trade disputes, potential rate hikes and a slowing global economy.

This has resulted in many investors expecting above-average returns, in-line with higher-risk portfolios. While there’s certainly been volatility, so much optimism makes it easy to believe the good times will continue and forget that the future is uncertain.

But is basing your investment decisions on ‘hope’, in which you hope markets will continue to deliver the returns you need, the right approach when you have so much at stake? Especially in those years closer to retirement when big market corrections can do substantial damage to your future lifestyle.

A risk-based approach makes more sense

There’s no point trying to predict the future, but you can increase your understanding of the risks of your investment decisions by considering as many distinct potential scenarios as possible. By taking a risk-based, rather than a hope-based, investment approach we have a clear understanding that the future is not predetermined. We can better understand the potential futures that could arise. All options and scenarios are on the table, it’s not simply influenced by what occurred in the past.

We also uncover how, in the past, we have labelled assets into growth and defensive’ buckets but these no longer reflect their risks. Bonds, which have traditionally been known as defensive assets, will not perform that role in certain scenarios.

We aim to capture enough broad scenarios to assess a long list of impacts on GDP, inflation, monetary policy and innovation. We also analyse a more tailored set of scenarios that are more specific to the time and issues at hand. They’re updated as asset price change, and together they function as a comprehensive framework of the potential sources of future risk. This helps us work out the mix of assets our portfolios should be invested in.

So what are we wary of today?

US rate hikes

Interest rates in the US have been low for a long time and buoyant share markets are increasingly reliant on it staying that way.

The search for yield has led investors to accept greater and greater levels of risk, but if interest rates are pushed higher the returns on cash will improve and returns on risky assets will pull back.

Global economic slowdown

Corporate borrowing is on the rise and that’s highly susceptible to slowing growth.

Much of the rising debt has been directed to industries that are now exhibiting excess capacity which can lead to lower prices and lower returns on investment. If too many loans go bad it becomes a problem for the banking sector, and other holders of the debt in the shadow banking system, which has serious implications on the health of the overall economy. While policy makers wish to avoid a slowdown, doing so through more debt that is poorly deployed will inevitably end badly.

Similarly trade negotiations with the US are ongoing and any unexpected dislocations there could have far-reaching impacts for China which is highly reliant on exports.

Brexit

There’s certainly the potential for a significant negative impact on trade between the UK and Europe if the exit is disorderly. But, there’s also a chance the division won’t happen at all. Either way, the potential downside can’t be ignored.

Conclusion

No one really knows what will happen tomorrow, next week, next year or into the future. But by identifying the risks we could potentially face, we can at least prepare our investments so that our investors’ future lifestyle isn’t depending on the hope that the ‘share markets gods’ remain kind to us.

Important information

This article is provided by MLC Investments Limited (ABN 30 002 641 661, AFSL 230705) (“MLC”), a member of the group of companies comprised National Australia Bank Limited (ABN 12 004 044 937, AFSL 230686), its related companies, associated entities and any officer, employee, agent, adviser or contractor (“NAB Group”). An investment with MLC does not represent a deposit or liability of, and is not guaranteed by, NAB or any other member of the NAB Group.

The information in this article is general information only and is not financial product advice. It is not intended to be an offer of any products or services or recommendation to invest in specific or class of products.

Opinions constitute the judgement of MLC at the time of preparation and are subject to change. MLC believes that the information contained in this article is correct and that any estimates, opinions, conclusions or recommendations are reasonably held or made at the time of compilation. However, neither MLC nor any other member of the NAB Group, nor their employees or directors give any warranty as to their accuracy or reliability (which may change without notice) or other information contained in this article.

SOURCE: https://www.mlc.com.au/personal/blog/2019/05/how_do_you_plan_for

Australian house prices getting closer to the bottom, but don’t expect a return to boom time conditions

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Key points

  • The combination of the removal of the threat to property tax concessions, earlier interest rate cuts, financial help for first home buyers and APRA relaxing its 7% interest rate test points to house prices bottoming earlier and higher than we have been expecting.
  • As a result, we now expect capital city average house prices to have a top to bottom fall of 12% (of which they have already done 10%) rather than 15% and to bottom later this year.
  • However, given still high house prices and poor affordability, still very high debt levels, tighter lending standards and rising unemployment a quick return to boom time conditions is most unlikely.

Introduction

The negatives weighing on Australian residential property prices remain significant but the past few weeks have seen a number of developments that suggest that prices could bottom earlier and higher than we have been expecting. The election outcome removed a key threat, but several other factors also help. This note looks at the key issues.

The biggest home price fall in the last 40 years

According to CoreLogic data, capital city dwelling prices are down 9.7% from their September 2017 high, which is their worst decline in the last 40 years. Of course, there is a huge range here with prices down from their top by 15% in Sydney, 11% in Melbourne, 28% in Darwin, 18% in Perth, 2% in Brisbane, less than 1% in Adelaide and at record highs in Canberra & Hobart.

Source: CoreLogic, AMP Capital
Source: CoreLogic, AMP Capital

Drags on house prices remain significant…

The decline in prices reflects a range of factors, most notably:

  • A “correction” to the huge surge in prices into 2017 in Sydney and Melbourne that left prices very overvalued relative to income, rents and their long-term trend and affordability very poor and household debt very high.
  • The end of the mining investment boom impacting prices in Perth and Darwin since their peak in 2014.
  • A tightening in lending standards that initially cracked down on lending to investors but since 2017 moved on to interest only loans and then a more fundamental focus around credit quality which made it harder to get loans.
  • A surge in the supply of units to record levels which has led to rising rental vacancy rates in Sydney.
  • An 80% collapse in foreign demand.
  • A big pool of interest only borrowers switching to principal and interest loans driving higher debt servicing costs.
  • Price falls feeding on themselves – just as the boom in prices was accentuated by a fear of missing out (FOMO), falling prices are driving falling price expectations & leading to reduced demand and FONGO (fear of not getting out).
  • Investors started to factor in some probability that Labor would win the election which would have meant that negative gearing would be restricted and the capital gains tax discount halved – with estimates that this could have knocked another 5-10% from property prices.

The negatives weighing on the housing market remain significant. In particular, credit conditions are still tight with housing finance still falling with a brief bounce in February giving rise to further falls in March and the start-up of Comprehensive Credit Reporting which will see banks crack down on borrowers with multiple undeclared loans. And the pipeline of units to hit the Sydney and Melbourne markets is still huge as reflected in a still high crane count.

Source: Rider, Levett, Bucknall Crane Index, AMP Capital
Source: Rider, Levett, Bucknall Crane Index, AMP Capital

Meanwhile, auction clearance rates in Sydney and Melbourne have risen from their December lows but this looks largely seasonal with clearances still weak at pre-boom levels just above 50% as are sales volumes. What’s more the number of capital cities seeing monthly price falls has gone from three out of eight a year ago to now seven out of eight. Given all these considerations we have been reluctant to read too much into the slowing in downwards momentum in monthly property price falls in recent months, particularly given that Perth and Darwin have seen several phases where price declines slowed then sped up again during their five-year slump.

And Australian housing still remains expensive. Real house prices have fallen from 27% above their long-term trend to 7% above now, but housing is still expensive compared to incomes and rents. Sydney home prices may have fallen 15% from their 2017 high but this was after a 75% gain since 2012 when wages rose just 14%. And household debt remains very high.

…but some positives are starting to creep in

However, while the drags remain significant several positives have become apparent over the last few weeks.

First, financial support for first home buyers is now on the way with the Government’s First Home Loan Deposit (underwriting) Scheme. On its own it’s not a game changer particularly given that it’s capped in terms of numbers, the borrowers will be taking on big mortgages, which will come with a higher risk of negative equity, borrowers will still have to meet the tougher credit standards of recent times and it won’t kick in until next year. That said, with the Federal budget looking even healthier and probably already in surplus thanks to the surging iron ore price, I suspect that the deposit scheme will morph into a far more attractive home buyer grant at some point.

Second, APRA is looking to relax the 7% mortgage rate serviceability buffer. This was inevitable given APRA’s move to focus on more fundamental credit standards and 7% is way out of whack with current interest rates. Again, on its own it’s not a game changer – it wasn’t the main driver of the property downturn and borrowers still have to meet tougher credit standards. And don’t forget that relaxation of the 10% cap on growth in investor loans and the 30% limit on interest only loans last year had little impact. But it may help at the margin.

Third, RBA Governor Lowe has all but confirmed that rate cuts are on the way with his comment that “at our meeting in two weeks’ time, we will consider the case for lower interest rates” after observing that it needs lower unemployment to get inflation back to target. We expect 0.25% rate cuts in June and August and that the bulk of these will be passed on to borrowers given the recent reduction in bank funding costs. This would be a bit earlier than the August and November rate cuts we were assuming back in January when we last reviewed our house price forecasts. House prices bottomed around three months after the first cuts in 2008 and 2011. It may take longer this time as debt is now much higher, rates are already very low and lending standards are tougher. But they will still help.

Finally, the threat of changes to negative gearing and CGT is gone with Labor’s defeat. So a big negative for property is gone. Given the difficulty in predicting the election our house price forecasts had allowed for a 50% probability (ie 50/50 Labor would win) of an 8% additional drag on prices in Sydney and Melbourne from this, ie 4%. In other cities it was a bit less. Now it’s zero and we need to remove this from our forecasts.

It’s also worth noting that we have not seen much evidence of panic selling or forced selling by the banks despite rising (but still low) levels of negative equity. Mortgage delinquency rates remain relatively low – even in Perth where prices have fallen 18% and unemployment has spiked.

Meanwhile, strong population growth of around 1.6% pa is still driving strong underlying demand for housing at a time when supply is likely to start slowing again next year (given falling building approvals). And vacancy rates while very high in Darwin and above trend and rising in Sydney are actually benign to low in most capital cities and have collapsed in Perth.

Source: REIA, AMP Capital
Source: REIA, AMP Capital

So taking all these things together – some of which are minor but are still positive – it’s likely that we are going to see house prices bottom out a bit earlier and higher than we had expected.

What about the risk of higher unemployment?

The main risk is that Australia slides into a downwards spiral as the housing downturn – maybe in concert with a global slump -triggers a surge in unemployment which triggers rising defaults and a further plunge in house prices ultimately causing 30% plus falls in national property prices. This is still a risk, but we remain of the view that it will be avoided.

The housing cycle downturn will lead to the loss of around 60,000 jobs on our estimates. But there are a number of other things that will keep growth going – albeit at a slower pace than the RBA and Government are assuming – but which should be enough to stop unemployment surging beyond 6% and feeding back to become a bigger threat to house prices. Infrastructure spending is strong, resources investment is close to the bottom, non-mining investment is looking healthier, tax cuts for low and middle income earners next quarter (whether paid upfront or backdated a few weeks later when passed by Parliament) will provide some help, fiscal stimulus is likely to be increased helped by the windfall from the surging iron ore price and rate cuts will provide some help fo households with a mortgage.

Yes, the trade war could spiral out of control – but this probably means more stimulus from China which provides an offset for global growth and explains why the iron ore price keeps rising.

The other big risk is that investors decide to exit in the face of low net rental yields & diminished capital growth expectations.

Revised house price forecasts

Our forecasts for national average prices have been for a price fall of 15% top to bottom (of which we have done 10% so far) and for Sydney and Melbourne it’s been for a price fall of 25% top to bottom (of which Sydney has already done 15% and Melbourne 11%) and for prices to bottom in 2020. Reflecting the considerations discussed above – notably the removal of the threat of changes to negative gearing and capital gains tax, imminent rate cuts, assistance for first home buyers and APRA’s relaxation of the 7% serviceability test – we are revising the estimate for Sydney home prices to a 19% top to bottom fall, Melbourne to 15% top to bottom (partly because it has been holding up much better likely reflecting stronger population growth) and the national average to 12% top to bottom with prices likely to bottom by year end.

However, given still poor affordability, still very high debt debt levels, tighter lending standards and rising unemployment a quick return to boom time conditions is most unlikely. More likely is a lengthy period of constrained range bound house prices after they bottom later this year (although I thought the same around 2011-12 – but things are different now!)

SOURCE: https://www.ampcapital.com/au/en/insights-hub/articles/2019/may/australian-house-prices-getting-closer-to-the-bottom

Aussies making a slow transition to retirement

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This article originally appeared in The Australian

Retirement used to be a clearly demarcated milestone in the life of working Australians. Cake and speeches on a Friday and on the next Monday you started your life as a retiree.

That’s not so simple any more. More Australians transition into retirement over a few years. Let’s explore the growing cohort of Australians who work past the age of 65.

A decade ago 10 per cent of all persons between 65 and 85 were part of the labour force. At the last census this number had increased to 15 per cent. A total of 417,000 workers older than 65 help to keep our economy going.

With old age the nature of work changes and part-time work becomes more common. Between the ages of 22 and 65 more than 50 per cent of workers are employed full-time (peak full-time work is age 29, with 75 per cent).

From age 52 the slow transition from full-time to part-time work starts. At 52 a solid 72 per cent work full-time, by age 65 this is down to 53 per cent. From the mid-70s the share of the remaining workers that works full-time stabilises at around 34 per cent.

As a general trend, workers reduce their workload every year as they grow older. The 80,000 workers aged 65 worked on average 33 hours every week. The remaining 1400 workers aged 85 put in 26 hours. No rest for the wicked.

So, in what industries are our un-retired retirees working in?

While retail and hospitality are typical industries for people’s first job, they aren’t common last jobs. The most dominant industries are health care and social assistance (58,000 workers over 65), agriculture (44,000), education (40,000) and professional services (37,000).

Agriculture deserves a special mention here. Only 2.6 per cent of all Aussies work in agriculture but 35 per cent of workers aged 85 are working in the field (no pun intended). Besides financial necessity or pure passion, we see yet another reason why elderly people might stay in employment — succession planning. Farm aggregations are common as the younger generations choose not to continue to run the family farm. As a result, the old farmers just hang in there and continue to manage their farms until it becomes physically impossible to do so. They might need the income, they might be passionate about farming, but mostly they simply can’t bear the thought of having to sell the farm to a large agribusiness.

Many of the 1500 farmers over the age of 85 would have probably been all too happy to hand over the farm if only their kids had shown some interest.

For the fortunate well-paid workers (often in knowledge industries) retirement increasingly turns into a slow transition. They gradually reduce their weekly working hours over several years. For them, working past retirement age is a lifestyle choice rather than a financial necessity.

Workers in this group are truly financially independent, likely to own their own home and have well-stocked super accounts. This growing class of lifestyle workers are excellent consumers as they are both cash and time rich. This group is of large interest to cruise companies and luxury travel agencies among other high-end service providers.

Another group of grey-haired workers are not that lucky. Their superannuation accounts haven’t been topped up enough. Their savings simply don’t allow for a comfortable retirement yet. At this end of the spectrum work simply is a financial necessity.

The preparation for retirement starts early, with picking your future profession. Once you are in the hamster wheel of work your financial planning efforts determine whether you will be free to choose your own destiny at age 65.

If you played your cards right (and lived in prosperous times and didn’t fall victim to negative external influences) you will be free to choose whether to prolong your career and become a lifestyle worker or not.

If you fear you might not be able to retire comfortably in the future, seeking financial help now might be the first step to get you on your journey for a comfortable retirement. You will want to enjoy a Friday of cake and speeches after all.

SOURCE: https://www.mlc.com.au/personal/blog/2019/05/aussies_making_a_slow_transition_to_retirement

Worry, wellbeing and why more of us work later in life

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Dean Pearson, Head of Behavioural & Industry Economics, MLC

Ill health, job loss and family reasons mean one in two Australians will retire earlier than they anticipated. This is a now a well-established trend in MLC’s Wealth Behaviour Survey. But many more are staying in the workforce longer than previous generations.

That’s largely because pre-retirees, typically somewhere in the final decade of their working lives, feel less prepared for retirement than ever before. This is driven by fears of inflation and increased cost of living as well as the fact that people are living longer. Retirement for many people will be 30 years or more.

The gap between expected retirement income and the amount people expect they’ll need to live comfortably in retirement is on the rise. Property values are falling and most people like where they live, so they don’t want to cash in on this prized asset – only about one in 10 people in the MLC Wealth Behaviour Survey would sell the family home with a similar number prepared to use the equity.

So it’s no surprise that the number of Australians who plan to work past the retirement age is on the rise, with the need for greater financial security cited as the most important factor. One in five people in the MLC Wealth Behaviour Survey expects to work up to the age of 70, with one in 20 predicting they’ll be in the workforce past their 75th birthday.

But it’s not all about money because the survey data shows quite clearly that wealth means different things to different people. When we asked people what constitutes overall wealth and gave them the choice of ‘income’, ‘net worth’ or ‘lifestyle’, income was the most common response but almost as many people said lifestyle. These are the ‘lifestylers’ Bernard Salt has written about.

When we asked people what lifestyle wealth meant, the two aspects that came out were being debt free and having enough funds to feel confident about handling emergencies. But almost half of Australians don’t feel like they’ve done enough to achieve their wealth goals.

Insufficient earnings is most commonly cited reason for not having done enough but that’s followed by self-doubt. This fear and self-doubt around not having done enough really shone through when we asked people to describe the sort of retirement they want and the sort of retirement they expect to have.

When we asked people to describe the sort of retirement they want, they used words like ‘relaxed’, ‘travelling’, ‘comfort’, ‘happiness’, ‘freedom’, ‘choice’, ‘flexibility’ and ‘health’. Only one in 20 people used words like ‘cash’, ‘money’, ‘house’, ‘rich’ or ‘wealthy’.

The descriptions of the retirement they want are often in sharp contrast to the retirement they expect to have. More than one in five used words like ‘poor’, ‘tight’, ‘frugal’, ‘stress’, ‘worry’ and ‘hard’.

What’s your motivation?

Not everybody considers working for longer because they want to have more money. For some, it’s about working because they enjoy it. Yes, some will work beyond the retirement age to accrue the funds they need to support a desired lifestyle, but others are motivated by wellbeing factors like perception of self-worth and regular interaction with other people.

Whether your motivation is primarily to boost your financial position or for wellbeing purposes, the good news is that structural changes to the world of work are creating a raft of new opportunities. The sharing economy means you can now get paid for driving people around after a lifetime of being a free taxi service for the kids and grandkids. And if you have an investment property, or even a spare room, there’s an opportunity to spend a few hours a week keeping it in shape for short-term rentals.

Then there’s the time-honoured tradition for retired tradies and other ‘handy’ people to spend a few hours a week helping clueless professionals navigate the aisles of vast hardware stores. Or you might prefer to put your skills to work supporting a good cause that’s had a major impact on your personal life – perhaps you lost a loved one to an incurable disease or one of your children was born with a medical condition.

It’s temporary hours without a structured career path but in the sharing economy you can usually take advantage of these opportunities on your own terms. This is making many older Australians look at themselves in the same way as young people do. They become more entrepreneurial by default, because there isn’t the job security that there once was, but that’s just fine thanks very much.

SOURCE: https://www.mlc.com.au/personal/blog/2019/05/worry_wellbeing_and_why_more_of_us_work_later_in_life

Ageing is old hat for baby boomers

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This article originally appeared in The Australian

There was a time, not so long ago, when retirees were happy to be called “retirees” or “seniors”. After all, these older Australians had worked hard, raised a family, paid their taxes, volunteered, done their bit and now it was time for them to enjoy a long, happy and healthy retirement as “retirees”.

Let me assure you that the endgame hasn’t changed — baby boomers (4.7 million born 1946-1963) still want to enjoy a long and happy retirement — it’s just that they don’t want to be ­labelled as, or associated with, anything that includes, well, let’s just refer to the concept as the “r” word.

Shhh. I think he’s referring to the words “retirement”, “retired” and/or “retiree”.

No, no, no we baby boomers aren’t retired. We will never retire. Retirement is for old people. For goodness sake, our parents retired, and they were, like, really old.

I have it on good authority that there is, at this very moment, a cell of revolutionary baby boomers locked away in a safe house, with a whiteboard, workshopping words to replace — by whatever means — expressions such as “retirement” and “retiree” and “senior citizen”.

“They all must go,” says their slightly crazed dear leader. “We must install new words, our words, uplifting words that speak to the kind of people we are and the kind of society we want to create ­beyond the age of 60.”

“Si, si, si,” chant the boomer cell’s compadres.

Here’s the thing. Baby boomers don’t think they’re old and so being called “retired” or “retiree” let alone “senior citizen” is kinda offensive.

Plus, being 60-something today, or 70-something or older, isn’t like being this age in previous times. We are healthier, more interested in diet and exercise, we have access to better healthcare. And, because those dillydallying millennials are having kids later in life — baby boomer’s grandkids — there’s the promise of little bundles of grandkid joy to look forward to.

There is no time to be “old” in this world. There’s too much to be done. Plus, baby boomers are confident that older Australians will be soon embraced by the coming social revolution centred around inclusion and diversity.

“What, you mean there is no one in your senior management team who is in their 60s?” “How can that be?” “Does anyone know what a recession looks like?” “Surely, with no representation of older Australians in the decision-making process you are at risk of unconscious bias?”

The winning term thus far ­determined by the secret cell of revolutionary baby boomer wordsmiths, is “lifestylers”.

Baby boomers aren’t old, and neither are they retired; they have moved into the lifestyle stage of the life cycle. You know how KFC is a contraction of the original term Kentucky Fried Chicken — I suspect to hide the f-word (“fried” in case you’re wondering) — then so too should retirement homes shift their wordage selection from retirement to lifestyle.

“We’re moving into a lifestyle community.”

“Oh, how wonderful … that sounds fabulous.”

It is only a matter of time before journalists and social media influencers are admonished for using terms like grey nomads to describe older caravan travellers. Baby boomers are no less enthusiastic caravaners than preceding generations, it’s just that collectively they have been whiteboard-sanitised into the descriptor “adventure travellers” or, better still, “eco-travellers”.

I mean, “grey nomad” suggests an imagery of towelling hats and socks-with-crocs. Whereas the term “eco-traveller” suggests an imagery that is kinda Kathmandu-kitted and whose caravanning travels are purposed to explore the greater good of Gaia (“Earth mother” for those not operating at peak environmental velocity).

I have a theory why baby boomers are inclined to reimagine how life can be lived beyond the age of 60. Yes, it is that they are healthier and better educated than previous generations. But that’s not what’s motivating baby boomers right down to changing the language that is used to describe retirees. It is something deeper, more personal, more fragile, more emotional — it is something that is coming from their heart and soul.

Baby boomers are the first generation of retirees in history to have been witness to their parents’ retirement and ageing. Previous generations of parents died in their 60s, or earlier. They did not grow old as we now grow old. Not only that, but baby boomers have a ­detailed photographic record of their parents aged 60 and 70 and 80. Scratch a baby boomer and poke and prod around this question and you will get the same ­response.

Baby boomers are proud of the way they’re ageing; they are more active, more empowered, and they look better than their parents did at the same stage in life. Boomers are determined to reimagine how life might be lived because they saw how the Depression-generation, their parents’ generation, aged … and they do not want to go there. Hell no, we won’t go! Hell no, we won’t go!

Here’s a photo of dad at 60 at 70 at 80 and here’s what he was doing. Boomers are quietly benchmarking their ageing against the ageing of their parents. They need to know, they want to be told, that they are ageing better, that they are getting more out of life, than their parents did at the same stage in the life cycle.

I have this theory that older men magically as if suddenly possessed by some Ageing Demon from ancient times, go out and buy a rain gauge.

This whole ageing thing can go either of two ways. Either boomers baulk at traditional pathways to ageing. Or they might officially talk the talk, but deep down they cannot resist the allure, the engagement, the visceral thrill of discussing last night’s rainfall with family members. The Ageing Demon from ancient times strikes again. Free advice to Bunnings’ buying department: seek out Guangzhou-made, backyard rain gauges to cash in on the ageing of baby boomer men as they move into that time in life when matters ­meteorological seem to matter most.

There is a sense that baby boomers are indeed entering a lifestyle stage of the life cycle, a window of perhaps a decade or so when their knees and hips are still OK, and they’re trying to cram in as much living as possible. Cruises and travelling, including caravanning, visiting family and helping out here and helping out there, and chalking up projects, and ticking off lists, are all on the active ­retiree’s — oops, sorry — the ­active lifestyler’s later-life agenda. And they feel that they deserve it, they have worked for it, that they have made sacrifices from a young age, but now it is their time, our time, my time. In fact, if there were to be a rallying cry — a cri de coeur — for our whiteboarding boomer cell it wouldn’t be viva la revolucion it would be “it’s my time now”.

And for these lifestylers, these my-time-now aficionados, these older baby boomers determined to make the most of their remaining years — calculated to be: whatever their parents got, plus a bit — the tricky balance is to get things done, to tick things off, before health and finances fail.

The boomers are right now passing through the 60s and the 70s as hip and groovy lifestylers (with a secret lust for rain gauges), but progressively over the 2020s I am sure this generation will work their wordsmith magic on making the “era of the over-80s” sound positively alluring.

Viva los lifestyler!

Bernard Salt is managing director of The Demographics Group. Research by Paul Kelly.

bernardsalt@tdgp.com.au

SOURCE: https://www.mlc.com.au/personal/blog/2019/05/ageing_is_old_hat_for_baby_boomers

The trade war is back – what went wrong, what it means for share markets and Australia

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Key points

  • The trade war between the US and China has returned after talks to resolve their trade differences broke down.
  • Our base case remains that a deal will be reached to resolve the issues, but the risks to global growth are now higher (given the escalation in tariffs from the US) and share markets may need to fall further in the short term to remind both sides of the need for a deal.

Introduction

After taking a back seat over the last six months as negotiations appeared to make progress the US/China trade war is back on with the President Trump – “tariff man” – ramping up tariffs on Chinese imports again and threatening more and China moving to retaliate. This note takes a simple Q & A approach to the key issues.

What is a trade war?

A trade war is where countries raise barriers to trade with each other (such as tariffs or quotas on imports or subsidies to domestic industries) usually motivated by a desire to “protect” domestic jobs often overlaid with (or dressed up by) “national security” motivations. To be a “trade war” the barriers need to be significant in terms of their size and the proportion of imports covered. The best known global trade war was that of 1930 where average 20% tariff hikes on US imports led to retaliation by other countries and contributed to a plunge in world trade.

What is so good about free trade and wrong with protectionism?

A basic concept in economics is comparative advantage: that if Country A and B are both equally good at making Product X but Country B is best at making Product Y then they will be best off if A makes X and B makes Y. Put simply free trade leads to higher living standards and lower prices whereas restrictions on trade lead to lower living standards and higher prices.

It often strikes me as perverse that some want to protect local industry, but they don’t buy local themselves. The experience of heavily protecting Australian industry in the post WW2 period was that it was just leading to higher prices and lower quality products and Australians were voting with their wallets to buy better value foreign made goods anyway. We and many other countries started to realise this in the 1980s and so cut protection. We might have protected lots of manufacturing jobs if we stayed at the levels of protection of 45 years ago, but we would have become a museum piece as would the US.

Fortunately, despite the loss of jobs in manufacturing (from 25% of the workforce in 1960 to around 8% now) other jobs have come along in the services sector where Australia’s and America’s relatively highly-skilled but highly-paid workforce have a comparative advantage compared to workers in less developed countries.

In short, if you want to support your country’s products buy them, but trade barriers don’t work.

Why is President Trump raising tariffs then?

It’s basically about fulfilling a presidential campaign commitment to “protect” American workers from what he regards as unfair trading practices in countries that the US has a trade deficit with – notably China. And he knows this is popular with his supporters but there is also some degree of bi-partisan support for taking on China.

What does President Trump want?

While it’s been feared at times that Trump was willing to get into trade wars with any country that the US has a trade deficit with his main focus is China. Basically he wants China to lower its tariffs, allow better access for US companies, end US companies being forced to hand over their technologies and protect intellectual property of US companies. At a high level he wants a reduction in America’s trade deficit with China. Along the way he has renegotiated the NAFTA free trade agreement with Mexico and Canada and the free trade deal with South Korea and is in talks with Europe and Japan.

Where are we now?

Fears of a global trade war were kicked off in March last year with Trump’s announcement of a 10% tariff on aluminium imports and a 25% tariff on steel imports. US allies were subsequently exempted but China was not. On March 22 Trump announced 25% tariffs on $US50bn of US imports from China. These were implemented in July and August. After Chinese retaliation Trump announced a 10% tariff on another $US200bn of imports from China (implemented in September) which would increase to 25% on January 1 this year. The latter was delayed to March 1 in response to trade talks and then was delayed further as the talks made progress.

Last year’s tariff increases took the weighted average tariff across all imports to the US from around 1.8% to around 3% which took the US above the developed country average of around 2% but not dramatically so.

However, on May 10 the delayed tariff hike from 10% to 25% on $US200bn of imports from China was put in place and the US kicked off a process to tariff the remaining roughly $US300bn of imports from China at 25%. If fully implemented this would take the average US tariff rate on imports to around 7.5%, which is significant (albeit minor compared to the 20% tariff hikes of 1930.) See the next chart.

Average weighted tariff rate across all products

Average weighted tariff rate across all products
Source: World Bank, Deutsche Bank Research

Along the way China has retaliated with a 10% tariff on $US60bn of imports from the US and in response to the latest move has announced this will be raised to as high as 25%. Its retaliation has been less than proportional partly reflecting lower imports from the US but it has also so far refrained from retaliating via other means such as selling US bonds (possibly because it could just depress the $US) and making life tougher for US companies.

At the same time the US is considering auto tariffs after a report lodged in February. A decision is due by May 18 but could be delayed given talks with the US and Japan.

What happened to the US/China trade talks?

Up until a week or so ago the trade talks were reportedly going well – with key elements reportedly agreed and only disagreement remaining about when tariffs would be removed and enforcement. But President Trump’s May 5 tweets announcing a resumption of tariff hikes with more to come was supposedly in response to China back tracking on what had been agreed. There has been much speculation about what happened: maybe negotiators agreed more than was politically acceptable to China’s leadership, maybe China saw it as two big a step down given Trump’s often perceived insulting approach, maybe they misjudged what he would agree to, maybe Trump’s resort to threats is just more “Art of the Deal” stuff to get what he wants and to prove that he is standing up for his base. Who knows for sure! But it’s likely that both sides may have become emboldened by better economic data and share markets this year, and so have decided to take risks again. Ongoing or rising tensions around Huawei, North Korea, Iran (with the US ending sanction waivers on China importing Iranian oil) and Taiwan are probably not helping the issue either.

What will be the economic impact?

Contrary to President Trump’s assertions China is not paying the tariffs being collected on imports from China. China will ultimately suffer if there is less demand for its exports but most of the cost is borne by US businesses or passed on to consumers. Taxing all US imports from China at 25% would be a big deal compared to last year’s tariffs and see the impact shift to largely consumer goods as opposed to industrial and intermediate goods in the first tariff rounds. Which in turn could add around 0.2% to core inflation and detract up to 0.75% from US GDP particularly as investment gets hit in response to uncertainty about supply chains. Given the flow on to slower global growth (which is where Australia could be impacted), hopefully the latest tariff hikes will be short-lived and the extra tariffs will be avoided.

What is the most likely outcome?

Our base case remains that the US and China will ultimately reach a deal to resolve the issue before too much damage is caused – once both sides refocus on the economic costs of slower growth, higher consumer prices and potentially rising unemployment. This is particularly relevant for President Trump given his desire to get re-elected next year as rising prices at Walmart and rising unemployment will drive a backlash. However, things could still get worse before they get better.

Why have share markets reacted relatively calmly? Can it last?

Since President Trump’s tweets announcing a resumption of the trade war, US and global shares have fallen about 4.5% and Australian shares have lost 1.7%. Chinese shares have been hit harder reflecting their greater vulnerability. But overall the falls have been benign compared to last year’s sharp falls (and they followed a sharp rebound so far this year). This likely reflects a combination of: investor optimism of a deal to resolve the issue; last years’ experience where the worst case fears of tariff hikes did not come to pass; hopes for more Chinese economic stimulus to offset the negative impact; and perceptions that the Fed is more supportive of growth now compared to last year when it was more worried about inflation. Australian shares have also been helped by their high exposure to defensive high yield stocks and ongoing strength in the iron ore price.

While our view remains that a deal will ultimately be reached and that this will see shares end the year higher than they are now, the risks have ramped up again after the setback in the talks and the associated loss of trust on both sides so investors need to allow that the trade war could again get worse before it gets better risking further short-term weakness in share markets. In fact, sharper share market falls may be needed to remind the US and China of the need for a deal.

What does it all mean for Australia?

Fortunately, Australian’s aren’t having to pay higher taxes on imports like Americans, but the main risk is that we are indirectly affected if the trade war is not quickly resolved and this drags down global growth weighing on demand for our exports leading to unemployment pushing higher than our 5.5% forecast for year end. The risk of this adds in turn to pressure on the RBA to cut interest rates, although we think they will do that anyway.

What to watch?

Key to watch for will be a continuation of trade talks. So far, the indications are mixed. The June 28 G20 meeting in Tokyo may be critical in terms of providing an opportunity for Trump and Xi to get negotiations back on track, with Trump saying that they will meet.

SOURCE: https://www.ampcapital.com/au/en/insights-hub/articles/2019/may/the-trade-war-is-back-what-went-wrong

Newsletter – 7th May 2019

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Dear Sir/Madam,

 

Only 11 days till the Federal election and we won’t have to listen to or watch any more political advertisements! Sharemarkets have been relatively quiet although the inability of the US and China to reach a trade agreement has the potential to have a negative impact on the sharemarkets in the short term.

We have our annual Golf Day fast approaching on Friday 24th May 2019 and we need to finalise our numbers ASAP.

This year, we have had a change of venue and it will be at McLeod Golf Club at Mt Ommaney. Invitations have been sent to our golfing clients and other interested parties. We have a number of single players and couples so if you are interested and having trouble getting a team of 4 together please let us know so we can help to finalise teams and tee off times.

Until next month,

Emma

2029’s four major retirement tribes and their aims

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This article originally appeared in The Australian

By 2029, the last baby-boomer (born 1946-63) will have reached retirement age (over 65). This doesn’t mean that all boomers will be retired. Of the 5.3 million people over 65, about 545,000 will still be working — that’s 10 per cent.

The 65+ cohort will be bigger than ever before, making up 18 per cent of the population (up from 14 per cent in 2019).

Let’s explore the big-picture demographics of the Australian retirement market in 2029 and see what financial challenges the four major subgroups will face.

The first group, the lifestylers (55-64), isn’t retired yet and tries to prepare for retirement. The group is divided into two camps. Those who are working hard to be able to afford a decent lifestyle in retirement and those who were blessed with successful careers and can enjoy their lifestyle already. The wealthy section of the lifestylers choose how much they want to work. They scale down their work week to four days, play more golf or take long European holidays. Their finances are sorted, and they won’t have to compromise on lifestyle in retirement.

The other cohort of lifestylers has bigger challenges ahead. They weren’t blessed with high-paying jobs and are trying to sort out their finances with just a few years left in the workforce. They max out their super and save as much as they possibly can. Some might have to postpone retirement. When superannuation was introduced in 1992 the youngest lifestyler of 2029 was only 18 — making this the first cohort to have always contributed to their super account. As of 2029 we will see the full benefits of our national superannuation scheme.

 

Source: ABS

The second group are active retirees (aged 65-74). Many Aussies won’t retire at 65 but stay in the workforce for a few years, decrease their workload and gradually transition into retirement.

With more people holding knowledge jobs rather than physically taxing ones, this proportion is only going to rise. In 2029, active retirees will be made up of the younger half of the baby-boomer generation.

Business will love this cohort for its hunger for lifestyle and well-filled pockets. This cohort is not only big and growing at a decent rate (21 per cent larger than in 2019) but it benefited from the housing boom. Boomer homes are located on what is now very expensive land. If money gets tight, the active retirees cohort will often have the capacity to cash in the family home — a much-needed security mechanism as members of the cohort only started investing into their super accounts when they were aged between 28 and 37.

Our third group, the downsizers (aged 75-84), will grow the fastest (a whopping 51 per cent between 2019 and 2029). This is the older half of the baby-boomers. Downsizers slowly prepare for the old age phase of the life cycle. This includes downsizing their home. Australians didn’t downsize nearly as fast as most people predicted but by 2029 the largest birth cohort in Australian history reaches the downsizing age bracket. They can sell the family home (which has been purchased in the 1980s and by now is worth a ton) and move into something that is smaller and accessible. The profit will be used to top up super accounts, spoil the grandkids or assist home purchases of kids who haven’t entered the housing market yet. This is where we see the beginning of intergenerational wealth transfer.

Our fourth group deserves the label old age. This isn’t meant in a derogatory way. Being 85 years or older, many rely on some sort of care to manage everyday life. In 2029 no baby-boomer has yet reached that group, meaning everyone was born before the end of WWII.

The old age cohort is largely made up of widowed women, often managing the large family house by themselves. It will often take a medical emergency to ensure that members of this generation downsize. The youngest member of this group was already 48 in 1992 when super was introduced. Consequently, many are at the risk of not having put away a large enough nest egg. Intergenerational wealth transfer is in full swing now.

Each of the four major groups faces its share of financial challenges. The best way to ensure you can enjoy your retirement is to get your ducks in order as soon as possible. Superannuation and home ownership will continue to be the preferred ways for Australians to ensure retirement is the enjoyable phase of life that it should be.

SOURCE: https://www.mlc.com.au/personal/blog/2019/05/2029s_four_major_retirement_tribes_and_their_aims

Rich and invisible lives of over-55s

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This article originally appeared in The Australian

Google the term “over-55s” and up will pop the most confronting schedule of material that any baby-boomer could imagine. Apparently, the Over-55s is now a thing, a grab-bag, that encompasses everyone and everything that sweeps forth from the virtual end of the working life to, well, the great abyss.

I am sure that the term Over-55s was dreamt up by a young marketing consultant (where young is defined as under 40), who from the vantage point of youth regards anyone over the age of 55 as being part of the same great amorphous mass of aged and irrelevant humanity.

Hey, young marketing consultant (or, should that read “yo, young marketing consultant”) being 55 is vastly different to being 85, and suggesting that we’re all in the same “old” bucket is offensive.

Now I do get this. That young marketing consultant is trying to upsell the market for banking or housing or holidays and so by reaching down into the 50s they are able to appeal to a wider potential market.

One of the truly offensive ­pieces that Googling “over-55s” throws up — and I use that term advisedly — is a call-out to any over 50s who may be interested in retirement homes! I mean, if you’re aged 30 then I suppose 50 looks ripe for retirement and as for the 55-and-over set, well, they’ve pretty much already checked out, right? Wrong!

The over-55 universe is a bit like the deepest depths of the ­Pacific Ocean: from the surface it all looks the same. But send down a camera and a searchlight and a bright and colourful and fecund world is exposed that is hidden from anyone living on the surface.

Let me tell you about some of the life forms that exist in the world of the over-55s.

Lifeforms Beyond 55

Change in population later in life, 2019-2029
Age Nickname 2019 (m) 2029 (m) % change
55-62 SUPER SAVERS 2.400 2.582 +8%
63-69 DOWNSHIFTING CRUISERS 1.761 2.058 +17%
70-79 GRANDPARENT HELPER 1.791 2.388 +33%
80-87 LEGACY SHAPERS 0.708 1.151 +63%
88+ REFLECTORS 0.308 0.409 +33%
TOTAL AUSTRALIA 25.421 29.906 +18%

There’s the 55-to-62 Super Savers who are still working and, like busy bees, they’re storing as much as they can into their superannuation hidey holes. There’s 2.4 million Australians in this age group now, or close to 10 per cent of the population, and within a decade there’ll be another 8 per cent or so.

Super Savers is the life form that emerges soon after turning 50 when all of a sudden it occurs to Australians that perhaps they should check their superannuation balance. What follows next is technically called Super Shock Syndrome where workers, couples and singles in their early 50s suddenly realise that they haven’t put enough away to live a comfortable retirement.

The characteristics of Super Savers are on display for all to see. They take a vital interest in the subject of superannuation; they know who does and who doesn’t have a defined benefits scheme; they are tormented daily by one of later-life’s greatest conundrums: how much super is enough super? Sadly, it isn’t until later in life that they realise the answer. No amount of super is enough super.

And then there’s the 63-69 Downshifting Cruisers who have begun the transition to what we now call retirement but by the mid-2020s we will call the lifestyle stage of the life cycle. Downshifting Cruisers get their name from their various pastimes and obsessions. Downshifting is what happens when the kids leave home — finally — and the house seems empty and always in need of maintenance.

Although it must be said that downshifting to a smart apartment or a townhouse cannot occur until two preconditions are met: first, that the kids have finally collected all their stuff that has been stored at mum and dad’s including kayaks and bikes; and, second, that parents finally accept that it’s time to let go of the expansive garden where the kids’ pets are buried. It’s an emotional and existential transition that the young might find difficult to understand.

The second part of this lot’s nickname comes from their predilection for cruising. Not that they find cruising particularly enjoyable, it’s more that no self-respecting 60-something can “do lunch” without discussing their recent cruise or their forthcoming cruise. For your information there are 1.761 million Australians in the Downshifting Cruiser stage of the life cycle, but this will increase to 2.058 million within a decade.

And then we come to the largest, to the most interesting, to perhaps the best time in the life cycle, and that is the 70-79 Grandparent Helper whose entire existence is devoted to the care for, to the admiration of, to the enjoyment of, to the bragging about, their grandchildren. Let’s not hold back here; let it all come out. Those grandchildren of yours are the cutest, the cleverest, the most telegenic and are no doubt on track to become the most successful personages, like, ever! I mean, who in the Grandparent Helper circle is going to disagree?

There’s a secret understanding that exists between members of the Grandparent Helper sect, for it is a sect, and that is, “I will tolerate you showing me photos, and telling me about your grandchildren, if you return the compliment”. If for whatever reason one party is all take and no give, then that party is quietly shunned by the Grandparent Helper sect.

The GPH segment as it is sometimes known is the largest single segment of the over-55s life form. It now comprises 1.791 million Australians and will rise to 2.388 million within a decade, which reflects net growth of 33 per cent.

All those millennial children of baby-boomers, all this decade’s uber-groovy 20-something inner-city hipsters, are propelled by life’s ageing into their 30s and 40s and thus producing children in the 2020s. And so these children of the millennials are therefore the grandchildren of the ever-so-slightly-given-to-bragging baby-boomers. I am sure this great “grandparentification” movement of the coming decade will be in equal measure both insufferable and delightful. Is there nothing in life as sweet and as sublime as the delight of a grandparent peacefully holding their grandchild?

From the active grandparenting 70s there’s the 80-to-87 Legacy Shapers who are often individuals who have lost partners, usually husbands, within the past decade. Here are the keepers of the family’s corporate memory; here are the connection points between the last century and the next; here is a group less inclined to travel but even more inclined to make every day matter. Spirituality becomes important. Helping kids through troubled 40-something relationships can be important; retaining connection with adult grandchildren can be difficult. Time and technology have moved on and there’s fewer people to offer support to the Legacy Shapers.

And then there are health and wellbeing issues. If ever there was a time when family needs to step up and lean in, it is now. And often it is not so much the immediate family but in fact it can be a daughter-in-law who steps up and accepts the responsibility to connect on a daily basis. Here are 708,000 Australians today set to rise by 63 per cent within a decade; that’s a lot of work for millennial daughters-in-law.

And, finally, there’s the 88-and-over Reflectors, otherwise known as the frail elderly, some of whom proudly live independently but many of whom require assistance. Here are 308,000 Australians today rising to 409,000 within a decade.

And so, you see, young marketing consultants, there is a rich and colourful life form that exists in the deepest crevices of the great amorphous ocean that you see stretching out beyond 50 and beyond 55. And rest assured that time and tide will eventually carry you forth to such a place. Such is the grand circle and sea of life.

SOURCE: https://www.mlc.com.au/personal/blog/2019/05/rich_and_invisible_lives_of_over_55s

It’s time to rethink retirement for an ageing population

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Dean Pearson, Head of Behavioural & Industry Economics, MLC, part of the NAB Group.

It was the Greek philosopher Heraclitus who noted that change is the only constant in life. And yet, more than 2500 years later, most of us still have an uneasy relationship with the concept. We know what we like and we like what we know. We dream of difference but take great comfort in familiarity.

For those approaching retirement age, his words serve as a timely reminder. And it’s often the unexpected nature of change that makes it so unsettling. This is partly because people aren’t generally very good at looking forward. That’s true when we’re 18 years old and it’s still true when we get to 80.

We have a long time to idealise retirement during our working years and the reality is sometimes very different to those expectations. We know there are distinct differences between what people think they want in retirement and how things pan out when they get there. Leading up to retirement there’s often a lot of talk about travelling, studying or learning a new language but then there are unanticipated issues.

Most of us have a magic number in mind when we think about the age at which we’re going to retire, which of course assumes we can control it. And yet we know from the MLC Australian Wealth Behaviour Survey that one in two Australians retires earlier than they had planned to. Sometimes health issues get in the way, some people lose their job and find it difficult to get another one, and a range of other reasons also have an impact. Once they do retire, some people still have parents to care for, others still have financial responsibility for their children or are still paying off a mortgage.

The pre-retirement dream of renting a chateau in the south of France becomes less realistic for some and less appealing for many others. Most simply don’t want to move far at all in retirement and are often reluctant to leave their current home.

And yet, despite the uncertainty and often unexpected nature of change, the NAB Australian Wellbeing Report shows that levels of wellbeing increase as people get older. They won’t have achieved some of the things they’d hoped for, but they’ve readjusted expectations and are generally comfortable with their lot in life. Finances are still an issue, and we know their home is still an incredibly important factor, but non-financial considerations like relationships, local community and mental health become more significant drivers of wellbeing.

The Wealth Behaviour Survey also shows that financial anxiety is highest among people approaching retirement age. Those aged 55-69 are most likely to worry that they won’t have enough funds to support a comfortable lifestyle into older age. And yet, somewhat counter-intuitively, they’re also less proactive in doing anything about it. This inaction suggests one of two things – either they feel unable to do anything or simply don’t know how.

Defaulting into negativity

Even among those aged 70-84, the Wealth Behaviour Survey shows that 14 per cent simply don’t know whether they will have enough funds to support their chosen lifestyle for the rest of their days. This uncertainty breeds anxiety. Behavioural economics tells us that people who are uncertain will default to a negative position. In the absence of clear insight, they’ll presume things are going to get worse.

And of course there are macroeconomic factors fanning the flames. Heading into a federal election creates uncertainty, many people haven’t had a pay rise in a while and house prices continue to fall. This last point is particularly unsettling for those who hope to rely on their home as the key vehicle for supporting them financially.

Macroeconomic uncertainty is most likely the reason why the Wealth Behaviour Survey also shows more people investing in defensive assets – 29 per cent of those aged 55-69, up three percentage points from a year earlier, said they were investing in cash. Those aged 70-84 saw the same percentage-point rise to 33 per cent.

Coming back to Heraclitus, we can all be certain that retirement will bring change. But that’s not a reason to panic. Uncertainty is a reality of life, whatever your age or financial situation, but there are some things you can control and those are what you should focus on.

Whatever your personal situation, the most important decision you’ll make is the one to take that first step into planning your financial future. Getting the right financial advice will help you navigate the financial complexities of growing older. MLC realises more detailed age segmentation is key – it’s not good enough for the industry to consider the over-50s as an homogenous group.

We care deeply about superannuation and the opportunity for Australians to plan for and live well in retirement. We’re committed to higher professional standards including greater experience and more qualifications. And whatever your future holds, we want to help you make the best of it.

SOURCE:https://www.mlc.com.au/personal/blog/2019/05/its_time_to_rethink_retirement_for_an_ageing_population