History suggests superannuation funds will play a crucial role in financing the economic recovery ahead of us.
Already, funds have given back more than $4.4 billion to Australians suffering financial hardship.
As many as 1.4 million members are expected to withdraw up to $50 billion to inject back into the economy.
But the longer-term support the super funds provide will come from their financing of corporations and governments.
“Since the crisis emerged there has been a tidal wave of equity raisings that will continue,” said Roger Montgomery, principal of Montgomery Investment Management.
“We’ve had 32 companies coming to market since January 21 raising $10.03 billion, which is 13 per cent of their total asset bases – a significant ratio,” Mr Montgomery said.
The amount of capital raising during the global financial crisis gives some insight into the role superannuation funds will play as the COVID-19 crisis unfolds.
During the GFC, around 150 Australian companies raised $119.9 billion in moves that saw the big banks and major property trusts recapitalised, along with other groups.
Super funds’ big role
The super funds played a vital role in ensuring those major companies had access to money during hard times.
Although super funds at that point held about 26 per cent of shares on the stock market, alongside insurance groups they contributed at least 48 per cent of the capital raised during the GFC, according to research by the Allen Consulting group.
Montgomery analyst Joseph Kim said the big banks today are financially stronger than during the GFC.
“I suspect the banks are better capitalised than during the GFC. APRA and the RBA have said they should suspend their dividends so I think they’ll do that rather than raise equity,” he said.
However, already a number of strong companies “like Ramsay Health Care, QBE and Cochlear have raised capital,” Mr Montgomery said.
“People will be surprised at the quality of companies that come to market and that will put weight on share prices,” he said.
Although the demands for capital from corporations will be strong, super funds will have enough cash to support them.
“While unemployment is rising, at least 85 per cent of people will still have jobs and will be contributing to [their] superannuation, so there will still be a lot of cash going into funds,” said independent economist and former adviser to the Gillard government Stephen Koukoulas.
Providing cash for government
The other vital role for super funds will be in helping finance the large amount of new debt underpinning the governments’ more than $200 billion of economic stimulus.
Despite record-low interest rates, there is still strong demand for government bonds from major investors.
“It’s a once in a century shock so people have chosen to go for safety, buying bonds and gold,” said economist Craig Emerson, who served in the Rudd cabinet during the GFC.
“Rates will be very low as there is a global glut of savings. There could be an erosion of the value of bonds [if inflation becomes higher than interest rates] but investors are likely to choose that controlled erosion rather than the uncontrolled erosion in the stock market,” Mr Emerson said.
The RBA’s commitment to quantitative easing aimed at pushing down two-to-three year interest rates to 0.25 per cent is already affecting debt markets, said Laurie Conheady, fixed-interest expert with JB Were.“That is holding the yield curve flat between one and three years but beyond that it is starting to steepen as a result,” Mr Conheady said. That means long-term interest rates are climbing quicker relative to shorter-term rates than had been the case a year ago.
However, rate cuts since early 2019 have pushed all rates lower.
“A year ago the 2047 [27 year] bond was yielding 2.4 per cent whereas now it’s 1.6 per cent,” Mr Conheady said.
Despite that, long-term bonds were still likely to be attractive to institutional investors like super funds wanting secure returns, he said.
Hole in support net
Although the government has stepped in to support the unemployed, businesses and those still in jobs, there is a hole in the support plan.
“What worries me is the residential rent and mortgage market. There are bans on evictions and six-month mortgage holidays, but mortgages and rental arrears will still build up over time,” said Mr Koukoulas.
“If [the government] could provide $300 or $500 a week it would help renters and landlords not build up debts.”
Association of Superannuation Funds of Australia CEO Martin Fahy added: “Super funds are playing an important role in supporting Australians in financial hardship at this difficult time, and they will play a key role in rebuilding the economy after this pandemic has passed.”
The New Daily is owned by Industry Super Holdings.