Superannuation members have grown used to the sun shining on their investment returns since the end of the global financial crisis 10 years ago. But remarkable brittleness and uncertainty in the economic world is leading analysts to wonder how long this can go on.
Super consultancy Rice Warner warned that members should prepare for the possibility of a dose of reality – and lower earnings – that funds are not yet warning them about.
However circumstances are changing.”There are indications that global growth … could be negligible for many years. Slow growing and ageing populations, debt mountains, unforeseen trade wars and low inflation provide a paradigm with new rules and metrics,” the Rice Warner report said.
That environment is becoming more evident in Australia with growth well below pre-GFC highs and definitely on the slide since 2018.
The issue that has many scared is the record low interest rates. The official Australian cash rate is only 1 per cent while European bond holders are paying banks for the privilege of holding their money.
“Quantitive easing (money printing) has pushed interest rates to all time lows,” said independent economist Saul Eslake.
Low interest rates have distorted the financial world by dangerously pushing up the value of income-producing assets like shares and bonds. For example, the “Shiller ratio” of stock prices to company earnings has rocketed, with investors prepared to pay huge prices for a given earnings level.
That has made the economic world a brittle place where “the US economy has become very vulnerable to small movements in interest rates,” Mr Eslake said.
Those low rates have boosted debt worldwide because money is so cheap.
“In China and the US there is very high corporate debt, in Australia it is personal debt, while in Japan and Italy there are very high levels of government debt,” Mr Eslake said.
Another driver for low rates has been the influence of China.
“Since China entered the World Trade Organisation marginal product (manufacturing prices) have declined,” said Stephen Anthony, chief economist with Industry Super Australia.
Manufacturing prices have been driven down by state subsidies and technology piracy, he said. “It took the West 50 years to develop technological dominance while China did it in 15 years by stealing it,” Dr Anthony said.
America’s move to stand up to China over trade is a positive, Dr Anthony said. But countries also needed to increase productivity and efficiency in their own economies to compete.
It depends how you look at it
While Donald Trump’s aggressive stand against China over trade has worried markets and economists, a commitment on Thursday for trade talks between the two eased worries so much that German bond interest rates for a time turned positive.
And US stocks may not be as overvalued as the pessimists think. “It’s hard to argue that bond markets aren’t overvalued, but the US equity market is not overvalued in terms of current earnings,” said David Bassanese, economist with BetaShares.
“In current earnings it is 16.5 times while the average is around 15 times,” he said.
The difference between PE (price-earnings ratio) in current earnings and the Shiller ratio quoted above is that the Shiller takes a long-term view of earnings. The current ratio is built on the recent jump in earnings which followed the Trump tax cuts that many economists view as a ‘sugar hit’.
So the current economic sunlight emanates from a questionable earnings jump and what Dr Anthony called “lower for longer” interest rates which could end with a shock.
“It’s going to be harder for super funds to earn the same returns they have in recent years over the next 20 years,” Dr Anthony said.
“We are living in an environment of heightened risks,” Mr Eslake said. “We are going through a change in the world political and economic order with the rise of China.”
The New Daily is owned by Industry Super Holdings