Can super save the stock market?

Brokers are starting to wake up to the fact that the mining boom is only going to benefit the miners. The rest of the economy is likely to struggle, not least because Australia’s government finances are strong, national debt is low. Why does this matter? Because it means the Australian dollar is likely to remain high against the Euro and the greenback. The low interest rates in Europe and the US is a symptom of the poor state of their state finances, after their governments got the worst hospital pass in history from the banksters. Australia certainly has its problems, such as the Australian banks’ reliance on offshore funding and soaring household debt. But Australia’s government debt is positively AAA compared with much of the developed world and that has to have an effect on perception of the currency. Even if there is a big housing bust it give the government more options than was available in the United Kingdom, for instance.

It means the two speed economy is on the way to becoming institutionalised, and that will really affect the relative performance of the different sectors. Macquarie has this to say, for instance;

It’s crunch time for the Australian economy. The long promised boom in the economy is supposed to have commenced, but there are few – if any – signs of it in the data that have been released over the last few months. Indeed, what the first half of 2011 has highlighted is that the mining investment boom Mk II is not sufficient to carry the economy by itself. The evidence now strongly suggests that the impact of the high A$, the current level of interest rates and fiscal contraction is beginning to overwhelm the positive influence of stronger resource sector spending.

The other important development in recent months was the RBA conceding that the economy is not nearly as strong as it had expected. We always thought that the key downside risk for growth in 2011 was if the RBA kept tightening policy simply on the basis of its strong growth forecasts rather than evidence that activity had accelerated. That risk now appears to have receded, and while steady interest rates are obviously much better for the economy than ongoing rate hikes, it is not until interest rates fall – and the exchange rate declines – that conditions will improve dramatically. And that looks to be still some way off.

What will provide a floor for Australian equities is the inflow from super funds. Deutsche Bank is noting that Australian super funds are not using the strong $A to purchase off shore and they are pouring money into the stock market:

Superannuation funds have been the main contributor, injecting $13bn of new money into the market in each of past 3 quarters. Outside of domestic equities, super funds still prefer cash, channeling ~$5bn per quarter into deposits over the past 1½yrs. This continues despite cash holdings being elevated (15% of assets for the past 3yrs, compared to <10% previously).

Weight of money arguments about stocks are always questionable, but in this case they do seem to provide some sort of floor to the non-mining sector of the market. The bulk of that foreign money is going into the resources side of the market, which suggests that will be more volatile, but have hgher rewards.

dbdaily (5)

Macquarie (3)

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  1. Why would our super funds not be looking overseas? The Australian dollar is punching above its weight and anything outside mining here will face difficult times. Surely the professionals should be looking at the US and European markets for good quality companies (Coca Cola for example) at cheap prices because of the AUD. Baffling.

    • Equities mate!!!!

      They (the funds) have been brainwashed, programmed, and believe that a vast majority of capital should go into Aussie equities.

      They ignore the 2000-2011+ ongoing bear market in US stocks, the 30 year plus bear market in Japanese stocks, the sideways markets of the 70’s…. and that’s just recent history.

      Its houses and holes all the way!

    • Most super funds offer a limited range of options to their customers, and the most common is the default ‘balanced’ fund.

      Typically, this is something like 50% income assets, including about 15% overseas fixed interest, sometimes hedged; and about 50% growth, including about 15% overseas equities, sometimes hedged. Equities will usually include some listed property.

      The ratios vary quite a bit between funds, of course, and any given fund will usually offer a range of options with different ratios, but that’s more or less what a typical default account looks like.

      In these balanced funds, the percentages are maintained according to the specified ratios. Events that push the ratios away from those figures cause rebalancing. For example, if your (balanced) account has $20K in unhedged US equities, and the US$ halves, your account then only has $10K in US equities. The fund rebalances by buying US equities to the value of $10K, to bring it back to $20K. This is usually done with capital inflows, though if the change is rapid enough, the fund might sell down other assets to fund the purchase.

      In other words, these days most super funds are probably buying more US equities than usual, though probably units in wholesale index funds rather than individual companies.

      BTW, most people don’t realise that balanced funds have this built-in contrarian bias. Personally, I think the one thing that stopped the ASX getting overly bubbly prior to the GFC was the fact that rapid rises in the ASX are damped by super funds selling down their holdings to stay balanced with their fixed-income components. That’s not a bad thing.

    • Size- if one of the big funds such as rest chose to dump all their coles shares (hypothetically they shouldn’t hold coles shares as they may be the default fund for coles) in one hit, they could break the market. imagine if a couple big ones decided to express their irritation with the australian market. not pretty. on the other hand, the fact that super funds couldn’t take their money and run probably propped up the market more than it should have.
      People seem to forget that super is not an investment in itself, it is an investment vehicle- no different from a REIT or an MIT, except with better tax options and gov’t enforced money feed.

  2. It will be interesting to see how long before Australia’s government debt is downgraded from positively AAA. Things can turn quickly once the international market catches on to the fact that our real estate bubble is popping.

  3. Montgomery Burns

    How will the change in the marginal tax rates announced yesterday effect super contributions? The marginal rates are now out of alignment. e.g. before you would have no incentive to contribute to super below your 15c marginal threshold. These thresholds will now change. Assuming wages stay the same how does the optimal tax minimising super contribution change??

    • Montgomery Burns

      obviously I could get the spreadsheet out and do this but hopefully someone else will crunch the numbers 🙂 …intuitively my guess would be that it means you can probably add more to super (as long as you stay under the $50K contribution threshold) to make tax savings for the imaginary average punter.

        • Especially when, sans any particularly fraudulent behaviour, super is a nonsense ponzi scheme that engages in the magical thinking that money can be produced from nothing by a certain date.

        • Montgomery Burns

          The point of the question was not to debate super but to note that decisions on contributions are, in part, based on marginal tax brackets. These brackets have no changed.

          I’ll leave discussions about magic for another day.

  4. Super is more likely to destroy the stock market…and not just in Australia.

    Decades of baby bloomers retiring and taking their super out of the stock market, without enough younger people to buy their sells. This is worsened by the fact that bloomers hold disproportionately more wealth.

    It is inevitable that over the next few decades the stock market overall is only going to go down.

  5. 2 billion dollars a month goes into super, there still is a growing workforce albiet probably more part time, my own observations is that fund managers tend to look in the rear view mirror and their belief at the moment is the historical AUD value is about 77 cent to the USD, this actually tending to have a higher investment to overseas equities. The issue of hedging is also hurting them, as traditionally they have tended to run with about 30 to 40%, there are a number that have dropped the levels of hedging on the belief that the dollar was overvalued.
    Also when people retire, they still tend to have a mixture, although I have noted a greater use of fixed interest within pensions.
    There was also an interesting treasury discussion paper ( approx2 years) about the concept of swapping small super balances of less than $100k for increase in age pension payments, the purchase of a government guaranteed annuity, this could raise its head again if overall savings decrease and government debt increases.

    • >There was also an interesting treasury discussion paper ( approx2 years) about the concept of swapping small super balances of less than $100k for increase in age pension payments, the purchase of a government guaranteed annuity, this could raise its head again if overall savings decrease and government debt increases.

      Jack – got a link for that paper? Would add to my research on compulsory compulsory (sic) super…

      I can easily see that happening, given the average super balance of the average baby boomer is less than 100K. (and for women, its barely five digits…)

      • It was in the Henry review, and earned a mention in the Cooper Review.

        It sounds so promising, but could go so wrong. Hand over savings in return for a guaranteed pension- is there a minimum level, or will the rest of the taxpaying public have to make up the difference for the non-savers? If so, why not just increase the pension? Same effect.
        Not to mention- what happens when the cost of living rises? Do the carefully calculated payments rise as well? Just another way to give the boomers a featherbed retirement at the expense of the next few generations.
        I would much rather the money is spent on educating the next generation on financial matters- teach the kids how to spot financial frauds and dodgy interest deals- it will pay off more in the end.

  6. michael francis

    Every week Australian fund managers receive $1.4 billion from compulsory super contributions.

    Gee, what will we do with this weeks $1.4 billion they say. Lets buy bank shares or build office blocks.

    Bank shares go up. Bank shares must be a good buy-look at all that dermand.

    And look at all those new office blocks being built. They can join all those other office blocks up for lease that can’t find tennants.