9th September 2022

This week’s View comes to you from Hahndorf in the Adelaide Hills, where the FinSec team have just wrapped up two days of knowledge sharing, strategy and personal development. It is valuable time that we spend away from the ‘business as usual’ unpacking and re-framing the business challenges and exploring new opportunities.­­ It also happens to be show week and a great reason to escape the hustle and bustle of Wayville!

In discussing the current industry landscape, it was top of mind that many Australians are feeling the pinch right now – the rising cost of just about everything, interest rate hikes and volatile markets are just a couple of line items on a long list of worries keeping many awake at night. In fact, according to AMPs 2022 Financial Wellness report, financial stress has grown across all income bands and is at higher levels now than at any time since the start of the pandemic.

With yesterday being R U OK? Day, it is a timely reminder of the importance of checking in on yourselves and others. Telling signs that someone may need to ‘talk’ can be found here.

Elsewhere this week, super funds made headlines (again). Given they now control $3.4 trillion in retirement savings, it is little wonder they are given such a hard time. This time it was super funds that failed the annual performance test. The list encompassed five funds in total, with four failing for a second year running – these funds will no longer be able to accept new members. Of the five, the largest fund to fail the assessment was BT Super MySuper Retirement Wrap.

Understandably, the words ‘BT’, ‘Wrap’ and ‘Fund’ instigated a flurry of phone calls from concerned clients. Please rest assured this fund is not to be confused with BT Panorama as used by FinSec. BT Panorama is not a standalone super fund it is an administrative system whereby each client’s portfolio is unique based on their needs and circumstances.

---

What Reporting Season Has Taught Us

In Australia, August is our main profit reporting season, and it did not disappoint – This year’s results were extraordinary yet again.

The last three years have been distorted by the pandemic and in particular, three distinct phases: the confusion of rolling lockdowns caused by the virus in 2020; the rollercoaster of supply chain shortages and soaring spending in 2021; and the outbreak of post-pandemic inflation, labour shortages and higher interest rates in 2022.

We are guessing that few of the CEOs leading our biggest companies have ever faced any of these problems, let alone all three at the same time.

At a high level, bosses and boards seem to be making a good fist of it. This year saw bumper results overall, driven mainly by windfall profits and dividends from fossil fuels and iron ore (resource stocks make up around 30% of the total market value but contributed 60% of total dividends).

The big question is, can the optimism continue?

According to a recent article in the AFR, here are five things we learnt from this reporting season.

1. The economy is in a twilight zone

• Economic conditions that drove 2022’s numbers are likely to be very different six months from now when rate hikes around the globe start to slow economies.
• Commodity price gains enjoyed in the first half of this year have partly reversed.
• Strong consumer spending (pumped up by inflation) shows no signs of falling away just yet but will happen as rates keep rising.

2. Labour shortages could hurt earnings in two ways

• Higher costs
• Lower productivity = lost revenue

3. Pricing power is strong for now

• A consistent theme was the apparent ease with which companies passed through higher prices to protect their margins – and their plans to keep doing so.

But as the economy slows, a gap is likely to open up between those with real pricing power and those who have been able to push through higher prices while the economy was robust.

4. We need to look beyond the index

• Market indices such as the ASX 200 and S&P 500 are helpful in telling a story about the broader market, but reporting season has provided a reminder of how many speeds different parts of the economy are moving right now: the housing sector looks very different to the energy sector, which looks different to the banking sector, which looks different to the retail sector, which looks different to the tech sector.

Yes, this is always true to some extent. But in a higher inflation, higher interest rate world, the disparities between sectors and between companies within sectors is increasing. For investors active management is king!

5. The best CEOs are looking 3 moves ahead

• The best CEOs are focused on the big picture strategy, the moves that will drive shareholder returns for the next five years and beyond – not what is happening in 2023.

The full article is unfortunately behind the paywall but can be found here.

---

The Ultimate 1 Pager

A contributor to the publication Firstlinks, Rob Garnsworthy, a retired former Managing Director of Norwich Union Australia, set himself a challenge. To write an introduction to investing for his 18-year-old grandchildren on just one page!

Whilst simplicity is always harder than volume, if we can educate young people in the basics, then we’re gifting them a chance to ask the right questions and hopefully look after their own futures. We share Rob’s tips in the hope that you may find it a useful tool/ conversation starter to share with the teenagers in your life. Download here.

---

Chart of the Week

Our chart of the week depicts US inflation expectations measured by 5 year forward break-even rates and 5 year forward crude oil prices. Interestingly, the 2 year inflation expectation is pushing back towards the Fed’s target zone (around 3%), and the 5 year is in the Fed’s sweet spot. This indicates that whilst rates continue to rise quickly, terminal interest rates may not be as lofty as the markets currently predict.

---

---

Ethical Investing and Best Interest Duty

In the US, large Republican states such as Texas and Florida (which have populations similar in size to Australia’s) are cracking down on ESG investing, effectively banning pension funds operating under their control from divesting fossil fuels, ruling that full exposure to the energy sector is critical to retirement balances. One of the loudest proponents of this view, Florida Governor Ron DeSantis, is widely tipped to be a presidential contender in 2024, which would only add to the controversy on this topic.

The laws are obviously a little different in the US, but the principles under debate are the same. Depending on their politics, people are likely to view the duty to act in their best interest differently, and this could cause a dilemma, particularly for super funds here in Australia (perhaps one of the many reasons Michelle Levy (Reviewer of Australia’s Quality of Advice Review) is questioning the premise of ‘best interest duty’ altogether).

With a backlash against ethical investing from conservatives on the one hand, and pressures mounting from environmental activists on the other, this line of questioning is certainly not going away anytime soon.

It hasn’t missed us that Texas and Florida are both oil-producing states, so they are undoubtedly motivated to keep oil on the agenda.

What is becoming more and more evident is that we can only cross our bridge to renewable energy with a strong economy, reliable energy supply and pragmatism. Fossil fuels will play a role for a while yet.

---

All the Reasons in the World Not to Invest

The world is always full of dangers and risks for investors. At the moment, that list may seem plentiful. It is very tempting to just wait on the sidelines for all of these risks and crises to blow over or for the picture to become clearer.

It could be argued that there is always seemingly a good reason not to invest. Somewhere in the world, there is always a war, recession, corporate bankruptcy, a banking crisis, a natural disaster, a tax hike, an interest rate hike and so on.

When one of these crises hits the news cycle (every day), many lose their nerve and say, “maybe I’ll just wait a while”. By the time the crisis passes, another appears, and they remain on the sidelines. Eventually, years pass, and they look back and inevitably wish they had been in the market the whole time – instead, they are now several years behind.

The truth is, the future is always uncertain. If Covid has taught us anything, it’s that blindsiding events do happen.

As for the share market… throughout this constant stream of crises, it has managed to keep bouncing along on its long, upward journey, albeit with temporary ups and downs along the way.

The astonishing power of compounding interest: Start with $1,000 and invest only $1,000 a year (dark blue) for 50 years at 10% pa. The balance will grow to $1,281,299 of which $1,230,299 is interest (light blue).

---

Just Horsing Around

---

If you just received your energy bill…

Finally, as we head into spring and summer, spare a thought for the Europeans about to face a winter with soaring electricity and gas prices. There is no doubt it is set to become a massive social problem. The Irish Times quoted a cafe owner hit by an electricity bill up 250% in a year to €9,836.92 for 73 days. That is a lot of lattes!

---

Stay safe and look after one another. As always, if you have any concerns or questions at any time, please reach out to your FinSec adviser.