All Ords Report 01 September 2015
Should the big banks be allowed to influence our politicians to make further changes to the way superannuation works?
We know that big banks are looking to make up the revenue they will lose after the Australian Prudential Regulatory Authority (APRA) forced them to bolster their capital holdings to back lending, which has a direct impact on bank profitability. The out working of this is that big banks have their sights on a bigger slice of the Australian superannuation pie. Question is, how are they going to get it?
It appears that the big banks want to bump industry funds from holding the default fund position. Currently, if an employer or employee have not made a nomination to elect a particular super fund for their superannuation money to be paid into by the employer it is directed to a default fund, which includes industry funds and excludes retail funds. Now I donít have the exact figures, however, if the banks are going after this slice of the super pie then itís likely to be significant.
Bank representatives argue that all Australians ought to be able to choose their preferred super fund, and that default funds ought to include retail funds. But arenít they missing the point here? People who have their super in a default fund did have a choice, however I believe that many people simply donít choose because itís easier not to, and deciding on a fund can seem complex for many. Also, there are people who are happy to be in one of the default industry funds because they believe this is a lower cost option.
Industry funds say there is no argument for the big retail funds to be part of the default pool, as the industry fund model of lower fees has meant better returns for members over the long term. Currently, the data appears to support what they are saying. However, the big retail super funds suggest that changes to superannuation would lead to greater competition in the industry, and therefore lower fees for members. Itís a good argument, but are they right?
Letís consider for a minute the size of the whole pie, superannuation is a big industry in Australia, and retail funds hold around 26 per cent of all super assets. Australian Superannuation assets passed the $2 trillion mark earlier this year and analysts predict this is likely to rise to around $10 trillion over the next two decades. You can do a quick calculation to approximate the revenue that may be generated from these investments.
What I want to know is how are the retail funds really going to make super better for those members who donít really want to have to make a choice? And for those who do want choice, they are unlikely to end up in a default fund anyway. Many of those who now like to have more control over their superannuation have already set up their own Self Managed Super Funds (SMSFs), or they already have it in their minds that they would like to head that way.
Click here to learn more about how significant the move has been for Australians to set up their own SMSF.
What do we expect in the market?
The Australian share market continued its decline last week, as economic issues around China took centre stage. The All Ordinaries Index (XAO) traded below the 5000 point mark before rebounding to close the week up strongly at 5275 points. The move was very similar to what occurred when the market fell to its low in 2011 before making a slow recovery, as if someone suddenly turned off the selling tap and opened up the buying.
Mining and energy stocks were again among the biggest movers. That said, the four pillars, typically seen as being more defensive, were not immune from the sell-off. As an example, the Commonwealth Bank fell by more than 10 per cent over the past two weeks. Typically when a sell-off in this sector, or on the broader market occurs, the falls would be at least half of this amount.
Last week brokers were purporting that it was time to pick up banks at the lowest prices for the year, and by the end of last week the banks had recovered all of last weekís losses. It seemed almost like a self-fulfilling prophesy.
If you would like to hear my thoughts on the mood of investors you are welcome to listen to my latest podcast.
Although, when considering my analysis, the last part of the decline and the recovery during the week of the low is similar to what occurred when the market made its low in August 2011, and so the low appears to be in. However, trying to pick the bottom, or buy a stock before the low has been confirmed is a very risky business. Typically, it can take four to six weeks to confirm a low, and to allow the market room to move as it builds support for a rise.
All this activity, right on the eve of a potential interest rate rise from the Federal Reserve Bank (FED), and still no-one knows whether the FED will move to lift rates in September, however, it would come as no surprise to me if rates were lifted slightly. The first move, if it occurs next month, is likely to be mild in terms of the impact on our market.
From here, the market may slip back below 5200 points once again, however, over the coming weeks my analysis indicates that the market is likely to move largely sideways, while also rising to challenge the lower level of the resistance zone overhead, between 5400 and 5500 points.
Dale Gillham is Chief Analyst at Wealth Within