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RBA tries to thread the needle by raising rates without endangering the economy + Election bingo: Firstlinks Newsletter

Graham Hand  |  19 May 2022Text size  Decrease  Increase  |  
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Prime Minister Scott Morrison found a new policy that Labor could not copy to give his campaign final week momentum. Among the wide range of important issues facing the nation, the debate has turned to superannuation. Who would have believed it? No other country devotes as much media debate and political capital to retirement savings.

Now the nightly news a few days before voting shows Mr Morrison standing in front of plans of land developments, telling young Australians that he has found a way for them to buy a home: raid their super because it's theirs to spend.

“It is their money. It’s not owned by the super fund, it’s not owned by the government, it belongs to them."

With median super balances around $50,000 for 35-year-olds, the Super Home Buyers Scheme would allow $20,000 from super for a first home buyer. The median house price in combined capital cities is $926,000, and $20,000 would not even cover stamp duty. It's a marginal policy for all but a wealthy young couple with high levels of super.

But it comes with a clever political twist, where on sale of the home, the amount taken out plus a proportion of capital gain must be put back into super. It allows Morrison to say it is not a raid on retirement savings, and even better, Labor hates it because they would prefer 'big unions' to control superannuation.

We take a deeper look into the merits of the proposal plus check the widening eligibility of the downsizer policy.


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Anthony Albanese, facing a swing in the polls back to the Coalition, would have been relieved to see Wednesday's wages growth of only 0.65% for the March 2022 quarter, below analyst expectations of 0.8%. It allows him to run into the weekend with his 'real wages are falling' argument. Gareth Aird of CBA said:

"Today’s data is consistent with our expectation that the RBA will deliver another ‘business as usual’ rate hike of 25bp at the June Board meeting – the Q1 22 WPI has certainly not made the case for a larger rate hike in June."

We all know cash rates will rise further. That is old news. The dilemma for the Reserve Bank is called 'threading the needle'. The hole for the thread is small and easy to miss. The central bank needs to raise rates enough to reduce economic activity to control inflation while not causing a recession. It knows Australians are especially vulnerable to rate rises due to heavily-indebted households, making each rate rise more powerful than in other countries. At the same time, election-drunk politicians are making spending promises and pushing fiscal policy in the other direction. 

With these constraints in mind, the current pricing on cash rate futures would drive a recession and unaffordable additional mortgage repayments. Governor Philip Lowe knows how much impact falling house prices has on consumer sentiment, and the following rate levels would derail the economy.

That's 3.3% within a year, taking mortgages to around 5.5%. Here are the major bank economist forecasts for where the cash rate will peak in this coming cycle.

  • CBA: 1.6%
  • Westpac: 2.25%
  • NAB: 2.6%
  • ANZ: 3%

CBA's official position, also quoted by CEO Matt Comyn, is that cash rates will rise to 1.35% by the end of this year and settle at 1.6% next year. He even welcomed modest falls in house prices for "affordability and stability". Comyn said at the release of his bank's quarterly update last week:

"We anticipate as we've seen in prior cycles that the Australian economy and consumer will be quite sensitive and responsive to changes in the cash rate, so therefore we think that the rate of inflation will be slowed by those cash rate increases, which will reduce demand in the domestic economy."

While I believe Comyn and his economists are a tad optimistic, moving cash 0.25% every month for the rest of 2022 would significantly dampen demand, with sentiment already falling. As shown below, the Westpac-Melbourne Institute Index of Consumer Sentiment fell by 5.6% to 90.4 in May.

There's an excellent short video by Bill Evans of Westpac on Twitter.


Anyone holding a share portfolio with allocations to tech and small companies knows their investments have taken a hit. Morgan Stanley estimates that the millions of amateur and first-time investors who came into the market in pandemic 2020 and enjoyed a stellar start are now facing losses greater than their gains. The calculation is based on US trades by new entrants since the start of 2020, when they initially outperformed the S&P500 Total Return index.

More startling are the individual stock losses, as shown below (prices as at last week, unsourced). The incredible growth stories of each of these stocks are now gathering dust. We were riding Peloton equipment, watching Netflix day and night, Zoom became a common verb, documents were using DocuSignCoinbase was delivering the world of crypto, and we were eating Beyond Meat burgers. What could go wrong?

Australia has dozens of its own examples of rapid rises and falls, especially in BNPL, online retail (Kogan, Cettire, Temple & Webster, BWX), tech (Nuix, Xero, Audinate, Freelancer, Airtasker, Bluebet) and asset managers (Magellan, Platinum, Australian Ethical, Pinnacle, Janus Henderson). Some of these are good businesses but prices ran too far ahead of revenues.

In the fund space, the best local example is the Crypto Innovators ETF (ASX: CRYP), which traded a record volume on Day 1 (3 November 2021 where $8 million was invested in the first 45 minutes). It looks like the worst timing possible, as it quickly peaked at $12.41 and has been as low as $2.75. Those who jumped on this narrow thematic are facing an expensive reality check.

We warned in February 2022 that crypto was no place for retirement savings:

"Firstlinks has been criticised for not understanding the potential of cryptocurrencies, which is fair enough, but it is too volatile and unpredictable for a major role in retirement investment."

Also in this week's edition ...

In an exploration of the value of versatility, Andrew Macken explores the power of being a multidisciplinary generalist when it comes to investment returns and life.

A recent poll of financial advisers and accountants by Accurium shows the reduction in the minimum pension requirements by 50% since 2020 (and now extended to FY2023) is a popular change. Almost 75% of responses indicated clients had reduced pension drawdowns. Jon Kalkman makes the case for a permanent change in this policy to add greater certainty to retirement planning.

With the sell-off in many stock markets has come a widening of discounts to the Net Tangible Assets of the share prices of many Listed Investment Companies (LICs). Hayden Nicholson shows the extra returns possible if some of these managers return to more normal levels.

There is a tall wall of worry that has stood forebodingly in front of investors recently. Yet many of these issues such as the war in Ukraine, monetary tightening, inflation, (or its more feared cousin, stagflation) vary in their degree of severity across regions. Randal Jenneke explores the impact to Australia.

Max Cappetta says investors should keep an eye out for opportunities in the next two months as ASX-listed companies try to manage shareholder expectations ahead of the August reporting season and as the RBA's cash rate normalises. He also highlights three companies mispriced by the market.

Continuing with the macro theme, Peter Moussa delivers the case for bonds as recession risk bears down on global markets.

For added fun on Saturday night, play our Election Bingo Card. The clichés the politicians and commentators rely on are sure to get a run, and listen for the earnest humility in any acceptance speeches. Extra points for every time someone says 'interesting' which has become a curse in our language. For some reason, everything is suddenly 'interesting'. Try to complete a row or column, while all 36 boxes might require an all-nighter. 



is the editorial director of Morningstar Australia.

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