InvestSMART Radio May 3rd Transcript

Narrator: And now InvestSMART with Steve Price. Sponsored by InvestSMART, helping Australians grow and protect their wealth.

Steve Price: Second half of the program on this Thursday night. Last week as you know, we introduced our new segment with InvestSMART. The chairman of the group Paul Clitheroe was in the studio with us. Paul is one of the team of experts helping Australians invest and build their wealth for over 20 years. I’ve known Paul probably for 20 years, it was great catching up with him last week as he explained what InvestSMART is actually all about. 131873 is our number if you’d like to have a chat about where you should be investing given the current climate. We’d love to hear from you and this week I’m very pleased to say Evan Lucas; InvestSMART’s Chief Market Strategist is in the studio with us. Great to have you in the studio, nice to see you.

Evan Lucas: Thank you Steve, thanks for having me.

Steve: Investing certainly on the agenda. What have you made of, as you’ve sat and watched, what unfolded in that Royal Commission?

Even: Probably a lot of shock, as most people have, as so they should. I mean what has come out from the Royal Commission has been not only something that is damning but you need to look at it from a point of view that it really needs to make the industry sit up and actually think. That’s what we’re here to do, that’s why we’re an online business we believe that we can reach more people better. But at the same time it gives the ability for people to say okay I can understand what you’re saying but I want to get information from over here, here and here. And about collating that and allowing them to do it on their own terms. So the difference between what you’ve been seeing, the whole terrible thing particularly last Thursday, Friday at the Royal Commission is that you get the scope to make your own decision. We provide you with information that we think is very, very influential to decision making but in the end it means that you still have the choice of doing what you need.

Steve: You must be very disappointed when you read that people are paying for advice they don’t get, or that people who are paying fees when they’re not even alive any longer.s I mean you know we have to have faith in our financial institutions. I think that one of the great things about Australia is that we’ve always had strong banks, we have had faith in them. When you see people getting let down like that, it makes you think that there has been a culture that has grown up that really needs to be pulled back into line. You think that’s correct?

Evan: Yes, and I think you need to make that very clear obviously, the culture is what everybody is talking about. It comes down to the main thing you look at, governance and how governance has been done has obviously been very poor and again, I don’t use that word lightly because it needs to be put there as there is obviously a drive between product and the drive between sale and the drive between advice. Now again, getting back to what we just talked about, advice should be paid for if it is independent and it actually has an ability for you to say no. What I mean by that is that if the advisor ends up coming back to you and saying “in the end Steve, the best advice for you is to leave you as you are” then that is also fine. And that, I think is what we’ve come out and probably missed.

Steve: Some governments have also as you know what governments have done is cut the guts out of some of those agencies that are supposed to keep an eye on things. They’ve saved money they haven’t given the regulatory authorities the right number of staff and dollars to run the regulatory authorities to get them in a position where they can actually do their job.

Evan: The whole movement with ASIC and APRA is well known fact and that is what is also is clearly coming out, both sides of politics have done it over the last 15-20 years quite heavily, again that is what I think, the way I’d answer that is that what will come out of the royal commission is not just what is happening on the financial side, the regulation side is part of it but the overreaching corporate regulator is also part of the whole three prong scenario we’re seeing there and you can hear that what Hayne and Orr are saying is that that will be the case. Again, from my perspective in terms of what I would get back to my original point, there still has to be advice given because unfortunately Australia is one of the most financially illiterate countries around which is really unfortunate.

Steve: Really?

Evan: Yes, we are unfortunately. So if you look at, if you evaluate even simple things, even if I said to you Steve, what exactly is a debenture, what is a term deposit, what is a bond, what is a hybrid bond, what is most people in the street will look at you and go “I don’t care, I don’t want to know”. There is also this belief for instance cash is the safest asset you can have. Now on a scale technically yes, the issue with that is that they forget that things like inflation erode it. So yes you can put your money under a mattress but technically next year it’s worth less, 2% less than it is this year because inflation will erode it. That kind of thing the majority of people in the street in this country unfortunately won’t know that. And that again is what my role, and part of what I do. I love my role, I live and breathe it and I know I can talk highbrow highbrow, I’m not here to do that. I’m here to sit there and say look I understand that when you look at markets there is a whole heap of stuff going on that becomes quite complex. Markets, banks etc. are actually quite simple beings. It’s just psychology, moving things from from one side to another. In markets, banks all it is that you’re the borrower, I’m the lender the bank is in the middle, providing a meet up point. That’s why things like peer to peer lending is now such an exciting thing, because it sort of takes the bank out of the middle. But that’s a discussion for another day. So this is the issue with what you’re saying, is that unfortunately it’s just not something we talk about. We’re not like the Americans they love it, they will talk about it till the cows come home. We don’t do that, it’s not really in our DNA.

Steve: We’re getting up to what might come up in the budget next week, we’ve got Evan Lucas, InvestSMART’s chief market strategist in the studio with us. I mean you talk about financial ignorance of people, I mean if you talk to anyone under the age of 50 and you mention the word superannuation people eyes glaze over and say “I don’t need to worry about that, I don’t care” and yet that is probably one of the best investments you can make for the future. It’s such a tax effective vehicle.

Evan: And that gets back to the next point of the question you’re asking, is that if you actually have a look at the superannuation pool in this country, we’re the fourth largest on the planet and we only have 25 million people. Now the states are an absolute country mile ahead in terms of where they sit but the next is the UK, then Japan, then us. I mean you’ve got places like Canada, France, Germany etc. etc. way down the track. So superannuation is a fantastic tool yes, a lot of people particularly as you said under the age of 50 don’t think about it and we can talk about being put into very simple products in their very first job or you’re in your third job and you basically get the super form and you just say what super fund are you with, oh it’s this one. Again, that’s not what we’re getting back to talking about which is making decisions yourself. Now again, that also comes down to what we also look at here which is that we understand that people don’t actually necessarily like that. But what we want to do is provide you with the ability to understand how and why we are helping you move into x, y, z and moving from there.

Steve: We’re going to get onto exactly how InvestSMART works. Just one more question on superannuation, the tip is that Scott Morrison may in fact announce that 9.5% is going to go to 12% which is a big whack out of people’s take home salary when you’ve got no wages growth.

Evan: Yep.

Steve: Do you think that’s going to happen?

Evan: No and the reason for that is what we’re going to talk about probably after the break is that this is an election budget so don’t forget that. This time next year we will have had a federal election whether it’s at the end of this year which I don’t think will happen, I think next year. So this year is an election budget so you’ve got people losing 3% of their take home pay to super which a lot of people won’t see for up to 40 years is not going to go down well. What will go down well is the way they do the tax cuts next week and that will definitely happen. The question is whether or not next year the Labor party which has very much a very strong view of regulating 12% does come into effect and that will be a more interesting question at the back end of the year when the election campaigning starts to ramp up. But no he won’t do that next week, he already did that last year.

Steve: I’m going to get your tips on what might come out of the budget in just a moment. Straight after the break.

Steve: We’re lucky enough to have with us in the studio, Evan Lucas, InvestSMART’s Chief Market Strategist, what does a Chief Market strategist do?

Evan: So my role is to basically evaluate macro markets, and what I mean by that is global markets and using the technical term basically take the thematics and drill it into an investment narrative. So that’s the overriding thing of what I do. The best thing of what I do is that everything in the world affects what I watch. So if Donald trump puts out a tweet something about Iran or puts out a tweet about some sort of issue in Michigan blah blah blah that will affect what I do. It will affect the US futures or affect the US markets and away you go. If you go down the street, down Pennsylvania avenue and listen to now Fed chairman is saying Jay Powell, Jerome Powell took over from who I thought was a very good little president before with regards to Janet Yellen what the fed, the federal reserve in the us does.

Steve: Just like our treasury.

Evan: So it’s the largest global central bank does in rates, affects you and me almost every day of the week.  What I know we’ll talk about over the series is at the moment we’re all talking about the royal commission and that’s what we spoke about before the break. For me what’s catching my attention is what’s happening in global wholesale funding markets. Now you might have heard the banks sort of allude to this idea that funding is getting more expensive. So the reason why I talk about what is because they have to go overseas to borrow money to be able to satisfy the amount of lending they have in this country. So we love to buy housing. We love to do all that kind of stuff.

Steve: So we’re net importers of cash, we don’t generate enough cash here?

Evan: We are, and we have been net importers of cash since basically Captain Cook put his foot on the sand. What that also means is that to go over and borrow money from overseas you have to pay for it and that’s where the yield comes into it. The percentage you always see. The percentage in US bonds is going up. Now you may have heard the Australia version which is the Bank Bill Swap Rate.  Everybody in this country sort of believes that controls how we price mortgages. I wish it was but it’s not that simple unfortunately, the banks have to go to the Bank Bill Swap Rate and borrow short term money to fix up holes in their funding. Because most of it actually comes from retail which is a really good way, it’s very stable. People will leave their money in the banks for a long long time despite what we talked about beforehand. But that rate is getting more and more and more expensive. In fact, it’s actually up half, over half of one percent in the last three months.

Steve: So how come our interest rates don’t move up? And how come they were left again on Tuesday at the rate they’re at?

Evan: So the RBA hasn’t moved rates because they’re number one mandate in this country their “job” in inverted commas, their “job” is to ensure inflation doesn’t get out of hand. Inflation is definitely not out of hand; in fact some people could argue that inflation is under hand.

Steve: What are we running on, 5% or something?

Evan: Inflation is running at 1.5%

Steve: Oh right of course under 2

Evan: So their band, they have to keep inflation between 2 and 3 percent.

Steve: Yep

Evan: It’s part of the reason why we’ve had so many rate cuts over the last three or four years. It’s not there, it hasn’t materialised. So this is their issue, there are parts of the economy that have run quite heavily, things like the housing market since 2013, there has been other parts, we’ve had a bit of a renaissance in some of the commodities space in resources, which has been fantastic. Again might but a bit of a smile on ScoMo’s face come Tuesday because the resource’s prices have also gone up quite significantly and it will help budget bottom line but they don’t have the ability because wage growth in this country is not moving at a rate it should be. We’ve got underemployment still, despite the fact that employment is moving very very well. All that put together, short answer they can’t move rates. They just can’t. If they were to do any increase in rates the hit on the economy would be too great because people would basically start to stop spending.

Steve: So how would you describe the economy in general terms? For people listening, their cost of living keeps going up.

Evan: Yes.

Steve: Their wages don’t move.

Evan: Yes.

Steve: And many people listening to us are sitting on assets which is real estate. But the wallet is becoming emptier and emptier, particularly because energy prices and fuel prices keep going up so how would you describe the state of the economy.

Evan: Okay to answer that question that’s from the consumer point of view. From the consumer point of view things are picking up, we’ve seen that. We’ve actually seen that consumer confidence probably since about November last year finally, finally, got out of pessimism. But you have alluded to the biggest issues they always allude to is still just teetering on the edge, which is household consumption, energy, what they call the basics. The big four, education and health are the two other, to really talk about. Education and health, the inflation in those two is actually quite astounding. They grow at about 4% per annum. So you will know if you send your kids to school how expensive it is. In fact, the biggest item in the last inflation reads secondary schooling inflation jumped 6.5%. So you are feeling that. The economy as a whole on the whole is quite good.

Steve: The states and the federal governments seem awash in money.

Evan: They are. So what’s happened is that with employment being up, there is more and more people in employment that’s why we’re more optimistic, unfortunately wages aren’t catching up but more people are back in employment. So there is a natural increase, so more people are having to pay income taxes because they’re back at work. Fantastic. It’s expected to add about 3 billion dollars to the budget bottom line. Corporations have done better over 2017 and the most part of 2018. They’ve also seen an increase in profits so there is now about 4 billion dollars expected.

Steve: So why are those profits not flowing down to the worker’s wages?

Evan: So the argument to it is that the other part of the reason why they’re going to get a bit of a kick up is that the GFC, who thought we’d be talking about the GFC? It is finally, the tax losses, the tax losses incurred over that period has finally gone. So companies that have been bringing forward tax losses, this is really boring, I do apologise guys.

Steve: No, no you’re making a lot of sense.

Evan: Are now having to pay tax again, which is a really good thing. So the argument is, this is what the RBA argument is, and people like mine argument is the wage increases will likely come in two years’ time. I know that’s really slow but that means that finally companies can be not only in surplus, paying tax, they’re growing they therefore put more people on there is less therefore capacity, people can start bartering for better wages.

Steve: So as an analyst, as someone who’s going to look at it from above as a whole, what’s your view over the argument over company tax cuts.

Evan: Okay I’m going to come from a point of view as exactly as you said a pure analyst point of view.

Steve: Take the politics out of it.

Evan: Yes, that’s probably what I want to say.

Steve: Will these company tax cuts, will they be passed on as wage growth?

Evan: They will be passed on several fronts and that’s the way I think the argument should be handled is that the other thing that we probably have to take into account is that we’re probably going to yes get left behind. It’s just a natural phenomenon globally that we’re just going to have to swallow. Whether it’s politically charged or not we will become uncompetitive. It is that simple.

Steve: Unless company tax cuts get through.

Evan: Yes, now the trickle-down effect, that is the politics side of it, you can argue that till the cows come home. My look at it from the point of view is that if we are more competitive, if there is more ability to invest and this is again pure market point of view that does lead to increases in the economy, therefore increases in employment, increases in wages, increases in consumption. The catch with it is the time factor. The political cycle is what, 3 and a half years. This kind of cycle takes a decade.

Steve: So it’s just going to be which party is lucky enough to still have a chair to sit on when the music stops.

Evan: Yeah and I would agree with that. And I think that pretty much since 2007 when we saw the GFC come in and basically 2013 when the commodities cycle finally gave up and ghost. That has been the case. Either side of politics, it doesn’t matter who you follow or what you believe in terms of that side. The economy has been driven by organic movements. So as I said to you we’re seeing a renaissance in the iron ore price. Here’s something for you for every average dollar the iron ore price is above the MYEFO you’ll add a quarter of a billion dollars to the budget bottom line. MYEFO was expecting 67 US dollars a tonne in iron ore. The average price since MYEFO is 71. The other thing that’s happened is that the Aussie dollar over that period has fallen against the US dollar and that price is in US dollars so that’s a bit of a hit. Which is again why the expectation is that the budget next week will be better because of the commodities cycle.

Steve: I’m going to get some budget tips off you in a moment. The US economy, Donald Trump clearly was a candidate that made a lot of promises that he was going to get America back in business, make America great again was his slogan. He has managed to get tax cuts through, he has managed to force a lot of his agenda through the congress. So what’s states the American economy?

Evan: Again, taking the politics out of it. Before and after he’s been in, it’s in astounding state. So part of the reason is monetary policy.

Steve: So he’s been a bit lucky in what he inherited.

Evan: Yeah of course, absolutely, but at the same time you won’t argue against what he’s done with the tax cuts. I mean when you have the biggest company on the planet in Apple and announcing it’s going to repatriate 370 billion US dollars back into the country to reinvest as they say in employment, you can’t argue against that. That is why last week they announced that they’re basically going to buy back the entire CBA as a share buyback. So his tax cuts have helped but it’s not just him. The country was already powering ahead. The employment numbers were astounding, you’ve seen wage growth over there finally come in. Now you would argue that this is actually goes back to probably 2009 when then Ben Bernanke was the Head of the Federal Reserve cut interest rates to basically zero and was printing money.

Steve: I know this is simplistic but it always seems we’re always about a two-year lag behind the us which would fit your two-year prediction about when wages growth might happen in this country.

Evan: Yep correct and that is what we would see, is that we are still two to three years behind. We don’t have the firepower the US have. We didn’t need it, I’ll also put that out there. But because we didn’t go as hard we are also a little bit slower and I would agree we’re probably about two years behind. You can hear in what Phillip Lowe is saying that there is definitely signs, very good signs that things are coming. Employment is growing that that’s probably the way to look at it, consumption is up, GDP is holding at 3% which is, although below trend historically, it is good in the post GFC world.

Steve: Now you’re going to make me famous because you’re going to give me an insider’s tip on what’s going to come in the budget on Tuesday night and I’m going to go on air on Monday and Tuesday on the radio and Tuesday night on The Project and make out that it was me that came up with this. So give me your best zinger that you think is going to come out of Scott Morrision’s budget next week.

Evan: Scott Morrison next week is going to be smiling ear to ear with a budget deficit that’s probably more along the lines of 13 to 14 billion which is will be much better than forecast. Now I know that optimistic and the reason why I say that is what we’ve seen in the trade balance over the last three months.

Steve: What was the forecast deficit?

Evan: 16 to 17-billion-dollar deficit.

Steve: So it’s going to be 3 or 4 billion better off.

Evan: Yes, the question is how much does he hand back to us and that will be the next part of it is that I suspect he’s going to go after Bill Shorten heartland and look at particularly the brackets between $37000 and $87000 and that is where the largest tax cuts will come. Those brackets will move up quite heavily.

Steve: Lower to middle class income tax, you’ll hear that repeated several times between now and next week. Thanks very much for coming in I look forward to seeing you maybe same time next week.

Evan: Thanks Steve.

Steve: That’s Evan Lucas, InvestSMART’s Chief market strategist he’ll be back with us next week or someone from InvestSMART will be and of course the budget next Tuesday night and we’ll be in Canberra where it all unfolds.