The Australian share market provided a positive return of 1.9% for the month. Things started out very well on the back of a supportive Federal Budget and the slow reopening of Victoria. However, the rising second and third wave of Covid in Europe and the US led to a 5% sell off in our share market during the final week of October. In the end to finish the month in the positives was a good result.
The Banks finally made an impact with the Financial sector up (+6.3%) for October. Having underperformed the broader market for some time, Banks benefited from accelerating home loan growth and a reduction in loan deferrals. The other sectors that performed well were IT (+8.6%) and Consumer Staples (+5%), as both Afterpay and the Supermarkets continued to do well. At the other end of the scale the Transportation (-4.5%), Telecommunication Services (-3.2%) and Resources (-1.2%) sectors all went backwards.
The world share index was down (-2.7%), its second negative month in a row. Share market performance in October was heavily linked to how the Covid situation was playing out. Countries that had very low or no reported cases (Australia, New Zealand, China, Taiwan and South Korea) all delivered positive returns. In the US and Europe where Covid is back at record levels the returns were (-2.8%) and (-5.5%) respectively. One of the best performing markets has been Sweden who you might remember decided to go with a herd immunity strategy to beat the virus. It seems in terms of share market returns you had to either go hard to try and eliminate the virus or just completely ignore it.
House prices were back in the positives (except for Melbourne). After 5 months of declining values the Core Logic National Home Value Index rose (+0.4%). Prices in Melbourne fell by their lowest amount since the start of the pandemic (-0.2%) and are expected to turn positive before the year is over. Increasing consumer confidence, lower interest rates and a lack of stock should provide a tailwind for a price recovery in the short term.
The RBA maintained the cash rate at 0.25% during its October meeting, however they did cut the rate by 15 basis points to 0.10% on the 3rd of November. The price of Iron Ore fell (-1.7%), Gold was down (-0.3%) and the Oil price fell (-8.5%). The Australian dollar lost (-2.0%) against the US dollar.
The official unemployment rate increased to 6.9% during the month and is now expected to peak at just under 8%, rather than the 10% originally expected.
After announcing a review in the retirement income system over a year ago the government finally released the report late last week. The Australian retirement system is based on 3 key pillars:
- the means-tested Age Pension
- Compulsory Superannuation; and
- Voluntary Savings, including home ownership.
The findings provided some interesting insights:
- Most Australians can expect a good retirement. The typical single worker can expect to replace 88% of their pre-retirement earnings, and the typical couple 82%. Even most Australians who work part time or have broken work histories will achieve this benchmark.
- Increasing compulsory superannuation from the current level of 9.5% to the planned 12% (from July 2027) will actually cost the government more in tax breaks than it would save in reduced Age Pension spending for the next 35 years.
- If you are worried that their won’t be an Age pension when you retire, don’t be. The amount the government spends on the Age Pension has been relatively stable over the past 20 years at about 2.2-2.5% of Gross Domestic Product. This is actually expected to fall slightly over the next 40 years, although these figures don’t take into account the massive government deficit just announced due to the Covid response.
- The Superannuation system heavily favours the wealthy. In June 2018 there were 11,000 people with a superannuation balance of over $5 million. A balance this large can achieve an annual tax concession of over $70,000.
- There is a significant amount of inheritances in the superannuation system. A large number of people die with the majority of the wealth they had when they retired. Superannuation is intended to fund living standards of retirees, not to accumulate wealth to pass to future generations, yet a number of retirees only retire on the return the superannuation fund generates and not the capital amount itself.
Whether this review will trigger the government to make any changes is hard to know but it’s obvious there are large inequities in the system. About 60% of single retirees who don’t own their own home end up in poverty when they retire. On the other hand, tax concessions provided by the superannuation system to higher income earners means they receive more Government support over their lifetime than someone relying on the full Age Pension entitlement.