The BFG Report

Welcome to the 2015 Winter Edition of the BFG Report.

Challenge of Change – the 2015 Intergenerational Report

In early March this year, the Treasurer released the Intergenerational Report (IGR). Every five years, the IGR provides a snapshot analysis of how Australia is tracking now and how it will be in 40 years’ time. This is the fourth IGR to be published since 2002 and, like its predecessors, the 2015 IGR focuses on the three ‘Ps’:

Population

Australia’s population is expected to grow from 23.9 million to 39.7 million by 2055. The report emphasises the undeniable fact that we are living longer. Life expectancy at birth is expected to increase from 91.5 years (men) and 93.6 years (women) in 2015 to 95.1 and 96.6 respectively in 2055. Not surprisingly, life expectancy at age 60 is expected to increase from 26.4 years (men) and 29.1 years (women) in 2015 to 31.5 and 33.3 years in 2055, which is a long time to stretch out your super savings. Currently, 15 per cent of the population is aged 65 or over, however, by 2055, this is expected to increase to 22.6 per cent of the population.

Participation

Participation in the workforce for those aged 15+ is expected to decline from 64.6 per cent today to 62.4 per cent in 2055. The IGR also identified that the current participation of women in the workforce is 4 per cent below New Zealand and Canada, but increasing female participation to Canadian levels would add $25 billion to GDP. It is also predicted that the participation rates of people in the workforce aged 65 and over will increase significantly from 12.9 per cent in 2014/15 to 17.3 per cent in 2054/55.

Productivity

Labour productivity has slowed from 2.2 per cent in the 1990s to 1.5 per cent in the 2000s. To retain and improve living standards, productivity improvements are required. How could this affect you? From a retirement planning perspective, the fact that there will be more people living longer and working longer, requires the Government to makes changes and adjustments to superannuation and social security policy settings.

The report points to the inevitability of people having to remain longer in the workforce before being able to access the age pension and their super. It also highlights that, as more Australians receive compulsory super contributions for longer periods of their working lives, they are likely to retire with higher super balances. This would assist with Government policy to lower the level of reliance on the age pension and assist in the national budget deficits. The report noted that the median super account balance for a person aged 60 or over in 2011/12 was around $95,000, which is clearly not enough for individuals To be self-sufficient in retirement. Therefore, there is no doubt that super balances need to be much higher by 2055.

Investment Market Review – Quarter Ending 31 March 2015

Asset Class – Australian Shares
Index – S&P/ASX 300 Accumulation index
1 year return – 13.90% p.a.
5 year return – 8.32% p.a.

Comments
The March quarter was very strong for the Australian share market with the S&P/ASX 300 Accumulation index up 10.31%. The best performing sectors were financials (up 14.3%) and consumer discretionary (up 14.3%), followed by utilities (up 13.7%) and healthcare (up 11.8%). The only sector to deliver a negative return was energy (down 3.7%), while consumer staples (up 4.0%) and materials (up 7.7%) also underperformed.

Asset Class – Listed Property Trusts
Index – S&P/ASX 300 A-REIT index
1 year return – 34.39% p.a.
5 year return – 14.41% p.a.

Comments
The REIT sector generated a return of 9.22% for the March quarter. Over the quarter, the major driver of outperformance was a sharp fall in domestic bond yields with the 10 year bond rate down 42 basis points as investors continue to look for relatively high income returns.

Asset Class – International Shares
Index – MSCI World accumulation index (AUD)
1 year return – 28.63% p.a.
5 year return – 14.12% p.a.

Comments
Globally, markets ended the quarter broadly higher with the EuroStoxx 50 (gaining 17.5%), Shanghai Composite (up 15.9%) and Nikkei 225 (up 10.1%), while the FTSE (up 3.2%) was also up. The US market lagged with the S&P500 (up 0.4%) ending the quarter marginally higher. Part of the divergence in European and US market performance in the quarter can be attributed to varying central bank quantitative easing (QE) programs, with the European Central Bank announcing a larger than expected QE program in the quarter. In the US, the market remains focused on the timing and extent to which the US Federal Reserve may start to bring their QE program to an end.

Asset Class – Fixed interest and cash
Index – Bloomberg AusBond Composite index (Previously called UBS Composite Bond All Maturities index)
1 year return – 11.13% p.a.
5 year return – 7.63% p.a.

Comments
The recent bond market rally that began in the latter part of last year continued through the March quarter with yields falling materially, again boosting fixed interest returns. Investment grade credit also continued to perform relatively well as these scarce assets were preferred by investors.

Bond markets continued to rally through much of the March quarter with 3 and 10 year bond yields falling 43 and 42 basis points respectively. The primary drivers of bond yields were a combination of the impact from quantitative easing programs abroad and domestic economic weakness (causing cash rate expectations to fall).

Asset Class – Cash
Index – Bloomberg AusBond Bank Index 0+Y (previously called UBS Bank Bill index)
1 year return – 2.72% p.a.
5 year return – 3.76% p.a.

Comments
Money market yields in Australia fell sharply during the March quarter as market expectations for the future path of cash rates fell on the back of monetary policy easing by the Reserve Bank of Australia (RBA) and expectations for further cuts heightened. Compared to the USD, the Australian dollar was also weak over the quarter.

High Yielding Internet Savings Accounts

Financial Institution and Interest Rate

ING Savings Maximiser – 3.50% p.a.

UBank – USaver Ultra – 3.37% p.a.

BankWest – Hero Saver – 3.35% p.a.

St George – Maxi Saver – 3.10% p.a.

ANZ – Online Saver – 3.10% p.a.

Westpac – ESaver – 2.81% p.a.

Rates sourced from RateCity.com.au and are subject to conditions and change.

Rates are correct as at 28/05/2015.