The great Australian shift: A new dawn for income investment
Last week’s ‘Intergenerational Report 2023’ released by Treasurer Jim Chalmers, underscores a pivotal shift: as Australia ages, the market emphasis will transition from capital growth to income. Sophisticated investors, take note.
A global institutional fund behemoth overseeing nearly U.S. $700 billion just announced its Australian entry, underscoring its intention to tap into our vast superannuation reserves.
This isn’t merely a new player entering the field. It’s an acknowledgment that a financial revolution is imminent.
Driven by a tidal wave of retiring Baby Boomers and augmented by the growing trend of non-traditional lending, the Australian financial ecosystem is undergoing a seismic shift. In the next few decades, expect the number of citizens over 65 to double, with those over 85 tripling.
If even a small number of Australians begin to reduce their reliance on growth assets like equities and real estate, and shift to more stable forms of income generation, such as private credit, it could seriously impact the prices of the asset classes they are leaving. Do you want to be ahead or behind that shift?
The recent Intergenerational Report 2023 unveils this financial evolution, signalling the demographic changes impacting our nation. Treasurer Jim Chalmers also highlighted the challenges ahead, emphasising the strain on our tax base due to an aging population, coupled with burgeoning demands from healthcare, defence, and debt interest.
For discerning investors, recognising and adapting to these macro changes – particularly the refocusing of superannuation from accumulation to retirement phase – is imperative. It’s not about riding the waves for maximum gains; it’s about positioning oneself ahead of the wave and ensuring sustainable income amidst changing tides.
The legacy of the Baby Boomers – the iconic generation that sculpted much of the Western financial and cultural landscape – is monumental. Their collective contributions have significantly boosted the global pension pool to a whopping U.S.$55 trillion. Historically, these funds have driven economic expansion by providing equity to companies and debt to governments. But as Boomers prepare to draw from this reservoir, a new era beckons.
A paradigm shift: From growth to preservation
Baby Boomers are gradually shifting from wealth accumulation to the wealth preservation phase. Considering its economic size, Australia’s strong pension assets are at the heart of this transformation. Regulations, such as the retirement income covenant of 2022, which was added to the Superannuation Industry (Supervision) Act 1993, which requires advisers to have a strategy to assist members in or approaching retirement, have foreseen this. Still, many super fund trustees remain inadequately prepared for the massive investment outcomes to come.
By 2030, Australian retirees are projected to hold $1 trillion in super funds, gravitating more towards capital preservation and steady income over high-risk ventures. With rising interest rates, traditional investment avenues may lose their appeal.
Meanwhile, private credit (or private debt) is emerging as a sought-after asset for investors, and a vital new asset class for their advisers.
Diversification is the new norm
While retirees are projected to live longer, demanding an ongoing allocation towards ‘growth’ assets, an increasing chunk of portfolios will shift towards capital preservation. The allure of private credit, with its regular, contractually obligated interest payments and tangible asset security, is clear. The growing population of retirees will increasingly begin to see equity returns as unpredictably volatile. Private credit offers stability and predictability.
The evolution of the private credit market over the past decade presents it as a tantalising option. This investment strategy, already a darling for Ultra High Net Worth (UHNW) investors in the U.S. and Europe, is set to gain traction in Australia.
In essence, the Baby Boomer exodus from aggressive growth investments to stable income avenues calls for a recalibration. For long-term prosperity in these changing times, diversification is the clarion call for every sophisticated investor.
To find out more about private credit visit this page.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
