Investment for an uncertain future

KangaNews and National Australia Bank’s Fixed Income Beyond the Institutional Sector Summit returned to Sydney on 1 August. Agenda discussions focused on the future economy and what investors need to do to adapt to a rapidly changing world, with perspectives from a stellar range of speakers spanning the business and market universe.

“In an age of disruption, it is difficult to predict which sectors will thrive. We need to take a step back from the day-to-day and take stock of our position for the future."

"Australian investors continue to have inefficiently allocated portfolios. Part of our job at NAB is to bring our customers sustainable, sensible income product that will offer a better return than the cash rate – which clearly is not going up in the near future."

"We have all seen how data can be weaponised against us, changing our behaviour whether it be around purchasing things or how we vote. We are very interested in how we can flip this process, looking at ways to use data, AI and algorithms to save or invest money."

"A lot of scale is going to be added to the financial-planning industry through consolidation, in part because the regulator is introducing more stringent controls which will require scale. Clients are also going to demand more – value-add will come from the relationship outside of straightforward investment decisions."

"If you consider that AI uses the expertise of thousands of inputs, an index fund sounds similar to what AI is doing – it’s really the individual decisions of thousands of investors reflected in a single portfolio. In a way, investment markets have been deploying AI principles for well over 40 years."

"I think it will be possible to embrace AI and other tools but also to retain focus on relationship-based advice. This is easier for a boutique type of firm. I can imagine the mass market, where the key consideration is operating on fundamentally sound investment principles, moving more fully to robo advice."

"Banks now need to open their books – which was never historically the case in Australia, where banks liked to keep all their assets to themselves. The ascent of private equity has also helped the leveraged-loan market develop, and I think we will continue to see the high-yield bond market develop alongside loan products."

"The superannuation system was intended to work for people who retire at 65 and live to 85. This is not the reality of current or future work and life expectancy, though, so the system may no longer be adequate to meet the requirements of society."

"There is approximately A$1.4 trillion outstanding in the Australian investment-grade bond market and, according to the RBA, 50 per cent of this gets traded. But Austraclear does not release trading data so retail investors are not able to see correct pricing for securities – which is a big obstacle to entering the market."

"On average, retail investors in Europe have a 40-45 per cent allocation to fixed-income assets. In Australia, retail investors are overweight in property and equities with an offset of cash. This is a risky base for a portfolio and could potentially have disappointing returns in the long term."

"When reviewing property investment opportunities, it is important to understand tenant quality and the quality of real estate. We want our tenants’ businesses to be successful and to grow so they will be long-term occupiers and also provide opportunities for us to grow with our tenants in the future."

"Infrastructure financing needs to be directed with a view to where future needs will be. Urban shift is a key challenge identified by the CSIRO and the planning of cities is central to how we will live with and adapt to forecast population growth."

"Millennials are less inclined to own property due to declining affordability, and it is inevitable that we will see more long-term rental. From a capital perspective it will be interesting to see whether institutional ownership of build-to-rent real estate develops, as it has in the US and UK."

"The world is eating more and more protein, which is profoundly good for lifespan and health. Where this comes from and where agriculture is based are interesting – and changing rapidly – as are the nature of food demands as diets change around the world."

"Improving the NABERS ratings of buildings has become important as tenants are increasingly focused on sustainability. There are two-tier markets developing because some tenants, such as government offices, will not occupy a building with a low rating. A time will come where, in some cities, a building that doesn’t have a certain NABERS rating will be unleaseable."

"Agriculture technology is growing as an export sector in Australia. Most of these companies would have gone offshore but now the sector is developing in a way that allows companies to stay in Australia and export to the rest of the world."

"There is an often-used abbreviation on the internet: ‘TL; DR’ or ‘too long; didn’t read’. This is a representation of the intolerance of consumers in our economy – in essence, intolerance for companies that do not meet expectations."

"UBank is a good example of an incumbent disrupting itself. The ability to be a bank – or a fintech with a banking licence – gets rid of old models of banking while circumventing the problems that arise from horizon-thinking which incumbents typically face. If UBank were to build a ‘mini-NAB’ we would have failed as an organisation."

"Some of the greatest disruptions have come in highly regulated industries. The reason Uber was able to be so disruptive was because it completely disintermediated the government’s role in the taxi industry. Regulation is important, but in these instances it is often catching up to the business model."

"I think it is reductive to focus on generations – to talk about ‘millennials’, for instance. What the internet brings is transparency and the removal of information asymmetry. People – and especially young people – can look into your business and see if you are authentic. Fundamentally, consumers do not want to be misled."

"When I look at early-stage investment I try to invest in the strength of the founder, their ideas and their ability to respond when things go wrong – because they will go wrong."

"There is a need to improve our understanding of agriculture development. For example, drought offers a huge opportunity to invest in solutions. We need to be making smart investments in adaptation measures so the agriculture industry is prepared for the potential effects of climate change."

"The correlation between fixed-income and equity markets has become significant and synchronous, which makes investment decisions even more challenging in the current environment."

"With interest rates where they are around the world, the Australian equity market looks attractive relative to other global equity markets given it ranks second in the world in dividend yield."

"It is very important for investors to think about the way they price market disruptors and how to invest in disrupters in the current market environment. Price volatility is not the same as asset underperformance."

"There has been US$8 trillion of divestment from fossil-fuel assets globally due to climate-change concerns. It will be interesting if the rate of divestment lifts dramatically, particularly if this affects the cost of capital for new projects."

"Balancing the energy mix is very important but as a concept it is not well understood by the public. As a motivated investor with a particular public-policy objective, we try to push the investment market to places where others will follow in pursuit of these objectives."

"If Australia had easier access to natural gas, 50 per cent of renewables by 2030 would be much more possible. The key change will be the move to energy storage – how to get storage across the grid and into people’s homes."

"Economics will drive a shift towards clean energy as investment in fossil fuels becomes less viable. We will get to 50 per cent of renewables in 10 years’ time – it is just a question of whether it is a stable transition with supportive government policy or a continuation of the slightly chaotic transition we have experienced in recent years."

"The first stage of green investment saw a lot of subsidies. Now the sector is holding itself up independently and, with the prospect of new technologies entering and emboldening the energy mix, its trajectory bodes well for the future."