Over the next 20 years Australia is poised to join an elite group of countries that lends more capital than it borrows from the rest of the world.
While that is an enviable position for any nation to find itself in, Australia’s transition from net importer of capital to net exporter has serious implications for retirees, funds managers and policymakers alike.
The country’s switch from net borrower to net lender of money is almost entirely being driven by our burgeoning superannuation savings, which recently surpassed the $1 trillion mark.
That huge weight of money, equivalent to 100 per cent of Australia’s economic activity, also creates some interesting dilemmas for locally-based fund managers operating in a domestic equity market that constitutes only 2.3 per cent of global share market capitalisation.
As the pool of superannuation funds flow into the local share markets, Australian fund managers are increasingly looking to invest a larger proportion of their assets offshore.
The exponential growth of the superannuation savings pool will also continue to attract new players (both local and internationally-based) and products to Australia’s funds management market.
However, at the macro-economic level, the spilling out of Australian superannuation funds internationally will have some profound effects.
First, let’s examine the situation as it stands today.
As at March 31, 2007, Australia ran an annual current account deficit of around $57 billion dollars. The trade balance contributed $12 billion of this deficit, whereas our net income deficit was almost four times larger at $45 billion.
The key determinant affecting the income deficit component is the net position of Australians investing offshore (both debt and equity) relative to foreigners investing into Australia.
Our net equity position as of March 2007 was a deficit of $92 billion, and the net fixed interest position was a deficit of $532 billion.
Given the weight of money argument and the growing superannuation contributions, the trend will be for an increase in international investments by Australians in absolute and also asset allocation terms.
If we assume a gradual increase in overseas equities exposure — from around 20 per cent to 30 per cent from superannuation funds over the next five years — and an average return of around 10 per cent — estimated by nominal global gross domestic product (GDP) growth plus dividends — and an earnings rate of 9 per cent on Australian equities, Australia can go to a net equity surplus within four years.
The net fixed interest position, however, given its magnitude, is likely to remain in a net deficit position.
Based on the above assumptions, the rate of improvement in net lending will initially be modest, with the net amount of capital imports in 2021 estimated at around the level seen in 2003.
Ultimately, the continual build up of superannuation assets will eventually result in Australia becoming a net lender to the world by 2026.
We are already starting to see evidence of this shift to investing offshore.
Over the past two years, the total amount of funds invested in overseas listed property has doubled to more than $4 billion as at March 31, 2007.
Meanwhile, infrastructure has been growing rapidly as an asset class, with many projects located offshore.
These recent trends reflect the potent combination of globalisation, the weight of money and diversification.
Some commentators have suggested that with the ageing of Australia’s population, and the drawing of superannuation savings by retirees, Australia’s claim to be a net exporter of capital may be premature.
A quick recap of some population projections clearly shows the country is ageing.
In 2006, 82 per cent of Australians were aged less than 60, while those aged over 60 accounted for the remaining 18 per cent — a difference of 64 per cent.
That difference is forecast to shrink to 36 per cent by 2046, with the over-60s growing to represent 32 per cent of Australia’s population.
Clearly, the ageing of Australia will present governments with some tough spending choices, as successive Federal Budgets feel the strain of increased pension and healthcare costs.
Our robust private superannuation scheme has been designed to help ameliorate some of these fiscal challenges.
The ageing population will have some influence on the asset allocation of Australian investments as retirees draw-down their savings, but it is unlikely to, as some researchers have suggested, reverse the country’s position as a net capital exporter.
It has been projected that the working population’s share of superannuation assets will peak at 81 per cent in 2020, and that this proportion will gradually decline until it reaches 61 per cent in 2057.
Undoubtedly, as people retire they will reduce their allocation to international assets and focus more on income-generating Australian investments.
However, for super draw-downs to begin to reverse the net exportation of capital, it would have to exceed inflows into the system, which is an unlikely scenario.
The growth of worker’s superannuation assets in dollar terms always exceeds that of retirees’ because the latter makes up a much smaller share of the population and has a lower exposure to growth assets.
Australian superannuation assets will increasingly seek out higher returns in a globally competitive market.
In this context, Australian politicians who look to our superannuation pool as a cheap source of infrastructure funding are misguided.
It is important to remember that superannuation trustees are required to maximise returns for their investors within certain risk parameters.
Nation-building that does not maximise returns and is in fact potentially detrimental to the growth and protection members’ wealth does not sit comfortably within these parameters.
As Australian investors adjust to their expanded place in the world, our fund managers too face massive global opportunities, and risks.
Rather than allow overseas-based firms to secure an ever-increasing slice of Australia’s super assets, local firms will offer a broader menu of global investments.
Given our high skill levels, Australian fund managers should also be able to compete with global players and possibly obtain market share in foreign jurisdictions.
However, global strategies are also characterised by considerable risk and hazards for fund managers as well as investors.
One only needs to think back 10 years to the Asian financial crisis of 1997, when some currency and share markets in the region almost went into meltdown as investors looked for quick exit strategies when none were available.
This was when many people learned for the first time that global investing is far from a one-way street and that fortunes can be lost just as easily as they are made.
Emilio Gonzalez CFA is the chief investment officer at PerpetualInvestments .
