Australian Retirement Crisis: Impact Of Demographics On The Share Market
We’ve all heard and experienced the term ‘when America sneezes, Australia catches a cold’. For years I’ve been waking up to a notification from The Australian Financial Review stating whether the Australian share market will rise or fall that day. They don’t have a crystal ball and can’t accurately tell when the next Australian recession will be. Of course, their prediction is purely based on whether the US share market rose or fell overnight. Like it or not, we are financially linked to the US economy and the daily ups and downs of their share market.
The danger with the next Australian recession
What is worrying is that the US is quite possibly teetering on the cusp of yet another Australian recession. Historically, recessions come along every four to eight years on average, so it is inevitable at some point. And when the US goes into its next economic downturn, it will likely take Australia and the rest of the developed world down with it.
As I wrote in Turning Japanese here:
The problem, however, is that the next Australian recession is going to cross the exact point that the maximum number of Boomers are retiring. This crossover has never happened anywhere in the world before.
What it means is that the Boomers’ superannuation that’s invested in shares and other market-linked assets may get wiped out in one recession. This is the biggest problem I can see in financial advising today, and no financial adviser seems to have taken into account the imminent collision between the business cycle and demographics.
Can Inflation be generated?
In Australia, there are approximately three million Baby Boomers who will retire over the next decade. What I am seeing as a financial adviser in Sydney is that as the Boomer generation retires, they are changing their spending patterns. No longer are they buying the big-ticket items, like new furniture, or a new car every three years. They are usually comfortable in their family home and have a vehicle that they will only update every decade or so.
From the financial analysis of our client’s cash flows, over a five-year plus timeframe, they are spending around 60% less than they used to spend when they were working. Multiplied across the entire Boomer population and there is a dramatic economic effect. Inflation is almost impossible to generate, with meaningful economic impact from lower and lower interest rates.
Economic growth is impossible because people cannot consume enough. The millennials, saddled with university debt and property prices that are out of reach, are unlikely to earn enough to carry the burden of the change in spending of the retiring Boomers.
Why this is the biggest story in Australia
The Baby Boomers are the wealthiest generation in all history. But the median worker has an extremely elevated’ debt to income ratio of 199.7%, no savings, and too much geared property (particularly in self-managed superannuation funds) at a point in the business cycle that’s getting mature.
We may well muddle through in Australia and avoid another ‘official’ recession. I say official because the measure of whether Australia is in a recession or not is two successive quarters of negative GDP (Gross Domestic Product). This, of course, can be manipulated, such in the December 2008 quarter where cash was handed out by the Federal Government as part of a $42 billion stimulus package.
This artificial lift in spending meant that the December 2008 quarterly GDP number came in as a positive number and our Federal Treasurer at the time proclaimed that he had saved the country from another Australian recession. Try telling that to the workers from Bonds and other businesses who lost their jobs in the economic downturn. Make no mistake, Australia was in recession, but not officially.
We don’t have to have two consecutive quarters of negative economic growth for the medium person to feel like they are experiencing a recession. It’s just not about the numbers; it’s about how people feel that impacts their spending and consumption.
What will happen when our next recession hits?
There is some commentary appearing now stating that when the next Australian recession comes that our overvalued share market will halve. If this occurs, it will leave a massive hole in the financial positions of the Boomers, who are the biggest group in Australia to ever retire.
Boomers will be fully invested when the next Australian recession comes so they won’t be able to take advantage of the buying opportunities. The Gen-Xers and millennials can’t afford to buy either as they are busy paying down their mortgage, studying or travelling.
This is a considerable risk to the largest generation in Australia’s history, and it is something Boomers need to be massively aware of. The problem, however, is that the next Australian recession is going to cross the exact point that the maximum number of Boomers are retiring.
They may become more risk-averse than any generation in history at that point when the recession comes, and the market sells off. It is just tied into human behavior, and that means that the returns on the overall share market are going to be somewhat problematic.
I’m talking here about the Australian share market in general; those shares that retirees buy that ‘are good dividend-paying’. The share price of these companies may well fall a long way in the next recession as many of the dividends paid are propped up by borrowings. Just looking at the top 20 Australian companies and we can see that 19 companies are either poorly managed, structurally challenged or are under legislative threat.
But the next Australian recession will be opportunities…
Globally there will still be some fantastic opportunities, as technology innovation is moving at a remarkable rate. However, Australia only really has four world-class companies that would still prosper should the next recession come at the exact point that the maximum number of Boomers are retiring.
Want to know how demographics and the next Australian recession will affect your retirement?
If you are a Boomer and are concerned about your retirement, see our Retirement Roadmap advice package, and/or contact us for financial advice in Australia to ensure that you get to where you need to be at retirement and are well placed to achieve investment success.