"well good afternoon ladies and gentlemen and welcome to this afternoon's uh master retirement master class hosted by russell investments my name is martin kennedy i'm the head of education here at russell investments and i'm presenting to you this afternoon from the russell investments office here in melbourne wherever you're joining us from today i hope that you are safe and well now this afternoon's masterclass has been designed to give you access to some of our russell investment experts so you can hear first hand from them and share in their expertise today of course we are talking about investment markets and investing in retirement and i've got a couple of our great experts um to talk to you shortly first of all we do want this to be an interactive session but what you might find as you've joined us is that you are automatically muted please don't let that stop you you should have access to a questions tab there feel free at any point throughout the presentation to type your questions i'll see see them come through and i'll make sure they get answered before we finish um the presentation itself will run for approximately 30 minutes we might go over a fraction depending on how many uh questions that we have at the end of today's session a recording of the session will be available so if you do miss something you will be able to come back and look to it importantly all the information in today's presentation is general financial information only and that means it hasn't taken into account your personal circumstances please consider it in a lot of your own personal circumstances before acting on any of the information and if you do require personal financial advice or guidance it is available by contacting russell investments on one eight hundred triple five double six seven all right with all the formalities out of the way let's now go and have a look at what we're going to go through today because today we're going to start off by hearing from alex about the economic cycle and what's going on and there's been a lot going on lately their outlook for inflation and interest rates longer-term impacts of covert and of course where we are in the greed panic cycle after alex has taken us through all of this we're going to hear from adam and adam's going to talk about investing in retirement including the risks of investment and a paper via real loss how to manage some of the risks how to know what investment options are designed to do and finally trying to answer the question well which investment option is right for each of us individually so let's let me now introduce our experts so first of all we're going to hear from alex coosley alex has been with russell um since february of 2017 had previously spent a couple of years working at a economic consulting firm alex is uh very busy he's very presentable you'll enjoy alex talking to you he's a very busy boy because he has a new puppy after that we'll hear from adam adam is sydney-based he's also been with russell for about five years but has traditionally traveled across the country talking to people face to face about retirement and about their options adam of course is also very busy um he has a young family and is currently renovating his house so a lot of busy uh people here at russell but that's enough for me for the moment so what i'd now like to do is invite alex to come and join us so i'm gonna turn my camera off one of the things that you might see two the boys are going to i'm going to continue to drive through the slides they might need i'll try and keep up but they might need to tell me to move to the next slide etc with that out of the way um alex over to you thanks martin and thank you everyone for your time and thanks for the introduction on the the poppy i think he's getting more attention than me these days from not just at home but it seems like work so today what we wanted to do is really go through how we're seeing the world and and the economic cycle how i position for that some of the risks that are out there and really try and give everyone a better sense of what we think is important and what we think is kind of getting more attention than it did otherwise would deserve i think it's fair to say we really should take a step back and think about where we've come from so obviously we had the big covert recession in 2020 and then this phenomenal rebound in economic activity and global markets through 2021 and we had thought uh at the start of the we're going to be moving from very very strong economic growth to close to trend or slightly above trend growth uh through 2022 and then again slowing down again in 2023 that has accelerated that downshift that we thought would happen has accelerated quite a bit um just because that firstly inflation rates have been pretty high and we're going to get to that and also the central banks globally have really pivoted quite aggressively to raising rates at a faster pace than than ourselves and to be honest that the market had expected at the start of the year and that does suggest to us that recession risks are starting to rise for the second half of next year so second half of 2023 what does this mean for positioning we've been kind of very closely monitoring equity sentiment so the sentiment within you know equity markets and this is what martin was talking about with that greed and panic cycle for any signs we're seeing panic coming through and really trying to gauge how the market is responding to these recession risks relative to our view right now we're seeing some pessimism we're not yet seeing those signs of panic and then in terms of the key risk and one that we'll we can talk about at the end for australia but you know central banks is really the key focus and what is happening with inflation there is a lot some risks around what is happening with china but we think those risks have abated in the last month or so and then obviously energy price is remaining quite high if russia and ukraine escalates further and i think the last thing just to touch on because it's very timely uh is the the election that was held over the weekend and what we think that means for for the australian economy but if we can go to two slides forward martin so the next one um perfect yeah so i mentioned that recession risks are rising we think in the second half of 2020. that's still some runway of growth that we expect and what we've been really arguing and debating within the team and within the broader investment division at russell is is really if that is kind of starting to rise what kind of recession are we looking at and as economists there's two things you tend to look at so the first thing is what has happened with interest rates and what is happening with this concept called the yield curve which is the interest rate on long government bonds minus the interest rate on short government bonds when those relation when that relationship flips over that's a pretty good indicator that recession risks are starting to rise 12 to 18 months out and we have seen that quickly invert and then on invert the next thing that we want to look at though is really looking for those signs of imbalances in the economy that suggest that the recession is going to be either prolonged or quite sharp and so you know the perfect example was what happened in 2008 where there was a huge amount of household debt uh particularly in the united states uh that caused a much more prolonged recession than say the one that happened in 2001. when we look at this right now that on the left you can see some red and green so red means that it's concerning and so we have more of the market implied things that are suggesting worries and also corporate debt levels obviously there was a number of pretty broad-based borrowing through covert with interest rates so low but outside of that in the u. s things kind of look okay so there's not a great deal of imbalances if we compare that to australia i would say that the household debt side of things looks a little bit more red but we think that the rba here are going to be less likely to raise rise raise rates as quickly as they are in the u.s but let's move to australia for the next slide please martin uh on the australian labor market uh and this has been a phenomenal recovery uh in the labor market we now have an unemployment rate at 3. 9 it's been a long time a long long time since we've seen that uh and so that's quite an encouraging sign of the economy is moving quite nicely uh we still have the boost of the or the tailwind of the reopening that's happening in australia it's been a bit more delayed here than it has been in say northern america or western europe so we think that australia is actually a pretty good place in terms of asset allocation and economic strength the next slide though shows that even though we've had this really strong labor market we haven't really seen wage growth to the extent that we're seeing in other parts of the world particularly europe and the united states so i mean for comparison we had out wages print for q1 of this year that just came out last week and that was 2.4 year on year in the us that number's closer to four and a half to five percent so we are lagging quite a bit although you know i think we're starting to see some pressure building i was reading the australian financial review just on the weekend and it seemed like everything was about you know always is growing wage wage pressure um so we think that the reserve bank in terms of interest rates and what this means for heart the housing market in particular is within the rba are going to raise interest rates we don't think it's going to be as aggressive as the market would suggest so the market thinks the rba are going to get to 3 by the end of this year we think that's probably more closer to 1. 5 to 2 is about as far as we're going to get because at that point you really start to see the impact through the housing market and consumer balance sheets and income statements so at one 1.5 percent we estimate that you're pretty much close to mortgage payments as a percentage of income being back to long-term averages and so that's already taking some of the the you know the strength out of the housing market and also out of of the economy so that should be enough for them to be quite content letting you know uh seeing how the economy kind of settles after that first 1.5 interest rate increase uh so on equity markets uh you know our broader positioning and this is kind of more talking about the diversified funds that are you know either um 60 40 or even more aggressive but we can we can adjust these comments as you see as we need uh we have been looking at our regional allocations and we still have a slight preference for australian equities relative to global equities and the key rate there's three key reasons for that the first is we think that interest rates aren't going to be as aggressive here as they are in the rest of the world i think the economy has a nice tailwind from there's a couple of things firstly the infrastructure investments coming out of china as they get out of lockdown uh the economy has the reopening tailwind um so those two and the last bit this is a kind of a complicated or a busy chart what it really shows is how the market is valuing australian equities relative to global equities and so when that uh when that grey line is above the blue line it means that australia is being valued at a greater rate than uh global equities and vice versa and so right now it actually is slightly undervalued in our opinion so we think there's still some value to be unlocked there which we think is an encouraging place but more broadly if we take a step back from regional we have been trimming a little bit of risk and this ties into the greed and panic cycle so if we go forward two slides martin to you know this disgrading um uh despondency i think this is probably the most important part in one of the most important charts that we talk about in financial markets it looks like a pretty inconsequential chart doesn't look very scientific but it really shows you that markets tend to follow a cycle that is driven by psychology we're all human even the people that rely on computers still have a human element it's all we tend to see is that you go through this wave of optimism excitement thrilling euphoria then you go through some anxiety fear and then at the very bottom you see despondency and this is where people give up and they go but he says you know we're never going to make money again and so when you are seeing those signs of euphoria that's the point at which you have maximum financial risk and arguably we were there towards the end of last year and we actually started taking some risk off the table within the funds themselves we are now we've written down this kind of curve of anxiety fear we've seen panic um on different days we haven't seen the wholesale capitulation despondency that we would think presents the point of maximum financial opportunity right so you know we we have a number of indicators that we've built in-house to try and capture what the sentiment of the market is and we're kind of in that kind of fear to panic range right now so we're not right down the bottom yet we're kind of getting close to that we think uh i think the last thing just to quickly touch on is is the election we've spent some time this morning in sydney within the team talking about and digesting the news the first thing to note is that from a market perspective this is probably one of the the least consequential elections in the last couple of well probably the last 10 to 15 years the reason being that really wasn't a great deal of policy difference between labor and liberal there was a lot of talk about how different they were but when you think about the important uh the important factors for how an economy operates the first one was that the stage three tax cuts were already baked in for both parties uh there were some measures around housing labor didn't opt down the super path which we think is probably an appropriate choice to make and then you know on other things around productivity and wages there's a lot of talk but at the end of the day most of those decisions are made by private businesses and the independent uh the fair work commission which is a nominally independent institutions so we don't really think that this election really poses a big big shift in in how we see the how we see australia how we see the australian share market i think the bigger question is really three years down the track we have a re-election do we start to see later the labor party and the liberal party start to diverge more uh on their policy offerings i think the final bit just to say on the election i'm happy to take questions on this uh of course is you know that whilst there's those policy differences aren't really apparent then the other thing to note is that even though there's a lot of focus on labor having it seems that they're going to get a majority in the house of reps uh you know in the senate they're going to have to rely on either the greens the greens and the jackie lambie party or potentially trying to get people to cross the line in the in the from the coalition and so they really kind of can constrained in what they're really going to be able to do so we think it's been a pretty boring three pretty boring three years in terms of actual policy changes that come out of this this new government so which you know generally status quo and not too many things changing actually is a pretty good thing for the economy with that martin i might leave it there and see if there's any questions wonderful well thanks alex and i know just speaking personally i'm looking uh quite forward to a reasonably boring time in politics um i'm certainly from the last six weeks pretty over it but it's great but look thanks so much for sharing um your expertise there alex i know you've got a million of those graphs and you do a wonderful job mating in breaking them down and presenting them in a format that people like me can understand so i do greatly appreciate that i will highlight again if anyone does want to ask a question please you should have a questions tab that you see there please feel free at any point during any of the presentations type your questions in and we'll offer them to the boys um but next um with alex dunn i'm now going to invite adam crowell to present so again i will i can get my computer working um so adam hopefully you're there when you've got a moment um adam's going to talk to us about how important it is investing in retirement and for all of us the one thing and i'm certainly not going to steal any of adam's thunder here it's important to remember that when you are investing you're not just investing up until the day you retire one way or the other you will be invested for the rest of your life i know um adam's going to to talk about um lots of different options around investing so adam over to you so uh excuse me thank you very much much appreciated um what we're going to be covering today is um sort of your risk of investing so i'll get a deeper understanding about uh gains and losses so more on the side of paper versus real so we can help get a better understanding of that uh also we're going to be looking at how to manage risk essentially with i guess the way the world is at the moment too a bit of risk going on and getting a better understanding of how we can manage it uh while we uh uh essentially keeping our money invested as well now part of that will be then seeing how our investment options our risks and objectives uh work for each different investment option and it's going to be important to understand that so we have a better um a better understanding a better appetite for which investment option is going to be best for us which is uh the last point as well now if we just move on to the next slide the risks of investing so basically when it comes to investing here we're all going to have different levels of risk they're willing to take so for some a risk can be seen as driving a car or others it could be basically skydiving but where it comes to risk again we do more so see associated with uh investments than every other day life activities now the first type of risk that we're going to be looking at so there's a total of four of them essentially there are more but these are generally the more common ones that we do see now the first one the cyclical risk so basically what that is that is a business cycle or other economic cycles that are affecting investments so these tend to follow trends in the economy now uh there are many different sectors which i'm sure you have seen affected by that as well through cyclical risk within itself um it's going to continue it's just a risk that's always going to be there longevity risk is also another large one now this is to do with um essentially when our age of expiry essentially is so our expected age of death now longevity risk is the risk that you are actually going to outlive your funds so the older we get the more likely we are to live past our average life expectancy so men aged 65 in 2017 to 2019 can expect to live for actually another 20 years so that's an expected age of death at age 85 where women on the other hand are age 65 between 2017 to 2019 could expect to live another 22.7 years so we're getting close to uh 80 88 years of age there for a female now where that longevity risk comes in as if someone expects to pass away around their average life expectancy and financially plans their drawdowns to that then should they live longer than that they'll probably have exhausted all of their funds and be solely relying on the age pension from then forward which may or may not be an issue another type of risk is sequencing risk so sequencing risk is the effects on how long your supergeneration or other savings as well last depending on what part of the investment cycle you access your funds if there is a downturn and funds are accessed funds are essentially being sold off at a discounted rate and that is used to fund your your pension payments that might be coming out say monthly during the cover pandemic people actually have inadvertently managed that risk by delaying their retirement so travel was almost impossible during lockdown so people just quite simply didn't retire and therefore uh what happened was was that when we did have that downturn investment values decreased people kept working and over time over a few about six months or so the investment options essentially came back to the price of what it was prior to the downturn so yeah inadvertently people did manage that risk now uh alternatively people already retired they also may have inadvertently managed risk by simply delaying large purchases now inflation risk so inflation risk is something that we're all seeing today so martin mentioned before um that i'm doing some renovations uh inflation there is a lot of inflation going on out there and i can tell you that it's definitely happening the risk is that essentially that inflation is outpacing returns so basically what you're seeing there is that cash returns are not keeping pace with the inflation essentially so that is a very common one seen at the moment so uh next slide so the risks of investing essentially the higher the weighting to growth related investment options the more accepted risk by the investor so investment options that have growth assets have the ability to outpace cash returns over time in the short term that may not necessarily happen as markets are might be decreasing but overall essentially the idea is is that over time a growth-based investment option will outpace cash-based or defensive-based asset returns so cash or while normally seen as a safe investment it also has its risks so we mentioned inflation risk before we're going back to that again it may not keep up with inflation so essentially what's happening is over time this erodes purchasing power which leads us back to a very old saying a dollar today is worth more than a dollar tomorrow so in the graph that you can see there the two blue uh different cash fixed fixed interest they are traditionally what we call a defensive asset and the two dark investment options there the property and shares they are more seen towards a growth based investment type there as well so as you can see the risk is outlined there the higher the risk the higher the potential return but the higher the volatility that comes along with it now uh next slide there so real real versus paper so in life we're going to have real gains and losses and also paper gains and losses so it's very important to understand these because they are different so while we may see our balances change over time it is extremely important to know the difference between the real gains and losses versus the paper gains and losses so paper gains and losses are when we see our balances increase and decrease so for argument's sake that could be like the asx does daily whereas real gains and losses are where we turn an investment into cash so we're selling it down we're crystallizing the investment option has essentially been sold for a price and at that point the gain or loss has been crystallized so essentially what the difference there is is that with the uh the real gain okay we have crystallized an asset same as a real loss it's being crystallized whereas if an investment option increases or decreases you might see that in a superannuation balance that's on paper you haven't actually taken that that gain or loss realistically until it has been crystallized so very important to remember okay now managing risk it's what we do to manage risk is what is what really counts so there is no one correct answer as to how risk should be managed some people manage risk defensively so putting a lot of money down towards defensive based assets while others aggressively others may also take a mix of the both to allow for some growth when markets are positive but also to protect their position during market downside so diversification helps smooth out individual asset class movements to manage sector risk for argument's sake for example australian shares could be outperforming and international shares could be underperforming diversified investment options are investment options which already include a mix of asset classes which helps to again manage that sector type risk now uh with defensive assets defensive assets are again cash fixed income types in uh type of investment options whereas growth based assets are aussie shares international shares etc now as you can see there on the left-hand side of the screen a defensive asset so a defensive investment option is traditionally what they call a 30-70 so 30 uh growth based investment options and 70 defensive so 70 of that type of investment option is going to be in fixed income and cash type options whereas the other 30 is going to be in in growth options so aussie shares international shares property commodities infrastructure other alternatives right at the very end of that scale you've got a higher growth investment option that high growth investment option is traditionally going to be fully invested in growth based assets and then you have investment options that go in between now investment options sorry mark if you can just go back up one thank you so investment options how to basically see what they're designed to do through their objectives and also their strategy so the objective is a measure is measured in cpi plus a percentage above cpi over a rolling time period the higher the risk the longer the expected time frame to meet the objective of the investment option the investment strategy indicates how the investment option is invested a split between growth and defensive assets while no one does enjoy seeing negative returns at times our investment options indicate an estimated number of annualized negative returns over a 20-year period so for argument's sake what we do have on the screen right there is a defensive investment option it's designed to uh to earn a return of cpi plus two percent measured over rolling five-year period now what is very important to note is that the objective of that investment option can change over time as well i'm sure that as markets do change uh you will hopefully see that uh the two percent uh for two percent above cpi hopefully it's going to increase as time goes on but uh many years ago we did see cash investment returns around sort of six percent um so and that's obviously changed down as well so yeah basically what it is it is going to be a moving objective just depending on what the market is doing but it's a really good idea to have a look and see what the objectives of an investment option is just to help you understand what it can do and not only that the investment strategy of how the money is invested to understand how it's going to perform as well so for this defensive investment option it's typically exposed to a diversified mix of around 30 growth investments and 70 defensive so again it is a lot more weighted towards defensive assets like cash and fixed income there are plenty of different investment options out there please i do encourage you to have read of them see what they are designed to do check their objectives check their strategies very important for you to understand now the right investment option uh for you is basically going to depend on your own individual circumstances so your risk tolerance is really going to come into play then the level of risk is what you're uh for what you're willing to accept your goals and your balance can the investment option with your current balance help you to achieve your goals you might be required to consider more risk or maybe even take on less risk if it looks like you're going to overachieve your goals you could also have other forms of income there could be a government age pension for argument so there could also be an investment property or a portfolio of shares so it's not just what you have in superannuation it can also be outside of superannuation that can help determine which investment option is going to be best for you the they're very important to consider is it may not be against superannuation that you are solely relying upon so thank you very much for your time today and i look forward to any questions that do come through terrific thanks adam and uh to both adam and alex first of all thank you very much i hope i drove between your slides alright and i was a bit quick on some and a bit slow on the others most importantly ladies and gentlemen on the line thank you very much for your time today i i think it's been great to hear from the the experts who manage your you know retirement savings um and are really um you know that's what their day job is if you like making sure that you have access to the very best information and of course the best returns i can see we've had some questions come in which i'll get to momentarily just just a couple of things today has been the very first of our retirement master classes and i do hope you have found it valuable we are running a couple more on different subjects over the next couple of months and we would love for you to join us particularly if you found today valuable on the screen there is the details there's another one 21st of june and then 21st of july different topics and different information also quickly at the end of today's session there is going to be a just when you finish there'll be a new quick pop-up it's just three questions or three questions about today's session and one little box there at the bottom where we'd love to hear from you anything that you would like to hear from us and of course we can then um collate all that information if you um if you haven't yet registered you can use the qr code bottom right hand corner grab your mobile device you can click on that and work through to register for the upcoming master classes of course at russell we want to make sure you've always got access to the very best information and so we have recently released what we call zest zest is your feel good guide to super and retirement and rather than us just sending you a magazine full of articles and most of some of which won't be um relevant to you using zest you can control the content and information that you see to make sure it is relevant for you if you haven't yet registered for zest again either jump online again another qr code i'm probably testing your phone skills out there to do multiple ones register for zest and have control over the information that you receive from your fund lastly before we get to the questions i again just want to highlight that all the information that we've gone through today is general financial information only it hasn't taken into account your personal circumstances please consider it in a lot of your circumstances before acting on any of the information and if you do require personal financial information or advice it is available by calling the fund on sharing their 1-800-5555 it's been very valuable uh we really appreciate it and we're going to lean on it again a little bit further because we do have some very good questions that have come in so alex the first question i'm going to direct to you here and simon has asked is it too risky to invest in china now of course we all know there's been a lot going on with china and um alex have you got any thoughts about or russell's um response to investing in china yeah so we i mean within our emerging market funds we have exposure to china and i think one of the the live debates right now is is now a good time to start adding to that risk in china or adding to our position which might sound a bit counterintuitive not there's really three you know we have our process of thinking about cycle evaluation and sentiment evaluation of chinese equities is really cheap i mean even the big the big tech names for tencent alibaba they're actually trading in the cheaper valuation than your broad global equities and they're still growing pretty quickly um on the cycle side of things we know right now china is really struggling because of coverton and it's a it's a tough path out of this clovis situation because they have a very high rate of unvaccinated amongst elderly people next to the challenge but at the flip side we think that you know economics is going to start reinforcing itself so there's a big political meeting at the end of this year where president"