Latest / The Money Puzzle / Bringing it all back home - Why the oil shock is turning investors back to the ASX

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Bringing it all back home - Why the oil shock is turning investors back to the ASX · The Money Puzzle

0:10
Speaker 1: Hello, and welcome to The Australian's Money Puzzle podcast. I'm
0:13
Speaker 1: James Kirby. Welcome aboard everybody. Well, there goes the first
0:16
Speaker 1: quarter of calendar twenty twenty six. We won't forget it
0:20
Speaker 1: first three months of the year, my O, my Well, Basically,
0:24
Speaker 1: since the war broke out in Iran in February, two
0:29
Speaker 1: of the three major markets on Wall Street are now
0:32
Speaker 1: officially in a correction. You know, a correction is more
0:34
Speaker 1: than ten percent fall from the top. A crash is
0:37
Speaker 1: more than twenty percent. The only one left hanging on
0:40
Speaker 1: is the S and P five hundred, and that's just
0:41
Speaker 1: hanging on, folks. It's down nine percent this morning from
0:44
Speaker 1: the top. So we are tottering close to correction markets.
0:48
Speaker 1: Our own market, the ASX two hundred's a little bit better.
0:50
Speaker 1: It's down about three percent this year. But basically all
0:52
Speaker 1: the numbers are going the wrong way. And I'm speaking
0:55
Speaker 1: to you just before Easter. This will be our Easter
0:57
Speaker 1: special show since that rates might have two more lifts
1:00
Speaker 1: in them, if you know what I mean, two more
1:01
Speaker 1: interest rate increases from the RBA. Lucy ellis former Deputy
1:05
Speaker 1: Governor of the RBA, now Chief economists at West pexas
1:08
Speaker 1: three more. This morning, HSB chief economist Paul Bloxam says,
1:13
Speaker 1: the first quarter to June, that is, the three months
1:17
Speaker 1: to June, that quarter will be a recession quarter for Australia.
1:22
Speaker 1: That is, by that, I mean it's going to be minus.
1:24
Speaker 1: It's a negative number. If we had two of those
1:26
Speaker 1: in a row, we're looking at recession. So we need
1:29
Speaker 1: to take a helicopter view. We really do what's happening
1:32
Speaker 1: first of all, and what signals are we getting from
1:34
Speaker 1: the markets and from investors themselves as to what's going
1:37
Speaker 1: to happen. I have the ideal candidate for you. He's
1:39
Speaker 1: been on the show before. It's David BASSINETI, chief economist
1:42
Speaker 1: at Basis Shares. How are you, David?
1:44
Speaker 2: Great taberia with the jones? Not too bad?
1:46
Speaker 1: Thanks, rapidly revising your numbers day by day. It must
1:49
Speaker 1: be quite a period to be an economist, especially at
1:53
Speaker 1: the cold face like you are, with people making investment decisions,
1:57
Speaker 1: thousands of people making decisions. I suppose, off the back
1:59
Speaker 1: of where you're coming from, let's have a look at
2:02
Speaker 1: if we would. Let's let's just stand back and say, okay,
2:05
Speaker 1: how different was this quarter compared to the quarter that
2:09
Speaker 1: perhaps consensus expectations had in January.
2:13
Speaker 2: Yeah, well, look, as you mentioned, like a lot of
2:15
Speaker 2: markets are are in correction territory. I mean, for the record,
2:18
Speaker 2: the year to date numbers for the S and P
2:20
Speaker 2: it's down seven and a half percent, the Nasdaq is
2:23
Speaker 2: down ten percent, Europe down about six percent. Our market
2:27
Speaker 2: is actually it's down, but not as much so. The
2:29
Speaker 2: ASEX two hundred year to date is only down three percent. Meanwhile,
2:33
Speaker 2: we've had obviously oil prices are up eighty percent over
2:36
Speaker 2: that period, have had a big surgeon. All prices, bond
2:39
Speaker 2: yields have gone up, So I think, you know, the
2:41
Speaker 2: story has been you know, the expectation going into this
2:44
Speaker 2: year was markets could continue to grind high. Global growth
2:47
Speaker 2: was looking okay, Corporate earnings globally was looking okay. Inflation
2:51
Speaker 2: when you strip out tariffs was sort of under control,
2:54
Speaker 2: and the FED was looking to cut interest rates, so
2:56
Speaker 2: bond yields were supported. With markets, what we were seeing
3:00
Speaker 2: was a bit of a rotation. So some of the
3:02
Speaker 2: non US markets, Japan emerging markets doing better than the US.
3:06
Speaker 2: And you know, prior to the war that the key
3:08
Speaker 2: thing was Ai disruption and maybe that being a bit
3:11
Speaker 2: more of a headwind for the US market, but not
3:14
Speaker 2: one that would see the market fall, but maybe just
3:16
Speaker 2: maybe not perform as well as some other markets, which
3:19
Speaker 2: has been different from what we've seen in years gone by.
3:22
Speaker 2: You know, US has been outperforming for many years, and
3:25
Speaker 2: so there's a talk of that great rotation. But you know,
3:28
Speaker 2: the war has thrown everything up in the air, and
3:31
Speaker 2: it's pushed down equity markets, it's pushed up oil prices,
3:35
Speaker 2: it's pushed up bond yields, and yeah, just thrown everything.
3:38
Speaker 2: We've shifted gears to a whole new situation. At the moment, I.
3:42
Speaker 1: Don't want to go down any sort of tributaries too
3:44
Speaker 1: quickly because the listeners would like to get a picture.
3:46
Speaker 1: I'm sure of where we are and to what extent
3:49
Speaker 1: that is enough where with what we'd be Gold hasn't
3:52
Speaker 1: performed at all. In fact, it's had its worst month
3:54
Speaker 1: in a decade. So that's another surprise, isn't it. So
3:58
Speaker 1: some of these drivers that we were all sort of
3:59
Speaker 1: see back with they've changed. I know it's very hard
4:03
Speaker 1: to call on these things, but I see some of
4:07
Speaker 1: the very top people in the world, you know that
4:11
Speaker 1: in terms of finance. The head of Gorman Sacks and
4:14
Speaker 1: ahead of other big wall streets that of Parahouse are
4:17
Speaker 1: saying they told the market reaction would be worth Do
4:20
Speaker 1: you think the market drops so far reflects the problems
4:23
Speaker 1: that are emerging.
4:24
Speaker 2: Well, I think there's two reasons why the markets haven't
4:27
Speaker 2: maybe sold off as much as oil prices, for example,
4:30
Speaker 2: are up you know, over one hundred dollars a barrel.
4:34
Speaker 2: You know, we've had like a massive shock. You know,
4:35
Speaker 2: I've had ten to twenty million barrels a day lost,
4:38
Speaker 2: so you know, ten to twenty percent of global oil
4:41
Speaker 2: supply has been basically shut off. Now. The thing is
4:45
Speaker 2: that will hit markets with a lag because a lot
4:47
Speaker 2: of the ships that you know, there's a lag before
4:50
Speaker 2: ships leaving the straight up on wards, which has been
4:52
Speaker 2: blocked flow through to refineries and affect supplies. So we've
4:56
Speaker 2: had a few weeks where ships were still arriving at
5:00
Speaker 2: their destinations and delivering oil. The problem will be and
5:04
Speaker 2: it's starting to emerge now that there's no new ships
5:06
Speaker 2: coming through and so the blockage in the oil market,
5:09
Speaker 2: it has had an effect. But the longer this war
5:11
Speaker 2: drags on the bigger the effect on the oil market.
5:14
Speaker 2: I think the other factor is just simply what's being
5:17
Speaker 2: called the taco trade. You know, Trump all wes chickens out.
5:19
Speaker 2: I think markets have been anticipating, you know, the worst,
5:23
Speaker 2: if there's to the extent the equity market sells off,
5:26
Speaker 2: bonyards go higher, all prices go higher, that he's going
5:29
Speaker 2: to like look to back out, you know, and we've
5:31
Speaker 2: seen some signs of that, and sort of markets are
5:34
Speaker 2: now caught in this bind. You know. On the one hand,
5:36
Speaker 2: Donald Trump says he's negotiating and talks are going well.
5:39
Speaker 2: On the other hand, you know, troops are heading toward
5:42
Speaker 2: the Middle East, and he says if they don't strike,
5:44
Speaker 2: as I ear, he's going to drop a ton more
5:47
Speaker 2: bombs on our arms. So we're in this state of
5:49
Speaker 2: flux really at the moment. But again I think why
5:52
Speaker 2: the markets haven't sold off as much as firstly, the
5:54
Speaker 2: oil shock is still a lagged effect and we yet
5:58
Speaker 2: to see the worst of that. Market has been hoping that, yeah,
6:01
Speaker 2: Donald Trump would find an exit strategy before got too bad,
6:05
Speaker 2: but so far that hasn't happened.
6:06
Speaker 1: Right, Okay, So broadly we see that the market obviously
6:10
Speaker 1: is down when many people thought it would be tracking well.
6:14
Speaker 1: Inflation is higher than we expected. Interest rates have gone
6:18
Speaker 1: up and are going to continue going up. The full impact,
6:21
Speaker 1: as you see to listeners of the oil shock has
6:24
Speaker 1: not been felt, and perhaps that means the markets haven't
6:27
Speaker 1: felt it yet. Have you changed your numbers in any
6:31
Speaker 1: significant way in terms of outlook for the year.
6:34
Speaker 2: Yeah, Look, I think as you mentioned interest rates, I mean, look,
6:37
Speaker 2: so this is an oil shock, and so oil stocks
6:39
Speaker 2: add upward pressure on inflation through the energy channel, but
6:43
Speaker 2: also depress economic growth because you know, if you've got
6:46
Speaker 2: to spend more on petrol, which is an essential good,
6:48
Speaker 2: people kind of need to spend money on petrol, That
6:50
Speaker 2: means I can spend less money elsewhere. So it has
6:53
Speaker 2: mixed implications for central banks. Usually they try to look
6:56
Speaker 2: through these shocks. But what we're seeing is that markets
6:59
Speaker 2: are banks seem to be more worried about the inflationary consequences.
7:03
Speaker 2: And so you've seen markets price out the rate cuts
7:06
Speaker 2: are expecting in the US and now price in more
7:08
Speaker 2: rate hikes in Australia for example. So look in terms
7:11
Speaker 2: of macro forecast, yeah, I mean I've lifted my inflation
7:15
Speaker 2: numbers for the Dune quarter, So we're looking at just
7:19
Speaker 2: over four percent for headline inflation in the June quarter,
7:22
Speaker 2: could potentially be five to six percent now and obviously
7:26
Speaker 2: that's going to hurt consumer spending, it's going to hurt
7:28
Speaker 2: real income. So economic growth was looking to maybe be,
7:32
Speaker 2: you know, around the two and a half percent, it's
7:34
Speaker 2: probably going to be closer to two and maybe a
7:36
Speaker 2: little bit under. So yeah, so the consequence is higher inflation,
7:40
Speaker 2: weaker growth. And I'm still of the case that the RBA.
7:45
Speaker 2: I think the RBA, even before the war was probably
7:47
Speaker 2: planning to raise rates in February and in May because
7:50
Speaker 2: we had an inflation problem even before the war began.
7:54
Speaker 2: And I think the impact of the war has been
7:56
Speaker 2: to add in an extra rate hike, which we did
7:58
Speaker 2: get in March. But I think, and maybe naively, I
8:01
Speaker 2: think May will be enough. We'll be back well basically,
8:04
Speaker 2: that'll be three rate hikes for the year, and it
8:06
Speaker 2: will have unwound all of the rate cuts of last year,
8:09
Speaker 2: take us back to where we were, and that was
8:11
Speaker 2: a time when that level of interstrates helped to slow
8:15
Speaker 2: economic growth and bring down inflation in the past. And
8:18
Speaker 2: I just don't think the RBA would want to throw
8:20
Speaker 2: a lot more. You know, I think the all price
8:24
Speaker 2: shock is going to be pretty damaging up in itself
8:27
Speaker 2: if it lasts, and I don't think they want to
8:29
Speaker 2: sort of be adding to the downside risk to the economy,
8:32
Speaker 2: So there is a balancing actor. I recognize some forecasters
8:35
Speaker 2: are saying three more rate risers, like you're almost guaranteeing
8:38
Speaker 2: recession if you start talking about that, And I don't
8:41
Speaker 2: think a recession is warranted at this stage. But yeah,
8:44
Speaker 2: so that's how I've been thinking about things.
8:46
Speaker 1: That's very clear. So I think what we'll do is
8:48
Speaker 1: we take a break and I'll we come back. We're
8:49
Speaker 1: going to look at so there are settings, right and
8:52
Speaker 1: obviously David's in a position to see the ETF fluws
8:55
Speaker 1: particularly so we can get an idea of what other
8:58
Speaker 1: investors are doing just now and what signals it gives
9:01
Speaker 1: us for investing from here on in for the rest
9:04
Speaker 1: of the year. And there are obviously very particular issues
9:08
Speaker 1: that are out there now. Energy transition is a totally
9:10
Speaker 1: different story than it was. Energy is entirely different story.
9:14
Speaker 1: Look at those petrol stocks, they are thirty percent or
9:17
Speaker 1: so all of a sudden the software companies are kind
9:19
Speaker 1: of down the out more or less the same amount,
9:21
Speaker 1: so very different market forming. But we'll come back to
9:24
Speaker 1: him in a moment. Hello, Welcome back to The Australian's
9:37
Speaker 1: Money Puzzle podcast. James Kirby here with David Bassinetes, the
9:41
Speaker 1: chief economist at Better Shares b ETA Shares. That's the
9:46
Speaker 1: ETF house. Okay, So you watch those flows of the
9:49
Speaker 1: ETFs all the time, and I suppose every year as
9:52
Speaker 1: the ETF become more and more important and more reflective
9:56
Speaker 1: of investor sentiment and the market, the flows are more important.
10:00
Speaker 1: Can you give us a snapshot as to what people
10:02
Speaker 1: have been doing in the first quarter, particularly to the
10:04
Speaker 1: extent that they vary from what we thought there might
10:06
Speaker 1: have been doing.
10:07
Speaker 2: Yeah, looking at the numbers, I mean what we've seen
10:09
Speaker 2: in terms of flows into ETFs over the past few years,
10:12
Speaker 2: is that really the line's share of investment in the
10:15
Speaker 2: equity market has been in global equities. You know, people
10:18
Speaker 2: mess to see ETFs is a great way of getting
10:21
Speaker 2: that international diversification. They might hold a lot of like
10:24
Speaker 2: blue chip Australian companies, but just to get that diversification
10:28
Speaker 2: they use ETF. So flows into international ETFs equity ETFs
10:32
Speaker 2: tended to be larger than for Australia, but so far
10:34
Speaker 2: this share we've seen a gravitation towards the Australian market,
10:38
Speaker 2: so the flows have been more lineball, so you know,
10:41
Speaker 2: equal amount going into the Australian market as into the
10:45
Speaker 2: global markets, which is a big ship. So I think,
10:47
Speaker 2: you know, people are hunkering down and being closer to home,
10:51
Speaker 2: and that's consistent with what I said earlier. Our market
10:53
Speaker 2: hasn't it's come off, but hasn't come off as much,
10:56
Speaker 2: and I think our mining and energy companies are probably
11:00
Speaker 2: you know, helping in that groud. We do have a
11:01
Speaker 2: greater exposure to the resources and energy sector, lower exposure
11:05
Speaker 2: to the technology sector, which as you pointed out, has
11:08
Speaker 2: been hit harder globally. So that's one interest in the
11:12
Speaker 2: commodity space. So we're seeing good flows into our crude
11:15
Speaker 2: oil ETF triple O. Obviously that sort of tracks the
11:19
Speaker 2: futures price of oil and even fuel which is an
11:23
Speaker 2: ETIF that tracks global energy companies and so two ways
11:26
Speaker 2: to play the oil shock is through either buying the
11:30
Speaker 2: crude oil futures price or buying companies that benefit from
11:34
Speaker 2: higher oil prices, so we're seeing good flows into that.
11:37
Speaker 2: Another thing that people like to look at is the
11:39
Speaker 2: balance between geared and bear funds. So we have funds,
11:42
Speaker 2: you know, if you think the market's going to go
11:44
Speaker 2: down and you want to obviously bet on the market
11:46
Speaker 2: going down or protect your portfolio, can buy bear fund
11:49
Speaker 2: or we have geared funds. What we have seen is
11:53
Speaker 2: more interest in buying the geared funds still, so people
11:56
Speaker 2: still have a dip buying mentality rather than looking to
11:59
Speaker 2: load up on bear funds fearing, you know, there's worse
12:02
Speaker 2: to come.
12:03
Speaker 1: Okay, that's interesting, and those geared funds are what happens
12:07
Speaker 1: in the effects what you said at the start, which
12:08
Speaker 1: is more or less fifty to fifty global local. And
12:13
Speaker 1: obviously that particular allocation balance has been fruitful to the
12:17
Speaker 1: extent that you lost less in the last file. But
12:21
Speaker 1: what I want to ask you is tell me what
12:23
Speaker 1: you think of that. Is that just nie jerk stuff
12:25
Speaker 1: or is there something more going on?
12:27
Speaker 2: Look, I think what we are seeing. You know, again,
12:29
Speaker 2: up until last few months, the big trend in ETFs
12:33
Speaker 2: has been international equities has been US large cap technology companies.
12:38
Speaker 2: The Nasdaq ETF I mean, one of our powerhouse ETFs
12:41
Speaker 2: has been the Nasdaq one hundred ETF that holds Google, Amazon, Facebook,
12:46
Speaker 2: those sort of companies. But the sort of fervor for
12:48
Speaker 2: that area of the market is certainly called at the moment,
12:52
Speaker 2: and there's a shift toward more you know, I guess
12:55
Speaker 2: we call them value sectors like energy, materials, consumer staples,
13:00
Speaker 2: and these are sectors that are more prevalent in countries
13:04
Speaker 2: like Europe for example, and Japan to an extent, and
13:07
Speaker 2: Australia obviously through energy and materials. And look again, in
13:11
Speaker 2: terms of isn't the right call? I mean, I think
13:13
Speaker 2: our view had been prior to the war that AI
13:16
Speaker 2: disruption was going to become a bit more of a
13:19
Speaker 2: headwind for the US tech sector, Whereas you know, since Chat,
13:23
Speaker 2: GBT and twenty two anything AI related has been a
13:26
Speaker 2: positive for technology. But just in the last three to
13:29
Speaker 2: six months it has become a bit more of a negative.
13:31
Speaker 1: Okay, So yeah, listeners who would have tuned into the
13:34
Speaker 1: last show, which was with Ben James, who was the
13:36
Speaker 1: top advisor his CEO of a Scalar Partners, we put
13:40
Speaker 1: it to him what he thought people should start doing
13:44
Speaker 1: now in terms of our location, and particularly inside the
13:47
Speaker 1: market and inside the share market I'm talking about, and
13:50
Speaker 1: he mentioned that he thought, first of all, he thought
13:54
Speaker 1: gold was still a very valid call. He then talked
13:57
Speaker 1: about energy transition infrastructure, particularly because of the built in
14:06
Speaker 1: inflection hedge there, and even retail reads. Would you believe,
14:11
Speaker 1: he mentioned, So, what's the story on that? I imagine, let's
14:14
Speaker 1: take them one by one if you're able to do.
14:16
Speaker 1: But I don't know what you've got. You're doing very
14:18
Speaker 1: well considering I know that you are actually on the road,
14:20
Speaker 1: not in the confident of your office. How about gold,
14:23
Speaker 1: what's the floor? Have you any call on the flows there?
14:26
Speaker 2: Yeah, it suffice to say the flows are being more
14:29
Speaker 2: choppy this year. So there's been no net you know,
14:32
Speaker 2: significant inflows into gold, but obviously there have been up
14:36
Speaker 2: until recently, I mean just on gold. I mean it
14:39
Speaker 2: is a bit surprising that gold was taken a hit
14:41
Speaker 2: because you would have thought with war inflation, gold would
14:44
Speaker 2: be a safe haven. But I think what we're seeing
14:47
Speaker 2: is that people are cashing up. What's tended to do
14:49
Speaker 2: worse since the war has been the things that we're
14:51
Speaker 2: doing well just before the war. I think people are
14:54
Speaker 2: having to cash up some of their winning trades to
14:57
Speaker 2: fund some of their losing trades, or just go to
14:59
Speaker 2: cash and se Some examples like the Bank of Turkey
15:02
Speaker 2: for example, Central Bank of Turkey sold a lot of
15:04
Speaker 2: gold to basically help defend its currency. So we're seeing
15:08
Speaker 2: central banks sell gold to shore up their currencies because
15:11
Speaker 2: they've been weakening in this environment. So you know, again
15:14
Speaker 2: the fundamental underpinnings of goal I think is still in place,
15:17
Speaker 2: but we're just getting some portfolio reallocations during this period
15:22
Speaker 2: of uncertainty and needing to fund you know, selling your
15:25
Speaker 2: profitable trades to fund other trades at the moment, which
15:28
Speaker 2: is wrong.
15:29
Speaker 1: That's a trading, it's not structure. Yes, coming towards all right.
15:34
Speaker 1: And what about the other path that I mentioned there
15:36
Speaker 1: in terms of any signs in the flows into ETFs
15:40
Speaker 1: on people looking for infrastructure for instance, they're looking for
15:44
Speaker 1: that inflation heads, looking for that built in CPI buffer.
15:48
Speaker 2: Yes, I mean definitely like infrastructure. I think. I mean
15:51
Speaker 2: this is interesting because infrastructure has been doing well even
15:56
Speaker 2: before the war because basically when you think about infrastructu
16:00
Speaker 2: so you know, it's ports and rere ports, and these
16:02
Speaker 2: are real assets that are unlikely to be disrupted by
16:05
Speaker 2: AI or less likely. So infrastructure has become popular simply
16:10
Speaker 2: because it's got less AI disruption risk. And certainly the
16:13
Speaker 2: returns in global infrastructure over recent months has been very good.
16:17
Speaker 2: Over the past year have been very good.
16:18
Speaker 1: Yeah, why is that, David? Do you think?
16:20
Speaker 2: Well? For example, so infrastructure wins from my own in
16:24
Speaker 2: two ways. Firstly, the energy companies because AI demands a
16:28
Speaker 2: lot of energy, so the energy producers that are within
16:31
Speaker 2: infrastructure been benefiting. Secondly, as I said, it's a safe
16:36
Speaker 2: haven if you like, in a world that's been disrupted
16:38
Speaker 2: by AI. So I think there's been the other trend there.
16:42
Speaker 2: So I'm not across the flows. We have a new
16:45
Speaker 2: Global Infrastructure ETF, but it's pretty new, so I wouldn't
16:48
Speaker 2: say we've seen a lot of flow into that as yet,
16:51
Speaker 2: and I couldn't really speak to the other ones out
16:53
Speaker 2: in the market at the moment, but definitely the price
16:55
Speaker 2: performance has been very good.
16:57
Speaker 1: Yes, okay, So tell us what your call is now,
17:01
Speaker 1: looking at what those flows are, what would you say
17:04
Speaker 1: that Australian investors seem to be doing. Having watched the
17:08
Speaker 1: markets really take a kicking in the first quarter calendar
17:12
Speaker 1: of twenty twenty six.
17:13
Speaker 2: Yeah, I mean, I think maybe staying closer to home,
17:16
Speaker 2: closer to what they know tending to be, they says.
17:19
Speaker 2: I said, if you look at the balance of flows
17:20
Speaker 2: between geared and bear funds, they tend to be more
17:23
Speaker 2: inclined to buy the dips. So there's still a view
17:25
Speaker 2: that the war could be over soon and the markets
17:28
Speaker 2: are going to bounce back. So there's been some buying
17:30
Speaker 2: into the geared funds, but also just buying outside of
17:34
Speaker 2: the US technology sector and so closest you know, Australian
17:38
Speaker 2: going toward value, going toward energy as a play over technology.
17:42
Speaker 2: I think that's been the key theme the flows overall,
17:46
Speaker 2: I mean maybe still overall cautious. I mean, I think
17:48
Speaker 2: the radar flows into equities for example, has slowed a little.
17:52
Speaker 2: We've seen maybe more going into cash for example, even
17:55
Speaker 2: cash ETF's been cashed up. So yeah, cautious and gravitating
18:00
Speaker 2: away from the technology sector towards the more of the
18:03
Speaker 2: value sectors.
18:03
Speaker 1: And when you say that in this quarter we'd seeing
18:07
Speaker 1: fifty to fifty flows local and offshore. What was it
18:11
Speaker 1: running at before this quarter.
18:14
Speaker 2: It'd probably be seventy thirty you know as.
18:16
Speaker 1: Far as that you know, yeah, I had rolled up
18:18
Speaker 1: to that peak.
18:18
Speaker 2: Well yeah, in terms of global total flows into equity ETFs,
18:23
Speaker 2: the line's share still tends to go toward the global ETFs,
18:28
Speaker 2: just to provide that, you know, global diversification. But yeah,
18:32
Speaker 2: so far this share it's been a more of an
18:33
Speaker 2: even split.
18:34
Speaker 1: Yes, it's that interesting safety at home. But as you say,
18:37
Speaker 1: it's a couple of things. There is energy exposure. There's
18:41
Speaker 1: many exposure commodity, gold, copper, yes, aluminium being this morning's
18:46
Speaker 1: hot commodity. And also you have the dividend player, which
18:49
Speaker 1: we didn't mention, but there is the dividend aspect in
18:52
Speaker 1: place on the Essex, which isn't common offshore, particularly in
18:55
Speaker 1: the US. Okay, very good, We'll be back in one moment, folks.
18:58
Speaker 1: I have kept some questions for they, but I just
19:00
Speaker 1: want him to talk to back in one second. Hello,
19:12
Speaker 1: Welcome back to The Australian's Money Puzzle podcast Easter Special folks.
19:17
Speaker 1: We would just have one show this week. I wanted
19:19
Speaker 1: to do something in the order of a review of
19:21
Speaker 1: the quarter, which was much more interesting, that's for sure,
19:25
Speaker 1: than we might have expected. When we all came back
19:27
Speaker 1: after our summer holidays in January. David, My first question
19:31
Speaker 1: is from James. Recent reports suggest the government is considering
19:35
Speaker 1: reducing or eliminating the CGT discount under the banner of fairness.
19:41
Speaker 1: What evidence is there that such changes would genuinely improve
19:44
Speaker 1: fairness without worsening rents and investment in capital flight big
19:48
Speaker 1: debate there. The consensus, David, which could be wrong, but
19:52
Speaker 1: it seems to be the consensus just now is they
19:54
Speaker 1: will change CGT. They will change the discount. It's currently
19:58
Speaker 1: at fifty percent. After one year they will change that
20:00
Speaker 1: to maybe twenty five percent or thirty three percent. And
20:04
Speaker 1: also there will grandfather that that's a huge one, obviously,
20:09
Speaker 1: what do you think.
20:10
Speaker 2: Look, if that's the case, is probably the minimum change
20:13
Speaker 2: that you know we would be expecting. The big one
20:16
Speaker 2: is not to grandfather because you know a lot of
20:18
Speaker 2: people who already got a lot of investment properties and
20:20
Speaker 2: it will be changing the goalposts. I guess after the
20:22
Speaker 2: fact that they brought the properties on a certain expectation.
20:25
Speaker 1: Everything is grandfathered these days, isn't it. Can you think
20:27
Speaker 1: of anything that was brought in it wasn't grandfather? And
20:30
Speaker 1: by the way, for story, I sorry and we'll explain
20:32
Speaker 1: just in case someone doesn't know what we're talking about.
20:34
Speaker 1: Grandfather He means the people who are already doing it
20:36
Speaker 1: are left alone. It's on new people that get hit
20:38
Speaker 1: with the new loan.
20:39
Speaker 2: Yes, now, ironically, I mean the argument against grandfather. I mean,
20:44
Speaker 2: you are right most things are grandfather because people will say,
20:47
Speaker 2: you know, we we it doesn't have to be grandfathered.
20:50
Speaker 2: But I mean, I think it just seems to be,
20:52
Speaker 2: you know, people have been invested on a certain more
20:57
Speaker 2: than to change the more retrospectively, if you like, is
21:00
Speaker 2: a bit unfair. So one aspect though of this is
21:03
Speaker 2: that if they do grandfather it actually hurts younger investors
21:06
Speaker 2: that are not need in the market.
21:08
Speaker 1: Of course, it kind of ring fences the aldis right, Yeah, yeah.
21:12
Speaker 2: Yeah, So that's one consequence of grandfathering it is it
21:16
Speaker 2: really reduces that incentive that exists for younger investors that
21:20
Speaker 2: might have wanted to invest in the property market or
21:22
Speaker 2: even like what's been called rent vesting. Yes, younger people
21:25
Speaker 2: are looking to rent where they want to live, but
21:27
Speaker 2: buy an investment property somewhere else. And so there'll still
21:31
Speaker 2: be advantages in doing that, but there'll be just less,
21:34
Speaker 2: but look, if that's the minimum, probably wouldn't affect things
21:37
Speaker 2: too much. To be honest. If there have been changes
21:39
Speaker 2: in New Zealand and the UK where they have cut
21:41
Speaker 2: back on investor incentives in property, and what we have
21:44
Speaker 2: tended to see in those countries has been the share
21:47
Speaker 2: of investors in the market falling modestly, not collapsing, but
21:51
Speaker 2: there's been a small fall, more moderate fall. And say
21:55
Speaker 2: the case of New Zealand, again the policy changes are
21:58
Speaker 2: probably more signals in New Zealand, but the share of
22:01
Speaker 2: investors went from you know, one third to one quarter
22:04
Speaker 2: for example.
22:05
Speaker 1: And do you know did they go further in those locations.
22:08
Speaker 2: What they did was they cut back on your ability
22:11
Speaker 2: their negative gear going forward. So that's a more significant
22:14
Speaker 2: one if they were And in the UK, and look
22:17
Speaker 2: I'm not across all the details in the UK, but
22:19
Speaker 2: they did announce some changes in twenty fifteen and the
22:22
Speaker 2: share of investor lending did fall from about sixteen percent
22:26
Speaker 2: to ten percent, So the investors weren't as significant in
22:28
Speaker 2: the UK. Obviously in Australia it's a lot higher, something
22:32
Speaker 2: like thirty odd percent of the marketers or investors. So
22:35
Speaker 2: look at the margin that would probably drop a little,
22:38
Speaker 2: and you probably see first time buyers increasing their share
22:42
Speaker 2: a little, but probably isn't going to affect house prices
22:45
Speaker 2: all that much. Some estimates suggested two percent hit two
22:48
Speaker 2: house prices relative to your baseline. But yeah, so if
22:52
Speaker 2: that is all that happens, that would probably be the minimum.
22:55
Speaker 2: I think, you know, a lot of property investors would
22:57
Speaker 2: probably sire have a sigh of relief if that's all
23:00
Speaker 2: what we did get.
23:01
Speaker 1: Okay, yes, and we had Sam Wiley on the show.
23:03
Speaker 1: You might know docorm Wiley University, and he has talked
23:07
Speaker 1: about how behavior will change and people will hang out
23:11
Speaker 1: to properties for longer. The economic theory. Yeah, okay, just
23:15
Speaker 1: find a question from Susie s u z. There was
23:19
Speaker 1: a lot of fanfare around the productivity summers. Who remembers that,
23:23
Speaker 1: but productivity growth remain sluggish. It's one of the weakest
23:27
Speaker 1: in the world, Susie. The positive focus seems to have
23:30
Speaker 1: moved out to capital gains, tax and other priorities. Did
23:34
Speaker 1: this come out of the productivity summers or was it
23:37
Speaker 1: just a chat fest? Thank you, Susie. And obviously this
23:40
Speaker 1: is information only, not advice, but just on the CGT.
23:45
Speaker 1: When you answer the question, you said that was the
23:47
Speaker 1: least we expect. What would be the most you expect?
23:49
Speaker 1: If the least you expect is you know, just this
23:52
Speaker 1: kind of nip and talk around the discount, what what
23:55
Speaker 1: would be the most you expect?
23:57
Speaker 2: I mean they could like not Grandfather for example. I mean,
23:59
Speaker 2: that would be an immediate revenue boost, you know, if
24:02
Speaker 2: they cut it from fifty to twenty five. The other
24:05
Speaker 2: thing is negative gearing, you know, limiting the number of
24:07
Speaker 2: properties you can negatively gear, or call limiting the amount
24:10
Speaker 2: that you can negatively gear. I mean that's something New Zealand.
24:13
Speaker 2: Did you know they kind of cut back on the
24:16
Speaker 2: degree to which it can a negatively gear property. So
24:19
Speaker 2: that's one area that could be touched that you know,
24:21
Speaker 2: at the moment doesn't seem like it will be touched,
24:23
Speaker 2: but yeah, they could.
24:24
Speaker 1: And they are modeling it, of course to be you know,
24:26
Speaker 1: we do know that Treasury is modeling around negative view.
24:31
Speaker 1: So they are actively it is actively under consideration, regardless
24:34
Speaker 1: of what the headlines might be saying to us, yes exactly,
24:37
Speaker 1: which is often half surprised.
24:38
Speaker 2: There's another David, Yeah, lookin on the productivity summit. As
24:44
Speaker 2: you mentioned, I mean, look, it was largely a talk.
24:46
Speaker 2: Best things did come out of it, I mean in
24:48
Speaker 2: terms of tax nothing concrete. It was really just motherhood
24:52
Speaker 2: statements about need to improve fairness of the tax system.
24:55
Speaker 2: Maybe one consequence of that is the charmer's decision to
24:59
Speaker 2: do something about out the negative deering or the capital
25:02
Speaker 2: gains tax discounts. So maybe that is one, yes, consequence,
25:05
Speaker 2: although it wasn't. There was a number of things touted
25:07
Speaker 2: in the summer. That was one of them by some groups,
25:10
Speaker 2: but you know, that seems to be one that he's
25:12
Speaker 2: latched onto. There was a lot of talk about cutting
25:14
Speaker 2: red tape though apparently they identified four hundred areas where
25:18
Speaker 2: red tape could be cut. So again we'll see to
25:21
Speaker 2: what extent that flows through. Yeah, a few bits and
25:23
Speaker 2: pieces that flowed from the summit, But look, in large
25:26
Speaker 2: part these things are usually just to talk best but
25:29
Speaker 2: you know, to the extent businesses come to the table
25:31
Speaker 2: and highlight areas of red tape that are probably unnecessary
25:35
Speaker 2: that you know that can be good sources of information
25:38
Speaker 2: for governments. You know that feedback, yeah, I expect.
25:40
Speaker 1: So it's just not a headline graver when you do
25:42
Speaker 1: those changes. Okay, very good, very good to talk to you.
25:45
Speaker 1: Very different quarter than we were expecting. Your outlook for
25:49
Speaker 1: the year ahead, I asked you during the show, but
25:51
Speaker 1: to what extent has your outlook during the for the
25:54
Speaker 1: year head been disturbed by this quarters? Final question for you?
25:57
Speaker 2: Look, yeah, I mean growth, unfortunately is going to be weaker,
26:00
Speaker 2: Unemployment more likely now to be getting up to four
26:02
Speaker 2: and a half percent or so. I've only got the
26:05
Speaker 2: RBA raising rates once more in May. I'm still hopeful
26:08
Speaker 2: that this war will end in the next few weeks.
26:10
Speaker 2: I think the pressure on Donald Trump will be that
26:12
Speaker 2: he will want to get an exit, either some form
26:16
Speaker 2: of face saving exit rather than putting boots on the ground.
26:19
Speaker 2: That's my judgment. But obviously everything hinges. A lot of
26:22
Speaker 2: the economic outlook hinges on his decision on that, and
26:26
Speaker 2: so we're in the hands of one man essentially, so
26:29
Speaker 2: it makes forecasting difficult.
26:32
Speaker 1: Good on you for trying and coming on the shell.
26:34
Speaker 1: That was David Bassinezi, the chief economist at Basis Shares.
26:38
Speaker 1: Thanks David, talk to you now, and I do wish
26:41
Speaker 1: you all a good easter, prosperous rest of the year.
26:44
Speaker 1: It's going to get more difficult to do that, but
26:46
Speaker 1: I'm sure you can. And also, folks, thank you very
26:48
Speaker 1: much for those reviews on the app for the podcast,
26:53
Speaker 1: especially on the Apple app. I really do appreciate that.
26:55
Speaker 1: That was great. Thank you. I did a call out
26:57
Speaker 1: and it was great to freshen them up and bring
26:58
Speaker 1: them up to deed the correspondence rolling. I'm very keen
27:01
Speaker 1: to answer your questions the money Puzzle at the Australian
27:04
Speaker 1: dot com dot au. Have a good Easter, talk to
27:07
Speaker 1: you soon.