‘Exceptional period of uncertainty’: Big risk to Australian super
Australia’s super funds are at risk — and it’s not because of a market crash, but what is happening in the US.
The Reserve Bank of Australia has issued a fresh warning about “a quite exceptional period of uncertainty” that could hit Australian super balances big time — but it’s not a market crash they are focused on.
The RBA is laser-focused on the overseas exposure of Australia’s super funds at a time when the US currency could cease to act as the world’s reserve currency because the results of American capitulation could be major.
Here’s the thing about Australia’s super. It’s increasingly invested overseas. It used to be basically all loaded into the Australian share market, but not any more.
Why? Not just because of some clever risk-mitigation strategy. But because there’s so much of it. We have enough super now that it simply doesn’t fit into the stock market. The ASX is worth $3.3 trillion compared to our retirement savings that clock in at a massive $4.3 trillion. More and more superannuation is now stashed overseas.
The size of our super system is not just bigger than the share market, it’s bigger than the whole economy. It’s worth 150 per cent of GDP, and that is expected to go up to 180 per cent in the next ten years.
This makes our overseas risk greater and greater.
“The share of this larger pie devoted to overseas assets is set to rise,” said RBA’s deputy governor Andrew Hauser this week.
All that foreign super is at risk.
Why? Because of our currency. The Aussie dollar goes up, the Aussie dollar goes down. We have a thing called a free-floating currency. It operates very differently from countries like China, which peg their currency to another, so it doesn’t vary.
The risk is not our dollar falling. If our currency collapses, guess what happens? It’s actually good news. When the Aussie dollar is weak, it means every foreign dollar we own is worth MORE in Australian terms. For example, you bought stock in Google back when the AUD was worth $1USD exactly. Google goes up 100-fold. But your investment goes up 150-fold, because at the same time, the US dollar got heaps stronger against our dollar.
So the risk is not our currency collapsing; the risk is some other currency collapsing, like the USD. The mighty greenback sits at the heart of the global financial system. The world’s reserve currency. It couldn’t wobble, could it?
Well.
USD performance this year is down, as US President Donald Trump applied tariffs to everything that moved and generally destabilised the globe. Usually, when there is chaos, it causes the USD to rise, as it is considered a “safe haven”. But not this time.
At times, the USD can really plunge. For example, in the 2000s, after the dot-com boom, it blew up. The value of the Aussie dollar doubled against the USD in seven years between 2001 and 2008, which made owning US stocks back then a really bad play. (It became an even worse play in 2008 when those stocks all crashed!)
Recently, by contrast, owning US stocks has been free money. Our dollar has been basically stable for ten years, or even become slightly weaker, while the US stock markets have roared to ever greater highs. But that can change.
So are we going to see what the RBA deputy governor called “the end of dollar hegemony in international capital markets”?
The RBA says not to worry. You can decide for yourself how much comfort you get from the fact that the RBA is wheeling out a deputy governor to insist the USD isn’t going to tumble off its perch.
My take is that while the US looks like a dumpster fire right now, it doesn’t have a monopoly on incompetence. China would be the natural competitor to America, but its economic future looks as wobbly as it has in decades right now.
China’s demographic future looks bleak too. The fertility rate is now one child per woman, and it has been falling for a long time. Every year they wait to increase fertility, they’re asking a smaller and smaller cohort of young people to make more babies. They’re trying to lift fertility with cash payments, but it is not working yet, not even a little bit. And it is not long now until maintaining the population is impossible. Forecasts have China’s population halving across the next three generations (From 1.4 billion to 700 million by 2090).
So I can’t see the RMB taking over. Maybe I’m wrong. China’s government has certainly pulled a rabbit out of a hat before. Maybe they recover their economy, manage the decline in their population, become the world’s reserve currency and prove the doubters wrong. If so, America’s dominance is at threat — and so is our super.
Hedging
But an end to American dominance is not the only issue with overseas investing. Everyone knows super fees can kill your returns. In the same way, the costs of investing overseas can hurt the merits of investing overseas. One of those costs? Hedging.
Hedging is a word that means insuring. You pay a bit of money for insurance against the cost of a foreign currency collapsing. If the USD falls and your currency soars $US1.50, your investment isn’t totally lost; that’s the idea.
You don’t need to hedge for Aussie assets. They’re in Aussie dollars. You do need to hedge for foreign assets, and the more of them you have, the more you spend on hedging. We currently have half a trillion in hedging, and that is expected to double just as we come to own more foreign assets. But it could get even worse — the cost of that insurance could go up. If the big institutions that sell currency hedges start to worry that US dollar supremacy is ending, the cost of our hedges goes up and up.
The excellent returns we’ve been getting on our superannuation (a ten-year average return of 7-8 per cent is not unreasonable to hope for) could be at risk.
Jason Murphy is an economist | @jasemurphy.bsky.social. He is the author of the book Incentivology
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