Investors are pumping more funds into super. But is that wise?


16 June 2017

Robert Gottliebsen

This weekend I want to take you back to June 2006, which is Australia’s last experience of a rush to thrust money into superannuation before the rules changed. It is worth recalling what happened in the subsequent months as a note of caution.

And we can also learn from the adventures of Lachlan Murdoch and James Packer in their investments in the Ten Network, showing how it can be very dangerous for small investors when major players are pursuing big strategic objectives.

I remember 2006-07 very well, when I was involved in a website start-up and had invested in the project. In the years leading up to 2006-07, the rules for putting money into superannuation were very flexible and you could invest very large sums. But the then Treasurer Peter Costello wanted to restrict superannuation investment – tax paid or so called non-concessional contributions – to $150,000 a year. And, as a bonus, he allowed investors in the nine months to June 30, 2007 to invest $1 million each on a tax-paid or non-concessional basis. For a couple, that meant $2 million.

Lots of people could access $1 million, and a great many borrowed money on their house to take the opportunity to invest in superannuation which would be tax free for those in pension mode.

I don’t think we have ever seen such a rush of money into superannuation in a short period of time, and it so happened that at that very time world stock markets were surging (the Dow reached a then peak of 14,000 in July 2007) and Australia hit highs that have not been reached since.

And so, given we were in a boom, a large amount of that superannuation money went straight into the stock market around June 30, 2007. Looking back there were signs that the US subprime market was in a very dangerous phase. The balloon went up in August 2007 and, in the months that followed, it led to the global financial crisis. Those that took up Peter Costello’s invitation to put their savings and or borrowings into superannuation and then bundled their money into the share market lost a fortune.

Looming super changes, and market jitters

And so now, exactly a decade later, in the period leading up to June 30, 2017, we are about to further restrict the money that can be put into superannuation on a tax-paid or non-concessional basis. This time the limit is to be $100,000. But you can invest $540,000, or three years’ contributions, at the current rate if you make the investment before June 30, 2017.

It is very clear that many thousands of Australians are doing just that, and have not waited until June 30. Some who have boosted their contributions are already buying shares in high-yielding banks and infrastructure stocks. It would seem that, as the superannuation buying pressure pushed up stock prices, so the shorters panicked and began to cover. I suspect short covering in the case of banks has eclipsed the super money demand.

A lot of international institutions are short Australian bank stocks, so would have been alarmed at the super driven buying. That cocktail triggered demand swings, so the upward thrust was interrupted during the week.

Once June 30 passes our stock market will perform in a more normal way and follow the US and local trends. At this point I can’t see a global financial crisis about to hit us, but it is fascinating that the US bond market is reacting in a way that is totally different to what most predicted six months ago.

Federal Reserve chief Janet Yellen is lifting interest rates, but instead of the bond rate rising in response it fell this week because investors are jittery about President Trump’s ability to ‘make America great again’ by tax cuts, sucking US funds held offshore back to the US and create spending on infrastructure. American and global funds are pouring into the US bonds. In other words, the bond market is telling us the US revival is going to be much tougher than was expected, and that is not good for global share markets. My contacts in the US say that the car market is weak, and the burst of oil drilling in the US is receding with the fall in the oil price. Those fortunate enough to have $540,000 to invest in super should be careful about repeating the mistakes of 2007 and plunging it into the share market.