The US to Follow China into an Infrastructure Spending Spree

There’s a difference between superannuation in Australia and some pension plans around the world. Ours is compulsory.

In 1983, trade unions agreed to forgo a national 3% pay rise. Instead, they agreed to a new superannuation system for all employees in Australia.

The new system required employers to make contributions on behalf of employees.

Originally, this was around 3% of an employee’s income. Over time, it’s gradually increased. Now most businesses contribute around 9.5%.

The compulsory nature of our retirement system can throw some people off.

In the US, pension plans are complete voluntary.

The US 401(k) workplace retirement system gives employees the option to save for their retirement…or not.

With sponsorship from employers, employees can put up to US$18,000 of their salary away in a retirement fund.

Employers usually match employee contributions up to 5%. As sponsors, they’ll also offer various funds to invest that pension pot into.

That fund could be the S&P 500 index, an international fund index, or some other fund.

The point is, in many places around the world, saving for your retirement isn’t mandatory.

In Australia, it is.

And while that might bother some people, it’s allowed our small nation to build up one of the largest pension funds in the world.

And because of low returns in stocks and bonds, our retirement funds are about to be invested somewhere else.

Details below…

Something has to give

$2.5 trillion.

That’s the amount of money awaiting Aussies when they retire.

Our pension pool is among the top five in the world. And it could get a whole lot bigger in the years ahead.

According to Bloomberg, retirement savings could reach $4 trillion by 2025.

Australia's Retirement Savings 23-02-18

Source: Bloomberg

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It should come as relief to know that super funds hate taking risks. They know they’ll need to pay out funds once members hit retirement age. 

The idea then is to earn as much as possible by taking as little risk as possible. It’s why most portfolios are generally made up of government bonds and dividend-paying stocks.

Asset Allocation 23-02-18

Source: Association of Superannuation Funds Australia

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But super funds may be thinking that something has to give.

Government bond yields are still extremely low. The largest Aussie stocks also haven’t been the best performers.

It’s why many super funds have chosen to increase their exposure to higher returning asset classes, like hedge funds and private equity firms.

They’re taking on more risk. But they still have to meet their target returns somehow.

One of the most popular ‘alternative’ investments in recent years has been infrastructure.

Infrastructure Appetite 23-02-18

Source: Bloomberg

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These projects generally provide great long-term returns. And they benefit society by contributing to and facilitating future economic growth.

In the next few months, this exposure to infrastructure could grow even more…

Malcolm and Donald come to a mutual agreement

In the next few days, Australian Prime Minister Malcolm Turnbull will be catching up with US President Donald Trump.

Both have problems to solve.

Trump has to make good on his US$1.5 trillion public works plan. Malcolm needs to find higher returning investments for our $2.5 trillion Aussie pension pool.

The solution?

Bloomberg reports:

Turnbull will propose using a chunk of Australia’s A$2.53 trillion ($1.99 trillion) pension savings pool to help unlock funding for Trump’s infrastructure push.

Trump’s $1.5 trillion public-works plan has hit potholes amid a lack of bipartisan support in Congress and questions over who would pay for the initiative despite his pledge of $200 billion in federal funding over 10 years.

Australian officials have pointed to their own success in selling or leasing public assets to finance new construction without incurring new debt — a concept known as asset recycling.

Joe Hockey, now Australia’s ambassador to the U.S., was a key champion of the initiative when he was federal Treasurer and has been pivotal in promoting it in Washington.

An infrastructure spending spree

On Tuesday, I wrote about China’s massive infrastructure project — the ‘One Belt, One Road’ initiative.

It will cover 65 countries, touching more than 4.4 billion people. It’s China’s way of opening up trade with the rest of Eurasia.

It’s a massive opportunity not just for Aussie construction businesses but for investors as well.

Contractors, engineers and building suppliers with exposure to China have the chance to win multiple contracts for the largest infrastructure project in the world.

These massive infrastructure projects align perfectly with Cycles, Trends and Forecasts editor Phil Anderson’s Grand Cycle. Contrary to fears over an economic meltdown, the Grand Cycle says that the global economy is still in an expansionary phase. And it could remain so for far longer than most think. How long? Find out here.

Kind regards,

Harje Ronngard,
Editor, Money Morning

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Fat Tail Investment Research, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.

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