The Wrap: Robo Advice, China, Lockdowns, and Listed Property

Weekly Reports | Jul 30 2021

Weekly Broker Wrap: The rise of Robo advice, China’s growth U-turn, lockdown hits GDP, listed property feels lockdown impact

-Robo advice could potentially be a $60bn market in Australia
-China’s retreat from technology to trigger a shift back to manufacturing/consumption
-Landlords with retail exposure have greatest exposure to lockdowns

By Mark Story

Robo advice on the march

Rainmaker Information believes the rapid fall in investment adviser numbers, courtesy of the recent industry shakeout, has led to a corresponding rise in digitally delivered robo advice, which the researcher suggests has the potential to be a multi-billion-dollar market in Australia.

Rainmaker maintains that the way robo advice is delivered – as a low-cost, automated replacement to a ‘real’ human adviser - lends itself to becoming increasingly more important for millions of Australian consumers.

In short, robo advisers are online financial planning and investment services offering simple pre-packaged investment recommendations to retail investors. Robo advice is based on answers to basic questions robo advisers ask online to get a snapshot of an investor’s current financial position, income, age, debt levels, and financial aspirations.

After determining an investor’s risk profile, analysis by computer-generated algorithms comes up with suggested investment products, including low-cost exchange-traded funds (ETFs).

While only two of the eight robo advice providers identified in Australia by Rainmaker report on their funds under advice (FUA) - Stockspot and InvestSmart – the researcher suspects this market may be collectively advising on several billion dollars.

Having adjusted figures for the US market - in which there is currently $825bn in funds under robo advice - for the Australian population, Rainmaker sees a $60bn potential, twice the amount originally estimated in 2018.

With the number of human advisers having dropped from 28,000 two-and-a-half years ago to 19,000, Alex Dunnin, executive director of research at Rainmaker, expects digitally delivered robo advice to become more relevant than ever.

“It is a very cost-effective way for retail investors to obtain limited financial advice and be connected with packaged investment solutions,” said Dunnin.

At around 0.4% to 0.5% annually, total fees charged by robo advice are around half the total fees charged by the average super fund in Australia.

Based on Rainmaker data, Australian robo advisers offer on average seven investment solutions, 70% of which are diversified, meaning they mix their investments across exposure to shares, property, or bonds.

China’s downshift to lower growth

To reflect a myriad of factors including concerns about monopoly power and data security, China appears to have changed tack on its technology sector, and ANZ Research suggests the implications are substantial.

Within its July issue of Blue Lens, ANZ suggests the vigour of China’s shift in policy targeting the tech sector - arguably one of the country’s hot spots of growth for the past five years - is worth keeping on radar.

ANZ argues that if technology – which accounted for 1% GDP growth in 2018 --is unable to sustain China’s high rate of growth, the focus will shift back to manufacturing and consumption.

One of the big conundrums confronting China is maintaining manufacturing’s share in GDP on the one hand, while honouring climate commitments on the other.

A BIS study that mapped data from 121 countries between 1971 and 2016 found that carbon emissions rise with economic development, manufacturing activity, and urbanisation: All three of which have been integral to China’s economic fortunes over recent decades.

ANZ suspects China’s recently developed five-year plan to reduce energy intensity by -13.5% by 2025 will put a major drag on the growth of its industrial sector. As a case in point, while countries have decoupled carbon emissions from GDP growth, almost all were growing slowly.

While China’s household sector has been regarded as the source of future growth for some time, ANZ believes structural constraints mean further declines in the savings rate are likely to be modest.

For example, the decline in China’s savings rate from 52% of GDP in 2008 to 44% - which corresponded with the halving of China’s growth rate – reveals that even a falling srate will not insulate China from its structural headwinds.

One of these headwinds is the shrinking of China’s working-age population, with some studies suggesting the population will peak by 2025. While one solution could be to raise China’s relatively early retirement age, it’s argued that the impact on the country’s unique demographic and social structures would make this option unrealistic.

In light of these structural constraints, the Ministry of Commerce’s recently published Five-Year Plan for Commerce Development projected retail sales only growing at 5% annually for the next five years, down from 10% in the last five-year plan.

Sectoral restrictions aside, China also faces macro policy constraints, with the IMF putting China’s augmented public debt at 96% of GDP. Not unlike many economies, the IMF concludes that China’s fiscal capacity is limited.

BIS data also highlights an increase in China’s non-financial debt from 263% of GDP at the end of 2019 to 290% of GDP by the first quarter of 2021.

While structural concerns about the build-up of debt is a driver of China’s recent shift towards a more prudent monetary policy stance, ANZ notes China’s recovery hasn’t been as vigorous as hoped. The end result, concludes ANZ, has been a step towards renewed easing through a reduction in bank reserve requirement ratios.

Admittedly, China will continue to grow more quickly than many other countries.

However, what’s important to note, adds ANZ, is that risk-driven constraints on the tech sector, demographic constraints on consumption, climate constraints on manufacturing, and macro constraints on monetary and fiscal policy suggest the economy is gearing down for slower growth.

Lockdown: Major shift in near-term economic outlook

With Sydney now a month into a hard lockdown, BIS Oxford Economics’ initial forecast is for consumption in NSW to fall by around -8% in the third quarter due to restrictions on travel, and a lack of access to services.

The forecaster does not expect to see a return to relaxed trading and travel conditions until 70-80% of the adult population is fully vaccinated, which at the current pace, it will take until the end of the year.

With the share of cases that have been active in the community remaining stubbornly high, Oxford expects the NSW government to continue to pursue an eradication target. The net effect is that restrictions will not be meaningfully relaxed until after community transmission falls to zero.

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