2006: the road ahead

The outlook for the financial services industry in 2006 is, as the French would say, plus ça change — the more it changes, the more it is the same.

Many investment decision-makers believe the strong performance of the Australian economy and its investment classes will continue in 2006. However, the risks that could have impacted on performance in 2005 are still there.

The threat of the Chinese economy stalling, rising interest rates and the US deficit becoming uncontrollable and sparking a global recession are all still present.

Why some of these risks haven’t become real is causing people to scratch their heads as the Australian economy, despite minor hiccups, is now in its 10th year of growth.

It almost seems like nothing will stop the rise of the share market and property markets.

Perhaps one reason why this cycle is different to others is the amount of superannuation money looking for a home.

The statutory superannuation contribution (9 per cent) pumps about $1.6 billion into investment markets every month. This has to be invested, and the share market is virtually full.

Superannuation funds and wholesale investment trusts have bought most of the big property assets in Australia so the search is on to place this money.

It is a case of demand outstripping supply, which is also benefiting retail investors as they hang onto the coat tails of the big wholesale funds.

And the statutory contribution is not the only money going into the wholesale market.

Voluntary contributions are also pumping in billions of dollars a year.

In retail, self-managed superannuation funds continue to grow and there again is more money looking for a home.

Perhaps one item that can sour the rosy picture for 2006 is a natural disaster.

Unfortunately, it is a cold fact of life that a massive earthquake in Pakistan would have a much smaller impact on global markets than if the same devastating event occurred in Japan or the US.

And natural disasters are becoming bigger and more common.

The US endured three major hurricanes last year with massive damage trails in the country’s south.

Australia is still affected by drought in many areas and there has been talk of this being the start of a 100-year drought.

It is this volatility in the global economy that makes it so hard to predict what will happen in the next 12 months.

However, the consensus is that investors will be enjoying much of what they received last year in 2006.