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Solid Growth for the Finance Sector

January 31st 2014

Australia’s finance sector is on track for several more years of solid growth...

An improving global economy will be the key factor behind renewed activity for personal and business borrowings, investment, credit and for individuals looking after their superannuation.

While some of the excesses have quite rightly been purged from the banking sector in the aftermath of the global financial crisis, there are some long-run structural changes still unfolding in the economy that will see the finance sector do well in 2014 and likely beyond.

One interesting issue has been the relative under-performance of the Australian stock market over the past couple of years, despite the fact that the Australian economy has out-performed most of the rest of the industrialised world. While stock markets in the US and parts of Europe have reached record highs in recent weeks, the ASX 200 index remains more than 20 per cent below its peak level reached in late 2007, just prior to the GFC hitting.

The reasons for this are complex, but the strong Australian dollar (until recently at least), signs of less rapid economic growth in China and a near certain fall in the commodity prices and the terms of trade have all hit corporate earnings and share prices in Australia.

Over time, and with housing looking expensive and the economy set to improve during 2014, it is more likely than not that stock prices will rise as investors move to take advantage of improving economic conditions. This should attract a lot of fund managers – including self-managed funds – who are currently sitting on cash holdings rather than being invested in the stock market. As sentiment turns positive towards stocks, there could be a bit of a herd investment approach which would of course, drive the Australian stock market higher.

Clearly, this is good news for those employed in the finance sector.

Linked into this is the ongoing demographic phenomenon of Australia’s aging population. For the finance industry, there are many elements that aging and older Australians need which will be expansionary for their businesses. Not only are the obvious funds management of pensions a strong part of the sector as we all add shares to our superannuation savings, but the availability of other financial products will continue. Term deposits, bonds, real estate trusts, foreign investment opportunities and a myriad of other areas will continue to develop to allow investment funds to diversify into a balanced portfolio which contains investment risk, yet still derives a decent return.

It is worth noting here that the compulsory superannuation contribution is currently set at 9.25 per cent of income, meaning a torrent of money that flows into fund managers accounts that needs to be invested and managed on a continuous basis. Already the funds management industry is booming, but the steady flow of inflation into the industry will ensure buoyant activity in the years ahead.

One other aspect which continues to play out is the finance sector’s links to Asia. Be it personal banking products, managed funds or treasury operations, the links to the part of the world with the fastest rising wealth and incomes can only have positive spin-offs for the finance community.

All up, it is a positive outlook for the finance sector with a strong economy a vital aspect of its ongoing expansion.

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Solid Growth for the Finance Sector
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