Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 87

I will survive! Investing amid structural change

Australia’s economy has fared better than most post-GFC, buoyed primarily by the tail end of the resource boom, solid population growth and a strong financial sector. That said, with the resource boom maturing and the workforce ageing, the Australian economy has slowed – and is likely to grow at a slower pace in coming years than we’ve grown accustomed to. Investors must deal with the challenges of ‘picking winners’ in the new environment.DB1 Chart1 071114

DB1 Chart1 071114

At first glance these changes could be taken as a negative for investors in the Australian share market. But the reality is that our economy has long had to cope with structural change, which has not stopped quality Australian companies from generating profits and wealth for investors over the long term.

Structural change and the economy

Most investors are familiar with Australia’s recent commodity export price boom, and the associated strong lift in mining investment. During this period, national income and employment grew at a healthy pace.

Of course, a by-product has been relatively high interest rates by global standards and a strongly rising Australian dollar, which have been harmful for many Australian sectors not exposed to the resource sector. In effect, interest rates and the $A worked to ‘squeeze’ other sectors of the economy to make room for a rapidly expanding resource sector without threatening a break-out in wages and prices.

Population ageing has also contributed to a fall in labour force participation, which has meant somewhat slower growth in the work force relative to the overall population.

DB1 Chart2 071114With commodity prices now in retreat, and a falling share of the population of working age, the Australian economy faces slower growth in national income. Indeed, Senior Treasury official Dr David Gruen recently noted gross national income per person grew at an annual rate of 2.3% over the past 13 years but may rise annually by only 0.9% over the next decade.

Reserve Bank Deputy Governor Philip Lowe extrapolates that data to suggest: “we will need to adjust to some combination of slower growth in real wages, slower growth in profits, smaller gains in asset prices and slower growth in government revenues and services.”

The economy’s next phase

The good news, however, is that slower income growth does not necessarily mean falling share prices or lower dividends. For starters, although growth in national income ‘per person’ may be slowing, overall growth in national income should remain well supported by continued solid population growth.

And growth in domestic production should be faster still, due to strong gains in resource export volumes – particularly iron ore and LNG – following the heavy investment in new capacity in recent years. Low interest rates and the weaker $A are also helping the economy unleash activity in sectors once held back by the mining boom, such as housing and non-mining trade exposed sectors like tourism and international education.

Of course, as the baby boomer generation moves into retirement, growth patterns will change. Far-sighted management should identify and respond to these changes – witness the massive investment by our major banks into wealth management businesses, to replace lost mortgage income with the fees earned by managing retirement funds.

More generally, the predicted changes in the economy should be gradual enough for many existing firms to respond in a timely manner to the new challenges and opportunities as they arise. And those that don’t are likely to be usurped by nimble new starters which, if successful, are also likely to stake their place among Australian listed companies.

Apart from changing or amending corporate strategy (which the best companies already do), astute management can also modify their financial management to maintain or boost dividends. Capital management programs can help support share prices and grow dividends, at least in the near to medium term.

In short, thanks to earlier pro-competitive reforms such as deregulation of labour and product markets and the floating of the $A, the Australian economy has demonstrated remarkable resilience and flexibility. It avoided recession over the past 20 years despite the dotcom crash, Asian financial crisis, and the most recent US sub-prime induced global financial crisis.

Picking winners will not be easy

We should not underestimate the ability of corporate Australia to rise to the next set of challenges they face. That said, picking tomorrow’s corporate winners and losers via purchasing individual shares will not be easy. In this regard, investors should note an often little-appreciated benefit of index-based investing such as through exchange traded funds – survivorship bias. The indexing process automatically cuts exposure to poorly-performing companies over time, while re-weighting to new and more strongly-performing competitors – something you don’t get when buying individual stocks.

The structural changes will also give rise to major macro themes relating to technology, climate change, the emerging Asian middle-class, demographics, an ageing population, and energy and natural resource usage. Exchange traded funds can not only target the overall macro themes through diversified portfolios, but also specific sectors within an index. It is a faster-changing, more complex and harder to anticipate investment world. There are many reasons for optimism about the future of Australian companies but some of the star performers of today will struggle to adapt to the inevitable changes.


David Bassanese is the Chief Economist at BetaShares Capital, a leading manager of exchange traded funds. This article is for general information purposes and does not constitute personal financial advice.

Jerome Lander
November 14, 2014

An index fund will usually reliably underperform the index that it tracks (due to costs). Interestingly, indexing was initially designed for benchmarking purposes, and it works well for this purposes (over longer periods of time). Indexing was not designed to be used as an optimal investment strategy.

Indexing reflects the average performance of investors (dollar weighted) in a market. It is questionable whether the average investor will or should be well-rewarded by markets in the long term, particularly when that investor does not perform due diligence on their investments but trusts in markets to deliver them favourable outcomes.

Market cap weighted indices by their very nature overweight past success stories and underweight emerging success stories. They underweight the areas of future potential opportunity, such as some of those mentioned in the article.

Good active Australian equity managers have fairly consistently beaten the index in Australia - for various sustainable reasons - and many of them are also likely to outperform in downmarkets when outperformance is more important to meet investor needs, preferences and long term returns. In addition some Australian equity managers offer their services at low cost relative to their value add given the large amount of competition in Australia and institutional biases for the status quo. Hence the current love for indexing may be more reflective of ideology and politics than a rational assessment of what can be achieved by informed investors.

Indexing is becoming increasingly popular due to various factors but is a suboptimal way to invest over the long term. As a style of investing, indexing is a poor quality momentum strategy (as it doesn't risk manage its positions sizes or its losers very well). Indexing tends to do well in upmarkets and may make sense to use for those making short-term asset allocation plays. As a long term investment approach it has significant weaknesses.

Sometimes cheap and cheerful is just that.

Warren Bird
November 11, 2014

If you have an index fund that holds index weights to all stocks at the start, and some stocks rise faster than others, you don't have to "rebalance". Your portfolio will now hold a higher weight of the better performers, but it will be the new index weight.

So if an index portfolio is being managed properly it shouldn't have any sort of lagged affect. Perhaps that's why index funds usually make index returns, at least before fees. For example, look at the consistency of the CFS indexed Australian share fund over each of the time periods 1, 3, 5 and 10 years - it's net return is around 0.35% below index per annum over all of them.

This isn't because buy and sell lags even out over time. It's because there is no lag. Managing an index fund properly requires some skills - eg handling cash flows and the timing of buying new stocks that enter the index - but index managers at least don't have to negotiate 8 balls all the time.

November 08, 2014

But what effect does the lag between the market rising and share purchases then being made, have on performance?
Likewise with a falling market.

If, say, you buy or sell stocks every 3 months to realign the index, aren't you detracting from performance since you are always behind the eight ball?

Would be interesting to know whether these continuous changes average out or not

David Bassanese
November 11, 2014

The issue you refer to is one the key criticisms of traditional market-cap weighted indices where index weight is determined by market price. However not all indices are created equal.

For example the index we aim to track with our "QOZ" product (see, is a "fundamentally weighted" index. This Index selects and weights its constituents based on factors related to the fundamental size of a company, reflecting the company's economic footprint rather than its market capitalisation. Use of these factors seeks to overcome the limitations of traditional indices based on market capitalisation by using measures which do not depend on the fluctuations of market prices, while still maintaining the benefits of passive investment.

Breaking this link between index weight and market price aims to produce superior long term performance compared to indices weighted using market capitalisation.


Leave a Comment:



Global ETFs: insights into a multi-trillion-dollar industry

Australian ETFs: end of year reviews 2018

Active or passive ETFs: how do you decide?


Most viewed in recent weeks

Is it better to rent or own a home under the age pension?

With 62% of Australians aged 65 and over relying at least partially on the age pension, are they better off owning their home or renting? There is an extra pension asset allowance for those not owning a home.

Too many retirees miss out on this valuable super fund benefit

With 700 Australians retiring every day, retirement income solutions are more important than ever. Why do millions of retirees eligible for a more tax-efficient pension account hold money in accumulation?

Is the fossil fuel narrative simply too convenient?

A fund manager argues it is immoral to deny poor countries access to relatively cheap energy from fossil fuels. Wealthy countries must recognise the transition is a multi-decade challenge and continue to invest.

Reece Birtles on selecting stocks for income in retirement

Equity investing comes with volatility that makes many retirees uncomfortable. A focus on income which is less volatile than share prices, and quality companies delivering robust earnings, offers more reassurance.

Superannuation: a 30+ year journey but now stop fiddling

Few people have been closer to superannuation policy over the years than Noel Whittaker, especially when he established his eponymous financial planning business. He takes us on a quick guided tour.

Comparing generations and the nine dimensions of our well-being

Using the nine dimensions of well-being used by the OECD, and dividing Australians into Baby Boomers, Generation Xers or Millennials, it is surprisingly easy to identify the winners and losers for most dimensions.

Latest Updates


Superannuation: a 30+ year journey but now stop fiddling

Few people have been closer to superannuation policy over the years than Noel Whittaker, especially when he established his eponymous financial planning business. He takes us on a quick guided tour.

Survey: share your retirement experiences

All Baby Boomers are now over 55 and many are either in retirement or thinking about a transition from work. But what is retirement like? Is it the golden years or a drag? Do you have tips for making the most of it?


Time for value as ‘promise generators’ fail to deliver

A $28 billion global manager still sees far more potential in value than growth stocks, believes energy stocks are undervalued including an Australian company, and describes the need for resilience in investing.


Paul Keating's long-term plans for super and imputation

Paul Keating not only designed compulsory superannuation but in the 30 years since its introduction, he has maintained the rage. Here are highlights of three articles on SG's origins and two more recent interviews.

Fixed interest

On interest rates and credit, do you feel the need for speed?

Central bank support for credit and equity markets is reversing, which has led to wider spreads and higher rates. But what does that mean and is it time to jump at higher rates or do they have some way to go?

Investment strategies

Death notices for the 60/40 portfolio are premature

Pundits have once again declared the death of the 60% stock/40% bond portfolio amid sharp declines in both stock and bond prices. Based on history, balanced portfolios are apt to prove the naysayers wrong, again.

Exchange traded products

ETFs and the eight biggest worries in index investing

Both passive investing and ETFs have withstood criticism as their popularity has grown. They have been blamed for causing bubbles, distorting the market, and concentrating share ownership. Are any of these criticisms valid?



© 2022 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.