Self-funded retirees are set for tough economic times as the global economic downturn will result in a steep drop in company dividends, financial industry heads warn.
The head of consulting at investment advisory firm JANA, John Coombe, said historical data suggested company dividends fell by about 30 per cent during a recession and could fall by a greater amount than that during this downturn.
“That will have a big impact on the retiree community because they live and breath off the dividends that they receive,” Mr Coombe told the annual Fidelity Australian Equities Summit in Sydney.
“So they may well have to sell other assets to keep funding their retirement at the level that they have.
“I hope history repeats itself and that they really do only come off 30 per cent because we’ll have a much bigger flow-on effect if they come off a lot more than that.”
MLC chief investment officer Chris Condon said dividends would inevitably fall as company earnings were affected by the global downturn.
“If you don’t have earnings, you can’t pay dividends,” Mr Condon said.
“They will come off, significantly.”
Fidelity International head of Australian equities Paul Taylor said it would be one or two years before equity markets recovered from their steep falls of recent months.
He also said that troubled times presented opportunities for long-term investors.
“You’ve got really good businesses that are trading at quite cheap prices, and if you think they’re going to be there in two year’s time that’s a great fundamental investment,” Mr Taylor said.
Opinions at the summit were divided about future strength of China’s economy, but all participants agreed it played a vital role in Australia’s ability to withstand the global recession.
Although the recent public focus has been on the loss of Australian manufacturing businesses to China, mining was the key for the domestic economy, Mr Coombe said.
“We do dig stuff out of the ground very well, and we do supply the rest of the world with top quality material,” he said.
“If the world goes into a big downturn then it’s impossible for me to believe this economy doesn’t get badly hurt because that’s our strength.”
Mr Coombe said he remained optimistic about demand from China but the head of manager research at Watson Wyatt, Hugh Dougherty, told the summit “the China bubble is broken”.