Geopolitics needs to be considered as a first order risk by investors, as Brexit is only a symptom of the bigger issue – the rise of populist parties around the globe, Sunsuper’s economist says.
Over the past few decades, investors have had to keep an eye on what was happening with political issues but they were not really the “main game,” according to Brian Parker, chief economist at Sunsuper.
“Ultimately you kept your eye on politics, but the bottom line was all about what the central banks were doing and what the underlying economy [was] doing. Politics really was a second-order issue in many in ways,” Parker said.
“Now politics really matters. We now have to pay a lot more attention to political issues and geopolitical issues than we used to.”
He added the instability to the EU was not the only concern brought about by the UK’s decision to leave, but that how Vladimir Putin was going to respond also needed to be considered.
“Does this further embolden not just the anti-EU critics within the EU, but does it embolden Putin’s Russia to be a bit more aggressive on the world stage or on the European stage?
“This reinforces the message that politics and geo-politics are much more important in making investment decisions than perhaps they have been for some decades,” Parker said.
Sunsuper’s tactical allocation
Sunsuper’s tactical asset allocation to foreign exchange and equity options has helped to reduce the financial impact to the super fund, following the fall in share markets across the world.
While the direct economic impacts on Australia are relatively limited, as the trade exposure was not large enough to derail the domestic economy, the $33.5 billion super fund was worried about its GBP and UK equity exposure, so implemented a protection strategy prior to last Friday’s referendum.
“Anyone running globally diversified portfolios will feel the impact of this. Nobody is going to be immune,” said Parker.
“[However] the key risk to us though is really via the financial markets. The longer the financial market turmoil goes on the more likely it is that turmoil will do damage to the global economy, and if you do damage to the global economy then Australia will inevitably be affected.”
He added this was not an immediate threat, as Australia had mechanisms in place to counteract this, such as the ability of the AUD to fall.
“In a time of global turmoil you really want your floating currency to sink. So far it has actually held up well by the fact that it’s still around the 74 cent mark, give or take, which is pretty remarkable given the size of the shock we got on Friday.”
To help smooth the ride for members, Parker recommended having a substantial exposure to unlisted assets, with the caveat that as long as the market volatility was relatively short-term, they should hold their value quite comfortably.
In its balanced option, Sunsuper has a 7 per cent allocation to infrastructure, 6 per cent to private capital and 10 per cent to property. Its allocation to international shares is 29 per cent.
“The longer the financial market turmoil persists means you could see an impact on valuations in unlisted assets and this is going to affect Australian asset owners, absolutely.
“But even then if you look at the way unlisted assets behave even during a major prolonged crisis, their value doesn’t tend to fall as far as share markets. If the valuations of unlisted assets end up being affected down the track, and I stress down the track, you’re still likely to see those assets provide a smoother ride to members than having all your exposure to listed market.”
