Rod Eddington’s storied career has involved some of the biggest companies in the world. The chairman of J.P. Morgan’s Asia Pacific Advisory Council spoke to Investment Magazine about his views on escalating global trade tensions.
IM: Your session at the ASI 2018 Super Investment Conference is called “Trade Talk”. How important a factor is trade in the current state of markets?
Markets hate uncertainty and there’s significant uncertainty about what the future global trading regime is going to look like. It will affect economies, currencies and individual companies.
I think there’s no doubt that increased protectionism is bad for markets and consumers. It means higher prices for consumers and barriers to trade. There’s a much greater chance of that happening now than there has been over the last decade because the American Government is no longer driving an open, global trading regime. And the Brexit outcome is still uncertain.
A trade dispute between America and China has enormous implications for us here in Australia. I lived in Asia for 18 years, when I was working for the Swire Group and Cathay Pacific, and I still spend a lot of time in Asia, so I see that up close.
China is our biggest trading partner and the US is our most important strategic partner and has been since the Second World War. When two entities that are so pivotal to Australia’s wellbeing are disagreeing, we need to follow that dialogue very carefully and try to understand what it means for us. We need to try to use whatever influence we have with both of them to try to see that a sensible solution is found.
We’ve seen central banks around the world support markets for so many years following the GFC that investors now seem to take uncertainty in their stride. Perhaps a trade war is the spark that unseats that optimism?
What markets are currently telling us is that they think these issues are going to be resolved. They take the view that President Trump is, at heart, a dealmaker.
But there’s a broader point. The Chinese say that when bad news comes, it doesn’t come as a single soldier but as a whole battalion. If there’s uncertainty around global trade, it adds uncertainty to markets, so something else that has nothing to do with global trade could trigger a bigger market reaction.
Who would have thought that in 1997 a debate around the Thai baht would trigger a substantial Asian financial crisis? Or that the global financial crisis a decade ago would be triggered by the sub-prime issues in the US?
How can super fund CIOs navigate these escalating trade tensions? How will it affect their investments in Australia and globally?
When I have informal conversations with CIOs (wearing my J.P. Morgan hat) they’re trying to understand where the current trade uncertainty will end up – will it get resolved sensibly, practically, and intelligently? And, in the meantime, what does it mean for their investment strategy?
Greater protectionism has so many implications for individual companies, currencies and debt instruments.
At a company level, some will be affected more negatively, but for others there will be increased opportunities in some areas.
For example, in a world where the Americans are more protectionist about steel, BlueScope investing in new American steel production facilities may well be a positive for its business and its share price.
What role do you believe Australian super funds have to play in infrastructure investment?
I was chairman of Infrastructure Australia for the first six years after it was established, so I’ve seen the sector up close. Some people were critical of the super funds. They said there’s no capital for infrastructure projects. My observation was there’s plenty of capital for good infrastructure projects.
If governments want super funds – which are natural holders of infrastructure assets – to invest in infrastructure projects, they need to make sure those projects are structured appropriately. Governments are now more aware of the needs of super funds than they were a decade ago, although that doesn’t mean all infrastructure projects will attract super fund investment.
There seems to be growing discontent in the community that infrastructure still isn’t coping with the demands of a growing population.
That’s right, but the brutal facts of life are that greenfield investments are treated with great caution by super funds because construction risk is a real issue – we’ve seen that with light rail in Sydney – and patronage risk is a real issue, too. Privatising existing assets, where the construction risk has passed and patronage is understood, is an easier thing to do. And our super funds have been very much involved.
Governments have become more open to the idea of privatising existing assets and recycling that capital into riskier greenfield projects, where super funds are less likely to come on board.
In doing so, super funds are playing an important role in helping governments, which need capital to build new infrastructure.
How can collaboration between asset owners, corporate Australia and government be positive for Australians and their retirement outcomes?
Infrastructure provides good, stable returns over the long term, which makes it a natural fit for retirement incomes and superannuation money. But asset owners, corporate Australia and government each have to understand what the others want from that investment.
There are a number of projects whose economic viability isn’t clear, and super funds will rightly stay away. It’s up to government to fund those projects if it believes they’re really important.