Asset owners need to smarten up their investment style if they are to thrive in the current tough environment.
Mark Burgess, the chair of HESTA’s investment committee, said it will take a lot of skill to distinguish between good and bad assets without the support of falling rates which has had the effect of ramping up asset prices regardless of quality.
Speaking ahead of Investment Magazine’s Fiduciary Investors Symposium, which will be held on May 20-22, Burgess also underlined the importance of active management skills.
Burgess, a former Future Fund boss, said 30 years of consistently falling interest rates, with the support of globalisation and relatively benign political environment, has provided a tail wind for asset revaluations and returns.
“The past 30 years, around which my own career was built, will be seen in hindsight, as the easy part. This is not to say we should be bearish, but I believe it is a return to a more normal environment,” he said.
Signs of weakening growth is not the only thing worrying the world’s pension funds, he warned. Liquidity in the financial system is shrinking. At the same time, protectionism, populism and nationalism are rising in the developed economies.
When Burgess talks to investors, he is often asked about the capability of central bankers to protect against the risk of an economic slowdown.
Right now, the investment chief believes the current shift away from further monetary tightening is positive for global financial markets.
“In the short term, it will remain a support to markets and with high levels of capital still available on the side lines, comments about loose monetary policy can be effective,” argued Burgess.
But he cautioned that the “Greenspan put” now called the ‘Powell put” has become pervasive in investor focus and thinking.
This term was coined after the market crash of 1987 when the then US Federal Reserve chair Alan Greenspan reversed a tightening cycle by suddenly slashing rates. Similarly, last month, the Fed’s current chair Jerome Powell signalled a pause in the Fed’s tightening cycle.
For its part, the European Central Bank last week revived its stimulus program after warning that the region was in a “period of continued weakness and pervasive uncertainty”.
However, Burgess warned this protection is unhealthy in the long run as reliance on such support will result in excessive risk taking (such as high debt levels) and may become ineffective.
“This has been a 30 year build-up in expectations of a form of protection (which was used initially to such good effect post the 1987 crash,” he added.
“In a world lacking confidence in political leadership, markets, while supportive of positive monetary policy stimulus, are also keeping a wary eye on its long term effectiveness.”
Unwinding quantitative easing is an unprecedented experiment says QIC investment director, Allison Hill who believes central banks have done a good job managing the situation they found themselves in after the global financial meltdown of 2008.
“However, should political pressure mean that they weren’t able to act with independence, or they changed paths, I believe that this would have a dramatic impact on markets,” she said pointing to December’s stock market rout.
Hill, who will also be speaking about central bank credibility at the FIS conference, warned that markets could lead the global economy into recession if the normalisation of monetary policy wasn’t managed well.
Turning to investment strategy, Burgess warned that reliance on monetary policy requires a carefully considered diversified portfolio.
“Just expecting interest rate or monetary action to resolve long-term growth could be a mistake so the selection of investments and building diversification is key.”
At the conference, Burgess will also speak on the hunt for yield in emerging markets.
Developed countries with high levels of GDP per capita and already high levels of debt, are likely to be drags on global growth and in fact possible sources of balance sheet stress.
“In this way, emerging countries will actually prove to be the most significant areas of focus for investors, and skill in forming an investment view in these areas will be critical.”
Investment Magazine’s Fiduciary Investors Symposium will be held in the Blue Mountains, New South Wales, on May 20-22. Find the full agenda here https://www.fiduciaryinvestors.com.au/