Japanification looms large for asset owners
The “Japanification” of financial markets is spreading through the developed world and has now become a challenge for Australian asset owners, says Allison Hill, director of investments at the $85.7 billion QIC.
With a large part of fixed income in developed markets trading at negative real yields and the remainder heading towards zero or even lower, the global economy could start to mirror Japan where monetary stimulus has burdened the country with debt and has done little to boost growth or inflation for almost 30 years, delegates will hear at Investment Magazine’s Fiduciary Investors Symposium to be held on November 18-20 in Victoria.
“From an economic perspective most of the world has low real growth rates and low levels of inflation, despite central banks’ best efforts to stimulate the economy and increase the level of inflation towards targeted bounds,” she said. “Evidence is suggesting that at current interest rates, further monetary stimulus will have limited impact and as a result there is a risk that deflation could take hold in some geographies.”
Hill said while low rates and QE have not have not created inflation in the broader economy, they have stretched valuations in many parts of the market which proving to be very difficult to unwind.
“You could see a situation where we are could be at zero or even lower for a very long time,” she said in an interview. “There is an effective lower bound concept which Europe appears to be hovering around, or close to but this is untested waters. This is a genuinely challenging time for investors.”
The investment chief said if Australian investors believe that rates are heading lower, there is an argument that while bonds seem very expensive they still have a valid role in the portfolio. She said equities could present reasonable value, particularly while consumer spending remains reasonably strong alongside corporate earnings.
While the majority of local super funds have sought to maintain unlisted holdings, she said a number of investors have also stayed overweight in equities because of the boost from quantitative easing.
“If supportive action being taken by the central banks does stimulate growth, then continuing to invest in infrastructure and credit also makes sense since companies should be able to pay their liabilities because interest rates are lower.”
The Reserve Bank of Australia cut the cash rate by 25 basis points to 0.75 per cent at their October meeting last week and QIC expects another rate cut to 0.5 per cent sometime this year.
“Commentators talk about not being far away from QE in Australia although we are not there yet,” Hill said. “The view from the central banks around the world is that they can’t do too much more and what they can do has decreasing levels of effectiveness. While the central bank has expressed a reluctance to go further, they may be forced into it,” she said.
Hill said QE in Australia is not QIC’s base case but there are reasons including a hard Brexit and the US-China trade wars for why the world might slip into a global recession.
She noted that the RBA is trying to pressure Canberra to undertake prudent and targeted fiscal policy, which would stimulate inflation and to kick-start the economy, because there is a limit to what monetary policy can solve.
Central banks around the world have looked at Japan to understand whether fiscal austerity was a policy mistake and using fiscal policy instead to stimulate growth is a better outcome.