Mark Delaney, chief investment officer of mega-fund AustralianSuper, has said that the current media and market narrative around China’s supposed structural decline is “too pessimistic”, emphasising that the country’s changed economic model does not imply that it will become a portfolio “write-off”.
In a virtual meeting attended by some 4,600 fund members on Tuesday, Delaney outlined his market outlook for China. He said while the country may have “run out of runway” for an infrastructure, housing and export-centric model, there’s still room for growth in other areas.
“The labour force is contracting, and the population has peaked and declining, but they still have the potential to increase urbanisation,” he said. “Currently, urbanisation in China is only in the mid-60 per cents, and that could well go to 80 per cent.
“It’s [China] slowed down a fair bit, but it’s almost the same size – or is the same size – as the US economy. It’s not surprising that it’s not growing at six per cent any longer.
“It’s an enormous beast, and the key thing for Australia is that it won’t be as resource intensive as what it used to be. But its market will be much larger.”
AustralianSuper, which manages about $300 billion in assets on behalf of more than 3 million members, is the 18th largest pension fund in the world. The fund is increasingly expanding its global presence, under the guiding principle of “investing globally, managing locally”.
Delany recalled that during his recent trip to visit AustralianSuper’s Beijing research office (one of the fund’s three overseas locations), he was “surprised” by how different the sentiment on the ground is from “what you read in the press and the commentary”.
“The government in China didn’t give massive handouts to people like what happened in the US and, to a lesser extent, Australia, so people didn’t have this wall of cash they’re able to spend when they came out of COVID.
“[And] the government has been trying to deflate what they think is an overvalued and excessive supply of housing in the short term… The downturn in the housing market has led to slower growth than people would anticipate, but the government is in the process of reversing those changes.
“In summary, I actually think China will do a bit better than people anticipate.”
Scale benefits, or curses?
AustralianSuper’s balanced super option returned 8.22 per cent in the year to June 2023, against a 9.05 per cent median balanced option return. Delaney said this is only the second time since the fund’s establishment in 2006 that it has underperformed the benchmark and conceded that the fund was “disappointed” about the result.
However, he denied that AustralianSuper’s scale is hindering its ability to outperform the market when answering one question from the member.
“I’ve been asked this question for the 20 years I’ve managing money for the members of the fund, and particularly over the last ten years, but I just don’t think so,” he said. “I think there are winners and losers as the fund gets bigger, but by and large there are more winners than losers.”
With its now-17 per cent-plus stake in ASX-listed Origin Energy, AustralianSuper is set to say no deal to the proposed acquisition of the company by a bidding consortium led by Brookfield and EIG Partners this Thursday. The fund has become one of the most influential players in the tussle, and that, Delaney said, is a direct result of scale, alongside other benefits such as bigger unlisted investments, more internalisation and lower cost.
“Sure, there are some things which are a little bit harder to do, like owning investments in small caps in Australia, but there are not that many things which are really kept out of the market because of scale.
“The key thing in managing scale is to focus on the advantages and change your operating model to make sure the constraints don’t limit what you can do.”