With the Trump Administration hellbent on carrying out an increasingly punitive economic agenda, it looks like no country will be exempt from the tariffs that have been levelled against the likes of Canada, Mexico and China. Australia, and a host of other traditional US allies, can only hold their breath for what comes next.
Equity markets have responded accordingly, with the local and global indices quickly falling into correction territory as recession fears spiked.
“The short-term noise around trade policy and geopolitical risk has certainly increased,” Michael Winchester, head of investment strategy at the $190 billion Aware Super, observes – a little drily.
But what does that mean in practical terms? A rule-of-thumb used by Aware’s economics team is that a one per cent increase in the tariff rate in the United States results in a one-off 0.1 per cent increase in prices on a range of goods in its CPI basket. Before Trump returned to the Oval Office, the average tariff rate was 2.5 per cent; Aware’s latest estimate is that if all the threatened tariffs are imposed the rate would rise by seven per cent to a level “not seen since the 1940s” but one which would only result in a one-off 0.7 per cent increase in prices (with some variation; food is mostly domestically produced, cars are not).
But that’s not really the point, Winchester concedes. The other morning, getting out of bed, he saw that another wave of tariffs had been launched; by the time he’d eaten breakfast they were already being wound back.
“The uncertainty is pretty damaging for confidence, and that’s why the market is starting to price in recession risk,” he says.
“But what we’re seeing with Trump is that it’s a noisier version of a trend that started some years ago: the trend towards onshoring, friendshoring and an increase in government intervention in industrial policy. That’s a trend that’s likely to continue, even after the sound and fury – or whatever comes after it – is over.”
But Winchester says that an increase in economic protectionism doesn’t necessarily herald the death of traditional portfolio construction, as prophesied by the likes of the Future Fund. The main driver of returns will remain equities, which provide liquidity and diversification; bonds will do the heavy lifting during deflationary periods and economic slowdowns; and if inflation rises again – a likely side-effect of a more frictious global trade environment – funds can fall back on the inflation-linked revenue streams of their real assets.
And equity allocations geared heavily towards the US market are unlikely to go anywhere, anytime soon. Like most super funds, a significant chunk of Aware’s portfolio – 30 per cent – is invested in the United States. That’s not because of any particular target, Winchester says; it’s just that that’s where the opportunities are, and he’s confident they will be in the future, too.
“If you think about the Magnificent Seven… they’re global companies that happen to be listed in the US,” he says.
“But it’s telling that these huge global companies arose from the US and I think it’s an economy that is dynamic and a huge source of innovation. I think that’s likely to persist. Valuations are going to change; there’s a lot of hopes and dreams priced into those seven companies. But some already have changed the world, and I think we’re going to see even more change arising from them in the future.”
Still, market volatility “isn’t fun for anybody”, but Aware’s macro strategies team has played the edges of it by shifting the fund’s weighting to the US dollar. Elsewhere, younger members will get to load up on risk at a better price than they’ve been able to in years, while older members drawing a pension are somewhat insulated against the correction by the tail-risk hedging program instituted by StatePlus nearly 11 years ago and maintained by Aware since the 2016 merger.
“That program has a pretty long history and it’s done a really good job, with positive returns since inception,” Winchester says.
“It’s provided an offset to market volatility in the periods where it really mattered, like Covid and the first half of 2022. If this current sell-off extends further, it’s pretty well-positioned to provide that protection again.”
Most funds scorn tail-risk hedging for two reasons: it costs a lot of money to run – you have to keep going back to the derivatives market until something finally blows up – and big funds tend to have plentiful liquidity from contributions to buy the bottom anyway.
“Your investment program needs to match your member base; because we manage so much for members at different life stages, it makes sense for us to include those strategies for the retired member bases,” Winchester says. “If it looked different – if it was mostly accumulation – it wouldn’t be necessary.”
More broadly, Aware has been “really active” in investing across the digital asset space, but its property team has become much more confident that it has arrived at a “really attractive buying point in the cycle”.
“Markets that have been really out of favour the last few years are reaching levels where we think that we’re going to get some really excellent returns… Office has been pretty beat-up, and there’s a lot of bad news priced in.”
