UniSuper CIO John Pearce says the $140 billion super fund remains fully invested, despite risks stemming from trade wars, massive AI capex and the spectre of rising inflation. 

Pearce told the FAAA Professional Congress in Perth on Wednesday that he remains optimistic about the investment outlook in the medium term and is expecting rising asset prices to be underpinned by “strong nominal growth and accommodative [monetary] policy”.

“Valuations are not in a bubble – things are a bit frothy, [and] the correction we’re having now is welcome and overdue,” Pearce said, adding that inflation remains the biggest potential threat to his otherwise optimistic outlook.

“When I say inflation, I really don’t believe that 3 per cent is a problem. I don’t even believe that the central banks believe 3 per cent is a problem,” he said. 

“I’ve always felt they talk 2 per cent but they walk 3 per cent, even 3.5 per cent. If it starts getting to 4.5, 5 per cent then we’ve got a problem. But, you know, the big picture looks like it is heading in the right direction. So those risks are under control.”

Despite the fact Pearce believes the correction has some ways to run, he said he is not trying to time new investments.

“I constantly say, and you’ve heard the old adage: time in the market is better than timing the market. It’s an oldie, but a goodie,” Pearce said.

On a single day after Liberation Day in April, UniSuper members switched $500 million into cash. Most members who switched then missed the rebound – one of the 10 largest single-day gains ever. 

That’s a pattern repeated throughout history: six of the ten largest one-day equity market rises in history happened during the Great Depression, two during the Global Financial Crisis and one during the COVID global pandemic – a clear message to investors who “chicken out when the market is selling off”. 

“These things happen at the worst of times, the biggest rallies happen at the worst of times, [and it’s] very hard to catch that upside,” Pearce said.  

“Small funds can say, ‘we’re nimble, we can time this’ but I just don’t believe that. Whether you’re small or big, timing the market is a bit of a mug’s game.” 

A key theme of global investment over the coming year will be to insulate portfolios from risks posed by China, particularly in relation to a trade war with the US. But there are other “wars” that investors must contend with.

“So you have trade wars, real wars, tech wars, et cetera,” Pearce said. 

“What does the market do? Well, the market, as it always does, climbs a wall of worry.” 

Pearce reiterated his view that it is still too soon to call an end to US exceptionalism, and while investors can “laugh at the Donald all we want… we have to recognise that Trump is a force”. 

“We have to invest on the basis of how we see the world and how we expect the world to be. We can’t invest on the basis of how we want the world to look like. And the reality is that Donald Trump is calling a lot of the shots at the moment, and we have to take that seriously,” he said.

An optimistic outlook is also underpinned by “permanent stimulus demographics”. Usually, as a population ages, people spend less and demand drops, but this time it really is different.

“The difference this time around is the people retiring are the richest retirees in history, and you know that better than I do – they’re your [financial advisers’] clients – these richest retires in history are spending like there’s no tomorrow. So demographics these days are seen as a potential positive influence on growth,” Pearce said.

Investment in both the energy transition and AI are continuing apace, even if AI currently hogs the headlines. Still, there will be “trillions of dollars in capital expenditure” committed to decarbonisation. 

“Tech is the place to be, I believe, as an investor,” Pearce said, and he also likes “the turnaround story in Japan”. The fund still favours private credit, but more so in the US than in Australia where there is too much construction risk. 

We much prefer the US, where we’re still getting spreads of around 550 over base rate. So you know that’s we’re not seeing bubbles in the pricing,” Pearce said. 

Unlike many of its peers, UniSuper has not been seduced by the siren song of data centres. Instead, it prefers to target ancillary industries, such as cooling and cleaning. 

“But the big summary is that always, when you when you’re thinking about investing, and you go back to any long-term chart [it] always starts down the bottom left and ends up at the top right,” he said.

“That’s because the history belongs to the optimistic, long-term.”