The US market and Japanese bonds are out of favour with one of Australia’s biggest super funds as it manoeuvres ‘difficult’ conditions with higher interest rates and recession risks.
Sky News Business Editor Ross Greenwood has acknowledged there are indicators pointing towards Australia entering a recession.
“Last week the yield curve, which is an indicator of the future of Australia’s economy, the short-term interest rates got higher than long-term interest rates,” Mr Greenwood told Sky News host Sharri Markson.
“It is one predictor of an economic downturn or a potential recession.”
Australian Retirement Trust, the country’s second-largest pension fund, has a preference for equity markets in the UK and Japan over shares in the US and even Australia.
ART chief investment officer Ian Patrick said the total exposure of the fund to equities was roughly 48 per cent, with a 33 per cent allocation to alternative (unlisted) investments, including property, infrastructure, private equity and private debt.
“Within equities, we have a preference for almost any other (market) other than the US. If you take out what they call ‘The Magnificent Seven’, the US market is flat,” he said, referring to the stocks of technology giants Apple, Meta, Amazon, Nvidia, Alphabet, Microsoft and Tesla.
In 2023, the strong performance of Big Tech companies has been the primary driver behind the S&P 500 benchmark index, which is up almost 14 per cent so far this year.
Those seven stocks alone make up more than a quarter of the index total weight, and have posted large gains after a bleak 2022, offsetting the more subdued performance of the rest of the market
Mr Patrick said the fund had a slight preference for equities over bonds, given the latter were much more sensitive to rising interest rates that are slowing consumer spending and leading to sluggish growth this year. “Interest rates are probably going to be higher for longer, and as a consequence (we see) risk to the downside in interest rates and less risk to the downside in equities,” he says.
“That may come as somewhat surprising because everybody is talking about recession, and equity markets not fully pricing in the decline in earnings from here. But on a comparative basis … we find equities marginally more attractive, and particularly in markets like Japan and the UK.”
Mr Patrick said it was very difficult to position for the long term.
“Because I do think there’s more uncertainty than is given credit for, around the forward outlook,” he said.
ART chief investment officer Ian Patrick.
Questions about how a possible recession would impact the interest-rate cycle meant there was a lot of uncertainty building.
“But you can take advantage of the choppiness,” he said, including capturing the benefits of volatility when equity markets overshoot in either direction – “that has been quite productive for us”.
Mr Patricks said the total exposure of the combined fund to equities is now roughly 48 per cent, with a 33 per cent allocation to alternative (unlisted) investments, including property, infrastructure, private equity and private debt.
“Within equities, we have a preference for almost any other (market) other than the US. If you take out what they call the magnificent seven, the US market is flat,” he says, referring to the stocks of technology giants Apple, Meta, Amazon, Nvidia, Alphabet, Microsoft and Tesla.
In 2023, the strong performance of Big Tech companies has been the primary driver behind the S&P 500 benchmark index, which is up 12 per cent so far this year.
Those seven stocks alone make up more than a quarter of the index total weight, and have posted large gains after a bleak 2022, offsetting the more subdued performance of the rest of the market.
ART’s dynamic asset allocation strategy has a preference for equity markets in the UK and Japan, over shares in the US and even Australia, its latest investment report shows.
In bonds, Mr Patrick said ART is avoiding Japan, given the fund’s expectation the country will have to yield to (albeit weak) local inflationary forces and adjust its monetary policy. “At some point we think the Bank of Japan will have to respond to the inflationary impulse and let rates increase somewhat. Probably still relatively low in the global context, but increase somewhat and that’s going to be unhelpful to bonds.”
He sees the US dollar as “marginally overvalued”, the Swiss franc “quite overvalued”, and commodity-related currencies such as the Norwegian krone and the Canadian and Australian dollars “marginally undervalued”.
The $240bn-plus ART was created in 2022 with the merger of industry fund Sunsuper and QSuper in Queensland.
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