The US/China trade dispute is seen as the biggest threat to Australia’s landscape over the next ten years and is more concerning than the impact of global warming and the policies of central banks.
By Lachlan Colquhoun
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This result on the the US/China trade dispute poll was seen at the FSC Summit session on the Investment Landscape for Fund Managers in Australia, where audience members were invited to vote on what they saw as the biggest economic risk.
The US/China trade dispute was the overwhelming choice, selected by 57 percent of the audience, while 29 percent nominated climate change and only 14 percent nominated central bank policy.
Although he personally viewed climate change as the biggest risk, panel member Shane Oliver, the Head of Investment Strategy and the Chief Economist at AMP Capital, agreed that the trade was a “dominant issue and is causing a messy environment” of volatility and slowing growth.
He saw the start of a “long cold economic war” which would have a lasting global impact while climate change, although critical, was more of a longer term risk and was therefore less of a priority for many.
Oliver believes that the global economy, and Australia, will avoid a recession.
“There is a slowdown but there are glimmers of hope in the housing market and even in retail there is evidence that the tax cuts and the lower dollar are helping,” he said.
“We probably need some more monetary stimulus and more talk about unconventional monetary policies, but I see more of a role for fiscal stimulus.”
While monetary policy had worked positively during the global financial crisis of 2008, Oliver said that given record low interest rates, conventional “monetary policy has reached the end of the road” in its effectiveness.
He cautioned, however, against a policy of negative interest rates from the Reserve Bank of Australia, saying it could potentially cause “panic” in the economy.
On investment returns, Oliver warned that the time for double digit returns from superannuation funds had passed for the time being, and said that in the current environment an expectation of around 5 percent was more realistic.
Fellow panelist Kate Howitt, a Portfolio Manager at Fidelity International, said that despite headwinds, she was confident that some parts of the economy were “firing through most conditions.”
She said that in her view, markets needed three things to do well: a good earnings outlook, attractive starting valuations and abundant liquidity.
Each of these was still available in some measure and there were “lots of pockets of opportunity in the local sharemarket”, while the lower Australian dollar was “very helpful” for many companies.
One of the strengths of the Australian sharemarket, said Howitt, is that it is “one of the highest yielding markets in the world”, a characteristic which imposes capital discipline on management teams and helped in moving capital to the “most efficient place in the economy.”
On the question of global warning, she described environmentalism as like purchasing a “luxury good.”
“Support for longer dated aims waxes and wanes,” said Howitt, although she said that the corporate world was being more responsive than government to popular concerns about global warning.
The move to ESG investing, she said, showed that many believed the political process was not working as well as it did in the past, and so were looking to investment managers to “help that shift.”
“BHP’s move recently was also very interesting, and shows that the largest companies in the world have better execution than some governments, and that multi-national corporations can be a part of the solution,” she said.
From UniSuper, CIO John Pearce said the global economy was “still living in the post GFC world” which had “pricked the biggest debt bubble in history.”
“Central banks are about to inflate, and the problem with the trade wars is making their role just so much harder,” he said.
The US/China conflict, he said, would be the “dominant theme” for some time to come, while global warning could take a century or more to play out.
The issue for investment managers was “how to convert global warning into an investment thesis” and this was still problematic.
The fourth panelist, Grant Wilson, the Head of Asia Pacific for Exante Data, agreed that the US/China trade war would become a “feature” of the global economy, largely because there was bi-partisan support in the US for a tariff policy.
He pointed out that Australia was about to enter a significant transition, in that it was about to go from being a net debtor economy to a creditor.
While Australia had maintained its standard of living through borrowing from offshore, as a creditor the economy would “start earning on a net basis.”
“If we make this transition, it will be additive (for our standard of living),” he said.
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