Bloomberg
‘Markets are wrong’: $ 2 trillion in pension funds ignore the bond route
(Bloomberg) – While nervousness in interest rates overwhelmed the collapse of the largest bond market in the world, Sam Sicilia barely blinked. “The markets are wrong” about inflation expectations, said Sicilia, investment director at A $ 56 billion ($ 43 billion) Host-Plus Pty pension fund in Melbourne. “Deflationary forces are greater. Interest rates will effectively stay at zero. ”With governments around the world still adding trillions of dollars of stimulus to tackle the pandemic, pension fund managers who are trying to discern the long-term effects are raising the question: does inflation make a return? If that happens, more than $ 46 trillion of global pension assets would be affected as central banks turn to sustained higher interest rates. Interviews with five pension funds that help oversee part of Australia’s A $ 2.9 trillion ($ 2.3 trillion) in retirement assets reveal a rating that investors are not concerned about the risk of rising prices. Last week, bond trading sparked speculation that inflation may accelerate to multi-year highs as the inevitable conclusion to the $ 19.5 trillion worldwide coronavirus rescue package. Yields on 10-year Treasury bonds skyrocketed to pre-pandemic levels on Thursday, convulsing stock markets to credit, while traders bet on a more aggressive squeeze – with a US interest rate hike soon estimated to the end of 2022, at least a year before the Federal Reserve had signaled. Debt markets calmed down on Monday, with investors betting that central banks would increase asset purchases to keep yields from rising too quickly. “I don’t think they would like to risk any recovery,” allowing markets to contract very quickly, said Michael Clavin, head of fixed income at Aware Super, Australia’s second largest pension fund in assets, at 140 billion Australian dollars . There may be an “explosion of inflationary data, but we are not sure if it is sustainable”. Wind VaneLike Sicilia, Clavin points to advances in technology as the biggest buffer in long-term price growth. Economists have struggled for years to quantify technology deflation impacting everything from supply chains to wage growth – Clavin’s pinwheel for price pressures – but the overall effect has been to stifle price increases. And that does not include the increase in unemployment with the pandemic. Read more: Aggressive Fed Hike bets stimulate treasure buying calls “There is still a major hurdle to recovering jobs that have been lost,” said Clavin. “I don’t see how you are going to overcome these deflationary forces without some kind of salary increase.” Aware is adhering to a strategy that includes overweight global equities and cash as its default option to overcome market volatility. It also invests around 15.6% of its default fund in fixed income assets. Sicily continues to avoid “outrageously expensive” bonds and is investing in stocks and private equity in bets that risky assets will continue to outperform, as central banks maintain near-record rates “In five to ten years, you there will be people saying ‘we should have bought shares at 20 times the profit’, ”he said. “If technology is the root cause of the absence of inflation, it means that you will not be able to generate inflation anytime soon.” While bond markets suggest that there may be “inflation in the pipeline,” it may be short-lived, said John Pearce, head of Sydney-based investments at Australian $ 90 billion UniSuper Management Pty. The 30-year-old market veteran cites Japan as an example where inflation remains undefined, despite years of quantitative easing and ultra-loose monetary policy. Today’s markets are a long way from the 1970s, when a major oil shock and the collapse of the Bretton Woods system raised prices for the Bretton Woods system, he said. “You look at the marginal cost of everything that is plummeting because of improvements in technology – I don’t see how it stops anytime soon,” said Pearce. “We do not believe that we will see persistently high inflation.” It may be worth “taking a look at” 10-year Treasury bills if yields go up to 2.5%, he said. Contrarion bets. This is not to say that recent volatility has not produced some buying opportunities. When bond yields plunged to historic lows last year, IOOF Holdings Ltd. directed some of its government debt funds to senior credit and loans. In December, one of the underlying asset managers of the Melbourne-based pension switched from a long-term position – or holding securities with a higher interest rate risk – to a short position in signs that inflationary pressures were growing. The bets were worth it. During the worst month for registered Australian bond returns, the fund’s fixed income strategy rose 0.6%. “As we are starting with such a low base of inflation, you are likely to see in the next three to six months” economic data showing some price increases, said Osvaldo Acosta, head of fixed interest assets that studies securities and stock returns in search for an inflection point for inflation. “The biggest risk we’ve seen in the past 12 months has been the amount of monetary and fiscal stimulus that was emerging – it’s just tremendous.” Now, with US yields pushing global rates up, Acosta is assessing his fund’s position. “The titles are starting to look attractive,” he said. Even so, most of Australia’s giant pension fund managers do not see a return to the high levels of inflation that characterized the United States economy in the 1970s. Con Michalakis, chief investment officer at Statewide Superannuation Pty, compares earnings from dividends from the S&P 500 Index with the US 10-year benchmark as a bond valuation barometer and now it is looking for opportunities in government debt after the sale. “We are going to reach an inflection point – bonds close to 2% offer some insurance value that they did not offer when they had 80 basic points,” said Michalakis, from Adelaide. “We are in an era of slightly higher long-term structural inflation, but nothing disastrous.” (Adds tout) For more articles like this, visit us at bloomberg.comSubscribe now to stay on top of the most trusted business news source. © 2021 Bloomberg LP