How the coronavirus shock will reshape the investment landscape

Ben Powell - Chief Investment Strategist, APEC at BlackRock

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In this episode, Ben Powell, Chief Investment Strategist, APAC at BlackRock, joins us to analyse the trends from BlackRock's 2020 midyear global outlook, which includes the steps to restarting the global economy, the future economic impacts of blurred monetary and fiscal policies and the acceleration towards sustainable investing.


Transcript

Paul O'Connor (POC): Welcome to the Netwealth Investment Podcast Series. My name is Paul O'Conner and I'm the head of investment management and research. The investment management and research team oversees the investments we make available to you through our superannuation and non-super investment platforms, and we're also responsible for the managed funds and the managed accounts that Netwealth issue. So we spend a lot of time interacting with fund managers. The due diligence that we undertake on funds provides many insights into the different views on the global economy, financial markets and investment strategies offered by the managers.

Today we have Ben Powell from BlackRock with us who is a managing director, chief investment strategist for APEC within the BlackRock Investment Institute. Ben is responsible for delivering value-added market and investment insights across asset classes and is experienced in developing both a macro-level framework and tactical ideas within that framework that are implemented in BlackRock and client portfolios. Good morning, Ben.

Ben Powell (BP): Good morning, Paul. Nice to be with you.

POC: BlackRock was founded in 1988 and is a global investment management business based in New York. BlackRock is the world's largest asset manager with well over US seven trillion in assets under management and operates globally with 70 offices in 30 countries. BlackRock offer both active and passive investment strategies across most asset classes through managed funds and their REIT shares passive business. And many of these funds and ETFs are available on the Netwealth platform. BlackRock also work closely with Netwealth assisting us in providing asset allocation support for our GSS index managed models and the GSS index funds whose underlying funds are REIT shares index funds.

BlackRock was founded in 1988 and is a global investment management business based in New York. BlackRock is the world's largest asset manager with well over US seven trillion in assets under management and operates globally with 70 offices in 30 countries. BlackRock offer both active and passive investment strategies across most asset classes through managed funds and their REIT shares passive business. And many of these funds and ETFs are available on the Netwealth platform. BlackRock also work closely with Netwealth assisting us in providing asset allocation support for our GSS index managed models and the GSS index funds whose underlying funds are REIT shares index funds.

BP: That's right. No, here in Singapore similarly to you guys down in Australia, we are still in a... We call it phase two of the lockdown. So that means that of course a little bit of a unusual time in the virtualization of everything from retail to communication and so forth. So it seems to us broadly that the virus has acted as an accelerant to many preexisting trends. It's not like the internet didn't exist before March, but this virus has of course obliged us all to become much heavier users of this virtualization. And I think one of the things we're very thoughtful around is how much of this is going to stick and how much of life will return to some version of normal when hopefully at some stage we get through this virus situation.

POC: The fiscal and monetary responses of governments and central banks since March you see has been nothing short of extraordinary, but does BlackRock believe enough has been done to avoid a deep global recession?

BP: So we think in the round that the economy, the global economy is restarting, and of course there are complexities and uncertainties that you pull in Melbourne, particularly familiar with at the moment. So there are risks around this, I think it's fair to say, but the quarterly growth, Q3 on Q2 is going to be the biggest quarterly growth in human history. Of course that's largely because Q2 was a broad global shutdown, but nonetheless, our answer to the alphabet question, what's your favourite letter, is it's going to feel like a V-shape recovery. The mood music it seems to us across the board from US home building through to China PMI and annal pricing, et cetera, is going to continue to suggest that this global economy is restarting albeit with those obvious concerns around the virus, geopolitics, US politics and many other issues in a complex world.

To the point on policy, we consider it to be a policy revolution in 2020. So of course there's been an awful lot of unorthodox policy over the last decade and more going back to the GFC, but for us 2020 is a distinct break from the past, and in particular it's more than just the remarkable pace and scale of the global policy support that we've seen in 2020. What we think is new news, I suppose, and hence the revolution rather than evolution, a framing that we have is the overt at times and implicit at others, coordination between fiscal and monetary policy. So that blending of the normally discrete arms of macro policy support, the fiscal and monetary arms, that blending, the working hand in glove all over the world I think we all understand it as government seek to build a bridge from before the virus to after the virus. But that blending is for us an extremely different policy setting even when compared to the unorthodox QE for example that we've seen over the last years.

POC: Yeah. It is interesting. I mean, I don't think we've seen such extraordinary fiscal policy announcements from governments. I mean, as you mentioned, the GFC, we saw extraordinary monetary responses, but I think the combination of the two appears to have supported the economy, and with a bit of luck we will avoid that deeper recession. BlackRock has recently released its midyear outlook. The future is running at us, and must admit, I feel almost on a daily basis that I'm embracing the future, including changing societal, marketplace and workplace behaviours. So I certainly appreciate the title. Could you explain at a high level what this outlook covers?

BP: I can. Yeah, so going back to the end of 2019, which seems an awful long time ago, but at the end of 2019 we released our 2020 outlook, and that outlook was called Testing Limits. And we really took the opportunity back in December-January to introduce for the time we thought were longer term concerns around sustainability, de-globalisation, financial policy and inequality. So the question we were posing really is are we reaching limits around those different themes? And if we are, when are they going to start to impede on the shorter term a more positive risk framing that we had at that stage?

And in all candour Paul, we were thinking in terms of years ahead, and then of course the virus arrived and the future's arrived all at once. So what we thought was five years has in fact transpired in five months with the virus acting as an accelerant across so many different aspects of our life, with everything from the virtualization of retail, communication, all the way through to the geopolitics. US-China tensions of course were in the air before the events of the virus, but it feels like the virus has exacerbated some of those preexisting fault lines.

So the main points as per the title is that this extraordinary event has accelerated a variety of different concerns, observations, topics across all aspects of our life. And these were in the air before as I've mentioned, but now becoming so much more immediate and pressing. So that's the, I suppose, the big picture, and that then feeds through into some, we think quite important implications for markets and for the portfolio itself in turn.

POC: As the outlook focuses on three key themes, activity restart, policy revolution and real resilience, can you provide the listeners with a summary of each theme?

BP: With pleasure. Yeah. So activity restarts, we think the world is slowly returning to work of course very carefully and not without risk, but in the round we see activity restarting in all different facets of the global economy little by little, and therefore we're going to see a tremendous quarterly pickup of course based on Q2s broad economic shutdown. So it feels to us that activity restart is the right framing, and I would therefore put us at the BlackRock Investment Institute at the relatively more constructive end...Investment Institute at the relatively more constructive end of economic forecasts and outlook. So first is activity restart. Second, policy revolution. This is the explicit, at times, and at other times implicit, blending of fiscal and monetary policy. And this was done, I think we can all understand, for good reason in order to help fight a very frightening health situation, yet alone economic and business situation, but it was done so swiftly all over the world that this policy revolution we would observe has been put in place without what we call guard rails, i.e. how are we going to get out of this policy revolution over time? So the policy revolution is with us, the implications are substantial, and it's not clear to us at this stage what are the guard rails that policymakers themselves will be using to unwind what should be, I suppose, extra ordinary policy for an extraordinary time as we move back into, we all hope, more normal times in the quarters ahead.

And now that feeds through in turn to the third key pillar, which is a real resilience. So what that means is, and I think this is probably the critical point we're making at the moment, with the policy revolution we're looking at a situation with trying to source income, yields are going to be even even lower for even even longer. And this is problematic, and this feeds through to our, I think, our main call that developed market government bonds simply don't give you what they used to as a matter of mathematical truth. So we're not really making an argument, we're just observing with yields having fallen as dramatically as they have in the previous years and then in the previous months it's not as clear cut that, say for example, a traditional 60/40 portfolio can get the job done in terms of giving us the income portfolio performance that we would prefer.

Just a quick statistic on that. If you look okay, this is within the US where I happen to have the data to hand, but I think it's approximately true globally as well. A sort of standard 60/40 bonds equities, excuse me, equities bonds portfolio in the 2010s. So from January the first 2010 through to New Year's Eve 2019 into 2020, that would have given you around 10%, the exact number is 9.8%, but around 10% return, which is obviously pretty good. Looking forward, so we know certainly about the past, so this is a forecast, but our forecast here at BlackRock using our capital market assumptions, is that the same 60/40 portfolio looking forward for the next 10 years will return you about 4% or even a little bit lower. And clearly a little bit lower than 4% is substantially, critically, vitally different from 10%. And we think therefore necessitates some pretty substantial changes in how portfolios are going to be constructed looking forward if we're going to generate income and portfolio returns in the way that I'm sure we'd all prefer.

POC: Yeah, I did find that interesting when I was reading the BlackRock outlook, the six monthly outlook there. And also I guess the key theme there that we really need to consider our portfolios, our allocations in our portfolios. And perhaps some of the norms of the past, we really need to question. Net wealth investor interest in ESG or environmental sustainability and governance has been growing in recent years. But I note this has accelerated significantly in the last six months. So appreciated BlackRock's view that COVID-19 has accelerated a tectonic shift towards sustainability. What does BlackRock believe are the key drivers of this change since March? And perhaps if you could provide the listeners with a short summary of just what you consider are the key attributes of a sustainable asset?

BP: Sure no. So firstly, I'll emphasise the point you kindly just made Paul, which is it is happening. So of course there are still important and, frankly at times, contentious debates around the merits and otherwise of ESG. So we understand that. We're not deaf to that of course. But as a matter of fact, in the first five months of 2020 through to the end of May, we saw more investing into ESG style product than we'd seen in any full year previously. So of course, we're going to come to the discussions as to the merits and otherwise, but I would observe as a kind of observation, a fact if you will, that it is happening. And I would argue that there is a tide here flowing into ESG, and all of us can make the choice to swim with that tide or swim against it. Our suggestion would be that swimming with it is probably the safer way for investing moving forward.

So with that kind of just observation as to the flows that we've seen, moving into sort of how we think about it and how I think about it. I mean I'm an economist by training, for which I feel like I should apologise given the various challenges the economics profession has had over the last years. But one concept you learn as an economist is that of so-called externalities. So these are things like pollution, which companies can cause, but don't fully bear the cost of. So to some degree there is not a reason to stop polluting. Now over the last many decades, societies have dealt with these so-called negative externalities of which, as I say, pollution is perhaps the most famous, by regulation. And to be clear, that is going to continue of course. But what could be, I think, a fascinating experiment that we're undertaking at the moment is, can we fully internalise at the company level the full costs and benefits that a particular company security brings to society?

And the answer to that question, I think almost certainly is no, we can't fully achieve that, but I think there's an aspiration to try and have costs of capital across different securities fully reflect or, let's say, more fully reflect the total benefits and costs that they bring to society. That to me seems like an aspiration which is both worthy on the one hand, but also economically coherent on the other hand. So you've got a kind of, as I say, a moral purpose I think to striving for that on the one hand. But two, just as a soulless economist, it is just a, I think, better maths if we can more tightly incorporate the broad costs and benefits that different companies and therefore their securities bring to bear. So that's how I think about it. This is the micro level internalisation of externalities, as I've described them, ultimately at the security level.

And to be clear, we will never fully get there. I mean the idea that we will solve for this perfectly I think is optimistic. But as I say, and as we're sort of seeing in the flow data as per my initial comments as part of this answer, we are seeing this become, I think, increasingly ... I'm not going to say mainstream yet, but I think it is quickly moving away from, frankly, a little bit left field, a little bit niche, to becoming just another way that we think about investing. And I suppose of the S and G governance in particular over the last years, governance and the risk of company malfeasance that say, I think that is now just a completely normal way that we think about risks in around investing. The S, the social, and the E the environmental, perhaps is still more nascent in their journey, if you will.

But I think it's fair to say that we at BlackRock, the world's largest investor, we very much think the wind is blowing in the direction of a more ESG focus. And indeed to some degree we're trying to help facilitate that with the creation of a product to make investing in that direction easier for all of us.

(Previous episode) What is driving increasing company valuations? - T.Rowe Price

In this episode, Scott Berg, Portfolio Manager for the T.Rowe Price Global Equity Fund, joins us to discuss the recent performance and outlook of global equities, the role of value and growth stocks in your portfolio and the current factors driving company valuations. Scott also shares his views on the rising geopolitical risks between China and the US and his investment philosophy for navigating the current financial crisis.

Listen to the episode



POC: 
Yeah. You make some interesting comments there Ben. And had me thinking around, I guess, for a long time as ESG has started to become more and more mainstream, that a lot of it at a high level is about is the company a good corporate citizen? Does it try and think about these externalities? And I can certainly appreciate your comment there, that it is very difficult for anyone to fully capture the externalities of a company. But I also think simplistically, with the environment for example, that post the industrial revolution companies used to just throw their waste into the river. And we got rid of that many, many years ago. So I guess I look at the environment and the year as a similar example there. But I think it's so positive that we're all thinking about this and talking about this, and ultimately it must have some long term impact on company management and how they're actually addressing those issues.

So can you explain, Ben, what impact each of the three key themes in your report will have on- key themes in your report, we'll have on portfolios. And particularly, I'm thinking about the comments you've made earlier around bonds and naturally the strategic asset allocation that a lot of funds and investment consultants use in portfolios, for example, have had a very large [inaudible] to government bonds. But as you pointed out earlier, from a simple arithmetic viewpoint, the yield on bonds is at all time lows. So, a lot of people are questioning now where to go with their portfolios.

unch meeting over the years has been to say, if you could click your fingers and magically have a meaningfully bigger business in two or three countries of the world, what would those countries be? Where do you really wish you had more than you have today? And what I would share with you kind of the summary of all that is never have I had anyone say they wished they had a lot more in Russia. I don't think I've ever had anyone say they wish they had more anywhere in Africa. I've had probably 80% of people say they wish they had more in India or in ASEAN. 

It's the number one place in the world that even successful companies, even companies like Amazon and Alibaba, which notionally to me have the best positioning of near any company on earth. Both of those see India and Southeast Asia as the two most important dynamic, interesting markets on us that can move the needle for them. Right. And so there are parts of the [inaudible 00:27:02] but interestingly, the incredibly small pots of the [inaudible 00:27:06] benchmark. And so we're not talking about South Korea or Taiwan, we're not talking about South Africa or Brazil, we're talking about focus, parts of it, but I'd say most of the corporates I meet with are looking to have more of their business in these fast-growing [inaudible 00:27:21]. And they would much prefer to have that than have more business in Western Europe or Japan or in a number of places, even in the US.

POC: So Scott, how do you think about the larger crowded COVID winning companies, and the valuations that they're currently trading on? Because they do appear quite extreme. You really comments there around the market as a whole, not being too overvalued, but some of these individual, I guess FANG stocks, and what have you seem to be trading on extreme multiples?

BP: That's right. And I don't want to get too grandiose here or a typically pretentious English guy, but here goes. I think it is almost impossible to exaggerate what a big deal this is because forever, for the last 50 years, you've had the US Treasury. Before that, you had UK gilts and before that in the 1800s, you had UK consoles. For at least a couple of hundred years and probably longer, you've always had some form of safe asset, which gave you this double positive whammy of a bit of income, 3% or 4% or 5% typically, and crucially provided you the diversification benefits portfolio ballast, if you will, to hedge you to some of the bad days in markets. And that has obviously been great, and now you don't have that, as I say, so I don't want to get too excited here. But I really do think it's hard to exaggerate what a big change that is, from having had that asset for the last couple of hundred years to now not really having one, or at least we're going to have to be a lot more creative about how we solve for this.

So, in terms of where we end up in portfolio dynamics, the combination of activity restart, this more constructive, I would say, sense we have of global economic normalisation combined, of course, with the huge tailwind provided by global policy makers. That actually makes this quite constructive risk, I guess. So, we want to be exposed to markets and exposed to risk, but in a, I would say, consistent up in quality bias and up in quality bias throughout the portfolio. So, you can see that in terms of our asset class preferences and our geographic preferences. So, within asset classes, for example, we are neutral global equities. I just want to stress, sometimes when people hear neutral, they hear negative. We are not negative, we are neutral, which I would understand as meaning fully invested. So, neutral equities but actively overweight credit. So, again, you can see within the capital structure, we're overweight credit, which is a bit senior to equity.

Very similarly within geographies, we are underweight emerging markets on the tactical timeframe, and I always think this seems almost like an unfairness, but a shock such as the virus by definition will hurt the most fragile the most. And that is a tragedy, but it's true. So, many emerging markets all over the weld are still really suffering with the virus itself. And by definition, emerging markets don't necessarily have the same capability as developed markets to deal with the virus, both in terms of a healthcare challenge and in terms of the economic and policy response which would be needed. So, to come to the critical points. Yields are lower, that's likely to continue. We see this policy revolution as being sticky in the absence of guardrails, as I mentioned earlier. So, we think that, unfortunately, developed market government bonds are going to continue to not get the job done in the way that they have done historically.

So, we don't think this is a aberration for a month or two or even a quarter or two, this is going to be prolonged, and therefore we think will necessitate pretty meaningful changes to portfolio construction. The punchline is own fewer developed market government bonds. If they don't give you what they used to, then owning fewer, we think, makes sense. Exactly how many for you, of course, will depend on exactly the shape of your portfolio and what you're trying to solve for. But the bold broad point is own fewer developed market government bonds. Now, that begs the question, "Okay, fine. I get that. I understand the maths and it's a little bit frustrating because developed market government bonds have worked for 200 years, but anyhow, we're going to have to adjust. So, if we're selling developed market government bonds, what are we investing into?" And the disappointing answer is there's not an easy, straightforward solution.

It seems to us that it's going to be a little bit of a mixture of assets that we're investing into, which between them can help provide for the income needs, which are obviously so important to all of us, and the risk mitigation, the diversification benefits that treasuries have also helped with. So, on the list we would include privates, alternative investments, as I've mentioned we would continue, of course, to be fully invested into traditional risky assets with a neutral wasting in global equities and an outright overweight in credit. And then, importantly, we think that some hedge to inflation is absolutely critical, because this portfolio, it seems to us, where we are being encouraged by global policymakers to reach a little bit for yield and therefore to go further out the risk curve, be that by illiquidity in the shape of privates or elsewhere, by geography and so forth.

We think that if we were to have any return of inflation, it could be extremely inconvenient for the broader portfolio. So, we talk about TIPS, Treasury Inflation Protected Securities, as being a crucial component of portfolios looking forward because, of course, they are hedged to inflation and can perform well themselves. But I think more broadly, TIPS is a hedge to the specific problem, if we were to see even a small return of inflation, it would be, as I say, potentially quite inconvenient for the broader portfolio. So, having a hedge in the form of TIPS, which speaks specifically to that concern, we think is a good idea moving forward from here.

POC: It certainly sounds very rational to me, your comments there, Ben, and I guess you've mentioned the elephant in the room there, inflation. A lot of people have forgotten about inflation, but I guess my view is that given the huge fiscal and monetary stimulus and the huge amount of public debt taken on by governments, I would have assumed the policy makers would like to err on the side of allowing a bit of inflation to take off and run. And then, to your point there, the impact that inflation eventually has on other assets like equities, et cetera, it certainly makes sense to have some type of inflation protection in your portfolio, because I think it's a case of when and not if we see inflation. But I think, at the moment, it still might be a few years off there. From the tactical perspective, the midyear outlook states that you favour the assets higher up the capital structure, so you have a preference for credit over equities. Can you elaborate on this view, and do you regard some credit as a risk growth asset and as a proxy for equities or are you talking about now reallocation within the fixed interest portfolios?

BP: So, that's right. So, we want to be exposed to risk, of course, but in this consistent up in quality manner because of the uncertainties, complexities around, of course, the virus itself and other issues of geopolitics and so forth. So, we think that having this... I'm prepared to accept, it does potentially sound a little bit, "Have our cake and eat it too," but I guess I like cake. So, if one can be exposed to risk, we think that makes sense given the activity restart policy revolution framing that I've mentioned, but with the uncertainties with the virus and so forth, in a careful way we think that makes sense. So, therefore, overweight credit, neutral equities as we've talked about.

Within the credit space, I must say I still go back to Fed chair Powell's comments back in March, which I really think were of historical significance. You may recall, he said, "Main Street didn't cause this," this being the virus of course, "We need to make them whole." And that's really quite an amazing comment if you think about it, this, I think, pretty explicit step from the Fed away from pure monetary policy into what I would describe as credit policy supporting the functioning of markets. And of course, there's nothing wrong with that, it's a critical component of the Fed's mandates to support the functioning of markets, as was a little bit in question back in March. And this has obviously provided a huge tailwind for the broad performance of credit indeed, as we've seen over the last several months. So, I think we might see more of this. It seems quite likely to me that the Fed is going to be, potentially in the next few weeks, adjusting how it creates policy, potentially moving towards a so-called average in-... potentially moving towards a so-called average inflation target regime. Now what this would mean is the Fed would commit a promise to achieve something like a 2% inflation on average, over something like a period of two years. So therefore mathematically, if the Fed under achieved the target, let's say inflation is 1.5% as it has been for many years to this point, if the Fed under achieved that target, they commit to overachieving inflation, really pushing it through 2% to levels we haven't seen in a long time.

So again, to circle back to the points around credit, this policy revolution we think is sticky. We think the Fed, the world's most important central bank, will be to some degree formalising the framework, almost catching up with Paul's comments from back in March made under the stress of the market maelstrom of that time. So as a result, a net of all that, we see this policy support as being with us for a long time. And that's obviously very helpful in terms of providing this tailwind that we've talked about for the performance of credit markets as we've seen and as we think will continue in the months ahead.

POC: Just moving on to geopolitical risk, China appears to be flexing its economic muscle more than ever. And this has led to increasing tensions with numerous countries, including the US, Australia, Canada, France, India. What are the rising geopolitical risks that concern you the most? And do you think China is attempting to reset its global position, given the US has become far more domestic focused under President Trump?

BP: I think this is of course an absolutely critical question, not just for markets, but frankly for all of us as citizens of the planet. So for us, the tensions between the US and China are structural and persistent. And what that means importantly is, for example, regardless of who wins the US presidential election on November the 3rd, these tensions will continue. So of course, one assumes if there were to be a Biden victory, there would be important changes of style and tone and indeed certain areas of policy, but in terms of the deep structural issues, these will persist and they are bigger than individual personalities, even some of the very large individual personalities that are involved here. So these structural and persistent tensions are going to continue.

I think China has become, of course, just a much more significant part of the global economy. There was almost no alternative for them as they become larger, China was always going to garner more attention. The interesting question it seems to me for countries such as Australia, even my own in the UK, and frankly everyone else, is for the last many years, particularly here in Asia, candidly, there's been a pleasing sort of no decision to be made about having perhaps the defence of the 7th Fleet on one hand and deep business interests with China on the other. That now seems to be coming into much sharper relief.

And I sort of joke at the moment that a lot of countries have the policy of trying not to pick the phone up because on line one is the US saying, "You need to be on our team," and on line two is China saying, "You need to be on our team." And I think that position of not picking the phone up is becoming increasingly difficult around technology and other areas.

So you asked me which areas in particular I'm, I guess, focused on. It's clearly moved from being about trade. Trade's obviously very important. But it's a bigger deal than that now. And we're seeing this really extraordinary almost day by day technology tensions, and that I think is going to continue to move forward and ultimately will likely lead to some sort of a ... not a total splits because we're obviously a very interconnected world, but I do think we are moving into the direction of a fairly distinct Sinosphere led by China and an Anglosphere led by the US with potentially quite distinct technology, internet, architecture, software, chip components, and so forth.

Now to get from here to there will take an awful lot of time, money, investments, and political will, but it does feel Paul that that to me is the direction of travel given the nature, again, of the structural and persistent tensions between the US and China.

POC: Yeah, it certainly appears that technology's becoming a key focus of the trade war and the trade war is moving almost to a tech war there, but you make a very relevant comment there. And particularly in Australia, I think we're starting to grapple with the fact on one hand, we've had the long-term security relationship with the US, but on the other hand, China, who is our biggest trading partner are so important to Australia's continued economic growth. So I think it is the growing tensions as China just becomes a bigger part of the global economy.
Finally, have you got a tip for a spin on the US presidential election coming up in November? And who do you think markets are supporting, a Democrat or a Republican president?

BP: So my tip, I don't know if it's a tip, but my tip is that the election that matters is the Senate. Of course the excitement and drama, which I will definitely be watching live on TV and so forth, is the White House. But critically, it seems to me is the potential for a blue sweep, a so-called blue sweep. So this would be Democrats not only controlling the White House with a Biden-Harris victory, but if they also control the Senate and already control the House, and one would assume in the events where blue sweep was to maintain control of the House. If the Democrats can win all three branches of the executive, then of course they can get things done.

And I think potentially what you might see to facilitate that in the event of a blue sweep would be a change to the so-called filibuster legislation. I know this sounds a bit detailed, but I think it's kind of a huge deal. And if they were to change that legislation, that would then mean that they would have a much easier time passing what one assumes would be a progressive agenda.

So in terms of tips, I don't know if it's a tip, but I really think the critical election is the Senate. If that turns blue, it's likely to be part of this blue wave, a so-called blue wave. And that I think is sort of a huge deal. So I think almost as the election as being, obviously it's more complex than this, but a binary between is it a blue sweep or not? Because even if Biden wins the presidency, if the Senate stays Republican, obviously mixed government means it'll be much harder for a Democratic White House to move their agenda forward.

So, as I say, for me, the critical aspect time sort of focused on is the Senate race and therefore the potential for a period of at least two years of a blue wave and therefore the ability for what would be President Biden and VP Harris to really move their progressive agenda through legislation and make it reality rather than just aspiration. So that, as I say, my I don't know if it's a tip, but I think a somewhat disproportionate focus for me on the Senate is where I'm spending my time for what that's worth for.

POC: Certainly rational comments there Ben. And finally, thank you very much for joining us on the Netwealth Investment podcast series. Your time spent with us is certainly appreciated. Your insights have been fascinating I've found, and I'm sure will be great food for thought for our listeners. And to the listeners, thank you for joining us again on the investment podcast series, and we look forward to joining you on the next episode. Thank you.

Finding balance in a low-interest environment

In this webinar, Matt Sherwood, Head of Investment Strategy, Multi-Asset at Perpetual Investments, joins us to provide an analysis of recent market performance, drawing on comparisons and lessons from the GFC. Matt also shares what investors might expect to see in a post-COVID environment.

Watch the presentation


POC: 
It certainly sounds very rational to me, your comments there, Ben, and I guess you've mentioned the elephant in the room there, inflation. A lot of people have forgotten about inflation, but I guess my view is that given the huge fiscal and monetary stimulus and the huge amount of public debt taken on by governments, I would have assumed the policy makers would like to err on the side of allowing a bit of inflation to take off and run. And then, to your point there, the impact that inflation eventually has on other assets like equities, et cetera, it certainly makes sense to have some type of inflation protection in your portfolio, because I think it's a case of when and not if we see inflation. But I think, at the moment, it still might be a few years off there. From the tactical perspective, the midyear outlook states that you favour the assets higher up the capital structure, so you have a preference for credit over equities. Can you elaborate on this view, and do you regard some credit as a risk growth asset and as a proxy for equities or are you talking about now reallocation within the fixed interest portfolios?

BP: So, that's right. So, we want to be exposed to risk, of course, but in this consistent up in quality manner because of the uncertainties, complexities around, of course, the virus itself and other issues of geopolitics and so forth. So, we think that having this... I'm prepared to accept, it does potentially sound a little bit, "Have our cake and eat it too," but I guess I like cake. So, if one can be exposed to risk, we think that makes sense given the activity restart policy revolution framing that I've mentioned, but with the uncertainties with the virus and so forth, in a careful way we think that makes sense. So, therefore, overweight credit, neutral equities as we've talked about.

Within the credit space, I must say I still go back to Fed chair Powell's comments back in March, which I really think were of historical significance. You may recall, he said, "Main Street didn't cause this," this being the virus of course, "We need to make them whole." And that's really quite an amazing comment if you think about it, this, I think, pretty explicit step from the Fed away from pure monetary policy into what I would describe as credit policy supporting the functioning of markets. And of course, there's nothing wrong with that, it's a critical component of the Fed's mandates to support the functioning of markets, as was a little bit in question back in March. And this has obviously provided a huge tailwind for the broad performance of credit indeed, as we've seen over the last several months. So, I think we might see more of this. It seems quite likely to me that the Fed is going to be, potentially in the next few weeks, adjusting how it creates policy, potentially moving towards a so-called average in-... potentially moving towards a so-called average inflation target regime. Now what this would mean is the Fed would commit a promise to achieve something like a 2% inflation on average, over something like a period of two years. So therefore mathematically, if the Fed under achieved the target, let's say inflation is 1.5% as it has been for many years to this point, if the Fed under achieved that target, they commit to overachieving inflation, really pushing it through 2% to levels we haven't seen in a long time.

So again, to circle back to the points around credit, this policy revolution we think is sticky. We think the Fed, the world's most important central bank, will be to some degree formalising the framework, almost catching up with Paul's comments from back in March made under the stress of the market maelstrom of that time. So as a result, a net of all that, we see this policy support as being with us for a long time. And that's obviously very helpful in terms of providing this tailwind that we've talked about for the performance of credit markets as we've seen and as we think will continue in the months ahead.

POC: Just moving on to geopolitical risk, China appears to be flexing its economic muscle more than ever. And this has led to increasing tensions with numerous countries, including the US, Australia, Canada, France, India. What are the rising geopolitical risks that concern you the most? And do you think China is attempting to reset its global position, given the US has become far more domestic focused under President Trump?

BP: I think this is of course an absolutely critical question, not just for markets, but frankly for all of us as citizens of the planet. So for us, the tensions between the US and China are structural and persistent. And what that means importantly is, for example, regardless of who wins the US presidential election on November the 3rd, these tensions will continue. So of course, one assumes if there were to be a Biden victory, there would be important changes of style and tone and indeed certain areas of policy, but in terms of the deep structural issues, these will persist and they are bigger than individual personalities, even some of the very large individual personalities that are involved here. So these structural and persistent tensions are going to continue.

I think China has become, of course, just a much more significant part of the global economy. There was almost no alternative for them as they become larger, China was always going to garner more attention. The interesting question it seems to me for countries such as Australia, even my own in the UK, and frankly everyone else, is for the last many years, particularly here in Asia, candidly, there's been a pleasing sort of no decision to be made about having perhaps the defence of the 7th Fleet on one hand and deep business interests with China on the other. That now seems to be coming into much sharper relief.

And I sort of joke at the moment that a lot of countries have the policy of trying not to pick the phone up because on line one is the US saying, "You need to be on our team," and on line two is China saying, "You need to be on our team." And I think that position of not picking the phone up is becoming increasingly difficult around technology and other areas.

So you asked me which areas in particular I'm, I guess, focused on. It's clearly moved from being about trade. Trade's obviously very important. But it's a bigger deal than that now. And we're seeing this really extraordinary almost day by day technology tensions, and that I think is going to continue to move forward and ultimately will likely lead to some sort of a ... not a total splits because we're obviously a very interconnected world, but I do think we are moving into the direction of a fairly distinct Sinosphere led by China and an Anglosphere led by the US with potentially quite distinct technology, internet, architecture, software, chip components, and so forth.

Now to get from here to there will take an awful lot of time, money, investments, and political will, but it does feel Paul that that to me is the direction of travel given the nature, again, of the structural and persistent tensions between the US and China.

POC: Yeah, it certainly appears that technology's becoming a key focus of the trade war and the trade war is moving almost to a tech war there, but you make a very relevant comment there. And particularly in Australia, I think we're starting to grapple with the fact on one hand, we've had the long-term security relationship with the US, but on the other hand, China, who is our biggest trading partner are so important to Australia's continued economic growth. So I think it is the growing tensions as China just becomes a bigger part of the global economy.
Finally, have you got a tip for a spin on the US presidential election coming up in November? And who do you think markets are supporting, a Democrat or a Republican president?

BP: So my tip, I don't know if it's a tip, but my tip is that the election that matters is the Senate. Of course the excitement and drama, which I will definitely be watching live on TV and so forth, is the White House. But critically, it seems to me is the potential for a blue sweep, a so-called blue sweep. So this would be Democrats not only controlling the White House with a Biden-Harris victory, but if they also control the Senate and already control the House, and one would assume in the events where blue sweep was to maintain control of the House. If the Democrats can win all three branches of the executive, then of course they can get things done.

And I think potentially what you might see to facilitate that in the event of a blue sweep would be a change to the so-called filibuster legislation. I know this sounds a bit detailed, but I think it's kind of a huge deal. And if they were to change that legislation, that would then mean that they would have a much easier time passing what one assumes would be a progressive agenda.

So in terms of tips, I don't know if it's a tip, but I really think the critical election is the Senate. If that turns blue, it's likely to be part of this blue wave, a so-called blue wave. And that I think is sort of a huge deal. So I think almost as the election as being, obviously it's more complex than this, but a binary between is it a blue sweep or not? Because even if Biden wins the presidency, if the Senate stays Republican, obviously mixed government means it'll be much harder for a Democratic White House to move their agenda forward.

So, as I say, for me, the critical aspect time sort of focused on is the Senate race and therefore the potential for a period of at least two years of a blue wave and therefore the ability for what would be President Biden and VP Harris to really move their progressive agenda through legislation and make it reality rather than just aspiration. So that, as I say, my I don't know if it's a tip, but I think a somewhat disproportionate focus for me on the Senate is where I'm spending my time for what that's worth for.

POC: Certainly rational comments there Ben. And finally, thank you very much for joining us on the Netwealth Investment podcast series. Your time spent with us is certainly appreciated. Your insights have been fascinating I've found, and I'm sure will be great food for thought for our listeners. And to the listeners, thank you for joining us again on the investment podcast series, and we look forward to joining you on the next episode. Thank you.

 

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