The biggest decision facing equity investors at the moment is when to trade out of highly valued tech stocks and back into cyclical companies leveraged to the economy, says the chief investment officer of $180 billion super fund, AustralianSuper.
Mark Delaney, who oversees investments for the pension behemoth, told The Australian Financial Review‘s Inside Markets that there was a wall of money trying to decide when to make the switch.
“We saw a touch of this three weeks ago when value [stocks] started to run really hard in the US and global equity markets as people became pretty optimistic that we were through the COVID phase,” he said.
But as COVID infections in the US and around the world defied containment measures and returned, tech stocks resumed their extraordinary run.
MLC chief investment officer Jonathan Armitage said Amazon’s market capitalisation had increased by more than the combined value of US banking giants JPMorgan and Wells Fargo over six months, as evidence of the flood of money in tech.
“It shows you that investors are paying up for certainty in what continues to be a foggy landscape going forward,” he said.
Mercer chief investment officer Kylie Willment said there were “valid reasons” for the market’s recovery, although she said few investors expected it to be as strong as it had been in the second quarter.
“Looking out over that three-year time horizon, you can see that recovery coming through. It doesn’t mean there won’t be bumps along the wa,y so I would expect to see some spikes in volatility,” she said.
“We may get spikes in bankruptcies or spikes of the virus popping up around the world and it may seem like it’s not able to be controlled.”
Such is the unique nature of this crisis that marginally profitable technology stocks have assumed safe haven status in a market where central banks have pushed bond rates to zero levels.
Another defensive asset that more institutions are considering, particularly in an environment of unconventional monetary policy and increased spending, is gold.
But CIOs were mixed on the role of gold in their portfolios.
“Gold acts as a buffer in an inflationary environment. But inflation is not a word in investors’ vocabulary at the moment,” said Mr Armitage.
“Our role in managing super assets is to think longer term. Whether it is gold or other commodities, in managing that inflation risk is where it does play a role,” he said.
Mr Delaney and Ms Willment said gold was not a core holding because it did not generate any income, but Ms Willment noted that it could be used strategically during certain points in the cycle.
The CIOs are committed to investing in so-called private assets, the valuations of which are a source of controversy.
Ms Willment said Mercer decided to write-down assets in March to ensure the fair treatment of investors.
But some assets, such as shopping centres and airports, had been hit hard, while others, such as distribution centres that serve Amazon and Woolworths, have benefited.
“There’s quite a bit of dispersion in terms of how these assets have been impacted and how they have performed,” she said.
AustralianSuper was also early in writing down the values of its illiquid assets, and Mr Delaney said some investments had recovered. The fund remained cautious on other sectors, such as real estate.
He said valuation policies work well in normal circumstances. “But when we’re confronted with something as unusual as COVID, it was an unusual circumstance,” Mr Delaney said.
Australian super funds have benefited hugely from allocations to global equities.
But as economies achieve mixed success in handling the health crisis, could that result in different economic and investment outcomes? Mr Delaney said that it was potentially “wrong” for investors to assume there were wildly divergent behavioural responses to the COVID-19 crisis after he was presented with an analysis of Google mobility data.
“The performance of each country through the virus has been remarkably similar,” Mr Delaney said. “There are more similarities around the virus than there are differences.”