May 13, 2021

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Australian sovereign wealth fund chief warns against ‘cleansing’ stock markets

3 min read


The world’s major central banks are fueling a tech bubble that will lead to a “cleanup” of global stock markets, the chairman of Australia’s $ 135 billion sovereign wealth fund has warned.

Lower interest rates and bond buying programs put in place to cushion the impact of the pandemic last year have left economies and markets vulnerable to a shock, Costello said in a statement. interview.

His comments come as investors around the world begin to worry about how long central banks will hold interest rates in the event of rising inflation as the global economy recovers from the coronavirus. These nerves weighed on the stock markets and hitting government bond prices, pushing up yields from the United States to Australia.

“What worries me is having spent all their firepower, there isn’t much left for the next crisis, and there will be another crisis,” said Costello, a former Australian treasurer who heads the Future Fund, the 15-year-old $ 171 billion Australian (US $ 135 billion) sovereign wealth fund.

“I’m concerned that we have unsustainable asset prices in some areas and when those prices drop – when the correction comes – what firepower do central banks have then? Nothing.”

Reflecting these concerns, the Future Fund increased its cash holdings last year, raising the level to 20% in December, from 17% in June, according to its annual performance statement. This cautious approach detracted from the fund’s performance in 2020 despite the market rally, with investment returns of 1.7% – well below its target of 4.4%. Global equities rebounded nearly 12% last year.

Technological actions listed in the United States seemed particularly vulnerable to a correction as many of those companies were unprofitable, Costello said, warning of a pullback similar to the dot-com bubble burst in 2001.

Bank of America’s latest investor survey this month highlighted the bullish backdrop, revealing average cash reserves were at an eight-year low of 3.8 percent. A record number of fund managers surveyed admitted that they were taking more than their usual level of risk in the markets.

But the growth of investors concerns about inflation have translated into a recent rise in bond yields, with those in Australia rising particularly rapidly. The country’s economy has benefited from its trade ties with China, where growth has already returned pre-coronavirus levels. Australian ten-year yields are 1.64 percent – the highest in two years – but the selloff has been widespread on highly-rated government debt.

Given the level of government and central bank support and signs that the global economy could benefit from a post-pandemic boom, “it’s no surprise that more investors are worried about another inflationary crash, ”bond investment group Pimco said in a note on Wednesday.

US tech stocks have been particularly sensitive to the recent reversal in the global fixed income market. The highly technological Nasdaq 100 index slipped about 5% of its high record Last week.

Policymakers around the world are aware that rising yields could drive up borrowing costs at a difficult economic time and are reluctant to raise interest rates. Most of the major central banks have focused on allay fears they could cut back on monetary stimulus to mitigate the risks of a more serious temper tantrum in the market.

Chairman of the Federal Reserve Jay Powell told Congress this week that although the outlook was improving, the US central bank intended to maintain its massive support to the economy.

Christine Lagarde, president of the European Central Bank, stressed that rate regulators on the continent are “closely monitoring” the reversal of bonds.

The Reserve Bank of Australia this month mentionned it would add A $ 100 billion to its bond buying program. Philip Lowe, governor of the RBA, said he did not believe economic conditions would support an interest rate hike “until 2024, at the earliest.” He added that inflation should hit the central bank’s target range of 2-3% before changing course. The rate is less than 1 percent.

But Future Fund’s Costello said he believes asset prices could become unsustainable and inflation could take off before 2024, forcing the RBA to act. “Anyone who thinks they know what the economy will be like three years from now is making fun of themselves,” he said.



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