Mr Glenn Stevens AC worked at the highest levels of the Reserve Bank of Australia for 20 years, most recently as Governor between 2006 and 2016. Mr Stevens has also made key contributions to a number of Australian and international boards and committees, including as a Board Member of the Lowy Institute for International Policy, Chair of the Australian Council of Financial Regulators between 2006 and 2016, as a member of the Financial Stability Board, and on a range of G20 committees.
Scott leads the Chief Investment Office at LGT Crestone, covering strategic and tactical asset allocation, portfolio construction and manager selection across equities, fixed income and alternative assets. He has more than 25 years’ experience in global financial markets and investment banking.
Marigold is responsible for managing IFM Investors’ Net Zero Infrastructure Fund. At IFM, Marigold has been involved with various investments for the Australian Infrastructure Fund and Global Infrastructure Fund, including Colonial Pipeline (US), Pacific Hydro, Port of Brisbane, NSW Ports, NT Airports, Brisbane Airport and Adelaide Airport.
Bob is co-founder and managing director of Revolution Asset Management. He is responsible for leading the strategy for the Australian and New Zealand private debt portfolio.
Mike is the Group Managing Partner of Roc Partners where he is responsible for leading client relationships and investment activities in several markets. Mike was one of the founding partners of Roc Partners following the management buy-out of Macquarie Group’s private markets business unit by its senior executives in June 2014.
Interest rates are now at their highest level in more than a decade, but central banks are yet to declare victory over inflation. Jobs markets remain tight and consumer spending resilient, although there are tentative signs we are on the cusp of greater economic weakness. As Australian households and businesses prepare for an extended period of higher borrowing costs, many are asking if it will be possible to get inflation under control without a recession.
At last month’s 2023 LGT Crestone Symposium, held in Perth, we were joined by Glenn Stevens AC, Australia’s longest serving Governor of the Reserve Bank of Australia. Mr Stevens offered his perspective on the outlook for inflation and interest rates, and provided his observations on the key themes he feels investors should turn their minds to. He was joined by Scott Haslem, Chief Investment Officer at LGT Crestone, who explained how LGT Crestone is positioning portfolios for the period ahead, as well as our panel of experts in private equity, infrastructure and private credit: Michael Lukin, Group Managing Partner, Roc Partners; Marigold Look, Executive Director, Infrastructure, IFM; and Bob Sahota, Managing Director and Chief Investment Officer, Revolution Asset Management.
In the US, the recent slowdown in inflation has come as welcome news—however, it is still unclear whether policymakers have done enough to keep inflation where it should be. Talk of a cost-of-living crisis remains widespread—and although inflation has slowed, the ‘level’ of those prices has not fallen back to where it was. This means that populations have lower real incomes than they had a few years ago. Mr Stevens explained that with labour markets so tight, it would be unsurprising if salary earners tried to recover that lost real income wherever they have the market power to do so. This, coupled with an environment where firms are no longer afraid to raise prices, has caused policymakers to remain vigilant about the outlook for inflation.
“It's appropriate that they show determination and commitment to their inflation targets and that they are willing to endure considerable criticism and unpopularity in the process.”
Mr Stevens explained that most of the discussion on inflation has been on short-term cyclical dynamics. However, there are developments occurring, which could lead to incrementally higher rates of inflation over a run of years. The tendency to onshore supply chains will “reinforce the tendency for labour to be re-empowered”, and it is hard to see how this would not raise the cost structure.
There has always been a need for government action in some markets, and for government to play a role in maintaining frameworks that allow market players to compete and innovate. Mr Stevens discussed his observation of a renewed faith in the ability of public policy to solve problems and to allocate resource. One example of this is in the area of climate change. The substantial cost associated with the decarbonisation of energy systems will need to be borne by consumers. However, governments may try to shift the allocation of costs across income groups via taxes and subsidies. Financial resources are just one aspect that needs to be addressed. Finding labour to facilitate the energy transition will also be a challenge as this is in finite supply. A key question investors should ask themselves is: which sectors will need to become smaller to make way for the expansion in energy transition-related production?
“Those productive resources have to be turned away from whatever they would otherwise have been doing in order to achieve the physical aspect of the energy transition.”
Mr Stevens discussed the profound change taking place in the outlook for government budgets, and that the tendency towards deficit was “quite striking”. Citing forecasts from the International Monetary Fund, US debt to GDP is expected to approach 140% in the next decade. Other advanced economies are expected to approach 120%. Growing deficits will be fuelled not only by the enormous investment required for the energy transition, but also by the need to fund increased life expectancy via health and pension systems. He explained that throughout history, inflation has often been the “least difficult” way to escape fiscal deficits. For this reason, it will be important for central banks to retain their independence and stay committed to preserving the value of money.
Over the past 40 years, interest rates have been in a downward trend. This has created a massive tailwind for asset prices. Now, that trend appears to have come to an end, which is providing a fair bit of uncertainty for markets. While it is uncertain whether the future trend of interest rates will be upwards or flat, it almost certainly will not be down.
“It’s hard to see [interest rates] being as low as they were again. We’re still early in the process of understanding what that means, but it does provide a fair bit of uncertainty.”
Scott Haslem, Chief Investment Officer at LGT Crestone, explained that growth will likely slow in H2 2023, driven by the delayed effects of monetary policy and a stumbling in China’s growth. Although inflation has fallen, tight labour markets and the trend towards onshoring supply chains mean that it is unlikely we will see inflation at the levels it was prior to 2020.
In Australia, some retailers have reported a fall in discretionary spending, and the transition of many home loan borrowers from fixed-rate to floating-rate loans will take its toll on growth. However, we still feel Australia will be a relative macro outperformer, with strong immigration, a stabilisation in house prices, and a tight labour market all positive factors.
Mr Haslem explained that we have now entered a new phase for markets, where growth is slower, inflation has fallen, but central banks are not cutting interest rates. With rates higher, this has important implications for how we design portfolios, as investors can now harvest returns from a greater variety of asset classes (fixed income, equities, alternatives and cash).
"In this environment, fixed income will be a multi-year overweight, and we are still happy to be neutral equities. But investors should look to diversify beyond just equities, adding asset classes that can provide some inflation protection, such as hedge funds and real assets."
During the panel discussion, our speakers provided their perspectives on the role that alternatives can play in an investor’s portfolio. As well as increasing the return potential of a portfolio, they can also be an effective diversifier, exhibiting a low correlation to traditional asset classes. While there are some important risks investors need to be aware of before investing in alternatives, such as potential volatility and liquidity risks, our panel discussed the need for investors to really understand their true liquidity requirements. For investors who have the scale, long-term investment horizon, and lack of liquidity requirements, there is a strong argument to borrow some of the underlying principles of sophisticated portfolios like endowment funds and improve their existing framework.
Marigold Look, Executive Director, Infrastructure, IFM, explained that an exposure to infrastructure can provide resilience in economic downturns due to its inelastic demand. While an investment in infrastructure has typically been the domain of institutional investors, it is now more accessible to other investors.
“Infrastructure provides a foundational platform in a portfolio—and it’s resilient. It also exhibits a high degree of inflation linkage; we see this in port investments and toll roads, for example.”
Bob Sahota, Managing Director and Chief Investment Officer, Revolution Asset Management, explained that there has been a lot of interest in private debt recently. However, as the economy begins to slow, investors should expect to see more defaults. In this environment, investors should look for companies with defendable market share, and that have negotiating power to pass costs on to the consumer and preserve profit margins.
“Investors should avoid discretionary and pro-cyclical businesses, as there’s a risk defaults will increase in the next 12 months.”
Michael Lukin, Group Managing Partner, Roc Partners, said that activity in the private equity space had been subdued in the past 18 months. This was due to a mismatch in buyer and vendor expectations, largely due to a rise in the cost of debt and uncertainty around the economic outlook. As we move towards the end of 2023, he expects to see an uptick in transaction volumes, with more deal activity anticipated in 2024. When looking for private equity investments, Roc Partners looks for industries with above-GDP growth, such as healthcare and childcare, and avoids companies with heavily indebted capital structures.
“We prefer those businesses that have long runways of growth ahead of them and that can withstand the ups and downs of an economic cycle.”
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