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Super funds can benefit from “dread risk”

David Rowley



john Pearce-2804

Long term investors stand to gain from fear in markets as fundamentals remain sound report chief investment officers.

A common take on the fear which has led to falls of up to 10.5 per cent in US equities and 8 per cent in Australian equities in January, is that investors – particularly retail investors – are concerned that another meltdown on the scale of the GFC is on the horizon.

John Pearce, chief investment officer of UniSuper, cites the phrase “dread risk”, as employed by Andy Haldane, chief economist at the Bank of England, to describe an exaggerated reaction to any piece of bad news.

“There are a couple of idiosyncratic funds that have closed in the US that dabbled in the high end of high yield, and people are saying it is the canary in the coal mine; it is the next Bear Stearns moment,” said Pearce. “We are just not seeing that. We have an allocation to high yield, so we have a reasonable handle on that market.”

Pearce notes that in January ETFs have seen large retail investor outflows from equities into defensive assets.

“It is always a case that markets hate uncertainty, but the fundamentals do not look as bad as what the market would have you believe,” he says.

Other CIOs cite the willingness of central banks to continue to support markets as another cause of confidence.

Ian Lundy, chief investment officer at RBF, said the main mandate for central banks had become to prop up markets and dampen volatility, rather than letting markets tell their story.

“As soon as the ECB say they are going to create some money, it is like a put option for the market,” he said.

Craig Turnbull, chief investment officer with Local Government Super, noted the willingness of central banks in China, the US and Japan to steady markets.

He said that, in this environment, the actions of highly leveraged investors to liquidate their positions would benefit longer-term investors such as superannuation funds.

“If you assume that everything is okay, that the economy is not heading into recession, and we are not headed for another financial crisis, then some things are starting to show value. As weak holders are forced [to act] and the longer term investors step in, there is some potential for recovery,” he said.

For Brian Parker, chief economist at Sunsuper, it was too early in the monetary policy cycle or the economic cycle to be talking about another global crisis, or another major market downturn.

“This isn’t the first significant correction since the end of the GFC, and it won’t be the last. The world is still a very uncertain place; there are plenty of worries to go round. But it’s still too early to be calling this something worse.”