Pension-Fund Giant Warns Policy Mistake Risk Is Now Elevated

(Bloomberg) -- MLC Ltd., one of Australia’s largest pension funds, is pinning its hopes on private-equity investments to lift returns amid an outlook for increasingly volatile markets and an elevated risk of policy errors as the global economic cycle ages.

There is now a higher risk of policy mistakes coming from governments or central banks and the sustainability of corporate profit margins near all-time highs is under threat, according to Jonathan Armitage, the firm’s chief investment officer in Sydney, where he oversees about A$81 billion ($57 billion) in assets.

“In areas like equities, we expect the amplitude of returns to be quite volatile,” he told a conference in Sydney Wednesday. Private equity “will play a very strong and enduring role in our wider multi-asset portfolios and ultimately help produce” returns, Armitage said.

Even as the Federal Reserve signals a pause to tightening amid the highest chance of a recession in the U.S. since 2008, central banks around the world are expected to continue draining liquidity from public markets following years of post-crisis stimulus. That’s raised the risk of a policy mistake that could be triggered from either the monetary or fiscal side, he said.

Pension-Fund Giant Warns Policy Mistake Risk Is Now Elevated

“This could simply be a central bank raising interest rates at a faster rate than the underlying economy can withstand,” he told the conference. Or it may take the form of government policy decisions that have wider ramifications -- for example, the consumption tax hikes in Japan in the late 1990s and early 2000s that stopped a nascent economic recovery, he said.

“You are also starting to see that feed through in trade policies and increasingly populist stances taken by developed economies’ governments,” he said. “These are very much focused on short-term outcomes, but the longer-term ramifications of these tend not to be particularly understood.”

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