Trade War Impasse Tops Investor Concerns, Spurs Hunt for Refuge

(Bloomberg) -- The standoff between President Donald Trump and Chinese counterpart Xi Jinping emerged as the biggest challenge facing money managers at a Bloomberg investment forum in Sydney Thursday. The fallout is forcing them to lengthen their horizons and search for a refuge.

“I don’t think there’s a solution to the trade war in the short run,” Steve Goldman, managing director at Kapstream Capital, said at the forum, adding that Trump’s unpredictability makes it tough to take an investment position. “To the extent that Trump’s poll numbers look good, this problem is not getting fixed.”

A poll of the audience of investors, analysts and executives showed the Xi-Trump impasse was the biggest worry for about half the attendees, followed by the prospect of Australia slipping into recession for the first time in almost 30 years.

For a minute-by-minute recap of the conference, click here.

Among the key topics discussed at the forum were:

Safe Bets

With tit-for-tat tariffs between the world’s two largest economies disrupting the global supply chain, investors are hunting for stocks that can shrug off the turmoil. McDonald’s Corp. and Walt Disney Co. are examples of such refuges, said Nikki Thomas, portfolio manager at Alphinity Investment Management.

“They’re the sort of opportunities that we’re constantly looking for,” said Thomas. She cited the benefits from data investment helping McDonald’s predict what customers will order, and Disney’s dominance at the box office.

Fed Easing

Panelists from Pacific Investment Management Co. and JPMorgan Chase & Co. agreed that a more aggressive approach to easing at the Federal Reserve may speed up the timing of further interest-rate cuts in Australia.

Sally Auld, senior rates strategist at JPMorgan in Sydney, sees the RBA cash rate --- currently at 1.25% -- falling to 0.5% by the middle of next year. The risk to her forecast is that it gets there sooner than expected, with the central bank likely to shoulder the burden of stimulating the economy. Robert Mead, co-head of Asia-Pacific at Pimco, said that despite markets being “well-priced’’ for RBA reductions, they are likely to come sooner than anticipated.

Rachel O’Connor, portfolio manager at Vanguard Group Inc., is expecting yield curves to flatten even further and still sees opportunities to invest in longer-dated government bonds despite the recent rally.

“Given the high level of uncertainties in markets at the moment, we’d be encouraging investors to think long term,” she said. “As yields head lower, investors could be tempted to lower their allocation to fixed income, but we’d caution them against that.”

All Abroad

With Australia’s pot of pension savings forecast to almost double to A$5.4 trillion ($3.7 trillion) in the next decade, dwarfing the value of the nation’s listed companies, funds by necessity are having to invest offshore. With banks and miners dominating the local benchmark index, a lack of diversity is also causing them to look overseas.

The “quantum of money” makes it inevitable funds will continue to look abroad, said Kristian Fok, chief investment officer at Cbus. “You get access to industries and thematics that you can’t get here.” The A$50 billion fund has about 42% of its assets invested offshore, and sees that moving to 50% and beyond, he said.

Emerging markets in Asia are the biggest allure, driven by population growth and the subsequent rise of the middle class, according to Alva Devoy, Australia managing director at Fidelity International.

“One of the strongest bedrocks of investing is demographic themes,” she said. “Where’s that going to be, but centered in these growth regions?”

Performance Matters

With Australian regulators gaining greater powers to take action against under-performing funds, expect a wave of consolidation.

“Where the trustees of these funds are on the hook to ensure they’re acting in members’ best interests, which includes if they can’t deliver competitive returns to their members,
they should hand over the keys to someone else,” said Scott Hartley, CEO of Sunsuper, which oversees A$66 billion. The number of funds in the industry may not halve over the next decade, “but it’s certainly going to reduce rapidly.”

Old Age, New Returns

A big issue for the world’s fourth-largest pension pot is Australia’s ageing population. With one-quarter of the workforce forecast to be of retirement age by 2060, fund managers have to ensure retirees who are living longer have a steady flow of income.

For Damian Graham, chief investment officer at First State Super, the key is getting as “much growth as you can stomach” in the early stages of the accumulation phase. Kylie Willment, Mercer’s Pacific CIO, agreed, saying you have to have a “very high appetite for risk” in your younger years. The conundrum, nevertheless, presents an opportunity for funds to offer tailored advice.

--With assistance from Katrina Nicholas, Garfield Reynolds and Jason Scott.

To contact the reporters on this story: Angus Whitley in Sydney at awhitley1@bloomberg.net;Adam Haigh in Sydney at ahaigh1@bloomberg.net;Matthew Burgess in Melbourne at mburgess46@bloomberg.net;Jackie Edwards in Sydney at jedwards160@bloomberg.net

To contact the editors responsible for this story: Edward Johnson at ejohnson28@bloomberg.net, Peter Vercoe

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