Equity markets are set to slowly grind higher as investors shrug off macro concerns, according to two of the country’s largest superannuation funds.
“It is a bull market that doesn’t feel like a bull market,” said Simon Hudson, who helps oversee $80 billion as head of equities at UniSuper. “We are in a very long, grinding bull market cycle.”
As equities trade near record highs, central banks in Australia and abroad are cutting interest rates to stimulate growth and company outlooks have become more cautious. Last month, volatility spiked to the highest levels since January as trade tensions between China and the US intensified and UK politicians continued to tussle over Brexit.
Hudson says it is “healthy” for the market to climb a wall of worry as it shows investors are being “cautious and critical.” He said corporate balance sheets are still in reasonable shape, cash flows are solid and dividends on the whole are reasonably sustainable, which should help underpin the market.
He said that investors can expect an extended period of low interest rates and low inflation with high levels of debts, not dissimilar to the period after the Second World War.
Sunsuper’s Greg Barnes also expect stocks to climb higher, thanks to interest rate cuts and a rebound in some of the leading economic indicators. This is despite the market’s preoccupation with macro drivers which he says has made investing more complicated because price action is driven by sentiment rather than fundamentals.
“This cycle has been going on for long time, it is a record-breaking cycle,” said Barnes, head of listed shares at Sunsuper which has around $66 billion in assets. “Some people are of the view that we are closer to the top than the bottom but we are in uncharted waters. You have got policy makers that are standing on the sidelines ready to underpin growth.”
He also noted that a recent “pronounced slap back” in value stocks is worth paying attention to should the rally be sustained.
Both Barnes and Hudson are due to speak on separate panels at Investment Magazine’s Equities Summit in Sydney next month.
As for heightened levels of volatility, Hudson says while some pension funds tend to shy away, his team are comfortable with the relative price swings in the market because UniSuper has a higher allocation to equities than some of their peers. Barnes says portfolio construction and diversification remain key to managing risk in the market.
Australian super funds have the highest allocation to equities among the world’s seven largest pension fund markets at 47 per cent, according to Willis Towers Watson. That compares to the average allocation of the world’s biggest funds, known as the P7, at 40 per cent.