IFM Investors chief economist Alex Joiner said he expects pension funds around the world will buy more infrastructure assets as they look to de-risk portfolios, particularly in the aftermath of the corona virus outbreak that will likely send the global economy into a recession.
Joiner said the health crisis had reinforced the view that returns will be lower for an extended period of time and investors will continue to shift their behaviours to cope with the low-rate environment. For some, equities had become too volatile while owning bonds could make portfolios too vulnerable to swings in yields.
“This black swan event may cause a reassessment (of asset allocation) and how the global economy will evolve over the coming years,” he said in an interview. “We might see those tactically change. There is little doubt that Australia will see a pretty negative quarter for growth in the first quarter and the second quarter we would expect to see another negative impact.”
Joiner was due to speak at the CMSF Conference in Adelaide before AIST cancelled the event after the World Health Organisation declared that the corona virus was pandemic. Conference organisers said all those involved were now activating their pandemic plans.
The OECD has warned that the viral outbreak, which has already erased trillion of dollars from financial markets, could more than halve global economic growth in 2020 to 1.5 per cent, down from an earlier forecast of 2.4 to 2.9 per cent. Joiner said he expects to see a “u-shaped recovery” where things will gradually get back to normal after a few quarters of negative growth.
“I’d put the case forward for owning mid-risk assets,” Joiner said, whose firm oversaw $163 billion in assets as of the end of last year, including $68.1 billion in infrastructure. Investors “might not want to be taking as much risk as (they) would be in the equity market and may also not want generic fixed income either, but there is a whole range of assets that have become more desirable.”
The economist said while local superannuation funds were already heavily invested in infrastructure, UK and US assets owners were “under invested” and “lagging behind” their Australian peers.
Infrastructure “is still very much an emerging thematic,” said Joiner. “We still see ample scope for (local funds to invest) in these type of assets, particularly for portfolios exposed to the global system. There are not as many assets to invest in Australia so (they will) look to deploy capital globally.”
A recent McKinsey & Co. report showed that while globally fundraising for natural resources and infrastructure assets had slowed in 2019, infrastructure has grown 17 per cent annually over the past five years, making it the fasted-growing private asset class.
Joiner said that with the weight of money still expected to be allocated to infrastructure and other mid-risk assets, fund managers would have to weigh whether to lower an acceptable rate of return promised to investors as well as potentially pay a higher multiple for some assets.
“They are discussions that are going to be increasingly had,” he said, before adding that avoiding an open-auction process mitigated some of the risks. “There is a balance that investors will have to strike between the pressure to deploy and the risk of overpaying.”
“Market volatility right now is showing that investors will look at this,” he added.