2022 will be a transition year where the world watches as central banks tap the brakes on monetary policy amid concerns of rising inflation, according to the chief investment officer of Australia’s largest superannuation fund, the $250 billion AustralianSuper, Mark Delaney.

Speaking to Investment Magazine, Delaney says the year will see Australian Super trim back on its equity holdings, increase its holdings of fixed interest and expand its overseas footprint as it manages its annual $25 billion to $30 billion of cash inflows.

“The central banks are likely to tighten through the year. Monetary policy has been very easy for a long time. We will still have a fair bit of stimulus in the system. Economies will be strong, profits will be strong,” he maintains.

Delaney says inflation would be one of the most important things for fund managers like Australian Super to watch in 2022.

“The rise in inflation was the biggest surprise of 2021,” he says.

“If it turns out the central banks can manage it, it will prolong the cycle. If the reverse happens, it will shorten the cycle. Unfortunately, as 2021 showed us, forecasters of inflation are not very good… it ended up being twice as high as what people said. Most central banks are reconsidering their positions.”

“The biggest risk (to markets) is if the central banks tighten rapidly… then of course there is always Covid, geopolitical risk and the Australian election.”

Trimming exposure to shares

Delaney says the outlook, largely positive but with an eye on inflation and central bank tightening, is prompting AustralianSuper to trim back its exposure to shares.

“For much of the Covid period we have had quite a constructive approach to the market, being overweight shares, underweight fixed income and looking to increase our exposure to unlisted assets,” he says.

“That has been fuelled on the back of very stimulative policies by both central banks and governments, which has led to very strong economic growth, strong profit growth and an environment where the alternative to buying growth assets was pretty poor.”

“What we want to do with the portfolio is gradually reduce our exposure to shares from a meaningful overweight position. We will increase our exposure to fixed income if rates rise substantially,” he adds.

“We have just started to take out the pro growth (stocks) in the portfolio.”

Looking for hedges against inflation