Future Fund chief executive Raphael Arndt has said while a return to a pre-COVID world following a few years of recession is possible, he feels it is not probable.
“We can grow out of this recession, it is possible,“ he stated at a conference hosted by the Financial Services Council on Tuesday.
“For that to happen, there would have to be the right amount of government stimulus around the world that got economies moving again, obviously a vaccine and then economies would need to grow and create some inflation but not too much, so that interest rates didn’t have to rise too much, so debt was serviceable. And slowly, the debt would be paid down or shrink as a proportion of the economy and risk appetite would come back and so forth.”
It would all depend on multiple factors, occurring at the right time and pace, and at best, it would be a multi-year recovery.
But, Dr Arndt raised doubts around the pieces all falling into place, commenting: “Personally, I wouldn’t want to put all my eggs into that basket.”
Should there be a vaccine, people will still need to “learn to trust again” and become comfortable enough to travel, spend to use services. The best-case scenario would see economies recover slowly and governments incrementally getting on top of their debt.
“There are some views an effective vaccine might be negative for markets, because it could lead to some of the policy stimulus to come off more quickly – who knows, but it’s a risk,” Dr Arndt countered.
The world has changed under COVID, and it is expected to stay permanently altered in the aftermath. Australia’s large population boom, spurred by waves of migration, has ceased.
“From the investment point of view, things are definitely not going back to normal,” Dr Arndt said.
Asset prices, fuelled by falling interest rates, start expensive for investors. The level of earnings and margins have changed dramatically during the last 12 months.
The likely returns are expected to be significantly lower for the next decade, the Future Fund CEO cautioned, while risk has risen.
“It’s not about market timing, it’s about thinking about how markets are rewarding risk, and trying to have less risk on when it’s not being rewarded and more risk on when it is,” he said.
“We don’t think right now is the time to be taking on excessive risk – there’s a lot of uncertainty in the world.”
Interest rates, at their current historic lows, cannot dip further, should another market shock arise – which Dr Arndt warned will happen, commenting there is “always” another business cycle and another shock on the way (it could be a phenomenon such as a war or a major company going bust).
Central bank heads, including Reserve Bank of Australia governor Philip Lowe, have been vocal in pointing to a need for fiscal stimulus to support monetary policy.
“If something else happens, if the economy is in shock or if industries churn, really it’s over to fiscal stimulus and the answer to whether fiscal stimulus happens is political,” he said.
“And so every country is in a different scenario, it’s pretty hard to predict the politics. And we know, again, that right around the world, politics is volatile.”
Although many have celebrated Joe Biden’s victory in the US federal election, the reach of populist politics and deglobalisation still lingers. Donald Trump received almost half of the country’s votes.
“There’s a lot of people who are unhappy about how their lives are going and so that’s going to continue, unless we treat the source, not the symptom,” Dr Ardnt said.
“In other words, there probably at some point, will have to be some wealth distribution. I think we are going to be moving into an era of big government, interventionist government, of… lower investment returns.”
Dr Arndt became the fund’s CEO in July, after being its chief investment officer since 2014.
