AusSuper CIO says China is hard for investors to ignore

Mark Delaney said investors will find it hard to disengage from China, despite concerns about the second-biggest economy in the world.
AusSuper CIO says China is hard for investors to ignore

Concerns over the debt crisis at real estate developer Evergrande and several cases of perceived regulatory overreach have seen private investors become more cautious on China.

But the country remains a compelling  investment destination in the long term for many institutions.  AustralianSuper (AusSuper), for example, expects to increase its exposure there in the next few years.

“We've had an office in Beijing since 2012 and we think it is an area of excellent investment opportunities, particularly as the capital markets become more accessible," Mark Delaney, AusSuper’s chief investment officer, told a Bloomberg online event last week.

Mark Delaney, AustralianSuper

Delaney said the super fund is unphased by Evergrande's situation and what some investors see as unnecessary government meddling with the foreign businesses of Chinese conglomerates like Alibaba and Tencent.

“These things will happen in a developing country,” he said. “But China remains a very attractive place to invest.

"We've got about three to four billion dollars already invested in China, across listed stocks and fixed income and I suspect that's going to grow over time. China is the second biggest economy in the world and I don't think foreign funds can disengage from China.”

Delaney acknowledged that the tougher regulatory environment has created uncertainty for investors: “Clarity around the regulatory environment would be useful for us before gaining greater exposure.

"We have people saying China's got a debt bubble and as investors we need to know the income streams from real estate, for example, can be maintained. What we can see from the government is a process of steadily managing debt levels in the economy, and that's probably fairly appropriate. So, I think that all those conditions will sort themselves out over time.”

AusSuper, in common with several of Asia Pacific’s largest investors, recorded exceptional returns in 2020 and into 2021. They capitalised on the strong rebound of global equity markets in 2020, after the initial Covid lockdown correction. Being able to surprise scheme members on the upside was a special moment, said Delaney.

“They may have been expecting me to say we won't have as good numbers as last year, but in fact we returned over 20%, which was the best return ever. For the last 10 years, the balance has been close to 9.7%, so it's been a great environment for investing over that period.”

He added that a couple of years of a pandemic will undoubtedly change your perspective, but now was not the time to get defensive.

Tightening monetary policy might prove to be a bit of a headwind, he said. “But we think the basic preconditions remain in place - very low interest rates and an ongoing recovery. We can't expect returns to be as good as they were, but that's not a big enough change to make us negative.

“Everybody in the market thinks that inflation is temporary. If you have a look at the factors which cause inflation to rise, it's heavily concentrated in those areas where there is supply chain disruption. Other things being equal, you would think those supply chain dislocations would sort themselves out over time and wouldn't be a source of ongoing inflation.”

Delaney and his investment team remain focused on two key asset classes – public and private equities.

“We still think that equities are reasonably attractive, at least for a few more years in the current environment. We wouldn't deploy any capital into fixed interest yet. That cycle has got a bit further to go. The basis of our portfolio – reasonably valued equities and high-quality unlisted assets - remains the same."

In the private markets, Delaney said investors' key consideration should not necessarily be about getting the first call, but assessing the quality of the investment opportunity. Digital assets have disrupted traditional listed assets and the super fund is looking increasingly at opportunities where automation is transforming industries.

“All of that is really driven by the quality of the deal flow, which really something we can't control,” said Delaney.

In recent times the fund has run a 60% allocation to equities. “We're probably a little bit under that and over the next three years or so we anticipate that weighting will come down. But we wouldn't be starting now,” said Delaney.

While uncertainty remains about international travel in the short term, AusSuper has invested in Sydney Airport, "because we think airline travel will come back in the long run."

Institutions routinely use foreign exchange to hedge volatility and as Delaney points out, the Australian dollar is a currency that tends to appreciate in value against the euro in an economic downturn: "I think a lot of investors will move to hold more foreign currency as diversifiers over the next five years, at a point where you stop reducing your underweight in bonds.”

He had a proviso, however: investors cannot always rely on diversification. “Sometimes you can lose money on bonds and equities at the same time. And sometimes you can lose money on FX at the same time”, he said.

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