Ride the bubble
Investment consultancy William M. Mercer recently invited a number of Hong Kong corporate pension fund managers to hear its view of the world, and the advice was a no-holds barred call to diversify more into global equities. Tim Gardener, London-based global practice leader, said rising demand globally for equities would inflate their values, making them a good bet for the next decade. “I know it’s a bubble, but it’s a long-enough bubble to play,” he comments.
His reasoning: several global trends are forcing governments everywhere to take a more American style approach to savings and pensions. Demography is obviously one factor, with every developed country, save the United States, facing an ageing workforce. And again, except for the US, immigration to the degree required to balance this problem is too difficult for most cultures, so they need to bolster pensions funding right away. And the best way to do that, particularly for governments on the European continent, is to move into equities.
Information technology is another factor, Gardener says. It has facilitated globalization by not only reducing the meaning of distance, but also of complexity, so that very big organizations – think Citigroup – can flourish. Governments can also (supposedly) use IT to better manage their economies.
The last major trend Gardener cites is prolonged US dominance, which has helped political and economic stability, as well as fostered a US-style capitalism. That means US investment managers are at the forefront of the industry. “When I do searches [on behalf of corporate clients] it’s rare if there’s no Wellington, no Capital International, no JP Morgan, or another American house involved, because they have a better sense of what’s driving the markets,” he states.
Put these together, and Gardener sees ever-rising demand for growth stocks managed in the American mould. “This high demand will support high valuations in the medium term,” he believes. But because growth equities are also volatile, pension funds need to diversify, not just across geography but across sectors. “TMT won’t be the last bubble we see,” he adds.
In the Asian context, because these markets are even more volatile than America’s, and because Asian countries tend to vary along industry lines, there are greater market inefficiencies. Capital flows distort prices. Therefore, Mercers recommends active, not passive, managers for Asian equities.
Gardener left his audience with a final thought: in about 10 years from now, these themes will break down. Demography will have changed, with more spending of pensions than saving. He notes other trends such as global warming are a big unknown – what impact will it have on economies and their industrial composition? But 10 years is far enough away that pension funds can make a reasonably safe bet on global equities for the time being.