AustralianSuper betting on recession as inflation softens real returns

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Australia’s largest super fund is banking on a recession as it enters the new financial year with a portfolio positioned on the assumption that interest rates are nearing their peak.

AustralianSuper chief investment officer Mark Delaney, who in May said a recession was “most likely”, is still of the view that there is likely to be a material economic downturn.

AustralianSuper chief investment officer Mark Delaney says interest rates are nearing their peak.Credit: Eamon Gallagher

“We’re in a period where rates have tended to drift up higher than people thought and are likely to stay a bit higher for longer than people anticipate,” Delaney said. “Other things being equal, that will tend to say that the chance of a more material downturn is increasing.”

But Delaney said there was a risk that interest rates would take longer than expected to have an effect and people might have more COVID savings than anticipated.

“The risk is that we have another year a bit like this year when we have interest rates drifting upwards, equity markets holding up and people remaining pretty pessimistic,” he said.

AustralianSuper’s “balanced investment” option, owned by 90 per cent of its investors, returned 8.2 per cent for the 2023 financial year, in line with its three-year average. However, accounting for inflation, which came in at 5.6 per cent in May, it has returned less in real terms this financial year than its three-year average.

“The difference this year has been inflation hasn’t been average, and you’re going to get periods whereby inflation is higher in places,” he said. “We say we aim to beat inflation in the long run, and we deliberately don’t put a period on it because in some 10-year periods, it may not happen.”

Just as the fund reaches $300 billion in member assets under management, Delaney said it would be steered in a different direction, at least temporarily.

“In equity markets, the biggest returns have come from technology stocks, which were down about 10 per cent in the first half of the year but up close to 40 per cent in the second half of the year,” he said.

“Typically, the time to buy fixed interest is when you think interest rates are around their peak, so that’s what we’re doing.”

“We’re now starting to take cash that we’ve been warehousing for the past 12 months and investing in fixed interest. Typically, the time to buy fixed interest is when you think interest rates are around their peak, so that’s what we’re doing.”

As the economy slows from higher rates, Delaney said the portfolio would enter its next phase of asset allocation.

“A material slowdown in the economy will create opportunities in more of the growth asset classes, and we’ll look to roll some of that fixed interest exposure into growth-style investments whether it’s equities, infrastructure, property or potentially credit,” he said.

Delaney said that while history didn’t repeat, it often rhymed, which meant he drew on patterns from past years to navigate the uncertainty in the current environment.

“I think there’s a certain regularity about the way that high inflation leads to higher interest rates which eventually leads to economic downturns, which then corrects high inflation,” he said.

“That sort of rhythm has operated pretty much throughout history and that’s the sort of template I’m adopting for the current circumstances, overlaid with things like technological change and AI, energy transition, and global geopolitics.”

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