MLC’s Chief Investment Officer, Jonathan Armitage, talks investor challenges ahead and what the future holds for 2018.
Jason Hazell: Welcome to the CIO Update, I’m joined today by Jonathan Armitage. Welcome Jonathan.
Jonathan Armitage: Thank you very much.
Jason Hazell: So we continue to see US markets hit record high, volatility continues to be pretty low. This seems to have yielded some pretty attractive returns for investors.
Jonathan Armitage: It certainly has and I think that’s because you’ve continued to see relatively robust earnings growth, out of the US. And I think investors are also responding to some of the tax changes that have recently passed through Congress, and the anticipation that that is going to be good for corporate earnings in the US.
Jason Hazell: The US market economically continues to be quite strong and as you mentioned, the US tax plan has gotten Congressional approval. Do you think most of that is already priced in the markets?
Jonathan Armitage: I think that’s one of the challenges that investors, certainly in that part of the market are going to have to work through, in the coming months. It’s obviously quite clear that for certain companies that will be hugely beneficial as tax rates, certainly for the higher tax paying companies, come down quite dramatically. The issue I think is going to be how those benefits are shared between shareholders, employees and customers. And we’ve had some indication already from companies like J.P Morgan, that the CEO of J.P Morgan said that he would see the benefits of those tax cuts being shared proportionately between shareholders, customers and also employees.
Jason Hazell: How do you think that leads the US Fed to react over 2018?
Jonathan Armitage: One of the things I think markets have already started focusing on, and I think will continue to do so in the coming months, is how these tax cuts are going to be funded. And this is coming at a time when you are seeing full employment in the US and you’re starting to see wage inflation pick up, in certain parts of the economy. Skilled labour is becoming more expensive. And that is starting to see shifts in the way that, particularly bond investors, think about future inflation risks.
Jason Hazell: Turning our attention to Australia, economic data here is a bit more mixed. What’s your outlook for Australia over 2018?
Jonathan Armitage: I think we’d expect to see more of the same actually. It’s clear that there are some parts of the economy, particularly services, which continue to perform relatively well. You’re seeing quite a strong rebound in commodity prices, which helps the resources sector. The challenge here in Australia is in areas like retail and the fact that productivity gains, across the Australian economy, have been relatively weak. And so there are some pluses and minuses within that. We continue to see that there will be economic growth, but we expect that to translate into relatively muted earnings growth here in Australia, relative to other parts of the world.
Jason Hazell: One aspect that’s been quite topical of late is superfunds in Australia, seeming to under-report some of their growth asset exposure. Do you have a view on this?
Jonathan Armitage: I think that this is quite a complex issue and there are no clear guidelines, around the way that different superannuation funds will look at growth assets, as opposed to defensive assets. Our own view has been a relatively conservative one. We’re very clear around what we see as defensive assets, and what we see as growth assets. And we’re very clear that when we talk about those allocations within our various investment options, that we are absolutely able to stand behind the definitions behind those different components, in everyone’s investment option.
Jason Hazell: Given the markets are quite buoyant, let’s talk about risk for a second. What are the key risks that you are concerned about in looking forward through 2018?
Jonathan Armitage: I think one of the clear ones and you mentioned this a couple of times, is that markets have performed particularly well in the last 12 months or so. And one of the potential risks is actually that equity markets in particular, have got slightly ahead of themselves. And that the earnings growth from companies, doesn’t match the expectations that investors currently have. There are obviously and continue to be some geopolitical risks, those have been well rehearsed and well discussed.
We have some upcoming elections in Europe, we have an Italian election in March. It is very possible that that ends up in some sort of stalemate in a country, which is still a very important component of economic growth in Europe. And those are things that aren’t getting an awful lot of attention currently, but they will do as we progress through the year.
Jason Hazell: Thank you very much for your time.
Jonathan Armitage: Not at all.
Jason Hazell: And thank you for joining us today.