Coronavirus to slug APAC with $319bn loss: S&P

The coronavirus outbreak could result in a $319 billion loss for economies in the Asia Pacific, S&P Global Ratings has estimated, with Australia left vulnerable. Via InvestorDaily.

A report from S&P has forecast growth in the APAC will slow to 4 per cent in 2020, the lowest since the global financial crisis, as a result of the virus.

The multinational believes a U-shaped recovery will start later in the year, but by then, economic damage in the region will reach US$211 billion ($319 billion). 

Shaun Roache, Asia-Pacific chief economist at S&P Global Ratings has said the loss will be distributed across the household, non-financial corporate, financial and sovereign sectors, with the burden to be on governments to soften the blow with public resources. 

“Some economic activities will be lost forever, especially for the service sector,” Mr Roache said.

The hardest hit economies have been Hong Kong, Singapore and Thailand, where people flows and supply chain channels are large. 

Australia is also exposed, with S&P forecasting its growth for the year to touch 1.2 per cent, more than half of what it was in 2019 at 2.7 per cent.

“Australia’s most disrupted sectors employ a large share of workers which will weaken both the labour market and consumer confidence,” Mr Roache said.

Services in Australia account for a large slice of employment, the reported noted, with accommodation and catering being sensitive to tourism and discretionary consumer spending. 

Along with other economic experts, AMP Capital senior economist Diana Mousina signalled she expects Australian GPD growth to be negative in the March quarter, dragged by the bushfires and the virus.

Last week’s rate cut to 0.5 per cent will assist households with mortgages and businesses with debt, she wrote, but more stimulus is needed. AMP Capital, as well as UBS have called the RBA will enact another cut in April. 

Ms Mousina anticipates fiscal stimulus from government, starting with support for businesses hit by COVID-19, followed by a broader boost to help investment and consumer spending. 

“However if government stimulus does not prove to be enough (or come early enough) to support the economy then the RBA is expected to start an asset purchase program to further reduce the cost of borrowing,” she said.

As at Friday morning, there were 59 confirmed cases of COVID-19 in Australia, with two deaths.

APRA monitoring hits to financial system 

The prudential regulator has indicated it is assessing how the coronavirus outbreak will affect the operation of financial institutions, with chairman Wayne Byres saying the system is positioned to handle volatility, but it will need considerable vigilance.

Speaking to the standing committee of economics last week, Mr Byres said the regulator has also been examining broader economic impacts from the virus. 

The financial system has already copped hits from the extreme weather events over the summer. Current estimates for total insured losses as a result of the bushfires, storms, hail and floods across Australia are projected to be in the order of $5 billion. The Australian cyclone system is still yet to end.

APRA has reported the financial position of the insurance sector means it is well placed to cover the claims, however, Mr Byres stated: “The summer’s events will undoubtedly have an impact on the price and in some cases, availability of insurance in the future.”

QE could drive populism rather than the economy

The Reserve Bank will consider quantitative easing once rates fall to 25 basis points. It’s a tool that has been used by other countries, often with devastating consequences for society. Via InvestorDaily.

Australia is in uncharted territory, economically speaking. We’re latecomers to the low-rate party and we’re still getting used to it. Home owners are loving it but retailers are not. Unemployment is low but a record number of Aussies want to work more. It’s a strange time. 

The Reserve Bank of Australia only has a few options left if it fails to hit its inflation target and lift economic growth. It can continue to reduce the cash rate and even go into negative rates, as the European Central Bank (ECB) had done. The ECB benchmark deposit rate was cut by 10 basis points in September to negative 0.5 per cent. The ECB also reintroduced its quantitative easing program of buying 20 billion euros ($32 billion) worth of government and corporate bonds every month in an effort to prevent the European economy from sliding off a cliff. 

The ECB has been using QE on and off since 2009 in an effort to lift inflation. In 2015 the central bank began purchasing 60 billion euros worth of bonds each month. This increased to 80 billion euros in April 2016 before coming back down to 60 billion a year later. 

In the UK, the Bank of England bought gilts (British government bonds) and corporate bonds during its QE program during the global financial crisis in 2009. QE programs also took place in 2011 and 2016.

Meanwhile, the US Federal Reserve has undertaken three separate rounds of QE, the last of which it began tapering in June 2013. The US halted its program in October 2014 after acquiring a total US$4.5 trillion of assets. 

When a QE program takes place, a central bank begins buying securities with money that didn’t exist before the QE process began. They are essentially printing money and giving it to large corporates and the government through the purchase of these bonds, the logic being that the proceeds will be used to buy new assets (like mortgages) and invest, which in turn will drive the economy. 

The money doesn’t directly hit the wallets of consumers. Unlike “helicopter money”, which the Rudd government dished out during the financial crisis, QE has a much more indirect impact on consumers. Financially speaking. 

But the broader political and social impacts have had a lasting psychological effect on the populations of Europe and the US.

“If we look at the experience offshore, QE has been great at raising the level of assets in conjunction with a permanently lower interest rate,” Fidelity International’s Anthony Doyle said this week. 

“QE has stimulated asset price growth. The ‘haves’ have benefited compared to the ‘have nots’; income inequality has grown across the economies that have implemented quantitative easing and socially we have seen big shifts to the Right or to the Left in terms of the political spectrum. 

“If you think about Donald Trump, Elizabeth Warren, Bernie Sanders, Jeremy Corbyn, Brexit, Boris Johnson. The next decade could be characterised by moves to the Right or Left here as well if we follow a path that other economies have pursued.”

AMP Capital chief economist Shane Oliver told Investor Daily that QE “probably helps people who have shares and property more than it does people who have bank deposits.”

Prior to the election of Mr Trump in 2016, Luis Zingales of the University of Chicago Booth School of Business told Bloomberg that central bank policies are largely to blame for the rise of populism. 

Here in Australia, the Reserve Bank will have to consider the impact that QE could have on a society that has witnessed a banking royal commission that exposed widespread misconduct within the financial services industry.

If the impact on Europe and the US of QE on the people is anything to go by, Australia is well placed to split down the middle and begin gathering on the far edges of the political spectrum.

We were late to the low rate party. We might just be late to the populism party too.

BlackRock weighs in on Australia recession fears

The Australian economy is being almost entirely propped up by public sector jobs growth and infrastructure spending, according to BlackRock, via InvestorDaily.

Consumers and businesses just aren’t spending money, despite the Reserve Bank cutting the cash rate by 50 per cent over the last 12 months. Google searches for “Australia recession” reached GFC levels in October. 

While the RBA is battling with the federal government over fiscal stimulus, BlackRock head of Australia fixed income Craig Vardy explained that there is an enormous amount of infrastructure spending going on at the moment with quite a substantial pipeline.

“Really, it has been holding up growth in Australia for quite some time now. That is clearly a concern. Strip away the government proportion of real GDP and you are not left with much at all,” he said.

It remains very important for the RBA that infrastructure spending continues, particularly after three rates cuts in 2019 have failed to drive economic growth or see the Reserve Bank hit its inflation and employment targets.

“The concerning thing about employment is that almost all of the jobs created over the last 12 months have been in the public sector,” Mr Vardy said. “There [have] been almost no jobs growth in the private sector. That is quite concerning.”

BlackRock is predicting the RBA will cut rates to 50 basis points in the first quarter of 2020 and again to 25 basis points in the second half. Reserve Bank governor Philip Lowe has already flagged that 25 basis points is the lower bound for the central bank; once it reaches a cash rate of 0.25 basis points it will enact quantitative easing by buying Australian government bonds.

While few economists have called out the risks of a recession, in some ways the Australian economy has already experienced a number of mini recessions in 2019 if measured on a GDP per capita basis.

What is preventing the economy slipping into a technical recession (two consecutive quarters of negative GDP growth) is population growth, which is currently running at 1.5 per cent annually.

“It is actually very difficult to get a recession in Australia when you’ve got that tailwind behind you,” Mr Vardy said.

For the RBA however, strong population growth presents another issue: creating enough jobs.

“You’ve always got this new employment funnel of people coming through. The RBA has very little chance of hitting its 4.5 per cent unemployment target when population growth is so strong,” Mr Vardy said.

“They need to get the underemployment rate down. That has stalled. The lever they pull is cutting rates. Rates will continue to be cut. I think they have to keep rates low to try and generate employment.”

Bank Weights Overload Australians

With Westpac shares trading at a seven-year low following the alleged breach of anti-money laundering laws and three of the four big banks recently cutting dividends or franking credits, investors should consider cutting their exposure to the big banks to avoid the erosion of their wealth and income. Via InvestorDaily.

Early in November, even before AUSTRAC claimed Westpac did not comply with anti-money laundering laws 23 million times, the company shocked investors when it announced that it was cutting dividends for the first time since 2008 after its full-year 2019 cash profit fell 15 per cent to $6.85 billion. The bank slashed its final dividend to 80 cents from 94 cents a share. ANZ too recently cut the level of franking of its dividends to 70 per cent from 100 per cent while NAB cut its final and interim dividends to 83 cents a share from 99 cents for 2019.  

The big banks will most probably find it difficult to maintain existing payouts to shareholders given the economic climate of historically low interest rates and lacklustre economic growth. The graph below highlights that the big banks are much less profitable now than they were 10 years ago. The return on equity to shareholders has fallen from around 20 per cent in 2008 to close to 10 per cent at current levels. This is sounding alarm bells for investors looking for reliable income and capital growth. As the banks’ profitability falls, the risk is that shareholders will see more dividend cuts and even more capital losses on top of those they have already sustained. 

The chart below highlights that the big banks’ net interest margins (NIM) have also dropped to their lowest level of around 2 per cent, which is putting downward pressure on their profits. Falling NIMs and a rising regulatory spend in the aftermath of the Hayne royal commission are combining to reduce banks’ profits.

The outlook for profitability is not good. Low interest rates are likely to persist for a long time in Australia and abroad. High levels of household debt in Australia will inevitably hamper future growth in earnings from mortgages and households save more. Household debt sits at around 190 per cent of household income, higher than in most other countries. While most households are comfortably making their debt repayments now, any shocks to the economy such as significant rise in unemployment could push some households over the edge.

Added to this are remediation costs for the banks associated with poor customer outcomes and regulatory non-compliance, which, according to Reserve Bank figures, have amounted to $7.5 billion across the financial sector over the past two years and are still rising. That figure does not count Westpac’s likely escalation in remediation costs, law suits and potentially record-breaking fine following AUSTRAC’S prosecution of its alleged 23 million breaches of anti-money laundering laws. APRA has also imposed additional capital requirements on the major banks to account for poor risk management practices. All of these are weighing on banks’ ability to make money.

This is sobering news for shareholders. Dividend cuts and falling share prices and profits are alarming outcomes for the many Australian investors whose portfolios have significant exposure to the big four, which represent around one-quarter of the S&P/ASX 200. In other words, if you hold a blue-chip portfolio or are invested in an active or passively managed Australian equity fund that tracks or is benchmarked to the S&P/ASX 200, $1 out of every $4 is likely to be invested in banks and therefore vulnerable to the risks they face. In the last month alone (to 4 December), Westpac shares are down 10 per cent and over five years, they have fallen 25 per cent. NAB shares are down 16 per cent and ANZ 23 per cent. Commonwealth Bank has lost a relatively modest 0.6 per cent.  But these are dire financial outcomes for shareholders.

QE could drive populism rather than the economy

The Reserve Bank will consider quantitative easing once rates fall to 25 basis points. It’s a tool that has been used by other countries, often with devastating consequences for society. Via InvestorDaily.

Australia is in uncharted territory, economically speaking. We’re latecomers to the low-rate party and we’re still getting used to it. Home owners are loving it but retailers are not. Unemployment is low but a record number of Aussies want to work more. It’s a strange time. 

The Reserve Bank of Australia only has a few options left if it fails to hit its inflation target and lift economic growth. It can continue to reduce the cash rate and even go into negative rates, as the European Central Bank (ECB) had done. The ECB benchmark deposit rate was cut by 10 basis points in September to negative 0.5 per cent. The ECB also reintroduced its quantitative easing program of buying 20 billion euros ($32 billion) worth of government and corporate bonds every month in an effort to prevent the European economy from sliding off a cliff. 

The ECB has been using QE on and off since 2009 in an effort to lift inflation. In 2015 the central bank began purchasing 60 billion euros worth of bonds each month. This increased to 80 billion euros in April 2016 before coming back down to 60 billion a year later. 

In the UK, the Bank of England bought gilts (British government bonds) and corporate bonds during its QE program during the global financial crisis in 2009. QE programs also took place in 2011 and 2016.

Meanwhile, the US Federal Reserve has undertaken three separate rounds of QE, the last of which it began tapering in June 2013. The US halted its program in October 2014 after acquiring a total US$4.5 trillion of assets. 

When a QE program takes place, a central bank begins buying securities with money that didn’t exist before the QE process began. They are essentially printing money and giving it to large corporates and the government through the purchase of these bonds, the logic being that the proceeds will be used to buy new assets (like mortgages) and invest, which in turn will drive the economy. 

The money doesn’t directly hit the wallets of consumers. Unlike “helicopter money”, which the Rudd government dished out during the financial crisis, QE has a much more indirect impact on consumers. Financially speaking. 

But the broader political and social impacts have had a lasting psychological effect on the populations of Europe and the US.

“If we look at the experience offshore, QE has been great at raising the level of assets in conjunction with a permanently lower interest rate,” Fidelity International’s Anthony Doyle said this week. 

“QE has stimulated asset price growth. The ‘haves’ have benefited compared to the ‘have nots’; income inequality has grown across the economies that have implemented quantitative easing and socially we have seen big shifts to the Right or to the Left in terms of the political spectrum. 

“If you think about Donald Trump, Elizabeth Warren, Bernie Sanders, Jeremy Corbyn, Brexit, Boris Johnson. The next decade could be characterised by moves to the Right or Left here as well if we follow a path that other economies have pursued.”

AMP Capital chief economist Shane Oliver told Investor Daily that QE “probably helps people who have shares and property more than it does people who have bank deposits.”

Prior to the election of Mr Trump in 2016, Luis Zingales of the University of Chicago Booth School of Business told Bloomberg that central bank policies are largely to blame for the rise of populism. 

Here in Australia, the Reserve Bank will have to consider the impact that QE could have on a society that has witnessed a banking royal commission that exposed widespread misconduct within the financial services industry.

If the impact on Europe and the US of QE on the people is anything to go by, Australia is well placed to split down the middle and begin gathering on the far edges of the political spectrum.

We were late to the low rate party. We might just be late to the populism party too.

‘Something has gone seriously wrong in the economy’: Fidelity

Fidelity International cross-asset specialist Anthony Doyle has warned that the returns over the next decade won’t be anything close to the stellar performance seen over the last 10 years. Via InvestorDaily.

During a media briefing in Sydney on Tuesday (3 December), Mr Doyle said 2009 to 2019 has been a “phenomenal decade” for Australian investors. However, he said that he would be shocked if “we generated anywhere near these returns” over the coming ten years. 

“Particularly for a balanced fund, for example, the default option for most Aussie super funds. The returns over the next decade are unlikely to be anything like what we have seen over the past decade.”

The fund manager explained that lower returns are the result of a record-low cash rate and that investors are now having to move further down the risk curve in order to find returns that were once generated by defensive assets like cash. He also warned that the miracle of compound interest could soon be a thing of the past in a low-rate environment. 

“Something has gone seriously wrong in the economy,” Mr Doyle said. “After 28 years of uninterrupted economic growth, the commodities boom, low unemployment, a fiscal surplus and a current account surplus for the first time in years, our cash rate is the same as the Bank of England’s. The fact that our cash rate is the same as the UK’s tells me something has gone wrong in the Australian economy.”

Hours after Mr Doyle’s presentation the RBA left the official cash rate on hold at its final meeting of the decade. Governor Philip Lowe noted that interest rates are very low around the world and a number of central banks have eased monetary policy over recent months in response to the downside risks and subdued inflation. 

“Expectations of further monetary easing have generally been scaled back,” he said. 

“Financial market sentiment has continued to improve and long-term government bond yields are around record lows in many countries, including Australia. Borrowing rates for both businesses and households are at historically low levels. The Australian dollar is at the lower end of its range over recent times.”

While the RBA left rates on hold at 0.75 per cent on Tuesday, some economists believe the central bank will reduce rates to 25 basis points, a number flagged by Mr Lowe during a speech last week. 

“Our current thinking is that QE becomes an option to be considered at a cash rate of 0.25 per cent, but not before that,” the Reserve Bank governor said. “At a cash rate of 0.25 per cent, the interest rate paid on surplus balances at the Reserve Bank would already be at zero given the corridor system we operate. So from that perspective, we would, at that point, be dealing with zero interest rates.”

However, Fidelity’s Anthony Doyle believes Mr Lowe’s comments have been widely misread by the market. 

“Many had already been expecting a reduction to 50 basis points in February and then QE after that. I think he was far more bullish in his speech and was trying to get the message across that we are a long way from QE.”

The cash rate has been cut in half over 2019, from 1.50 per cent to 75 basis points. Mr Doyle believes the RBA will be reluctant to cut rates any further. He noted that the pickup in house prices in Sydney and Melbourne could flow through to boost economic growth in the new year.

QE ‘not on the agenda’: Lowe (?)

According to an article in InvestorDaily, RBA Governor Philip Lowe has poured water on the prospects of quantitative easing (QE), saying Australia “shouldn’t forget about fiscal policy” to prevent a recession.

“QE is not on the agenda at this time,” Governor Lowe told at the annual dinner of the Australian Business Economists. 

Interest rates will have to hit 0.25 per cent before the RBA considers QE – something that economists are predicting by mid-2020. But Governor Lowe doesn’t think QE will be necessary, saying that the Australian economy is in a good position and that the RBA will achieve its goals. 

“At the moment, though, we are expecting progress towards our goals over the next couple of years and the cash rate is still above the level at which we would consider buying government securities.”

However, Governor Lowe hinted again that he would prefer the use of fiscal policy rather than monetary policy to ward off a recession, citing a report from the Committee on the Global Financial System (CGFS), which he recently chaired. 

“The report also notes that there may be better solutions than monetary policy to solving the problems of the day,” Governor Lowe said. 

“It reminds us that when there are problems on the supply-side of the economy, the use of structural and fiscal policies will sometimes be the better approach. We need to remember that monetary policy cannot drive longer term growth, but that there are other arms of public policy than can sustainably promote both investment and growth.”

Governor Lowe also said that the willingness of central banks to provide liquidity could reduce the incentive for financial institutions to hold their own adequate buffers and create an “inaction bias” from prudential regulators or fiscal authorities. 

“If this were the case, it could lead to an over-reliance on monetary policy,” he said.

The sentiments about quantitative easing have been echoed by fund managers. Sarah Shaw, chief investment officer at 4D infrastructure and Chris Bedingfield, principal at Quay Global Investors have urged the government to instead allocate investment in infrastructure to create jobs and boost productivity. 

Ms Shaw noted the need to replace roads, bridges and other structures with better planned “forward-thinking” infrastructure is high.

“If you think about the need for infrastructure spend that I’m talking about, if you put a number on it, it’s maxed at $4 trillion by 2040 of infrastructure capacity that’s needed,” she said.

“If you think about that and you’re in an interest rate environment as low as it is today, if you’re not borrowing to invest in a much-needed infrastructure, then there’s something wrong.”

She added she looks for companies that are locking in fixed term bet to invest for future cash flows, because “now is the time to do it” with the current low cash rate. 

“Why shouldn’t countries be doing that?” Ms Shaw queried. 

“I’ll give you an example: China during the GFC, biggest form of quantitative easing – 35,000 kilometres of high-speed rail. That’s the sort of quantitative easing that we should be looking at here in Australia.”

VanEck has predicted there will be more rate cuts in 2020.

As discussed with John Adams in our recent post, we did not come away with the same conclusion, and Westpac, for example is forecasting QE will hit during 2020.

Afterpay Breached Money Laundering Legislation

Afterpay breached money laundering law because of incorrect legal advice, according to an auditor. Via InvestorDaily.

The buy-now, pay-later giant was the subject of an AUSTRAC probe over allegations it breached the Anti-Money Laundering and Counter-Terrorism Financing Act (AML/CTF).

But an independent auditor contracted by Afterpay has discovered that the breaches occurred because of incorrect legal advice. 

“In reaching these findings I have established that Afterpay’s compliance with its AML/CTF obligations was, from the outset and over time, based upon legal advice from top tier Australian law firms,” wrote Neil Jeans, an anti-money laundering consultant who conducted the audit. 

“I am of the opinion this initial legal advice was incorrect.”

The unnamed law firms decided Afterpay was not providing loans to consumers but instead providing factoring services to merchants. This advice “did not reflect Afterpay’s business model” and led to the company focusing its AML/CTF controls upon merchants rather than consumers. 

“Despite Afterpay having a compliance-focused culture, the consequences of being provided with incorrect legal advice has resulted in historic non-compliance with the AML/CTF Act and Rules,” Mr Jeans wrote in the report. 

However, the audit noted that Afterpay’s transaction monitoring system is now “effective, efficient and intelligent” as a result of greater resource allocation. 

Mr Jeans also decided that the nature of Afterpay’s service mitigates some money laundering and terrorism financing risks, and noted that the company’s AML/CTF compliance had “evolved and matured over time”. 

Afterpay was quick to seize on the opportunities of the report in light of Westpac’s recent breaches of the same laws. 

“Afterpay reaffirms that it has not identified any money laundering or terrorism financing activity via our systems to date,” the company said in a statement accompanying the report. 

But the ball is now in AUSTRAC’s court. The regulator will consider the report and decide whether to take further action.

Afterpay has pledged to continue its co-operation with AUSTRAC.

ANZ CEO received remediation from bank

ANZ chief Shayne Elliott has revealed he was sent three remediation letters from the bank, insisting that the company will refund every single customer it has wronged, via Investor Daily.

Appearing before a parliamentary committee on Friday, Mr Elliott commented many customers receiving remediation wouldn’t have known there was an issue at the time, pointing to himself as an example.

The bank is in the process of working through 247 problem products and around 250 issues, assessing customers and determining whether they were charged the wrong interest or fees. 

The majority of issues were revealed to be associated with the banking side, rather than the wealth segment and “fees for no service”. 

“So the million customers that we’ve refunded today, most of them got a cheque in the mail and a nice little letter and they didn’t even realise it,” Mr Elliott said. 

“I’ve had three. One was $30, one was $27 and one was $80. The average amount that’s being repaid out, you can do the maths. 

“It’s important we get the money back; I’m not diminishing that. But we are remediating every single case. There’s nothing to do with complaints. This had to do with we have discovered a mistake, and we have gone and put it right.”

Mr Elliott predicted there are around 3.4 million customers in total who are owed refunds from the bank, with around one-third having received their remediation.

ANZ has set aside $1.6 billion in reserves for remediation, with the amount that has been refunded so far ($l67 million) being around a tenth of that. 

Mr Elliott conceded the bank’s progress through returning customers’ money has been “modest”.

“We’ve taken provision of around $1.6 billion of that, maybe around $400 million has more to do with cost,” he said.

“That’s the cost of getting the money back.”

The bank now has 1,100 staff working sorely on remediation, with a further estimated 600-700 full-time employees lending a hand from other departments. ANZ has around 38,000 staff in total.

Mr Elliott said ANZ will give the remediation team all of the resources it needs.

“That team has no restriction on number of people they need to hire, none. They can hire as many people as they want,” Mr Elliott said.

“They have no budget restriction. Yeah, the restriction in a sense, the binding constraint, if you will, is not money or headcount, its expertise. 

“We want to finish those [remediation programs] and find any other problems we have. We have a productive program where we are searching through every single product and process we have to see if there’s anything that needs remediating, big or small, we add it to the list and we get it done as fast as possible,” he said.

Despite the bank’s remediation process having had a gradual pace, as far as Mr Elliott is concerned, it is in the bank’s best interest to complete the refunds as fast as it can.

“My shareholders have already paid the $1.6 billion, it’s gone from their accounts, it’s gone,” he said.

“So when we take that provision, we’ve expensed it. So there is no benefit in delay. So now actually, there’s benefit in speed because the delay costs money because the longer [it is], the accrued interest keeps mounting up, and I have to pay more and more.

“There might be a perverse incentive to not discover issues, if that makes sense. But once you’ve discovered them, we have a legal obligation to provide and expense the money. The 1.6 billion, as far as we’re concerned is we’ve spent it – so now the sooner we get that money back to customers, the better.”

Super funds ‘heavily exposed’ to volatile equities

Former Liberal Party leader John Hewson has questioned the management of superannuation funds and called out Australia’s sovereign wealth fund for ignoring climate risks. Via InvestorDaily.

Speaking on a panel at the Crescent Think Tank in Sydney on Thursday (24 October), Mr Hewson noted that most of the $2.9 trillion of superannuation money is invested in stock markets, primarily in the US and Australia. 

“You are heavily exposed when those markets are as overvalued as they are. By any measure the US stock market is way overvalued. There is going to be a correction. It’s just a matter of when and how far. Super funds are taking a risk by staying in those markets,” the former Liberal Party leader said. 

“Some have rebalanced portfolios and put a bit more into cash, but you don’t earn anything on cash. Fixed-interest gives you a very low return.”

Mr Hewson noted the low interest rate environment globally, highlighting that around 25 per cent of sovereign bonds have negative rates. 

“These are uncharted waters for those in the financial sector. Everyone is chasing yield but the only place you get a return is a stock market. The big question is how sustainable is that return? You can see how volatile equities markets are just based on a tweet from Trump.  This is a very volatile and dangerous world for superannuation funds to be so exposed,” he said. 

Mr Hewson was one of the key figures behind The Climate Institute’s Asset Owners Disclosure Project (AODP), which has since been taken over by ShareAction. Over the years the AODP index and report has repeatedly called out Australia’s sovereign wealth fund, the Future Fund, for lagging behind its international peers on climate change. 

Last week Future Fund CEO David Neal stated that Australia’s sovereign wealth fund does not invest for social concerns and will continue to invest in fossil fuels. 

“Our job is very clear. Our job is to generate a financial return for the nation,” Mr Neal told a committee in Canberra last week. 

Commenting on the Future Fund’s stance, Mr Hewson said: “This is a fund that was buying British American Tobacco flat out when both sides of government were running anti-smoking campaigns.”

“They are not interested in climate risk. The fund is not transparent enough to satisfy a lot of people. They are taking big risks,” he said.