Is BlackRock An ESG Canary?

When the world’s largest fund manager tells its clients that it plans to swiftly exit its thermal coal investments over the next six months, this should tell us something important.

BlackRock manages around USD$7 trillion of funds on behalf of investors and up to now has been cautious in its response to climate change and slow to participate in investor campaigns.  But that just changed, for good economic reasons. Recent analysis published by the Institute for Energy Economics and Financial Analysis (IEEFA), estimated that BlackRock lost as much as USD$90 billion in investment value due to poor investments in fossil fuel companies in 2019.  The IEEFA assessment also found that investments in just four fossil fuel companies, ExxonMobil, Chevron, Royal Dutch Shell and BP accounted for around three-quarters of the USD$90 billion loss.

Now, in a letter to clients, BlackRock’s Global Executive Committee, led by company founder and CEO Laurence Fink, explained that the company would be withdrawing its investments in thermal coal producers, including any company that sources more than a quarter of its revenue from thermal coal production.

Announcements of this kind have come out steadily over the past couple of years. Virtually all the major Australian and European banks and insurers, and many other global institutions, have already announced such policies. According to the Unfriend Coal Campaign, insurance companies have stopped covering roughly US$8.9 trillion of coal investments – more than one-third (37%) of the coal industry’s global assets, and stopped offering reinsurance to 46% of them.

A separate letter to CEO’s starts with a clear reference to BlackRock’s ‘fiduciary duty’ to its investors. BlackRock’s own analysis shows global financial markets will be materially impacted by climate change, reflected in the Bank of England’s analysis of $20 trillion at risk. “BlackRock concludes that this stranded asset risk is not yet priced into the market, so as a fiduciary, BlackRock really has no choice but to act.”

“Thermal coal is significantly carbon intensive, becoming less and less economically viable, and highly exposed to regulation because of its environmental impacts. With the acceleration of the global energy transition, we do not believe that the long-term economic or investment rationale justifies continued investment in this sector,” the letter says.

“As a result, we are in the process of removing from our discretionary active investment portfolios the public securities (both debt and equity) of companies that generate more than 25% of their revenues from thermal coal production, which we aim to accomplish by the middle of 2020.

Environmental, Social, and Governance (ESG) Criteria are coming to the fore – Environmental – a set of standards for a company’s operations that consider how a company performs as a steward of nature. Social – examines how a company manages relationships with employees, suppliers, customers, and the communities where it operates. Governance – how its deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.

“As part of our process of evaluating sectors with high ESG risk, we will also closely scrutinize other businesses that are heavily reliant on thermal coal as an input, in order to understand whether they are effectively transitioning away from this reliance.”

The move will see the investment giant dump around USD$500 million (A$725 million) in thermal coal investments.

And firms should note that Blackrock is going to flex its influence.  “Given the groundwork we have already laid engaging on disclosure, and the growing investment risks surrounding sustainability, we will be increasingly disposed to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them,” Fink said.

So, Blackrock’s Fink seems to have figured out the huge impact that climate change will have on not just money, but the world.

“Will cities, for example, be able to afford their infrastructure needs as climate risk reshapes the market for municipal bonds?” Mr Fink wrote in his letter to CEOs.

“What will happen to the 30-year mortgage – a key building block of finance – if lenders can’t estimate the impact of climate risk over such a long timeline, and if there is no viable market for flood or fire insurance in impacted areas? What happens to inflation, and in turn interest rates, if the cost of food climbs from drought and flooding? How can we model economic growth if emerging markets see their productivity decline due to extreme heat and other climate impacts?” he said.

BlackRock also announced that it would join the Climate Action 100+ initiative, that supports investors to actively engage with the companies they are invested in to assess, disclose and address the risk that climate change and the energy transition poses to the company and the value of investments. The Climate Action 100+ initiative includes the Australian based Investor Group on Climate Change, which supports Australian institutional

In 2019, the UK-based think tank InfluenceMap released a report that showed BlackRock was the leader of the asset management pack in terms of fossil fuel ownership. As at June 2018, the oil, gas and thermal coal reserves controlled by fossil fuel producers it holds represented an aggregated 9.5 gigatonnes of carbon dioxide emissions equivalent, with just under half of these emissions in thermal coal and equivalent to 30 per cent of total global energy-related carbon emissions in 2017.

“Among the 10 asset management groups with the largest aggregate fund AUM, BlackRock holds the most coal-intensive portfolios,” the report said. A -100% indicates full divestment while positive values indicates adding coal to the portfolio during the period 2011-2016.

“However, there are key differences between BlackRock’s passively and actively managed funds,” the report noted. “The group’s passively managed funds show a thermal coal intensity in 2018 of 680 t/US$m AUM, while its actively managed funds show a much lower TCI of about 300 tons/$m AUM, well below the global fund benchmark.”

And significantly ESG investment strategies are growing in profitability, with new geographic trends adding to their value, according to Amundi Asset Management who analysed the performance of 1,700 companies across five investment universes. Their research – ESG investing in recent years: New insights from old challenges – found that ESG strategies tended to penalise ESG investors between 2010 and 2013, but rewarded investors after 2014. “We have observed a massive mobilisation of institutional investors on ESG,” they said.  The global responsible investment is estimated to be $30.7 trillion USD, or two fifths of assets under management. This is a 34% growth in two years.

But here is the problem. Most of the money that BlackRock manages is wrapped up in passive investments, which track indexes. Indexes tend to contain the shares of the sort of companies that BlackRock’s active arm is now divesting from. So, what exactly BlackRock can do about that? Is this more than greenwash? 

Mr Fink has said that BlackRock will be doubling its offerings of ESG ETFs and will work with index providers to expand and improve the universe of sustainable indices. The company will also simplify the process by which investors can integrate ESG into their existing portfolios by adding a fossil fuel screen and has also expanded its impact investment strategy. 

But the contradiction between the company’s new activist stance and the passive replication of an energy-heavy index such as Australia’s is obvious. One solution might be for large mining companies such as BHP to dump their coal assets in order to remain part of both Blackrock’s actively managed (stock picking) and passively managed (all stocks) portfolios. This was discussed in a recent “The Conversation” article.

Another might be the development of index funds from which firms reliant on fossil fuels are excluded. It is even possible that the compilers of stock market indexes will themselves exclude these firms.

But once bond investors follow the lead of Blackrock and other financial institutions, divestment of Australian government bonds will likely follow. This process has already started, with the decision of Sweden’s central bank to unload its holdings of Australian government bonds.

Taken in isolation, Sweden’s move had virtually no effect on Australia’s bond prices and yields. But the most striking feature of the divestment movement so far is the speed with which it has grown from symbolic gestures to a severe constraint on funding for the firms it touches.

The fact that the Adani corporation was unable to find a single bank willing to fund its Carmichael mine is an indication of the pressure that will come to bear.

The effects might be felt before large-scale divestment takes place. Ratings agencies such as Moody’s and Standard and Poors are supposed to anticipate risks to bondholders before they materialise.

Once there is a serious threat of large-scale divestment in Australian bonds, the agencies will be obliged to take this into account in setting Ausralia’s credit rating. The much-prized AAA rating is likely to be an early casualty.

That would mean higher interest rates for Australian government bonds which would flow through the entire economy, including the home mortgage rates mentioned in the Blackrock statement.

So the government’s case for doing nothing about climate change (other than cashing in on past efforts) has been premised on the “economy-wrecking” costs of serious action. But as investments associated with coal are increasingly seen as toxic, we run an increasing risk that inaction will cause greater damage. So yes, Blackrock’s announcement is a real wake-up call, like it or not.

https://www.blackrock.com/au

https://theconversation.com/blackrock-is-the-canary-in-the-coalmine-its-decision-to-dump-coal-signals-whats-next-129972

https://www.theguardian.com/environment/2019/nov/15/swedens-central-bank-dumps-australian-bonds-over-high-emissions

https://www.theguardian.com/environment/2017/apr/28/big-four-banks-all-refuse-to-fund-adani-coalmine-after-westpac-rules-out-loan

https://growaldfamilyfund.org/institute-for-energy-economics-and-financial-analysis-ieefa.html

Homepage

http://www.climateaction100.org/

Sentiment Versus Fundamentals – The Property Imperative Weekly 11th January 2020

The latest edition of our weekly finance and property news digest with a distinctively Australian flavour.

CONTENTS:

  • 00:23 Introduction
  • 01:00 World Bank Global Economics Prospects
  • 04:10 US Jobs
  • 05:30 US Markets
  • 08:30 Gold
  • 09:30 UK
  • 10:25 Europe
  • 11:05 China
  • 11:20 Japan
  • 12:05 Bitcoin
  • 13:40 Australian Segment
  • 13:40 Retail
  • 15:10 Mortgage Stress
  • 15:40 Building Approvals
  • 16:00 Home Prices
  • 16:40 Bushfires Impact
  • 20:10 AUS Markets

January Live Show: https://youtu.be/Z03jkJEmvOI

Higher Still – The Property Imperative Weekly 21st Dec 2019

The latest edition of our weekly finance and property news digest with a distinctively Australian flavour.

Contents:

  • 00:20 Introduction
  • 00:55 US Markets and Data
  • 03:40 Trade Deals
  • 05:10 Bitcoin Risks
  • 06:30 Japan
  • 07:40 China
  • 07:50 UK
  • 09:40 Sweden’s Negative Rate Reversal
  • 12:00 The Global Waves of Debt Report
  • 13:30 Australia
  • 13:30 MYEFO
  • 15:25 Unemployment and Migration
  • 16:00 Loan Flows
  • 16:35 Household Ratios
  • 17:40 Home Prices
  • 19:10 Australian Markets

DFA Live Show From 17th December 2019

In this trimmed high quality recording of our live event, we discuss the latest financial and property data, examine our latest scenarios, and discuss the trends ahead. We also answer a range of questions posed by our viewers live. The unedited original stream with live chat, is available to view (starting at 0:30) below:

Is It Time To Move Beyond Exit Polls And Tweets? – The Property Imperative Weekly 14 December 2019

The latest edition of our weekly finance and property news digest with a distinctively Australian flavour. Contents:

  1. 00:25 Introduction
  2. 00:45 Trade Deals
  3. 03:00 Impeachment
  4. 03:50 US Markets
  5. 06:20 UK Election and Brexit
  6. 08:30 ECB and Euro
  7. 09:20 Deutsche Bank
  1. 10:30 Australian Section:
  2. 10:30 ASIC Responsible Lending
  3. 12:45 BIS and Household Debt
  4. 13:00 APRA On Risks
  5. 13:30 Westpac
  6. 14:40 Citi and Deutsche Bank Action on Cartel
  7. 16:40 Home Prices and Auctions
  8. 18:15 Economics and recession fears
  9. 19:45 IMF Warns
  10. 21:00 Bank profit warnings
  11. 23:20 Markets

December Live DFA: https://youtu.be/N6QKe7IGGvc

Kitchen Sink From The Fed – Up To $365 Billion In The Next Month! [Video]

The latest from the Federal Reserve, and the trade talks – are they connected? Why the lift in repo transactions ahead?

https://www.newyorkfed.org/markets/opolicy/operating_policy_191212

Volatility Rules! – The Property Imperative Weekly 07 December 2019

The latest edition of our weekly finance and property news digest with a distinctively Australian flavour.

Contents 00:20 Introduction 00:48 US Markets 01:50 Labor Stats 05:20 Oil 06:00 Gold 06:45 Euro 07:00 China 08:00 UK 08:12 New Zealand 08:40 Bitcoin 11:55 Australian Section 11:55 Economic Data 13:00 Property – Opal Tower 14:00 Timber-PVC Cladding 15:40 PCI Index 16:20 Auctions 17:10 Prices 17:45 Council of Financial Regulators 20:00 Local Markets

The reign of disruption continues as global central banks and governments lose control

Saxo Bank 2020 Outrageous Predictions: 

Saxo Bank, a leading global multi-asset facilitator of capital markets products and services, has today released its 10 Outrageous Predictions for 2020. The predictions focus on a series of unlikely but underappreciated events which, if they were to occur, could send shockwaves across financial markets.  

While these predictions do not constitute Saxo’s official market forecasts for 2020, they represent a warning of a potential misallocation of risk among investors who typically see just a one percent likelihood to these events materialising.  It’s an exercise in considering the full extent of what is possible, even if not necessarily probable. Inevitably the outcomes that prove the most disruptive (and therefore outrageous) are those that are a surprise to consensus.

Commenting on this year’s Outrageous Predictions, Chief Economist at Saxo Bank, Steen Jakobsen said:

“This year’s Outrageous Predictions all play to the theme of disruption, because our current paradigm is simply at the end of the road. Not because we want it to end, but simply because extending the last decade’s trend into the future would mean a society at war with itself, markets replaced by governments, monopolies as the only business model and an utterly partisan and a highly fragmented and polarised public debate.

“It’s an environment where negative yields are now used to discriminate against access to mortgages for low income households, the elderly and students as regulatory capital requirement demands make credit hurdles too high for that group to get credit. Instead, they rent at twice the price of owning – a tax on the poor if ever there was one, and a driver of inequality. This, in turn, risks leaving an entire generation without the savings needed to own their own house, typically the only major asset that many medium and lower income households will ever obtain. Thus, we are denying the very economic mechanism that made the older generations ‘wealthy’ and risk driving a permanent generational wealth gap.

“We see 2020 as a year where at nearly every turn, disruption of the status quo is an overriding theme. The year could represent one big pendulum swing to opposites in politics, monetary and fiscal policy and, not least, the environment. In politics, this would mean the sudden failure of populism, replaced by commitments to “heal” instead of to divide. In policymaking, it could mean that central banks step aside and maybe even slightly normalise rates, while governments step into the breach with infrastructure and climate policy-linked spending.”

The Outrageous Predictions 2020 publication is available here with headline summaries below:

1. Australia’s nominal GDP to 8% on MMT

In 2020, economic red flags point to more downside ahead for the Australian economy. In Q1 of 2020, retail sales and cash register activity plunge to their lowest level since the 1991 recession and houses become more unaffordable, with Sydney and Melbourne being ranked among the world’s most expensive cities for housing. In Australia’s five biggest cities, more than 30% of average earnings are absorbed by mortgage repayments, leading to lower consumption and higher consumer stress.

The Australian economy could get a lift from the improving China credit impulse next year, but it is unlikely to be a game-changer as China’s credit transmission is still too slow. On the top of that, domestic monetary policy is also constrained as the effective zero-bound approaches and has limited positive effects on the real economy. RBA governor Philip Lowe was very vocal in 2019 on the limits of monetary policy and repeatedly explained that further rate cuts have only a marginal effect on GDP growth — arguing that fiscal stimulus is the only way to bring relief if the economy continues to weaken.

As consumer confidence and employment begin to plunge in early 2020, the government decides to embark on an MMT-inspired economic policy aimed at restoring confidence, stimulating GDP growth and attracting investment. This is the largest fiscal stimulus programme in Australia for at least 30 years. It leads to a massive increase in public spending in infrastructure, the health system and education, as well as the implementation of ambitious programmes to reduce the cost of living, provide affordable housing, reduce taxation and address environmental issues.

The strong rise in fiscal spending contributes to a jump in consumption and investment, almost doubling Australia’s nominal GDP rate to 8% in 2020. The business community applauds this bold new economic policy stance. Confidence and risk appetite are back. After being hit by a perfect storm that drove the Australian dollar down nearly 20% versus the greenback since early 2018, the AUD is among the best performing currencies in 2020. 

2. The sudden arrival of stagflation rewards value over growth

The iShares MSCCI World Value Factor ETF leaves the FANGS in the dust, outperforming them by 25%.The world has now come full circle from the end of the Bretton Woods system, when it effectively shifted from a gold-based USD to a pure fiat USD system, with trillions of dollars borrowed into existence — not only in the US but all over the world. Each credit cycle has required ever lower rates and greater doses of stimulus to prevent a total seizure in the US and global financial system. With rates at their effective lower bound, and the US running enormous and growing deficits, the incoming US recession will require the Fed to super-size its balance sheet beyond imagination to finance massive new Trump fiscal outlays to bolster infrastructure in hopes of salvaging his election chances. But a strange thing happens: wages and prices rise sharply as the stimulus works its way through the economy, ironically due to the under-capacity in resources and skilled labour from prior lack of investment.  Rising inflation and yields in turn spike the cost of capital, putting zombie companies out of business as weaker debtors scramble for funding. Globally, the USD suffers an intense devaluation as the market recognises that the Fed will only accelerate its balance sheet expansion while keeping its policy rate punitively low.

3. ECB folds and hikes rates

European banks on the comeback trail as the EuroStoxx bank index rises 30% in 2020.Despite the recent introduction of the tiering system, which has helped to mitigate the negative consequences of negative rates, banks are still facing a major crisis. They are confronted with a challenging economic and financial environment: marked by structurally ultra-low rates, an increase in regulation with Basel IV — which will further reduce the banks’ ROE — and competition from fintech companies in niche markets. In an unprecedented turn of events, in early January 2020, the new president of the ECB, Christine Lagarde — who has previously endorsed negative rates — executes a volte-face and declares that monetary policy has overreached its limits. She points out that maintaining negative deposit interest rates for a longer period could seriously harm the soundness of the European banking sector. In order to force euro area governments, and notably Germany, to step in and to use fiscal policy to stimulate the economy, the ECB reverses its monetary policy and hikes rates on January 23, 2020. This first hike is followed by another a short time later that quickly takes the policy rate back to zero and even slightly positive before year-end.

4. In energy, green is not the new black

The ratio of the VDE fossil fuel energy ETF to ICLN, a renewable energy ETF, jumps from 7 to 12. The oil and gas industry came roaring out of the financial crisis after 2009, returning some 131% from 2008 until the peak in June 2014 as China pulled the world economy out of its historic credit-led recession. Since then, the industry has been hurt by two powerful forces. The first was the advent of US shale gas and rapid strides in globalising natural gas supply chains via LNG. Then came the US shale oil revolution, which saw the US become the world’s largest oil and petroleum liquids producer. The second force has been the increasing political and popular capital behind fighting climate change, causing a massive surge in demand for renewable energy. The combined forces of lower prices and investors avoiding the black energy sector have pushed the equity valuation on traditional energy companies to a 23% discount to clean energy companies. In 2020, we see the tables turning for the investment outlook as OPEC extends production cuts, unprofitable US shale outfits slow output growth and demand rises from Asia once again.And not only will the oil and gas industry be a surprising winner in 2020 — the clean energy industry will simultaneously suffer a wake-up call.

5. South Africa electrocuted by ESKOM debt

USDZAR rises from 15 to 20 as the world cuts credit lines to South Africa. The very bad news is the South African government announcement late this year that in order to continue to bail out troubled utility ESKOM and keep the nation’s lights on, the budget next year is projected to balloon to its worst in over a decade at 6.5% of GDP, a sharp deterioration after the government managed to stabilise finances at a near constant -4% of GDP for the last few years. Worse still, the World Bank estimates that its external debt has more than doubled over that period to over 50% of GDP. The ESKOM fiasco may be the straw that will break the back of creditors’ willingness to continue funding a country that hasn’t had its financial or governance house in order for decades. Other uncreditworthy EMs will be drawn into the abyss as well in 2020, with the most differentiated performance across EM economies in years. The country teeters toward default.

6. US President Trump announces America First Tax to reduce trade deficit

A tax on all foreign-derived revenue scrambles supply lines and spikes inflation. US 10-year inflation-protected treasuries yield 6% in 2020 thanks to a rush of investor interest as the CPI rises. The year 2020 starts with reasonable stability on the trade policy front after the Trump administration and China manage at least a temporary détente on tariffs, currency policy and purchases of agricultural goods. But early in 2020 the US economy struggles for air and US trade deficits with China fail to materially improve, while Chinese purchases of agricultural products can’t realistically increase further. Eyeing polls showing a resounding defeat in the 2020 US Presidential election, Trump quickly grows restive and his administration drums up a new approach in a last-ditch effort to steal back the protectionist narrative: the America First Tax. Under the terms of this tax, the US corporate tax schedule is completely reconstructed to favour US-based production under the claimed principles of “fair and free trade”. The plan cancels all existing tariffs and instead slaps a flat value-added tax of 25% on all gross revenues in the US market that are sourced from foreign production. This brings stinging protests from trading partners for what are really just old tariffs in new clothes, but the administration counters that foreign companies are welcome to shift their production to the US to avoid the tax.

7. Sweden breaks bad

A massive and pragmatic attitude shift washes over Sweden as it gets to work to better integrate its immigrants and overstretched social services, driving a huge fiscal stimulus and steep rally in SEK. As often seems the case in Swedish policymaking, just as they took progressive taxation too far and collapsed the economy in the early 90’s, they have now taken political correctness on immigration so far that they have become politically incorrect. They are ignoring the large and growing contingent of Swedes who are questioning that policy, shutting them out of the debate. A parliamentary democracy should allow all groups of reasonable size a voice in the debate, but the traditional main parties of Sweden have taken the unusual collective decision to ignore the anti-immigration voice which has grown to represent more than 25% of the Swedish voters. The justification and intentions were good: openness and equality for all and safeguarding the Swedish open economic model. But anything taken too far can overwhelm, and to survive, all models need to be able to change when facts change. The other Nordic countries now talk of “Sweden conditions” as a threat, not as a model of best practice. Sweden is now in recession and with its small open economy status is extremely sensitive to the global slow down. This sense of crisis, social and economic, will create a mandate for change.

8. Democrats win a clean sweep in the US 2020 election, driven by women and millennials

The 2020 US election puts the Democrats in control of the presidency and both houses of Congress. Big healthcare and pharma stocks collapse 50%. The polls going into 2020 don’t look promising for Trump, and neither does the electorate. The marginal Trump voter in 2016 and in 2020 is old and white, a demographic that is fading in relative terms as the largest generation in the US now is the maturing millennial generation of 20-40-year-olds, a far more liberal demographic. Millennials and even the oldest of “generation Z” in the US have become intensely motivated by the injustices and inequality driven by central bank asset market pumping and fears of climate change, where President Trump is the ultimate lightning rod for rebellion as a climate change denier. The vote on the left is thoroughly rocked by dislike of Trump – with suburban women and millennials showing up to express their revulsion for Trump. The Democrats win the popular vote by over 20 million, grow their control of the House, and even narrowly take the Senate. Medicare for all and negotiations for drug pricing bring a massive haircut to the industry’s profitability.

9. Hungary leaves the EU

Hungary has been an impressive economic success since it joined the EU in 2004. But the 15-year marriage now seems in trouble after the EU initiated an Article 7 procedure against the country, citing Hungary’s – or really PM Orbán’s — ever-tighter restrictions on free media, judges, academics, minorities and rights groups. The push back from Hungary’s leadership is that the country is only protecting itself: mainly protecting its culture from mass immigration. It’s an unsustainable status quo, and the two sides will find it tough to reconcile in 2020 as the Article 7 procedure moves slowly through the EU system. PM Orbán is even openly talking about how Hungary is a ‘blood brother’ with the renegade Turkey as opposed to a part of the rest of Europe, a big shift in rhetoric, a change of tone which coincides with EU transfers all but disappearing over the next two years. Hungary’s currency, the forint (HUF) is on the back foot and reaches a much weaker level of 375 in EURHUF terms as the markets fear the disengagement or reversal of capital flows as EU companies reconsidered their investment in Hungary.

10. Asia launches new reserve currency in move away from US dollar dependence An Asian, AIIB-backed digital reserve currency takes the US dollar index down by 20% and tanks the US dollar 30% versus gold. To confront a deepening trade rivalry and vulnerabilities from rising US threats to weaponise the US dollar and its control of global finances, the Asian Infrastructure Investment Bank creates a new reserve asset called the Asian Drawing Right, or ADR, with 1 ADR equivalent to 2 US dollars, making the ADR the world’s largest currency unit. The move is clearly aimed at de-dollarising regional trade. Local economies multilaterally agree to begin conducting all trade in the region in ADRs only, with major oil exporters Russia and the OPEC nations happy to sign up due to their growing reliance on the Asian market. The redenomination of a sizable chunk of global trade away from the US dollar leaves the US ever shorter of the inflows needed to fund its twin deficits. The USD weakens 20% versus the ADR within months and 30% against gold, taking spot gold well beyond USD 2000 per ounce in 2020.

‘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.