The world’s big central banks are inflating a bubble in technology stocks that will lead to a “clean-out” on global equity markets, the chairman of Australia’s $135bn sovereign wealth fund has warned.
Rock-bottom interest rates and bond-buying programmes put in place to cushion the impact of the pandemic last year have left economies and markets vulnerable to a shock, Peter Costello said in an interview.
His comments come as investors around the world have started to worry how long central banks will hold down interest rates in the event of rising inflation as the global economy recovers from coronavirus. These nerves have weighed on equity markets and hit government bond prices, pushing up yields from the US to Australia.
“What worries me is having expended all of their firepower, there is not much left for the next crisis, and there will be another crisis,” said Costello, a former Australian treasurer who heads the Future Fund, the country’s 15-year-old A$171bn (US$135bn) sovereign wealth fund. Cheap money has also fuelled a boom in Australian property prices, he added.
“I am worried that we have unsustainable asset prices in some areas and when those asset prices fall — when the correction comes — what firepower have the central banks got left then? Nothing.”
Reflecting those concerns, the Future Fund increased its cash holdings last year, taking the level to 20 per cent in December, up from 17 per cent in June, according to its annual performance statement. This conservative approach dented the fund’s performance in 2020 despite the market recovery, with investment returns of 1.7 per cent — well below its 4.4 per cent target. Global stocks rallied nearly 12 per cent last year.
Technology stocks listed in the US looked particularly vulnerable to a correction because many of these companies were unprofitable, said Costello, warning of a pullback similar to the bursting of the dotcom bubble in 2001.
Bank of America’s latest investor survey this month highlighted the bullish backdrop, revealing that average cash reserves were at an eight-year low of 3.8 per cent. A record number of polled fund managers admitted that they were taking more than their usual amount of risks in markets.
But investors’ growing concerns over inflation have been reflected in a recent rise in bond yields, with those in Australia having risen particularly quickly. The country’s economy has benefited from its commercial links to China, where growth has already returned to pre-coronavirus levels. Ten-year Australian yields are at 1.64 per cent — the highest in two years — but the sell-off has been broad based across highly rated government debt.
Given the level of government and central bank support and signs that the global economy…
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