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(Pictured: Niall Quinn)

Australian super funds have a right to be worried about the world we are in, says Niall Quinn, a managing director and president of global manager Eaton Vance Investment Managers. But he is not a pessimist. He believes, for instance, the worst will be over within four years.

Quinn, who is a fixed interest expert, was in Australia recently to speak at a CIE conference and meet with clients. He was accompanied by Duncan Hodnett, now leading business development in Australia for Eaton Vance. Hodnett replaced Nicholas Allen late last year, after Allen moved back to his third-party marketing business.

In an interview, Quinn said there was a disconnect between Australia and the rest of the world right now, and Australians should be more worried about the Chinese slowdown than they appear to be.

“My bet is that Chinese growth is more like 4-5 per cent rather than 7 per cent,” he said. “They are reorienting themselves towards a consumption driven economy and that’s not going to be great for Australia, at least in the short term.”

He says that the Australian Government is not stimulating the economy and the weakening Australian dollar is reflecting our terms of trade.

“So, there are headwinds but at least there is leeway for action in Australia. There’s room for more rate cuts and the Government can also do things fiscally. But the picture is that Australia is out of step with most of the world.”

Hodnett said that Australia was in a similar position to that of Canada, which also went through a relatively benign climate during the global financial crisis. “But Canada now has very high house prices, even more than Australia, and it’s a resources-driven economy with a weakening currency. They cut their interest rates a week before us [last month].”

Quinn said that if you believed that this month’s Australian interest rate cut would not be the last, as most pundits do, then the Australian bond market was “not a bad place to be”.

“Aussie yields are still attractive,” he said. “But you have to put that into context with what else is on offer. In the medium term, fixed interest investments will be the only way to get yield. And for Australians, most of this will have to be offshore.”

He says that the very savvy investors got on board the tilt to international about 18 months ago, but it was not too late with this trend.

“From this point, it’s going to get difficult to buy US assets,” Quinn said. “But you need a diversified portfolio which is higher yielding and there is still a window of opportunity for some further diversification offshore.”

Quinn emphasized the diversification angle during his CIE presentation. He believes, for instance, that there will be a flow of money out of high-yield and investment-grade bonds, as the US Fed hikes rates. This will drive prices down in those parts of the fixed income market. The oil price effect will also add to volatility, he says.

“But I think the global economy will be back to normal within about four years. There are some risks. Whether ‘Abenomics’ works is one of them. Whether the ECB arrests deflation and whether China successfully reorients its economy are others. But there is no doubt, the US economy is back on track.”