Big super faces into a ‘piecemeal WWIII’

Australia’s superannuation funds are now parking member money further and further away from their old backyard. But a more divisive world presents them with challenges they’ve not faced before.

It’s perhaps unsurprising that the opening of ASFA’s 2022 conference was dominated by conversations usually reserved for the war room. The rapid divestment from Russia – enforced by Treasurer Josh Frydenberg, with assurances from APRA – brought geopolitical and country risk to the fore for investors who have historically stuck to their own backyard.  

There are perhaps few commentators better equipped to help them understand those risks than international relations expert and journalist Stan Grant, who has decades of experience as a foreign correspondent in China and other countries. And it’s now his belief – echoing the words of Pope Francis, in 2014 – that we are in a “piecemeal World War Three.”

“There is conflict raging in Africa through to the Middle-East and parts of Asia,” Grant told the ASFA Conference on Wednesday (27 April). “We saw the drawdown of foreign troops in Afghanistan just last year. And of course now, the war in Ukraine, which has shocked our senses – the type of war we thought we’d left behind in the 20^th century.”

That’s a gloomy enough outlook for Australia’s biggest super funds, who are effectively running out of places to park member’s money domestically and are now searching offshore in both the politically stable developed markets and the more volatile emerging markets. A more divided, more dangerous world is not one conducive to safely deploying capital. Perhaps the first sign of these times arrived several years ago in the form of the monster Saudi Aramco IPO, the prospectus of which warned of the potential for missile attacks by Houthi rebels alongside the more pedestrian possibility of reduced oil consumption.

But the bigger and more complex problem lies closer to home: China.

The “sick man of Asia” is now on track to be the biggest economy in the world. A nation that only a handful of decades ago could not feed itself has become indispensable, and we are living in the world that China, through its gargantuan manufacturing power, has made. Its development is nothing short of miraculous – but it has not followed the trajectory of other liberalising economies, in that its people have become richer but not more free.

That has not stopped super from flirting with it. It’s hard to ignore a country as large and central to global affairs as China is. Doing so means excluding a vast opportunity set in a time when investment returns are being crimped by forces outside of big super’s control. But just as Russia eventually had its day of reckoning, the good money is that China will itself one day cross a red line of its own – whether that’s in Taiwan, or the Solomon Islands.

Grant has personal experience with China’s authoritarian bent, recalling the measures employed against him during his time as a foreign correspondent; in Beijing his house was bugged, and was watched from a car parked out the front. His family was subjected to intimidation, and he to detention. Some of the people he interviewed disappeared. But what he saw in China “was undeniably remarkable”; it had lifted 700 million out of poverty and become the bedrock of the global economy.

“The rest of the world was clamouring for China’s riches,” Grant said. “Australia, like the rest of the world, was prepared to turn a blind eye to the excesses. Yes, the question of human rights was raised; but China still got the Olympics. It joined the World Trade Organisation and the World Health Organisation, and has been an integral part of the global order.”

“Now we reach the point where we’re asking questions about what the consequences of this is going to be. China has arrived as a superpower that can rival the United States. It has not become more liberal.”

Grant believes that balancing China’s authoritarian excesses with its position as the powerhouse of global economic growth will be one of the defining issues of the 21^st century. Most of the crises of the last 22 years actually had their inception in “the fallout and the hangovers” of the 20^th century – the end of the Soviet Union, the rise of radical Islam. For Grant, the 21^st Century began “in the driving rain, when (he) stood on the border of Hong Kong and mainland China and saw the Peoples Liberation Army teeming across the border in the driving monsoonal rain to reclaim Hong Kong.”

“You all have decisions to make about where you put your money,” Grant said. “Do you invest in a country like China, which has been accused of committing genocide against Uighurs, crushing democracy movements in Hong Kong, threatening to take back Taiwan by force, claiming and militarizing disputed islands in the South China Sea?… How do we make moral decisions in a world where China is an indispensable nation?”

It’s certainly harder to ignore China than Russia – if in doubt, look at the composition of emerging market indices. But gasps from the audience as Grant recalled how two security men intimidated his children on a frozen lake in the depths of Beijing’s winter serve as evidence that big super might soon have misgivings about its march toward China.

Photo: Jeremy Veitch

Lachlan Maddock

Lachlan is editor of Investor Strategy News and has extensive experience covering institutional investment.