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‘Lots of levers to pull’ as markets roiled: Michalakis
“Central banks are clearly behind the game here… and they’re trying to manage higher rates against a backdrop of pretty difficult markets,” Hostplus deputy CIO Con Michalakis told the Inside Network’s Equities and Growth Symposium. “If they overcook this we’re going to have stagflation leading to some sort of recession. If they undercook it, we still have an inflationary pulse. I think these are really difficult conditions.”
The geopolitical situation will “also here for a while”. Few expected that Russia would actually follow through on its threats to invade Ukraine, but the tensions now arising in South-East Asia and with China are not going away either. Equities have had a good run, but funds will now need to use everything in their toolbox to achieve anything close to the returns of the last decade.
“In the growth space we’ve done what we’ve always done, whether it was at Statewide or now (at Hostplus), which is broaden the growth exposure,” Michalakis said. “You’ve got a capital stack, with high-rated debt and equity; lower down the stack you can invest in different conditions and broadly across asset classes.”
“So not just relying on equities and bonds. And then within equities you’ve got different style buckets… Deep value has had a pretty good start since November in coming back given the spreads were so high. So there’s lots of different levers to pull, but frankly it’s a very interesting time to be allocating capital.”
There are “genuine opportunities” to be had in short-duration fixed income, while long-short funds and trend following strategies have also already delivered this year. Michalakis says that a significant chunk of Hostplus’ FUM – around 45 per cent – is now allocated to financing unlisted growth opportunities in private equity, venture capital, infrastructure, and property. Industrial property has also gone “through the roof” since supply chains started moving again, even if that movement is sluggish.
“When I’m seeing markets move three or four per cent a day, you know something unusual is going on. When I started off on a bond trading desk in the 90s, that was fun because rates were moving around a lot,” Michalakis said. “That’s what we’re back to – this really volatile word.”
“So having the set strategy and managing client expectations, and then being opportunistic to take advantage of some of the ideas of the world we’re in – and I think we’re stuck here for a while as we work through inflation and these geopolitical issues.”
The recent tech wreck bears comparison to the early 2000s, but some areas of the sector are not as obviously pumped up as others. Companies that relied on issuing equity or borrowing cheaply have been smashed as the cost of capital rises, and that effect is now starting to drift higher up the capital structure, affecting companies like Netflix. But Microsoft and Meta are still “printing money” despite having a shorter runway of growth ahead of them.
But Michalakis says “the innovation genie has not gone anywhere” and believes that there’s opportunities to finance decarbonisation and innovation, as well as new ideas appearing from revolutions in the digital space.
“I think there’s going to be a lot of brilliant ideas around the world and in Australia,” Michalakis said. “Financing that, expanding that, providing growth capital to those ideas – that’s not going away. In my era, when you graduated out of uni in the late 80s or 90s, you probably wanted to work at an investment bank. The really smart kids now want to start their own business. That’s not changing.”
