New Christian Super CIO Mark Rider, who spent a previous life at the RBA, speaks about the dynamics between monetary and fiscal policy throughout history and says we are entering a period not unlike the first few decades after the World War II.
While the United States is the country most heavily hit by the coronavirus pandemic, with over 24 million people infected and almost 400,000 deaths at the time of writing, you wouldn’t be able to tell it from the performance of US stock markets over the past year.
Despite 2020 being a horrendous period for both the people and the economy, US stock markets had a bumper year. The S&P 500 ended the year 15 per cent higher, while the Nasdaq Composite posted an unprecedented 41.5 per cent return.
Even the Russell 2000, a broad US small cap index, ended 19 per cent higher for the year.
Yet, the US economy has clearly been affected by the pandemic. The US unemployment rate was only 3.6 per cent at the start of 2020, but hit a record high of 14.7 per cent in April as the pandemic shut down much of the US economy.
Although the unemployment rate declined to 6.7 per cent in November, it is still significantly higher than at the start of the year.
This divergence between the stock market and the broader economy has been less pronounced in other regions, for example the Australian stock market ended the year flat to slightly lower, but the question remains why equity markets have not been more affected by the tribulations of 2020.
Christian Super’s new Chief Investment Officer, Mark Rider, who joined the fund in August last year, spent the first 10 years of his career at the Reserve Bank of Australia (RBA). Rider says the disconnect is largely the result of the lack of the usual internal dynamics of the business cycle, including systemic issues within the financial system, along with the very low level of interest rates.
“I think the response of markets reflects that the course of this recession was not normal,” Rider says in an interview with [i3] Insights. “The course of recession was driven by government policies to lock local economies down.
“Rather than going into a recession – where normally it is the internal dynamics of the cycle with rates going higher, a pullback in demand, credit slowing down and with businesses responding – this time around the economy wasn’t on the verge of anything like what usually plays out.
I think the response of markets reflects that the course of this recession was not normal. Rather than going into a recession – where normally it is the internal dynamics of the cycle with rates going higher, a pullback in demand, credit slowing down and with businesses responding – this time around the economy wasn’t on the verge of anything like what usually plays out
“Therefore, the reason why the equity markets looked through this period is the lack of the normal dynamics of the recessions that we’ve had in the past.”
Not only is there little evidence of systemic problems, there is still significant stimulus in place in the form of monetary and fiscal easing, which has bolstered investor confidence.
“In Australia, leading up to the last recession you had significant asset price inflation through the late 1980s, rates rose to 18 per cent, a number of banks got in trouble, and this all fed back into asset price deflation. That overhang took years to work through,” Rider says.
“We don’t have those dynamics this time; what we had was a shutdown. But once we got through that initial first wave and coronavirus infections were easing off, there was also increased confidence about the vaccine coming. And as the economy began to recover you saw markets respond to that.
“One thing that is quite evident from Australia and the US, is that there has been this big build up in savings. The amount of savings in bank deposits from corporations and households has gone up. There is a buffer there.
“So if the economy is going to be stablised by this there is a chance to get back to the normal mid-cycle level of earnings.
“The key thing here for markets is: ‘What is the earnings trend?’ and markets are looking through short-term weakness and saying: ‘Things are on the way back and we’ve got a lot of stimulus and, therefore, it is going to support the economy.’
“So markets have priced that in and I think that is a pretty reasonable outlook for the next 12 months,” Rider says.
“For share markets and their current lofty levels that’s only part of the story. The other is the pricing off the historically low interest rates and expectation they will stay low for many years to come.”
The Cycle of Monetary and Fiscal Policy
Rider spent a decade at the RBA at the start of his career and in his last role he was Head of Economic Activity and Forecasting, having responsibility for managing the team that monitors and forecasts the Australian economy, before switching to an investment role at UBS.
Asked whether the various quantitative easing programs around the world have distorted markets, he answers that the recent focus on monetary policy isn’t unprecedented. He argues that throughout history there have been cycles where the emphasis has shifted between monetary and fiscal policy.
“When you look at the basic objective of monetary policy, it hasn’t changed. It is about macro stability and about financial stability. But how central banks have gone about it has changed over time,” he says.
“When we came out of World War II, the psychology was still impacted by the Great Depression and high unemployment. You also had concerns about financial stability from the great crash and you had high debt from the war.
“And so coming out of World War II, the policy response was to target low unemployment. The Keynesian revolution emphasized the importance of fiscal policy in managing the business cycle and a long run trade off between inflation and the unemployment rate.
“Interest rates in that environment were kept extremely low, which helped to bring down the debt burden. That was the focus of policy.
“What happens throughout history is that central banks target one problem, only to set themselves up another problem down the track. So from ‘65 inflation starts to pick up in the United States and then you go into the next phase, which exploded in the ‘70s, which was the stagflation period.
“And then you suddenly see things totally flip around from fiscal policy being the dominant cyclical manager of the economy to monetary policy being the dominant one. You saw [former Chair of the Federal Reserve Paul] Volcker in the US and the monetarists theory coming through resulting in monetary policy dominating the policy mix to deal with high inflation.
I believe we will move into a regime where central banks want to keep rates low, but in terms of managing the economy, fiscal policy is going to be the dominant driver, which in some respects is going back to where we were back in the first few decades post World War II
“The problem was inflation was too high. We then entered a phase globally from the ‘70s to probably the early ‘80s, where the whole focus was about bringing inflation down.
“Interest rates went suddenly from being low to very high levels and the policy regime then shifted in time to one where we saw inflation targeting, where it was more about anchoring inflation around these low levels.
“But what then happened was that as fiscal policy became secondary to managing the cycle and the financial system was deregulated, the financial cycle started to become a dominant factor, which ultimately, I suppose, ended with the GFC.”
The current situation is one where the balance between monetary, fiscal and financial system dominance might tip in favour of fiscal policies, not unlike the period after World War II.
“When the COVID crisis occurred, monetary policy around the world flipped to being uber easy: interest rates hit rock bottom, as quantitative easing flooded bond markets. Fiscal policy became very supportive, with funding supported at arm’s length by central banks.
“What we will then see, in the next evolution, is that we are going back to where we were post war, where you have fiscal policy become dominant.
“If you look at monetary policy with rates being unbelievably low, there are limits to what you can do in terms of quantitative easing. Therefore, fiscal policy will become more important going ahead and I think financial regulations will probably be something that will rise again as well to manage financial stability risks.
“I believe we will move into a regime where central banks want to keep rates low, but in terms of managing the economy, fiscal policy is going to be the dominant driver, rather than monetary policy, which in some respects is going back to where we were back in the first few decades post World War II.
“And of course, the challenge for markets is that if we do that, if you look where share prices are, where valuations are and where rates are, it is going to take a lot of skill, judgment and probably a bit of luck to actually navigate that,” he says.
When the United Nations published its Sustainable Development Goals (SDGs), asset owners around the world recognised the potential of these goals to set future investment policies, taking their role as stewards of other people’s capital seriously.
But translating the SDGs into a practical investment framework took some effort.
Having joined Christian Super in August last year, Rider’s mandate is to invest in line with biblical values. Asked whether it is equally difficult to translate this into practical investment objectives, he answers that the Gospels provide a good guideline as to what not to invest in.
“If you dig behind it, you’ll find that for someone who is more aware of traditional ESG a lot of what we say and what we do is actually pretty consistent with that. But sometimes the way that we express it is somewhat different,” he says.
“Take the environmental issues, for example. In 2014, we were one of the first movers on negative screening of coal and electricity generation coming from thermal coal. We’ve got a long-standing position on that.”
In 2014, we were one of the first movers on negative screening of coal and electricity generation coming from thermal coal. We’ve got a longstanding position on that
“We believe that climate change is a material investment and physical risk.
“The way we view it, the biblical interpretation is that we need to care for God’s creations, that includes both humans and the environment.
“Clearly, climate change is a real risk for the environment, of which we are a steward of, and we don’t want to see its destruction. So, we are concerned about that.
“In terms of the care for creation, when it comes down to humans we talk about human flourishing. We want society to be a place where humans can live their lives, flourish and reach their full potential.
“What that means is that when you have a deteriorating environment that will have a significant impact on human communities and it will damage the ability of human societies to flourish.
“Take gambling, for example, that is another one that we have a negative screen on. We see that gambling affects a disproportionate part of vulnerable people in society, which is inconsistent with the biblical value of human flourishing.
“When we look at the SDGs, the SDGs are very much overlapping with social and environmental impacts. It captures very nicely the things that we are trying to achieve,” he says.
Ethical Options and APRA Heatmap
Most ethical superannuation options require an additional level of research which is often provided by an external or affiliated organisation.
In the case of Christian Super, it is Brightlight that provides them with advice on impact investing, while negative screening is done internally with external fund managers responsible for choosing the most sustainable companies.
But often this also means these options have higher fee levels than the average MySuper option, to cover the cost of this additional research.
The introduction of a heatmap by the Australian Prudential Regulation Authority has renewed the focus on fees and openly names and shames those funds it deems too expensive.
Asked whether he is concerned about the direction of the regulator on fees, Rider is practical.
“Our primary focus is our fiduciary responsibility to generate the returns that our members require. Now, the fees are somewhat higher, so we need to make sure that from an investor’s perspective that net return is still appropriate,” he says.
“What we are looking to do with our approach is to deliver investments to our members that are aligned with their values and beliefs, but that also meets their retirement income needs.
“And as responsible investing and impact investing becomes more mainstream…, that tends to be beneficial in terms of the fee structure. So that is one area where we are focusing on; to get those fees down and have the right investments in place.
“Also, if you read the research by the Responsible Investment Association Australasia, what they show in their annual review of responsible investing is that their RI Super leaderboard of funds over the medium term had a consistently higher return than the non-rated MySuper funds.
“So looking at the industry as a whole, for those who are adopting that RI approach it certainly doesn’t look like they are delivering lower returns,” he says.
Unlike the patterns we see among investment professionals today, Rider has had long tenures at all of his previous employers. After a decade at the RBA, he spent more than 15 years at UBS, climbing up to Head of Investment Strategy Australia.
After UBS, he spent seven years with ANZ Wealth, ultimately as CIO for ANZ Wealth & Private Banking.
Considering his tendency for long stints, we asked Rider whether this could be his swan song before he retires.
Rider seems amused by the question but answers carefully.
“My intention has always been not to flip around, and I’ve got the intention to do this job for a number of years, so I hope that might be the case.
“But I suppose you never exactly know in the world of investments.”
[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.