Investing in a post-pandemic future
By Peter Gill
South Australia should tap its substantial pool of local superannuation funds to invest in the State’s recovery from the COVID-19 pandemic, according to Statewide Super’s Chief Investment Officer, Con Michalakis.
Mr Michalakis says governments and the superannuation industry both have roles to play in the months ahead.
In an interview with the SACES Economic Policy Forum, Mr Michalakis said governments should capitalise on the current zero interest and bond rates available to support an ongoing fiscal stimulus.
And, he said that governments – both Federal and State – “should not be squeamish” about using this historically cheap finance.
Mr Michalakis said the goal of such support is to get through to the other side of the pandemic at which stage he anticipates that pent-up demand, particularly for household consumption, will underpin the road out of recession.
In the meantime, Mr Michalakis suggests the pandemic is forcing a rethink of traditional investment strategies, and funds managers will need to be open to novel and different opportunities.
“There is a big source of superannuation capital that can be used to a) deliver returns to members and b) provide local opportunities to do venture capital, public-private partnerships in infrastructure, and fund other projects the government won’t necessarily do,” Mr Michalakis told SACES Economic Policy Forum.
“I think that’s a key part for South Australia. Putting my purely South Australian hat on, the policy makers in this State need to think about a) what they can get from the Federal Government, b) what they can provide themselves, and c) the fact that the biggest provider of capital in this State could potentially be superannuation – and those super funds can be put to work.”
“If the State wants to bullet-proof itself in the future, it needs to have a good reputation and scale in higher education and some businesses emerging, hopefully, out of Lot Fourteen, with the opportunity to tap local capital to do that. At the moment the State Government hasn’t given enough thought to these opportunities.”
While there would be policy and regulatory issues to be addressed, Mr Michalakis says: “Don’t waste this crisis. Use the crisis to create conditions that will future-proof the State.”
“It is a mindset change but in the discussions that I’m having around town, people think this is an interesting approach.
“If you were to add up the local, large pools of capital there is probably $50-60 billion in South Australia. If a couple of billion dollars of that were to be deployed locally it would be a major increase in the capital injected into this State, and regionally across the State.
“It would provide a really big impact to the local economy and take a little bit of pressure off the State’s finances. I think that’s the way we have to think about the situation. Put personal interest aside and think about the greater good.
“Super funds have a sole purpose, returns for members first. But in a world where cash rates and bond rates are zero, the hurdle to provide capital and generate a return is not what it once was. And local investment would have massive benefits for the State.”
But Mr Michalakis suggests the focus should not just be on business-related investment opportunities.
“Governments should do the stuff that the private sector can’t do and that’s fixing up key areas like health, education, aged care, and roads that need to be done. On the rest, let the private sector step in with a building if that’s what’s needed.
“But the Government can also work its public stock harder as well so it can look at areas that need to be developed. One area in South Australia at the moment is social housing – this is as good a time as any to upgrade the social housing stock in this State.”
While such developments have traditionally been government specific projects, Mr Michalakis said its time to consider whether there is a role for a hybrid model involving both the government and the private sector.
“There’s always going to be a gap between what’s required long-term and what politicians want in the short term. In the long term, for me, it’s increasing the quality of health and education and providing services into the community – it’s very important to get that right. If we can fast track that to today, then let’s go for it. There are big gains in social housing to be picked up, for example.”
Taking a broader, national perspective on the economy, Mr Michalakis said “consumption has been scaled back during the pandemic and people are sitting on lots of savings, so we could come out of this recession a lot quicker than we first feared.”
Mr Michalakis used the analogy of the Roaring Twenties – which followed the first world war and the Spanish flu both with huge losses of life – to argue that there is a pent-up demand in the community.
“Following World War I and the Spanish flu, there was an outpouring of people who just wanted to have a good time and get on with it. We may be creating those conditions again today – the Boomers will have their final trips and the Millennials, the Gen-Y’s and the X-ers, who have been closed down effectively for a year, want to have a good time.
“So, we may get through this and be surprised how people will want to go out and express themselves. And we want to have the economy in such a state that they can do that when we free the shackles.”
On the crystal ball question of how long the current recession may last, Mr Michalakis said the downturn may not be as bad as first expected.
“In March-April, we probably feared a much worse outcome for the economy. As bad as its been, it’s not the dreaded U-shaped recovery that we were fearing, perhaps more of a ‘swoosh’ in terms of the recovery – a bit like the Nike symbol.
“The income support and various other measures have done their bit to stop the economy really going into a depression. The economies around the world are coming back – it’s between a V-style and a U-style recovery, not as quick as a V but equally not as slow as a U.”
“It’s really up to policy makers now. With interest rates at zero and lots of fiscal stimulus, if they can continue that, the economy will keep coming back.
“But we won’t be getting back to the old growth rates even though the growth paths may be positive. It might be 2023-24 before we get back to the original growth trajectory that the economy was doing (of around two per cent per annum).”
The caveat on such an outlook is that Australia continues to manage the COVID-19 pandemic well. As Victoria, and countries like the United States, the United Kingdom and a raft of other nations have shown, managing the pandemic remains problematic indeed.
But Con Michalakis, for one, can see how the pandemic could bring some innovative thinking and positive new approaches to investment and growth, rather than just a return to the past.