Issue - meetings

Introduction

Meeting: 13/09/2021 - Pension Fund Investment Sub-Committee (Item 4)

4 Macroeconomic Update pdf icon PDF 199 KB

Additional documents:

Minutes:

This was a new report presented by Bob Swarup, Independent Advisor to the Sub-Committee, which sought to set the scene on the Pension Fund’s greatest influences and encourage discussion of wider issues throughout the remainder of the agenda.  The report focussed on four key areas: the continuing impact of Covid-19 and government reactions, inflation (including supply chain issues), negative real interest rates in the UK, and

investors’ capital deployment.

 

In response to questions regarding inflation, Dr Swarup indicated that he felt the position was still somewhat transient with an element of short term demand and the economy was still stop/start and this needed to stabilise so that companies would invest.  He felt that capacity issues had not been fully factored in.  Noting High Street closures, he pointed out that this created less capacity for demand which resulted in greater pricing power for anyone left in the market.  He also pointed to record job openings balanced by significant demand for wage increases (eg in the haulage industry) which would eventually show in prices. He considered that the central banks were in a difficult position and would be looking for inflation to come back down.

 

Dr Swarup noted that wages had been low for 10-15 years and this pent up wage demand, decrease in natural resources, increase in energy costs, rising costs of carriage (through an under investment in shipping) and the huge shortages in supply chain created a risk of spikes but ultimately the rise in inflation would mute, and energy prices would come down. The concern was that certain parts of the supply chain like wages and conductors would stabilise at a higher level.

 

Dr Swarup indicated that if the Bank of England decided inflation would not return to target, they would write to the Chancellor.  He noted that the Federal Reserve had changed to an average inflation target and that was one option, but the government would be thinking more long term and seek to maintain credibility with the public.  

 

In response to a question regarding reinvigoration of the high streets, Dr Swarup noted that some investors had not allowed property prices to rise too much.  There had been a lower yield for warehouses and property owners were not willing to write down the value, preferring fewer tenants than lower rates.  If the market was hollowed out, there could be ramifications which were destructive to the balance sheet in the short term.

 

Regarding questions in relation to private debt capital overhang, Dr Swarup responded that it was significant that the chart included in the slide presentation (slide 14) showed some overhang.  He noted that over the last three years there was a lot of money raised that did not need to be deployed immediately.  There was a danger that too much capital left on the balance sheet would result in poor quality purchases and a good cash management strategy was required.  Philip Pearson added that strong growth was being seen in capital committed to private debt, with a significant  ...  view the full minutes text for item 4