Costello sees danger in low interest rates

Colin Brinsden, AAP Economics and Business Correspondent, and Steven Deare
(Australian Associated Press)

Future Fund chair Peter Costello has questioned whether government officials realise keeping interest rates low has helped stock markets to levels that may be unsustainable.

Mr Costello was speaking on Wednesday about the Future Fund rising 4.9 per cent during the December quarter. The result is a recovery from the carnage on financial markets during the early stages of the coronavirus pandemic.

The fund set up in 2006 to cover future superannuation liabilities of public servants stands at its highest value, $171 billion.

That compares with the initial capital injection of $60.5 billion from the then Howard government.

Mr Costello said the Future Fund had a wild ride last year, but as far as investors were concerned, economic recovery had been v-shaped.

Mr Costello cited fiscal and monetary policy helping, including the record low cash rate of 0.1 per cent.

"We are living through a period of extraordinary stimulation," he said.

Low rates have helped markets in many countries, including Australia and the US, rebound to record or near-record highs.

Yet Mr Costello was wary of dangers.

"The fact is money is very cheap. If you can borrow at one per cent, the easiest thing to do is go to a stock market and look for two or three per cent.

I don't know if governments realise this but by keeping interest rates low they are pumping stock markets.

Stock markets in the US, more so than here, have been pumped.

You're getting unbelievable valuations on companies that don't make profits.

You've got to ask yourself, is that sustainable in the long term."

Chief executive Raphael Arndt also cast doubt on markets' current levels.

"To believe market pricing, you would have to believe that monetary policy stays easy for that whole period," he said.

Mr Arndt said investors would also have to believe the economic impact of the virus was manageable, that vaccination of populations would go smoothly, there would be no more mutations of COVID-19, and other assumptions.

He said his team did not feel it was prudent to take more risk.

Future Fund decisions were not based on short term market moves, he said.

Mr Costello said the quarterly result comes after an unprecedented year where markets fell by more than a third during the early months of the pandemic.

"In the second half, markets staged a strong comeback," Mr Costello, the former Howard government treasurer, said.

"The Future Fund navigated the early market falls well, mitigating their impact on the portfolio, and performed strongly in the second half of the calendar year."

He said markets have been supported by fiscal and monetary policy, optimism around economic recovery, and the development and deployment of vaccines.

However, he said the extent to which the public health outlook improves, the duration of lockdowns, the recovery in the economy, and the pathway to reducing support measures will impact the outlook for markets.

"Investors must also remain conscious of the potential for economic, market and geopolitical shocks, particularly given that the ability for policy makers to respond with further measures is limited," Mr Costello said.

While the one-year return on the fund of 1.7 per cent was below the target of 4.4 per cent, the 10-year return of nine per cent compared with the target of 6.2 per cent.

The target is the consumer price index plus four to five per cent.