Interview: Investment giant’s three big questions about China

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Sean Aylmer: Welcome to the Fear and Greed business interview, I’m Sean Aylmer.

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Sean Aylmer: Regular listeners would know we’ve spoken a few times to

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Sean Aylmer: Rich Nuzum from global investment giant, Mercer, as Mercer’s Executive Director,

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Sean Aylmer: Investments and Global Chief Investment Strategist. He’s got terrific insight

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Sean Aylmer: into the forces affecting financial markets right around the world,

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Sean Aylmer: and of course what that means for investors. He usually

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Sean Aylmer: joins us from the US but he’s in Australia for

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Sean Aylmer: Mercer’s Global Investment Forum. So a great opportunity for a chat. Remember,

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Sean Aylmer: this is general information only. You should seek professional advice

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Sean Aylmer: before making any investment decisions. Rich Nuzum, welcome back to

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Sean Aylmer: Fear and Greed.

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Rich Nuzum: Thanks for having me, Sean. It’s great to be with you.

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Sean Aylmer: Are you enjoying your time in Australia, Rich?

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Rich Nuzum: It’s wonderful. I was warned that it’s winter here, but

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Rich Nuzum: it’s been beautiful and we got to spend two days

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Rich Nuzum: with our clients and our investment management partners at our

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Rich Nuzum: conference. It’s just been a great trip so far.

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Sean Aylmer: Fantastic. In Australia, we’re heading into earnings season that kicks

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Sean Aylmer: off properly next week. In the US, we’ve got June

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Sean Aylmer: quarter earnings coming out across the board. Just sort of

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Sean Aylmer: before we take a look ahead, what have we seen

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Sean Aylmer: in the past six months or so globally for investors?

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Rich Nuzum: Well, the overriding concerns remain the same as a year ago,

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Rich Nuzum: will monetary authorities be able to reign in the wage

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Rich Nuzum: price spiral without triggering a recession? What will happen with

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Rich Nuzum: the Russian invasion of Ukraine and its impact on energy

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Rich Nuzum: and food prices and then all things related to China.

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Rich Nuzum: But the outlook is a lot rosier than it was

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Rich Nuzum: even six months ago in February. And February consensus wisdom

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Rich Nuzum: was that monetary authorities would have to put us into

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Rich Nuzum: a significant recession with associated equity and other capital market

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Rich Nuzum: corrections to cause unemployment and to get wages under control

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Rich Nuzum: and to get inflation under control. And except in China

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Rich Nuzum: that hasn’t happened. Inflation has been coming down while unemployment

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Rich Nuzum: remains near historical lows. And as a result, stock prices

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Rich Nuzum: are up 18%, 19% year to date. You mentioned earning season,

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Rich Nuzum: that’s been a source of big concern the last few

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Rich Nuzum: weeks and earnings are actually coming in line with expectations

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Rich Nuzum: or better, which is good because the market has been

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Rich Nuzum: close to price to perfection. The measures of implied volatility

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Rich Nuzum: in the market have been trading near historical lows, signaling

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Rich Nuzum: that the market isn’t too worried about things. And for

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Rich Nuzum: people like me, when the market’s not worried, I worry

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Rich Nuzum: a lot because we’re not positioned for any downside risk. So

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Rich Nuzum: it’s good that earnings are coming in well, inflation news

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Rich Nuzum: is coming in well. We seem to be coming in

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Rich Nuzum: for a soft landing, knock on wood.

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Sean Aylmer: Yeah, I mean the most forecast recession ever in the

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Sean Aylmer: US may not actually happen, notwithstanding it’s been so well forecast.

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Rich Nuzum: Yep. Well said, Sean.

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Sean Aylmer: Yeah, okay. So what about the war in Ukraine? So

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Sean Aylmer: I’m going to go through the three things. So that’s

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Sean Aylmer: happening in terms of a potential of a global recession.

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Sean Aylmer: And knock on wood, hopefully it’s a soft landing. The

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Sean Aylmer: war on Ukraine, it continues. Obviously we’ve seen in recent

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Sean Aylmer: days Russia taking a harder line about Ukraine grain exports,

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Sean Aylmer: et cetera, but the steam has come out of the

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Sean Aylmer: energy shock from it. And so notwithstanding the human tragedy,

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Sean Aylmer: which of course is first and foremost, economically, it doesn’t

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Sean Aylmer: seem to be having as big an impact.

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Rich Nuzum: The human catastrophe remains front and centre and continues to

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Rich Nuzum: weigh on consumer and business confidence, particularly in Europe. In

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Rich Nuzum: terms of the impact on energy price, it hasn’t been

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Rich Nuzum: as bad as was feared in terms of either impact

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Rich Nuzum: or volatility. And fortunately or unfortunately, Russia has made progress

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Rich Nuzum: in finding ways to sell its oil, finding tankers that

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Rich Nuzum: aren’t registered with the coalition, making some progress in finding

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Rich Nuzum: insurance coverage that’s not with western insurers. And so finding

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Rich Nuzum: outputs for its oil. And so its oil is getting

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Rich Nuzum: to global markets, which is good from an economic standpoint

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Rich Nuzum: and bad from a sanctions’ enforcement standpoint. On grain prices,

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Rich Nuzum: we’d had a defacto agreement to let grain be exported and, effectively,

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Rich Nuzum: a safety corridor. And that’s come under threat in recent days.

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Rich Nuzum: And a food price shock would be bad for inflation globally.

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Rich Nuzum: It would also be another humanitarian catastrophe because many food

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Rich Nuzum: importing nations are frontier or emerging markets without a lot

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Rich Nuzum: of resilience to increase in food prices. So that would

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Rich Nuzum: fall tragically on some of the most vulnerable populations in

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Rich Nuzum: the world, and hopefully we’ll avoid that.

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Sean Aylmer: Stay with me, Rich, we’ll be back in a minute.

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Sean Aylmer: I’m speaking to Rich Nuzum, Executive Director, Investments and Global Chief

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Sean Aylmer: Investment Strategist at Mercer. Okay, the third one you mentioned

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Sean Aylmer: was China. That still seems to have a big question

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Sean Aylmer: mark over it.

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Rich Nuzum: Yeah, I think there’s three big questions about China. One

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Rich Nuzum: is to what extent will the Chinese government rededicate itself

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Rich Nuzum: to a focus on generating high single- digit, low double-

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Rich Nuzum: digit per capita GDP over other policy goals. And the

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Rich Nuzum: language around collective prosperity, the actions, whether it’s domestic internet companies,

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Rich Nuzum: the housing sector, the education sector, so on and so forth, over the

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Rich Nuzum: last few years has caused long- term China bulls to

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Rich Nuzum: get very concerned. So that’s number one, is what is

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Rich Nuzum: the policy of the government? The second is how effective

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Rich Nuzum: is that policy? China, if we rank order the top

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Rich Nuzum: 20 economies globally in terms of how well they’ve done

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Rich Nuzum: in getting inflation under control, China’s done the best. Inflation

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Rich Nuzum: actually touched zero recently. But if we then rank order

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Rich Nuzum: them on what’s going on with employment, what’s going on

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Rich Nuzum: with strength of the economy, there was a general expectation

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Rich Nuzum: that coming out of COVID China came out later than

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Rich Nuzum: other economies because of the zero COVID policy. But then

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Rich Nuzum: coming out of COVID, China would experience the same type

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Rich Nuzum: of economic boom that Japan, Korea, Western Europe, North America

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Rich Nuzum: did and that hasn’t happened. The official print for youth

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Rich Nuzum: unemployment people aged 16 to 24 was above 20%, unofficial estimates put

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Rich Nuzum: it at as much as twice that level. That’s a

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Rich Nuzum: horrible permanent loss in human capital development in China, to

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Rich Nuzum: have that proportion of the young population in an economy

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Rich Nuzum: that has a shrinking labour force to begin with. A

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Rich Nuzum: shrinking population to begin with, to have those potential new

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Rich Nuzum: workers not in the workforce building skills, you never get

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Rich Nuzum: that back. So as time goes on and they remain unemployed,

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Rich Nuzum: they continue not to develop skills, they continue not to

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Rich Nuzum: become more productive. It’s a permanent loss to Chinese and

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Rich Nuzum: global economic growth. So what really happens with Chinese economic

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Rich Nuzum: growth is partly driven by government policy, but that’s what

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Rich Nuzum: people are keeping their eyes on. And then part three

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Rich Nuzum: is the geopolitical tension. China is the world’s second- largest economy.

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Rich Nuzum: If we purchase power adjust, it’s the world’s largest economy.

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Rich Nuzum: And China, by all appearances, wants a seat at the

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Rich Nuzum: table and defining the world order. There’s a preexisting world

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Rich Nuzum: order around WTO (World Trade Organization) and United Nations and so on and so forth. And

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Rich Nuzum: so there’s a struggle for whose setting the rules. There’s tension

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Rich Nuzum: in the Taiwan Strait and the US government has picked

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Rich Nuzum: five technological areas where it wants to restrict those technologies

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Rich Nuzum: from flowing to China. And in those five areas, venture capitalists, entrepreneurs,

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Rich Nuzum: scientists who work in that space are quick to point

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Rich Nuzum: out something between 20% and 60% of the academic papers in those

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Rich Nuzum: areas are written by Chinese nationals. So to say, you can’t talk

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Rich Nuzum: about these things anymore, these five areas of technology with

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Rich Nuzum: Chinese nationals, it actually bifurcates the global scientific community. And

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Rich Nuzum: meant some of those Chinese nationals are working onshore in

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Rich Nuzum: the US, at US universities, at US tech companies. But

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Rich Nuzum: the law that’s gone into effect, criminalizes leaking those technologies

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Rich Nuzum: to Chinese nationals, not just Chinese companies, the Chinese government.

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Rich Nuzum: So we have some big issues to sort out between

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Rich Nuzum: China and the rest of the world, and it matters

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Rich Nuzum: a lot for the global economy because $1 in eight that

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Rich Nuzum: is produced or consumed on the planet is in China.

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Rich Nuzum: The economy’s that big, it’s as big as the Eurozone

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Rich Nuzum: post Brexit. So it matters a lot.

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Sean Aylmer: Okay. Rich, I mentioned Rich Nuzum from Mercer, I mentioned

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Sean Aylmer: that you’re here for the Global Investment Forum put on

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Sean Aylmer: by Mercer. I’m just interested in what investors are talking

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Sean Aylmer: about and thinking about now, and I suppose I’m leading

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Sean Aylmer: you the way of big tech companies and AI and

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Sean Aylmer: things like that. Does that get a big run at

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Sean Aylmer: the conference, for example?

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Rich Nuzum: It is artificial intelligence, Sean, and in a way it’s

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Rich Nuzum: not new. We’ve been talking about digitalisation and tech for years,

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Rich Nuzum: but it is new. It’s unleashing new energy and new optimism,

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Rich Nuzum: which is really important. Because whatever the data is, whatever’s

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Rich Nuzum: going on in the capital markets, the confidence of corporate

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Rich Nuzum: C-suites to invest the confidence of government policy makers that

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Rich Nuzum: things will get better, the confidence of consumers. That matters

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Rich Nuzum: a lot for driving economic growth and full employment and

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Rich Nuzum: keeping locomotive moving. So our view is that artificial intelligence

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Rich Nuzum: is net job producing, not job destroying. And we could

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Rich Nuzum: talk about that, but the basic thesis is you partner

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Rich Nuzum: AI with human beings, and the human beings become so

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Rich Nuzum: much more productive because of assistance from the AI. That

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Rich Nuzum: you end up hiring for jobs you couldn’t have afforded

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Rich Nuzum: to hire for before because you’re going to get so

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Rich Nuzum: much more productivity out of that human being partnered with

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Rich Nuzum: the relatively cheap AI. AI is impacting the real economy. It’s

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Rich Nuzum: impacting all stages of financial services, investment management, call centres,

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Rich Nuzum: financial advice. And so it’s causing corporate C-suites to look

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Rich Nuzum: at their digital strategies, their big data strategies, their AI

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Rich Nuzum: strategies again, and spend money at the margin that they

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Rich Nuzum: wouldn’t have spent before. And at a micro level, a

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Rich Nuzum: given spend decision may work out or not for that company,

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Rich Nuzum: it may be a good investment or not. At a

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Rich Nuzum: macro level, when you add up that spending across all

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Rich Nuzum: those companies, it’s a huge bull tailwind for the global

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Rich Nuzum: economy and for innovation and for productivity enhancement. Just one

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Rich Nuzum: more comment. When we forecast long- term expected returns to

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Rich Nuzum: stocks or bonds, real estate infrastructure, private equity, other asset classes,

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Rich Nuzum: ultimately we’re looking really hard at what’s GDP growth going

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Rich Nuzum: to be? And Sean, if you ask me, what’s GDP

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Rich Nuzum: growth over the next 10 years, I only need to

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Rich Nuzum: know two things. How much does the labour force grow

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Rich Nuzum: and how much does productivity grow? Well, if AI brings

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Rich Nuzum: more people into the labour force and then makes the

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Rich Nuzum: entire labour force more productive, GDP growth is higher, which

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Rich Nuzum: means all of our capital market returns are higher and

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Rich Nuzum: that’s great for everybody.

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Sean Aylmer: And do you think that is the case?

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Rich Nuzum: I absolutely believe that’s the case. I run into economists

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Rich Nuzum: who tell me it’ll be net job destroying, but I

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Rich Nuzum: haven’t heard any compelling arguments for that. And those types

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Rich Nuzum: of arguments have been wrong about technological advancement or digitalisation

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Rich Nuzum: for more than 30 years, technological advancement for more than 200.

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Rich Nuzum: On AI, when I talk to people in the real world,

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Rich Nuzum: people looking at turning text and interactive video or whether

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Rich Nuzum: to start up a call centre to do something or

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Rich Nuzum: whether to use and how to use drones for agricultural

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Rich Nuzum: purposes or to monitor power lines and telephone lines relative

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Rich Nuzum: to trees. And where do you have to cut the

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Rich Nuzum: trees ahead of the next storm? They’re going to hire more people,

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Rich Nuzum: not less because the AI partnered with the human makes

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Rich Nuzum: the human so much more productive that the cost curve

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Rich Nuzum: goes down to where the marginal benefit is greater than

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Rich Nuzum: marginal cost. So you can find areas where AI can

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Rich Nuzum: substitute for human and a job is eliminated. It also

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Rich Nuzum: becomes a lot cheaper. And so that’s deflationary, frees up

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Rich Nuzum: capacity in the economy. Everybody has more purchase power, but

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Rich Nuzum: that job is eliminated. But as I talk to people

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Rich Nuzum: in the real economy, there’s a vast outnumbering of job

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Rich Nuzum: creation versus job destruction stories for AI.

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Sean Aylmer: Okay, so that’s AI. What about ESG? Because that’s another trend,

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Sean Aylmer: certainly in recent years that has been growing and far

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Sean Aylmer: more on investors’ minds.

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Rich Nuzum: So Sean, there’s a huge debate in the global investor

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Rich Nuzum: community about the best way to tackle, I’ll pick climate

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Rich Nuzum: change as a specific issue. And there are many investors

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Rich Nuzum: who are trying to become net- zero in their portfolios

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Rich Nuzum: and screen out emitting companies and so forth. There are

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Rich Nuzum: other investors who take the position that that may be helpful.

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Rich Nuzum: But what we really need is to invest for impact,

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Rich Nuzum: to invest in technological innovation around green tech and clean tech.

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Rich Nuzum: To invest in green infrastructure projects, really change the technological

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Rich Nuzum: facts on the ground, get costs down, make renewable energy cheaper,

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Rich Nuzum: get renewable energy into the grid. Because that impact investment

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Rich Nuzum: fixes climate change directly and the screening out may change

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Rich Nuzum: the cost of capital and have an indirect effect. But

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Rich Nuzum: as some impact investors put it to other investors, you

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Rich Nuzum: can take your portfolio to net-zero and your portfolio’s net-zero,

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Rich Nuzum: but that doesn’t necessarily change the world. When you make

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Rich Nuzum: impact investments that reduce the cost of renewable power generation, transmission, storage,

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Rich Nuzum: or when you invest in green infrastructure that actually shifts

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Rich Nuzum: part of the power grid to renewables, you are changing

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Rich Nuzum: the world. And so we’re seeing a big interest in

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Rich Nuzum: direct deals and putting more money to work in those

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Rich Nuzum: for impact. And Mercer’s actually launching a catalytic investment exchange

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Rich Nuzum: to digitally link up direct deal sponsors with investors and

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Rich Nuzum: try to get more money to work faster in these

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Rich Nuzum: types of investment thesis.

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Sean Aylmer: I mean, of course, once the momentum is growing there,

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Sean Aylmer: so presumably the more people that think about impact investing

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Sean Aylmer: and agree with that thesis, the bigger it gets.

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Rich Nuzum: Well, absolutely. And to outperform in any area of investments,

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Rich Nuzum: you need to be early and then the rest of

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Rich Nuzum: the crowd needs to decide you were right and come

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Rich Nuzum: in behind you and bid up what you’ve already bought.

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Rich Nuzum: And so the early movers on this stand to make

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Rich Nuzum: much better returns as others follow them.

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Sean Aylmer: Rich, thank you for talking to Fear and Greed.

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Rich Nuzum: Okay, thanks for having me.

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Sean Aylmer: That was Rich Nuzum, Executive Director, Investments and Global Chief Investment Strategist at Mercer. This is the

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Sean Aylmer: Fear and Greed business interview. Remember, this is general information

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Sean Aylmer: only and you should seek professional advice before making any

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Sean Aylmer: investment decision. Join us every morning for the full episode

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Sean Aylmer: of Fear and Greed, Australia’s best business podcast. I’m Sean Aylmer,

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Sean Aylmer: enjoy your day.