Beware tech frenzy

SHARES in some unprofitable tech companies are reaching “unbelievable” levels in a market frenzy as governments and central banks pump sharemarkets but a correction is inevitable, says Future Fund chairman Peter Costello.

As the $171bn fund announced a 1.7 per cent return in 2020 – well down on its target – Mr Costello said a combination of three factors was behind the market’s strong momentum, particularly on the tech-heavy Nasdaq exchange in the US. Money was cheap, with Australia’s cash rate at a record low of 0.1 per cent; 10-year bonds were only yielding 1 per cent; and there was a belief in the unlimited potential of technology and fintech companies.

“Profit doesn’t matter; the only thing that matters is market share,” Mr Costello said. “That can continue for as long as people are prepared to take that risk but there will be a correction at some point.”

Mr Costello said some investors “in the frenzy of the day” would continue to hunt down the “return of the day”, which could amount to a good return the following month or even the following year.

“But professional investors would be asking themselves: is that sustainable in the longer term?” he said.

According to the former federal treasurer, the outlook for markets was hostage to public health, the duration of lockdowns across major economies, the recovery in the real economy and the pathway to reducing fiscal and monetary support.

The fund’s December portfolio update was a tale of two halves.

There was a strong comeback in the second half after markets crashed by more than one third in a “wild ride” in the early months of the pandemic.

The fund grew to a record $171bn after returning 4.9 per cent for the December quarter. A negative return in the first half – comprised of negative 3.4 per cent in the March quarter and negative 0.7 per cent in the June quarter – dragged the annual return back to 1.7 per cent, which compared with the fund’s 4.4 per cent target.

Since its inception in May 2006, the fund’s 7.6 per cent return has exceeded its 6.6 per cent target.

Chief executive Raphael Arndt said the fund entered the period of disruption at the start of the year in a strong position and weathered the tumult well. “The negative returns of the first half have been more than reversed and the fund continues to exceed its mandated benchmark return while controlling risk levels,” Dr Arndt said.

Mr Costello defended the fund’s 1.7 per cent annual return, saying it was wrong to compare the performance of the Future Fund with superannuation funds.