Risks to U.S. economy muted by strong fundamentals, CPPIB says
OTTAWA The chief executive of the Canada Pension Plan Investment Board on Friday said U.S. inflation continues to pose a risk to the fund, but added those concerns are tempered by strong economic underpinnings south of the border.
“Am I worried about a market where 40 per cent of our money is invested? Absolutely, it’s our biggest market,” Mark Machin said.
Still, he said that risks to the U.S. economy, which would include a spillover into Canada, are likely not imminent.
“The U.S. has been well supported by economic growth,” Machin said. “It has driven earnings growth. The fundamentals in the U.S. are still incredibly strong, and the question now is: how long can that go on?”
In a written message along with CPPIB’s quarterly earnings that were released Friday, Machin said that “solid performance today cushions the fund for an inevitable future market downturn.”
The U.S. is by far the CPPIB’s largest market, with $131 billion invested as of March 31, 2018. Canada is next with $54 billion, or 15 per cent of its portfolio, followed by Europe at $47 billion (13 per cent).
Some economists worry that inflationary pressures in the U.S. threaten to spur a market correction, hastened by President Donald Trump’s hefty stimulus plans and a recent tax reform aimed at encouraging business investment. Higher oil prices have also helped fuel inflation.
Rising wage growth in Canada, which observers say could push inflation higher, compounds those worries at home. A recent Bank of Canada survey found 34 per cent of businesses expected to face a labour shortage in the second half of 2018.
In a recent research note, Desjardins Group analysts said the BoC “will have to monitor this situation closely” as wage growth continues to rise while productivity loses ground, threatening to nudge inflationary pressure upward.
The U.S. Federal Reserve hiked its main interest rate in June for the second time this year, up to two per cent. The Bank of Canada in July raised its benchmark rate to 1.5 per cent.
Some market watchers, however, say the risks of the U.S. overheating are exaggerated, driven mainly by stock market volatility and rapid wage growth in a few select sectors such as oil and gas.
The CPPIB on Friday reported net assets of $366.6 billion for the quarter ended June 30, compared with $356.1 billion at the end of March. It reported net investment returns of 1.8 per cent, largely tied to its private-asset holdings.
In May, CPPIB reported an 11.6-per-cent return on investments during the last fiscal year, but warned that such double-digit growth was not sustainable as competition for assets intensifies.
That competition has been particularly visible for renewable energy assets as private equity floods into the market while previous asset holders shed their positions. That has pushed valuations sharply higher as various governments introduce stringent climate policies and offer incentives to would-be developers.
“It’s been fairly expensive for the last few years around the world, there’s a lot of capital chasing renewables,” Machin said. “We’ve found it difficult to find assets that we wanted.”