Investors to face trade war headwinds, CPPIB CEO cautions

Mark Machin, chief executive of the Canada Pension Plan Investment Board, said the trade dispute and heightened tensions between the United States and China offer little good news for investors over the next 12 months.

“The impact is not isolated to the No. 1 and No. 2 economies suppressing growth in the world. It spills over,” said Machin, whose CPP Fund announced Wednesday that it posted an 8.9-per-cent annual return for fiscal 2019, with net income of $32 billion. The fund also received $3.9 billion in CPP contributions and ended the fiscal year with assets of $392 billion.

Machin said the past year was a healthy one for deal making despite some assets being on the expensive side due to concerns about tax and regulatory changes. CPPIB completed 69 transactions valued at more than $300-million around the world.

The pension management organization, which invests on behalf of the Canada Pension Plan, has been stepping up its exposure to China, and Machin did not signal a change to that strategy.

Investments in mainland China represented 9.4 per cent of the portfolio at the end of March, up from 6.3 per cent a year earlier. Machin said in an interview that is expected to move up to the “midteens” by 2025, in keeping with the strategy of boosting the representation of emerging markets including India, China, and Brazil to 33 per cent in that time frame.

Investments in the United States accounted for 33.5 per cent of the portfolio in fiscal 2019.

The fund’s diversification — geographically, by sector, and by asset class — should help moderate the impacts of the “multifaceted” tensions including trade that threaten to play out over the coming year, Machin said.

One potential beneficiary would be fixed-income investments that do well in a low interest rate environment.

“Interest rates will probably stay very low for much longer, as central banks have no alternative but to keep supporting economic growth as the life force is being sucked out of it by tension,” he said. “Ultimately, yes, there will be winners and losers. But generally everything (is going to be) slowing down.”