Taper Jitters Mean $75 Billion Fund Prepares to Buy More Stocks

(Bloomberg) -- UniSuper Management Pty lifted its cash holdings in anticipation markets will overreact to any sign the Federal Reserve is readying to start removing emergency monetary policy settings.

Rather than a worrying prospect, moves to reduce monetary easing would be a sign the U.S. economy is healthy, the A$100 billion ($75 billion) pension fund's Chief Investment Officer John Pearce said. The last time the U.S. central bank tapered in 2013, the only impact was on fund manager performance, not on economic growth, he said in an interview Thursday.

“The market will overreact to some early tightening, and it would be good to have some bullets to fire when indeed the market does overreact to that,” Pearce said. “Nobody in the real economy cared about the taper tantrum.”

Federal Reserve Bank of Dallas President Robert Kaplan indicated Wednesday the central bank will soon begin tapering asset purchases that were brought in to support the U.S. economy in March 2020 as the pandemic disrupted normal activity. In 2013, the last time it tried removing stimulus, markets spasmed as investors sold riskier assets for the safety of bonds. The Dow Jones Industrial Average fell 2% between June and August that year.

Pearce is betting riskier assets like stocks will drive returns for the next few years even after global equities rallied 36% the past year. Consumer exposed shares still need to catch up to tech stocks as economies reopen, but the latter also still have value, Pearce said. Names like Microsoft Corp. and Amazon.com Inc. remain relatively cheap compared to bonds, he said.

The fund is overweight Asian shares given that emerging markets are yet to follow the rally of their developed peers, he said. China is the biggest tech story outside the U.S., though it's likely to see more “pain” as authorities keep stimulus at bay for awhile yet, he said.

Still, “the negative impact from China slowing will be more than compensated by the rest of the world emerging from the crisis and keeping a floor on commodity prices,” Pearce said. “We're not as dependent on China getting the world out of a slump as we were post-GFC.”

Meantime in Australia, the fund likes beaten down travel and tourism stocks like Qantas Airways Ltd. and Sydney Airport that “are a long way from really recovering,” Pearce said.

“The world is only really just emerging from Covid,” Pearce said. “So the Fed bringing forward rate hikes and tapering to me is a sign of health, not something we'd be worried about.”