Australia’s sovereign wealth fund grows on equity rally; cautious about rate cuts

By Lewis Jackson

SYDNEY (Reuters) -Australia’s sovereign wealth fund has cautioned against expecting rate cuts in Australia or the U.S. anytime soon after reporting on Tuesday a rebound in its performance in the final quarter of 2023 buoyed by the rally in global equity markets.

The A$212 billion ($139 billion) Future Fund, returned 8% in the year ended Dec. 31, narrowly missing its target return of 8.4%. In the December quarter it returned 3.2% versus a target of 1.9%.

Chair Peter Costello, who retires next month, said while there were signs inflation in Australia was beginning to moderate, it was too early to call a peak in interest rates.

“We think equity markets have priced in a peak and maybe a fall in interest rates already and they may have done that a little too early,” Costello, who was Australia’s Treasurer from 1996 to 2007, said on a call with reporters.

Markets are wagering Australia’s interest rates have peaked but do not forecast rate cuts until November, expecting total easing this year of a modest 34 basis points.

CEO Raphael Arndt said the fund did not expect rate cuts in the U.S. “anytime soon” and had increased its allocation to floating rate credit to just over 10% of the fund as a result.

The above target December quarter gains followed a choppy patch for the sovereign wealth fund, which has repeatedly missed its return targets, in part due to being positioned for interest rates to stay higher for longer.

Arndt said the fund had made A$70 billion worth of portfolio changes over the past 18 months in line with its view set out in 2022 that an era of “stagflation”, or slow growth and high inflation, similar to the 1970s was possible.

Designed to cover pension liabilities for public servants, the Future Fund was set up in 2006 with the proceeds from the privatisation of state telco Telstra and today rivals Australia’s largest pension funds in size.

($1 = 1.5223 Australian dollars)

(Reporting by Lewis Jackson; Editing by Jamie Freed)