AustralianSuper chief investment officer Mark Delaney believes the Reserve Bank of Australia will tip the economy into recession during its battle to get inflation lower.  

The RBA raised the official cash rate to an 11 year high of 4.1% in June, and flagged further rate hikes may be required in the months ahead. 

Speaking at the 2023 Morningstar Investment Conference in May, Delaney said the super fund was positioning its $280 billion portfolio for a downturn, and was currently short stocks and long bonds.

"Who wants to be the central banker who brought back inflation?" He said. "People will forgive them for having a recession, but they won't forgive them for ongoing inflation."

"Which also increases the probability of getting a recession because they're going to lean into inflation pretty hard. And they'll be successful at it."

Transcript: 


Mark Delaney: Our view is recession is most likely and we're positioning the portfolio for that. So we're short stocks and long bonds.

The timing of the recession is always very difficult to get right. We think that destination for the recession, that being the destination is far more likely than getting right about the timing. So we'll just have to live through the volatility until that occurs.

If you think about this bear market in US stocks, I think there's two legs to it. The first leg was the derating bear market, which previous session talked about a little bit, which was when the money bubble - when the tech fueled money bubble popped as rates went up.

And the second leg will be when the earnings go down. It's not unusual for bear markers to have two legs or three legs in them, with different triggers for each of the legs, and so we think this will be pretty much one of those.

Annika Bradley: And inflation, what's the view there?

Delaney: Gosh, people can't forecast inflation. They're hopeless at it. Everybody says they've got a good idea, but no one's got any.

Given that caveat, I think that the central banks can't afford to let inflation get out of the bag, so they're going to keep on leaning into it till they get rid of it. Who wants to be the central banker who brought back inflation? I just think that it's clearly the case they'll forgive - people will forgive them for having a recession, but they won't forgive them for ongoing inflation. History will write them off.

So I think they're going to keep on leaning into that. Which also increases the probability of getting a recession because they're going to lean into inflation pretty hard. And they'll be successful at it.

So I think paradoxically, just as the markets come to a position whereby inflation is more of a medium term problem. I think the shorter term looks better than people anticipate, but the medium term could be a bit worse. So in other words, it could come down more than what people think for two or three years, and then those structural factors will kick in tight labor markets, deglobalization, energy transition will all tend to push inflation up a bit higher.

It's yesterday's story, and it's kind of today's story, but I don't think it's going to be tomorrow's story.