Jim Cielinski: Corporate is the new sovereign

Significant uncertainty hung over key questions such as whether policy would swing from huge stimulus to austerity, and what support the recovery might offer to sustainable investors.

Fast forward five months and Jim Cielinski, the paper’s author and head of fixed income at JHI, says the word has more clarity on some, if not all, of these questions. For one, the short-term performance of environmental, social and governance-aware funds has been stellar. 

Even if future conditions, such as a rebound in commodity prices, might be less favourable to ESG funds, global governments’ continued commitment to huge green infrastructure projects provides a constructive long-term outlook for sustainable income investments.

Globally, the impulse for GDP growth next year is going to be very strong if we can get these packages through

The key question now is whether pensions can be used as the fuel for this green recovery, or whether government scepticism will block the translation of a sustainability agenda into investable assets.

“With ultra-low rates and a feeling that you can run big deficits, I’m not sure all the conditions to allow private companies to participate on the same terms they have in the past is something that there’s much of an appetite for,” Mr Cielinski says. “Any attempts to go back and talk about austerity have been slapped down very hard, and because it doesn’t look like there’s a penalty for running a big deficit… then it’s hard to see that trend reversing.”

Governments and central bankers’ apparent embrace of modern monetary theory, as alluded to by Mr Cielinski, does pose interesting conundrums for investors, particularly trustees of defined benefit pension schemes.

First, schemes may be wary of the tapering effect, compared with 2020’s enormous one-off payments, that could be felt even with continued stimulus next year. Huge deficit budgets could still “feel like austerity” in credit markets, given the scale of this year’s debt binge.

Asset bubbles forming?

Then there is the concern that policy-driven liquidity only succeeds in inflating asset values, rather than leading to credit creation and capital expenditure.

“Globally, the impulse for GDP growth next year is going to be very strong if we can get these packages through, and the key is going to be whether some of that starts flowing into the real economy and not just into markets,” Mr Cielinski says.

He cautions that managers pulling out too early due to fears of a bubble will face unforgiving clients, and suggests factoring questions of policy and liquidity — whether emboldened states will simply roll out further measures at the first sign of danger — into assessments of fair value.

Watch for inflation

That likelihood means lower rates are probably here to stay, with all the pain they can inflict on DB schemes. Although Mr Cielinski surmises that negative gilt yields can only do so much more damage with discount rates unlikely to fall below zero, he does suggest a new approach to fixed income may be needed.

“I think that’s a recipe for seeking out income in fixed income, and probably doing a little bit more of the income search, because there’s no alternative,” he says. “I would expect pensions to embrace higher-quality credit as the new sovereign risk, and then continue to move down into things that are a bit less liquid.”

One threat does loom — that of inflation, the biggest risk to MMT-style policies. “I’d probably want to think about how to hedge inflation risk,” says Mr Cielinski, suggesting real assets may provide this buffer.