‘The sooner lockdowns end the better’: Future Fund’s Peter Costello

Former treasurer calls for state and federal governments to work together to reopen the country, warns on economic cost of the harsh restrictions.

Future Fund chairman Peter Costello has warned of a challenging investment outlook. Picture: AAP

Future Fund chairman Peter Costello has called for an end to Australia’s “long and severe” lockdowns, urging state and federal governments to work together to reopen the country as he warned of the economic cost of the harsh restrictions.

“Much of Australia is locked down and that is not supportive for economic growth. That will bear on national output and ultimately will bear on investments,” Mr Costello said.

“So the sooner the lockdowns can be brought to an end the better, from both an economic and financial view.”

Prime Minister Scott Morrison has been pushing states and territories to stick to the plan to open state borders up once vaccination rates reach 70 per cent, saying Australia must adjust its mindset to living with the virus. But even at this stage of the reopening plan, the prospect of targeted lockdowns has been flagged as a means of controlling outbreaks.

Meanwhile, lagging vaccination rates in Queensland and Western Australia could jeopardise the timeline for a reopening later this year, with both states also threatening to break away from the national plan and instead go their own way on border restrictions as case numbers spiral in NSW.

Just 25 per cent of over-16s are fully vaccinated, while 43 per cent of eligible Australians have received at least one dose.

The lockdowns, by world standards, have been “very long and quite severe”, particularly in Victoria, Mr Costello said.

“The sooner we can hit the vaccination targets, the sooner we can ease the lockdowns, the stronger the economy and the better it will be for people here in Australia.

“So I would welcome any well-judged exit plan and hope that state and federal governments co-operating together can bring that about.”

The former treasurer’s comments came as the Future Fund’s returns for fiscal 2021 showed its assets under management had surged to $196.8bn over the year after it notched up a 22.2 per cent investment gain.

In the weeks since, further investment returns have pushed its funds under management to “around $200bn”, according to Mr Costello.

The sovereign wealth fund has now more than tripled the $60.5bn it received from the government in 2006, adding $35.7bn to its asset pool over the year.

Amid the looming challenges, including inflation and the prospect of stimulus being wound back, the fund has lifted its risk settings and flagged that returns will be harder to achieve in the future.

“Inflation is the central issue for financial investors at the moment,” Mr Costello warned.

“It’s too easy just to say it’s transitory and it will all go and disappear; I think that’s a convenient way to think.

“I don’t think it will be maintained outside the range (of 2 to 3 per cent) but I do think there’s been a definite pick up in relation to inflation. And eventually what this means is that monetary conditions, which are extraordinarily loose, will have to be tightened,” he added.

Whether it would be done in an orderly way or not, monetary policy would have to change, Mr Costello said.

“I’m not saying tomorrow or next week, or even in a month, but over the course of years, it will have to change, and that is that is going to be a big issue for investors and I think one of the things investors have got to think about is how would you move your portfolios and your investments if you saw inflation coming down the track.”

Chief executive Raphael Arndt said the fund was taking steps in the portfolio to protect against higher inflation, including targeted equity exposures and lifting allocation to unlisted investments.

“The conditions are there for another sustained increase in inflation and that is very, very damaging for investment returns when you’re starting at a point where real interest rates are negative or zero,” Dr Arndt said.

“The (listed) companies that have some protection around their margin and provide staples, for example, are likely to do better in an inflationary environment than companies that aren’t generating any profits and where investors are discounting future profits back for multiple years.”

Mr Costello also revealed the impact of China-Australia tensions on the fund’s investment strategy, which saw it dial down its exposure to the world’s second-largest economy in a bid to protect “sovereign money”

“Given the difficulty in the relationship between Australia and China we have pulled back on allocation in China,” he said.