Markets ‘not great’ at judging election outcomes and reactions: CPPIB’s CEO
Canada Pension Plan Investment Board Chief Executive Officer Mark Machin says he was among the minority of investors who accurately foresaw Donald Trump’s march to the White House.
In an interview on BNN, Machin said his doubts in the polls indicating a Hillary Clinton victory began growing in late 2015.
“I had personally predicted a Trump win for the past year; I thought the margin of error was very, very tight in the polls … and it could quite easily swing in Trump’s direction,” he said.
Machin said investors can easily assess scheduled political events like the U.S. election and the U.K. referendum, but are no better at accurately predicting the outcome than the polls.
“Markets are not great at judging the outcomes because market participants don’t really have any better insight than anybody else on what the politics and public opinion is going to be,” he said. “They’re also not that great at judging what the reaction will be after the event as well, and that was classically the case in … the U.S. election."
Machin said the whipsaw action on U.S. equity markets, which saw Dow futures plunge more than 800 points in the wake of the vote before reversing course, was indicative of investors’ ability to quickly reassess the lay of the land after initially misreading the implications.
“The markets very, very quickly factored in corporate tax cuts and therefore an increase to earnings of U.S. corporations and they factored in a likelihood of increased fiscal spending, less regulation and potential for increased growth,” he said. “That’s what got priced in remarkably quickly.”
Machin also said he thinks Canada can attract foreign investment to help develop domestic infrastructure, but only if the federal government picks the right projects.
Ottawa needs to be selective in the scale and nature of each project in order to entice foreign funds, while also ensuring there is a steady pipeline of opportunities for overseas players to invest in, Machin said.
“Provided there’s an adequate pipeline of size opportunities, there should be interest from our peers and other institutional investors around the world,” he said.
Machin said Canada’s reputation as a safe jurisdiction with strong rule of law make it an attractive destination for foreign funds.
“I think people really like Canada … it’s very open, it’s a very mature market, it’s economically stable, the financial system is strong, there’s a lot of financing availability: there’s lots of things that make us an attractive market,” he said.
Machin added the federal government will have to properly communicate with Canadians the nature of attracting investment to key infrastructure like roads, as unpopular tolls may have to be levied in order to give foreign investors an adequate return on their investments.
“If you need more capital from the private sector, than you need to provide an adequate return for that capital,” he said. “That’s something governments need to explain to people: that if you’re paying for a toll on a toll road, you’re paying for the capital.”
Despite Ottawa’s plans to aggressively court foreign investment, Machin said Finance Minister Bill Morneau has not asked him to extend an olive branch on behalf of the federal government, but said he does occasionally field calls from foreign funds looking to get the lay of the land.
“We haven’t been asked to build bridges,” he said. “We obviously say good things about Canada and [foreign funds] know us, so they call us and talk about the market.”
IN DEFENSE OF SHORT SELLERS
Despite the fact that CPPIB holds stakes in a trio of Canadian firms that been targeted by short sellers in the last year, Machin praised the role that they play in capital markets. The companies include DH Corp, Home Capital Group and Valeant Pharmaceuticals.
Machin said the freedom to bet against companies through shorts ensures accountability on public markets and should not be unduly curtailed.
“I think if you have a one-way market where there’s only buyers, it can become an inefficient market,” he said. “There’s very few markets in the world that don’t allow short sellers: there’s two sides of every market.”
In fact, Machin said markets that clamped down on short sellers in an effort to stem the bleeding during the depths of the financial crisis underperformed more open peers in the following years.
“In the financial crisis there were certain markets that shut down short selling, whether in the financial sector or elsewhere; but those that actually remained open to short selling, when you look at the research, those markets actually performed arguably better with less volatility and had better functioning markets,” he said.
“I think it’s a healthy aspect of every market to have two ways to the market.”