OPTrust CEO warns against premature end to stimulus as reflationary trade plays out

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The chief executive of one of Canada’s biggest pension funds is sounding a note of caution about the risk of policymakers removing economic stimulus too soon, noting that the growth needed to justify the withdrawal of COVID-19-related aid has not yet materialized.

“My central view is that we are in a reflationary trade,” Peter Lindley, president and CEO of the Toronto-based OPSEU Pension Plan Trust Fund (OPTrust), told the Financial Post in an interview Tuesday. “I think we are going to be entering a period of good stimulus, modest inflation, which will be positive for the economy, positive for the equity and other growth-type assets.”

A risk to that steady outlook, according to Lindley, is a hasty withdrawal of that stimulus.

“The removal is premature, because you’ve seen the move in the markets, and they’re positive, but you haven’t actually got the economic growth to support that market perception of what’s going to happen,” Lindley said. “I think central banks are full of some very bright people and I’m hopeful that they won’t lose that.”

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Lindley made the comments after OPTrust announced that it was fully funded for the 12th year in a row after continuing to expand during 2020. Net assets for OPTrust — which administers the 98,000-plus-member Ontario Public Service Employees Union pension plan — rose to more than $23 billion, up from about $21.7 billion in 2019.

The comments also come amid increasing interest about the Bank of Canada’s monetary stimulus efforts, with the central bank set to announce its latest interest-rate decision Wednesday.

Investor expectations about a quicker end to those efforts are showing up in borrowing costs, such as the yield on the Government of Canada 10-year benchmark bond, which has shot up to around 1.5 per cent recently from 0.5 per cent last summer.

“The increase in interest rates can be linked to two related factors: increased optimism regarding the economic outlook, and the prospect of continued fiscal stimulus,” wrote Charles St-Arnaud, chief economist at Alberta Central, in a recent report. “Both aspects are leading to investors revising their inflation expectations with ‘reflation,’ an acceleration in inflation, becoming a common view.”

Yet economic data continues to show the economy still has some healing left to do. Canada’s unemployment rate, for instance, remained at a historically high 9.4 per cent in January, according to Statistics Canada.

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The lingering economic effects of the pandemic may keep the Bank of Canada and other policymakers from winding up their support efforts, such as the BoC’s bond buying program, too swiftly.

“Ultimately, with the Bank of Canada seeking a broad employment recovery, the still-low female and youth employment rates suggest it is unlikely to become much more hawkish soon,” wrote Stephen Brown, senior Canada economist at Capital Economics, in a report on Tuesday.

Lindley likewise said it was “relatively unlikely” that Canadian policymakers prematurely withdraw their support, with the OPTrust CEO noting the still-high levels of unemployment.

OPTrust, meanwhile, is eyeing opportunities in asset classes that could benefit from the reflation trade. The fund’s one-year net investment return was also 8.9 per cent for 2020, down from 11.2 per cent in 2019, but better than the 10-year average return of 7.8 per cent.

“We do think that there will be some real opportunities out there,” Lindley said.

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