Mercer is expecting economic growth to slow over FY2025–26 as the impact of tariffs flow through to the US economy and other markets.
Graeme Miller, chief investment officer of Mercer Super, said while it is difficult to make predictions in relation to US trade policy at the moment, the super fund is fairly confident that global growth and US growth will be slower in 12 months’ time than it is now.
“It’s very difficult to make predictions about where tariffs are going to settle and a lot of that will obviously depend on the bilateral negotiations that take place between all the various countries and the US,” Miller said.
“What we have seen is that the US is interested in making deals and so it’s likely that over the next few months we will see some resolution of this and some of the uncertainty will melt away.”
Miller said it was now clear that at an aggregate level, the tariffs wouldn’t be as high as first feared when the first Liberation Day announcements were made.
“Nonetheless, we’re likely to find ourselves in a position where tariffs are a lot higher in the US than they’ve been in living memory,” he said.
The tariffs will drive up prices for consumers, which Miller said will have a twofold impact.
“The first obvious impact is that it puts upwards pressure on inflation. The second thing they do is impact negatively on consumer sentiment and consumption,” he said.
“Those two factors, taken in isolation, lead us to conclude that economic growth, particularly in the US, is likely to continue to slow.”
However, Miller said the passage of the One Big Beautiful Bill Act is likely to have a stimulatory effect with the legislation introducing tax cuts for a significant part of the population.
“To some extent, that will counteract the impact of the tariffs,” he said.
Looking at the impact of these policies together, Miller said the most likely scenario is still a slowdown in global growth, with the US slowing down more than other countries.
“The big question is whether it slows enough to cause a recession,” he said.
“If the inflation impacts of the tariffs are relatively muted and if central banks continue on the trajectory that they’re currently on of slowly reducing interest rates, then we’ll still see a slowdown in growth but we won’t see a full-blown recession.”
Miller said while the super fund isn’t planning to make radical or substantive changes to its long-term investment strategies, at the margin it has made its portfolios somewhat more conservative by reducing its exposure to equities and holding more cash in its portfolios.
“That’s very must at the margin and just a couple of percentage points overall,” Miller said.
The super fund considers most growth-orientated investments to be richly priced at the moment.
“It’s reasonable to expect that the returns over the next two or three years from growth-orientated assets such as equities or credit won’t be as strong as they’ve been over the past two to three years,” Miller said.
“We’ve been in the fantastic position of being able to deliver double-digit returns for three years. While we’d love to continue to deliver another three years of double-digit returns, we think that’s less likely.”
Mercer Super will also be increasing its exposure to private equity within its flagship investment options.
While private equity has lagged public equity returns for some time, Miller said the super fund is excited about the opportunity set that private equity represents right now, particularly secondary private equity investments where it believes it can pick up attractive assets for favourable prices.
“Over the next 12 months or so, that’s where we’re going to be concentrating our focus, in the private equity space,” he said.
It is also continuing to build out its exposure to global unlisted property.
“We recognise that property, like all other assets, is cyclical and we think now is a pretty good time to be adding to our unlisted global property exposure at what we think is a low point in the cycle,” he said.
