Mr Farrell compared the low interest rates and quantitative easing programs being employed by central banks around the world to the spinning rear tyres on a dragster car.
“There’s plenty of fuel and power going to those back tyres, but it’s not getting any traction whatsoever,” Mr Farrell told InvestorDaily.
“The danger for a lot of the central banks around the world is that if that traction start to take hold then [inflation] is going to go screaming off.”
Low interest rates could cause an asset price inflation bubble, which may result in a sharp correction in the marketplace, he said.
BT has altered the investment strategy of its funds accordingly, taking some money out of equities and putting half of it into alternatives and half into property, he added.
“I define alternatives in three ways, and we’ve allocated accordingly within our funds,” he said. “There’s an alternative beta play, and an absolute return play … and we’ve got defensive alternatives.”
BT maintains its beta exposure between 0.2 and -0.2 to equity markets, with a futures overlay to bring the structural beta back in line when it moves above that level, he said.
“We have short futures in our fund, which hurts us when the market goes up – but it’s there to do a job,” he said.
When it comes to property, Mr Farrell said it has a lot more “downside risk protection” than equities.
“That was exhibited in Greece last year during April,” he said. “Growth assets were hammered but property kept on going.”
Looking more generally at the Australian equities market, Mr Farrell said that currently, a significant amount of investment strategy is based on hope rather than on “pure fund analysis”.
The high levels of investment markets have been sustained by an “onslaught of buybacks”, he said.
The practice of buying stocks back from shareholders has the effect of reducing the pool of shareholders and driving a company’s share price up.
“It’s very shareholder-friendly in the short term, but you’re basically paying for a lot of the forward earnings capability that these companies should be looking for,” Mr Farrell said.
The proliferation of share buybacks among Australian companies is confirmation that CEOs are focused on the short term, he said.
