Australian Super funds need to have a "bushfire plan" for US investments
It is difficult to obtain a precise number, but it is often quoted that Australian superannuation funds have $400 billion invested in the US; we think that's an understatement because it doesn't seem to include private equity investments. Regardless, Australian superannuation funds have significant investments in the market where the economic risks seem to be exceptionally high at the moment, and with little prospect of greater stability in the short to medium term.
Indeed, within what Trump calls his "One Big Beautiful Bill" lies the genesis of potential significant problems to come - Section 899, entitled "Enforcement of Remedies against Unfair Foreign Taxes." Of course it is the White House that determines what is "unfair"and the Section provides the power to levy a new tax of up to 20% on income paid to foreigners from countries that unfairly tax American businesses. Presently, the terms of the Bill would characterise Australia, together with most European Union countries and the UK, as a "discriminatory foreign country" (DFC) because it has implemeted an undertaxed profits rule (UTPR), because Australia levies GST, or because of long held issues with the Pharmaceutical Benefits Scheme (PBS).
The UTRP is one aspect of the OECD’s Pillar 2 global minimum tax regime - Pillar 2 seeks to impose a minimum 15% corporate tax rate on certain multinational enterprises. Thes provisions would ensure that certain multinationals, such as Microsoft, Apple, Meta and Netflix, who currently pay little or no tax in Australia despite billions in revenue would pay minimum levels of taxation. Section 899 is simply a blunt tool of leverage, to be used on friend and foe alike, to provide tax protection for major for major US, typically technology, firms.
The expectation and hope is that any Australian Government would not bow to what is effectively extortion in terms of managing its own tax regime. This section taken in concert with other Trump initiatives, substantially increases the risk and cost of doing any business or investments in the US, and therefore increases the required risk premium and the prospect of capital leaving the US with lower investment prices and higher interest rates as a consequence.
Many in the US simply take the somewhat arrogant view that global investors have little or no choice when it comes to US investments, because it is such a substantial part the global economy and it is simply a question of "where else will they go". The US currently accounts for around 45% of worldwide financial assets.
Nvertheless, super fund members should be pressing their fund to ensure that they have a "bushfire plan" when it comes to investments in the US - they have had sufficient time to carry out scenario planning, appropriately hedge their positions and assess the options available should everything "turn to custard". Members will not be forgiving if that planning does not take place and member investments are not suitably protected.
Alternatively, and separately, it may be possible for Australian superannuation to offer balanced and other investment options excluding US investments - giving individual fund members the option to avoid US investments and a direct exposure to the US dollar in a particularly difficult period. Whether that is sensible, compared to continuing to rely on the decisions of investment professionals, is debatable but there is certainly a segment of the Australian population that believes that what is now happening in the US is unsupportable and/or represents a significant financial risk from which they want protection.
POSTSCRIPT
Following the publishing of this article we became aware of media reports that the Association of Super Funds of Australia had modelling carried out with respect to the potential impact of S899, which suggested that the section could erase US$2.3billion from returns over the first years. We don't know about the precise parameters modelled but clearly the sum is significant.
Further media comments also suggest, "Since abandoning the US market is not really an option, it might be time to surrender quietly and gracefully – by reversing, at the very least, the contentious bits of pillar two."
We respectfully disagree with the comments above - both tactically, since any concession to Trump normally just sees him ask for more, and strategically because Trump will inexorably turn the US into a tax haven. Section 899 is also not assured of success - the US is reliant on foreign funding of its (enormous) debt and this will increase the cost of funding - also don't expect Europe to simply rollover on this issue and there is a significant chance of a credit strike.