Tim Hext: Finally a good year for labour

Wages are the next battleground for policy. Pendal’s TIM HEXT explains how it will play out and what it means for investors

THE upcoming federal election will determine if it’s a good year for the Australian Labor Party, which for some reason adopted the US spelling more than a century ago.

No matter the election result, it will finally be a good year for labour at least.

This year has not started well for asset owners, though a late 2021 surge means the one-year picture is better.

Here are the returns in AUD:

Of course these are nominal returns. If we look at it in real returns (including inflation) the picture is 3.5% worse. Spending power is going backwards.

This week we are seeing further evidence of the next battleground for policy — wages.

Wages will be under pressure on two fronts.

Firstly, workers who are feeling cost-of-living pressures are more likely to push for higher increases.

Secondly, there is a window in Australia we have not seen for a very long time where limited migration means worker shortages. Unions are not going to miss their chance.

Teachers and nurses have already begun their bargaining dance and transport workers have now joined them.

Expect a lot more of this as the NSW government (and others) 2.5% wage policy comes under attack. First introduced by Mike Baird a decade ago they got away with it given private sector wages were 2.5% or even lower.

The next year or even two will not be that kind. Collective agreements and awards underpin the majority of wages.

Watching with keen interest will be the RBA.

Wages are the ultimate lagging indicator but the clock is now ticking.

We think the market will be right about rate rises this year, likely beginning in August — though five hikes is probably one too far.

It is important to keep some perspective though. If by December we have a strong economy, wages at 3.5%, unemployment at 3.5% and inflation at 3% then it should be smiles all round.

Capital has had a much better decade — even during Covid — than labour. So a reversal for several years should be applauded.

Ultimately a strong economy, spurred on by pent-up savings and re-openings, should mean risk markets take rate hikes in their stride.

Mistakes happen late cycle and that will be a number of years away.

Investors should take advantage of higher bond yields in the next few years to start building up some defensive positions.

At 2.5% (zero real yields plus 2.5% inflation) I will stop calling bonds expensive.

History suggests, though, it is too early to call them cheap.

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Pendal’s Income and Fixed Interest funds

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About Tim Hext and Pendal’s Income & Fixed Interest boutique

Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.

Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

The team won Lonsec’s Active Fixed Income Fund of the Year award in 2021 and Zenith’s Australian Fixed Interest award in 2020.

Find out more about Pendal’s fixed interest strategies here

About Pendal

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.

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