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Anna Hong: What bond investors learned from this week’s RBA minutes
April 19, 2023
Pendal’s income and fixed interest team favours high-quality Australian assets likely to provide investors with a stable income and protection from the uncertainty ahead. Assistant portfolio ANNA HONG explains why
- Why bonds, why now? Find out more from Pendal’s income and fixed interest team
THE current rate hiking cycle may resume in Australia as soon as next month, after a short pause in April.
That’s the suggestion from the Reserve Bank’s latest meeting minutes, released yesterday.
Even though inflation has moderated, it is still higher than targets set by the central banks, because household spending remains resilient.
A fall in inflation from 8% to 4% is the easy part – the normalisation of goods supply chains has ensured that.
But getting back to the Reserve Bank’s 2% to 3% target range or US Federal Reserve’s 2% target will be a much tougher ask.
To get there, service inflation will need to moderate from the current 6% level back down to 3%, something that for now seems unlikely.
This is because monetary policy is a blunt tool that only impacts the demand side of inflation.
Meanwhile, the current inflation flare-up is shaped largely by supply: issues with supply chains, labour market tightness, energy constrictions and issues with housing stock lead the charge.
The persistence of inflation will drive future rate decisions.
Impact of rate hikes
Meanwhile, the impact of the rate hikes that have been already passed by central banks will continue to work its way through the system, increasing risks to global financial stability.
different story in 2023, with consumers staring at empty wallets.
Cracks were always going to appear after the ferocity of rate hikes in 2022-23.
Find out about
Pendal’s Income and Fixed Interest funds
The tightening of financial conditions led to the March madness that claimed the scalp of three regional banks in the United States and a 176-year Swiss bank. RIP Credit Suisse July 5 1856 – March 19, 2023.
Those events were a stark reminder that tightening conditions will have an impact on risky assets.
The RBA’s recent Financial Stability Review highlighted that knowing what assets you own is incredibly important, especially in light of the Silicon Valley Bank collapse.
Just like doing a regular health check and making sure your insurance is up to date.
What it means for investors
Having a defensive allocation in a balanced portfolio insures against adverse market outcomes.
Among safe-haven assets, we favour Australian government bonds and very high-quality credit from well-capitalised Australian issuers, due to the strength of the Australian financial system.
Why?
Australia is one of the strongest AAA-rated sovereigns in the world.
Australia has a pathway to surplus that most developed nations can only hope for.
That’s anchored by the Budget outcome to January 2023, which was $13.6 billion better than expected, driven mainly by $8.5 billion of upside revenue surprise and $5.1 billion less spending than expected.
Australian banks are the best capitalised major institutions in the world allowing them to be the pillars of support for the Australian economy.
Hence, in Pendal’s income and fixed interest portfolios, we favour high-quality Australian assets likely to provide investors with a stable income and protection from the uncertainty ahead.
About Anna Hong and Pendal’s Income and Fixed Interest team
Anna Hong is an assistant portfolio manager with Pendal’s Income and Fixed Interest team.
Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.
With the goal of building the most defensive line of funds in Australia, the team oversees some $20 billion invested across income, composite, pure alpha, global and Australian government strategies.
Find out more about Pendal’s fixed interest strategies here
About Pendal Group
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current at April 19, 2023. PFSL is the responsible entity and issuer of units in the Pendal Monthly Income Plus Fund (ARSN: 137 707 996) and Pendal Dynamic Income Fund (ARSN: 622 750 734) (Funds). A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com. The Target Market Determination (TMD) for the Fund is available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund. An investment in the Fund or any of the funds referred to in this web page is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested. This information is for general purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation. The information may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information. Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance. Any projections are predictive only and should not be relied upon when making an investment decision or recommendation. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections. For more information, please call Customer Relations on 1300 346 821 8am to 6pm (Sydney time) or visit our website www.pendalgroup.com
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