The Point

Be ready for a Russian default as sanctions bite

Few investors would take issue with global sanctions aimed at limiting the terrible human toll of Russia’s invasion of Ukraine.

It’s accepted that the financial implications will impact markets around the world. But what does it mean in terms of asset allocation?

“There is an increasing chance that Russia might default,” says Oliver Ge, a portfolio analyst with Pendal’s Income and Fixed Interest team.

“Russia has about $US640 billion of reserves of which $US400 billion is frozen in central banks around the world. On conservative estimates it costs about $US1 billion a day to run the war, so the impact to Russian coffers is material.

“The message to advisers is that if you were told at the start of the year that you’d get 5 to 7 per cent growth, that’s not going to play out in the current state of affairs.

“So, you should be very wary about holding growth assets and potentially think about some rotation to bonds. Bonds will keep paying,” he says.

“It shouldn’t be a massive rotation, but investors should be more mindful around the expectations of growth assets.”

Tim Hext: Is March the month for hawkish hikes?

Our head of government bond strategies Tim Hext turned a few heads recently when he spoke of a “hawkish hike”.

Aren’t all hikes by definition hawkish, a few readers asked.

“They are,” says Tim. “But the accompanying statement is a chance to influence expectations of future hikes. This is especially so in countries where longer-term fixed rate home loans are predominant – no point hiking and seeing them go nowhere.

“We expect the US Fed to do this in their March hike, possibly pushing up the terminal level of rates as well. This will not be bond friendly.”

In Australia the RBA would be “extremely happy if by the end of 2022 inflation is at 3.25%, unemployment sub 4%, wages 3.5%, equities 10% lower, 10-year bonds 2.75% and cash rates 1%”, says Tim.

“It is not the RBA’s job to make sure superannuation balances have positive performance in any given year. Or to protect house prices. Given the massive rises in 2021 a negative year for assets is not a major setback. A year where labour outperforms capital is long overdue.

“Of course the Ukraine disaster will have an impact. But prospects of higher inflation will mean the Fed will need to get on with its hiking path, even if near-term risk markets are unsettled.”

Pendal profile: Meet our head of cash strategies Steve Campbell

Steve Campbell: Labour data will determine timing of next RBA rate cut

A strong labour market and poor productivity meant the RBA’s rate-cut this week was not a laydown misere.

Was it a “one and done?”

“That’s highly unlikely,” says Pendal’s head of cash strategies, Steve Campbell. “So the focus will now move to when the next policy easing will occur.”

Before the next meeting in April (the first with newly separated monetary and governance boards), we will see updated wage price index data and two labour market reports.

If we don’t see a cut in April, further policy easing could still occur mid-year, Steve says.

The RBA remains “cautious and data dependent”, and didn’t give away much in its notes this week.

“Forecasting trimmed mean inflation at 2.7% until mid-2027 really means we don’t know how it will all unfold.”