The Point

Fast podcast: What the latest inflation numbers mean for investors

To come

Debunking a myth about fossil fuels and sustainable fixed interest

High fossil fuel prices can understandably discourage investors from allocating to sustainable strategies.

Sustainable portfolios generally exclude exposure to fossil fuels, which may mean underperformance when oil prices rise, for example.

But that’s not necessarily the case across all asset classes, says Pendal’s head of credit and sustainable strategies, George Bishay.

“There’s a perception that all asset classes face these potential performance risks when prioritising sustainability.

“But Australian sustainable fixed-income exhibits minimal sensitivity to oil markets or any other screened activities,” writes George in a new Pendal paper.

Fossil fuel companies typically make up a large part of equities indices (about 15 per cent of the ASX300 in July 2024).

But issuers involved in fossil fuel extraction, exploration or refining are a small component of the Australian fixed-income benchmark.

“This differentiation allows investors to integrate sustainable fixed income into their overall core fixed-interest allocation with minimal additional benchmark risk,” says George.

“By incorporating Australian sustainable fixed income alongside other traditional assets, investors can achieve a robust portfolio while also supporting climate stability or the underserved in society.”

Tim Hext: Why Aussie fixed-income investors can largely ignore a potential August rate hike

Australia appears to be at different stage of the rate cycle compared to international peers – a “lagging cycle compared to the rest of the world”, as Pendal’s Tim Hext puts it.

“Globally, people are looking at very high interest rates and going, ‘We just don’t need them anymore.’

“In Australia, though, inflation’s proven to be quite sticky around 4 per cent in the last couple of quarters. The RBA’s patience is being tested.”

August is a live meeting in terms of potential rate changes and next week’s CPI figures will be key to the decision, says Tim – Pendal’s head of government bond strategies – in a new fast podcast.

A higher-than-expected number could prompt a hike. A lower-than-expected number would mean rates stay where they are.

However, if an August rate hike eventuates, investors should largely ignore it, he argues.

Tim Hext: Why bonds still look better than term deposits

Have you missed the boat on bonds? No, says our head of bond strategies Tim Hext.

“Australian 10-year bonds did briefly touch 5% at the end of October. People may look at that and say, ‘Oh, I’ve kind of missed it’.

“But around 4.5% is still very attractive if you believe inflation is going below 3%.

“When I look across the spectrum of what you can buy in bonds, government bonds are around 4.5%, state government bonds 5.25%, and bank debt around 6%.

“On term deposits, my question to investors would be: Okay, let’s assume term deposits are at 5% and you’re locking yourself into those with no liquidity.

“Where do you think on average they’re going to be over the next five or 10 years?

“I think most people would assume they’re going to be a little bit lower, not higher; and that cash rates will come down rather than go up a lot more.

“The other advantage of bonds is that they’re liquid.

“That’s particularly important if you saw a sudden sharp sell-off in equities and you’re wanting to buy them – but your money’s locked up.”

Tim Hext: Bonds offer returns and cheap insurance right now

Bond yields are hitting multi-year highs. Why is it happening and what’s next?

Resilience in the US economy is the main factor, says Pendal’s head of bond strategies Tim Hext.

That’s due to the dominance of fixed-rate loans there and Joe Biden’s big-spending government.

Meanwhile, the Australian economy is holding up better than expected and the fixed-rate cliff hasn’t impacted as much as people thought.

“I think it’s a good time to be buying bonds,” says Tim. “At the moment you can buy state government debt at 6% yields.

“The cash rate is likely going to 4.35%, but I don’t expect it to be well above 5% for the next decade or two.”

Bond investors are rewarded in two ways, argues Tim: the return and the insurance.

“If things were to get out of hand – if you get a collapse in equities, if you see major geopolitical disruptions in this heightened risk environment – then bonds should perform their defensive role. I do think they’re cheap insurance.”

Fast podcast: Why China is hesitating on stimulus – and what’s likely to happen next

Why doesn’t Beijing pump stimulus into the Chinese economy as other countries do?

“We have to remember the Chinese political system is not democratic, and its principles are very socialist at heart,” says Pendal’s head of income strategies, Amy Xie Patrick.

“A very classic characterisation of the Chinese style of socialism is they don’t believe in ‘helicopter money’.

“They believe money going directly into people’s pockets isn’t the way to common prosperity. Instead, everyone should toil in order to achieve that prosperity.”

Even so, the severity of the Chinese property story may prompt action, says Amy.

“Lately we’ve been hearing that some government bodies have been proposing a larger fiscal deficit in 2024.”

Though the amounts aren’t big, it could signal that Beijing is considering more direct-to-consumer stimulus to keep the positive momentum going, says Amy.