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The Point
Quick, actionable insights for investors
Income and Fixed Interest
FAST PODCAST: What wages and jobs are telling us about recession and rates
Consumers are feeling gloomy but are we still headed for recession?
With inflation “sufficiently well-behaved”, the main factors to watch are now unemployment and wages, says our head of bond strategies Tim Hext in our latest fast podcast.
“I think in the US it’s still the case that we are going to have a very mild recession at some point.”
While it’s taken longer than expected, the impact of 5.25% of rate hikes in just over a year are starting to show through among consumers.
“The one thing that’s keeping the US economy ticking over still quite well is employment.”
Jobs and wages should remain “not strong, but well-behaved” this year, which should stop any chance of near-term rate cuts, says Tim.
In Australia the chances of recession are far lower due to population growth, he says.
“But there is definitely a possibility we’ll have a GDP per capita recession. In other words, the economy will be better off but individually we may not feel that way.”
Fast podcast: Be prepared for more US bank turmoil
Play podcastFast podcast: Be prepared for more US bank turmoil
How should bond and fixed interest investors think about the turmoil among US regional banks?
In our latest fast podcast, Pendal assistant portfolio manager Oliver gives a plain language explanation of what’s going on, and why he believes the turbulence may not be over.
“The problems with First Republic and SVB are not unique,” says Oliver.
“There are potentially cracks opening up in the 5th, 6th, 7th, and 13th largest banks.”
If further failures occur, investors may be over-confident that the Federal Reserve will continue to launch rescue missions, says Oliver.
The relatively mild market response could suggest “a disconnect between what investors are pricing in and what’s actually happening”, he says.
In the podcast, Oliver explains what that could mean for investors – and why he believes cash and government bonds are an important consideration for portfolios right now.
Head to head: Pendal equities chief Crispin Murray and bonds boss Tim Hext
Play podcastHead to head: Pendal equities chief Crispin Murray and bonds boss Tim Hext
There are a mind-boggling number of issues investors need to stay on top of in 2023.
The potential for recession, the outlook for China, government intervention, the impact of climate change, consumer confidence, population growth, wages, inflation and rates.
And there are differing views on these issues across the investing spectrum.
To cut through the noise and find some answers, our latest podcast brings together two of Pendal’s top investment managers: our head of equities Crispin Murray and head of government bond strategies Tim Hext.
In this special podcast, Crispin and Tim share their views on the issues above as well as their thoughts on portfolio construction and asset allocation in the current environment.
Why Credit Suisse is a wake-up call for Australian fixed income investors
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Why Credit Suisse is a wake-up call for Australian fixed income investors
There is anger among Credit Suisse bondholders who’ve been wiped out as part of the bank’s rescue plan. But there are also important lessons for Australian fixed income investors. Pendal’s AMY XIE PATRICK explains.
SOME $A25 billion worth of Credit Suisse “additional tier one” (or AT1) bonds have been written down to zero value as part of a rescue deal that favoured equity shareholders.
That’s caused anger among bondholders who have lost their money – and fears of wider fallout among investors around the world.
Are broader fears justified? What can Australian fixed income investors learn from the crisis?
Amy Xie Patrick: Prepare for likely recession with long-duration bonds
Play podcastAmy Xie Patrick: Prepare for likely recession with long-duration bonds
An economic recession is highly likely in 2023, says Pendal’s head of income strategies, Amy Xie Patrick.
How should investors be positioning their portfolios? Long-duration, high-quality government bonds are easy decision, says Amy in her latest fast podcast.
Regardless of a mild or deep recession, bonds should rally when recessions hit, she says.
“Being in duration, or government bonds, should be the crux of your portfolio decision this year.
“Compared to a year ago, bonds are now more attractive in terms of income stream versus other risky assets like equities.”
But it shouldn’t be a set-and-forget strategy. “We fear that 2023 will be just as volatile an environment as 2022.
“So putting a larger weight to fixed income and putting it with an actively managed strategy that has proven to be tactical and agile through market volatility will be key.”
The signals that will bring interest rate hikes to an end
Play podcastThe signals that will bring interest rate hikes to an end
What signs do central banks need to see before they stop hiking?
“The US Fed is looking for inflation not only peaking but coming down very convincingly to its 2% target,” says our head of income strategies, Amy Xi Patrick in a new fast podcast.
“Wage growth in Australia is only at around about 2.5% to 3%. The RBA is comfortable for it to go up to 3.5%, maybe even temporarily to 4%.
“Wage growth in the US, however, is hovering at about 5.5% to 6%, which is clearly not consistent with a 2% inflation rate.
“This means inflation will be stickier than the market expects. Central banks may slow down hikes, but they will be hiking for longer next year than the market expects, says Amy.
Higher-quality fixed income assets will help offer some buffer for future volatility, she says.
Fast podcast: Why bonds look compelling towards mid-2023
There are signs that inflation has peaked and is due to come off in the next few quarters, says Oliver Ge, an assistant portfolio manager with our income and fixed interest team.
“That would invariably take us to a position, maybe in Q2 2023, where it looks quite compelling to own bonds,” says Oliver in our latest fast podcast.
“At that point you’d already see inflation pressures come off and growth indicators start to materially deteriorate.
“Then central banks will in all likelihood tilt their reaction function to be more benign, more dovish.
“They’re not accelerating, there likely won’t be more hikes. That environment is conducive to owning bonds.
“You’re looking at returns of five to six per cent per annum at that point.”
Fast podcast: What the Budget, inflation and rates mean for bonds
Play podcastFast podcast: What the Budget, inflation and rates mean for bonds
What do this week’s Budget and inflation numbers — and next week’s likely 25-point rate rise — mean for 2023? And the role of bonds in portfolios?
“The key takeaway I have from the last couple of days is this inflation issue is not going to solve itself quickly enough to call an end to rate hikes anytime soon,” says Pendal’s head of government bond strategies Tim Hext in a new fast podcast.
“We are getting the ingredients — particularly globally more so than Australia — where in the second half of next year you could be getting a lot of weakness globally feeding through to the need for lower rates.
“My message — and this has been a consistent message for a number of months now — is start to think about getting some bonds in your portfolio as a defensive instrument.
“I don’t think they’re necessarily going to rally hard in the near term. But if you can own those 10-year bonds in Australia at 4% on a two or three-year outlook, I think you’re going to do well out of them.
“And they’re going to give you that buffer should the slow-down prove to be stronger.”
Amy Xie Patrick: Why it’s a myth that you shouldn’t buy bonds in a hiking cycle
Play podcastAmy Xie Patrick: Why it’s a myth that you shouldn’t buy bonds in a hiking cycle
Bonds can be an appropriate investment in a hiking cycle – as long as you know what to look for, argues Pendal’s head of income strategies Amy Xie Patrick.
“It’s a common misconception that you shouldn’t buy bonds in a hiking cycle,” says Amy.
“In a lot of hiking cycles, bonds actually do okay on a total return basis – that is, the income you get from the coupon on those bonds, as well as their potential to gain a little in terms of the capital price.
“That’s usually because most hiking cycles are fairly well flagged. The difference with this hiking cycle is the central banks left it too late and now have to catch up.
“Even though central banks may need to keep hiking, now their mantra is well flagged so there’s hope bonds can do better in the second half of the cycle.
“It does mean you probably want to look at having bonds in your portfolio as a defensive pillar, more towards the longer end of curves.”
FAST PODCAST: Where we are in this interest rate cycle
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FAST PODCAST: Where we are in this interest rate cycle
50-point rate rises are probably over for now in Australia, but investors should watch for lag, says Pendal’s Tim Hext in our latest fast podcast.
“Firstly, it takes several months for a rise to feed through to your mortgage. So given they only started in May, the full impact of rate rises won’t be felt until the end of the year around Christmas.
“The RBA will probably do two more 25s this year. They might put in a third to 3.1%, but let’s call it 3%.
“I think then they’ll sit back and see what impact it’s had. Of course in 2023 you’re going to see a lot of fixed-rate mortgages rolling into floating rates, so there’s a hell of a lot of tightening yet to happen.
“Secondly, on the goods inflation side there’s a huge amount of evidence that we’ve seen the peak in the US.
“There’s every chance we’ll get some negative CPI US prints. This doesn’t mean inflation’s over. It doesn’t mean they’re going to cut rates. But that certainly takes the pressure off.”
AMY XIE PATRICK: China’s going lower on rates. Here’s what it means for investors
Play podcastAMY XIE PATRICK: China’s going lower on rates. Here’s what it means for investors
As the West hikes rates, China keeps cutting, hoping to counter the impact of its Covid-zero policy and spark demand in a debt-laden property sector (see graph below).
Will Beijing continue the course? And what does that mean for investors?
China’s monetary authorities are not independent as we know them in Australia and the US, explains Pendal’s Amy Xie Patrick in our latest fast podcast.
“The central bank in China has been lowering interest rates because the economy quite frankly is in a rut.
“Most major investment bank analysts expect growth in China will fall to levels not seen over the last decade. Frankly China will struggle to get above the 4% threshold for the next year or perhaps even more.”
If these headwinds continue to build for China, and stimulus efforts continue to be piecemeal, the outlook for global fixed income could be very bullish, says Amy.
FAST PODCAST: Will country-level ESG become more important after Ukraine?
Play podcastFAST PODCAST: Will country-level ESG become more important after Ukraine?
Will ESG have a bigger impact at country level after the corporate reaction to Russia’s invasion of Ukraine? ESG investing has two main aims, says Pendal ESG credit analyst Murray Ackman in our latest podcast. “One is about avoiding a financial loss or achieving an upside, and the other is about bringing about change.” Can investors bring about change in a country, for instance engaging with sovereign bond issuers? “You can have a lot of influence over businesses, but countries are a lot bigger and a lot harder to influence, though there have been examples such as South Africa. “The Russian example is a little idiosyncratic because there’s widespread sanctions and the speed and scale of condemnation in the west is very unique. “Very few businesses have applied the same standards to other countries that have invaded sovereign nations, though we can see the English Premier League is starting to question this in regard to Saudi Arabia and Yemen, so maybe this will change. “We’ve seen there is a re-setting of the status quo view, so perhaps this is a watershed moment on the way in which we invest in countries.”
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