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Income and Fixed Interest
Tim Hext: Investors are still relaxed about the inflation outlook
Despite a narrative around re-emerging inflation, Australian investors are remarkably relaxed about the outlook for prices, observes Pendal’s head of government bond strategies, Tim Hext.
April’s inflation numbers – released yesterday – show a 3.6% increase in the annual Consumer Price Index. That’s slightly higher than March (3.5%) and more than the 3.4% markets were hoping for.
A rise in goods prices – mainly furniture, footwear and clothing – will not go unnoticed by the Reserve Bank and will require further investigation, says Tim.
But overall, the market is backing the RBA to do its job, he says. Implied 10-year inflation levels remain reasonably well anchored at 2.77%.
“Three-year yields in Australia moved back above 4 per cent after the data. We view this as a buying opportunity, since our medium-term view on inflation is positive.
“US inflation numbers come out on Friday and should show lower rental data feeding through to lower outcomes.
“Unless our concerns ramp up, we will be happy to be long duration into the winter months.”
Three charts that show the advantage of an active approach to fixed income
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Three charts that show the advantage of an active approach to fixed income
It’s been a bumpy road for fixed income – here’s the data on why now’s the time to consider allocating to an active manager, writes Pendal’s AMY XIE PATRICK
Amy Xie Patrick: There’s more to life than Term Deposits
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Amy Xie Patrick: There’s more to life than Term Deposits
THE RESERVE BANK held the Overnight Cash Rate steady at 4.35% on May 7 for the fourth consecutive meeting.
At first look, this makes 12-month term deposits seem attractive.
The 2022 “everything sell-off” still haunts many investors, while the allure of higher interest rates and certainty of returns is hard to turn down.
At the margin, however, investors we speak to are starting to wonder whether there is more to life than term deposits — even in a higher interest rate environment.
Our answer? Yes!
Tim Hext: Looking beyond the noise at this year’s Budget
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Tim Hext: Looking beyond the noise at this year’s Budget
Despite a half-hearted post-Budget “higher-spending, higher-inflation” narrative, bond yields were “sharply unchanged, to quote the cliché”, says Pendal’s head of government bonds, Tim Hext.
“I think the RBA will see the Budget for what it is: a mixed bag of measures that will leave them hopeful of further inflation relief, but wary of whether the 2-3% target band can be achieved and sustained.”
Some Budget hawks are calling for higher rates to combat inflation they expect from new spending measures and future deficits based on conservative commodity price forecasts, Tim says.
“My view is we are sufficiently past the pandemic that supply chains can handle a modest rise in consumer spending without stoking inflation.”
A number of direct Budget measures – especially the $300 electricity subsidies – should help the CPI, Tim says.
Federal treasury is forecasting inflation of 2.75% for 2024-25, while Tim expects the RBA to revise its forecast down from 3.2% to around 3%.
In a short analysis piece, Tim goes into more detail and covers the impact on bond issuance.
TIM HEXT: Investors should position now for lower rates later this year
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TIM HEXT: Investors should position now for lower rates later this year
Tim Hext: An upgrade to the financial system’s plumbing
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Tim Hext: An upgrade to the financial system’s plumbing
Private debt vs. public bonds: why it’s time to re-examine the traditional role of fixed income
Private credit has its place in portfolios.
So do bonds.
As rates normalise, investors would do well to remember those roles are different, writes Pendal head of income strategies Amy Xie Patrick.
AMY XIE PATRICK: How to manage fixed income portfolios in this environment
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AMY XIE PATRICK: How to manage fixed income portfolios in this environment
This week Pendal’s head of income Amy Xie Patrick sat down with head of client solutions Dale Pereira to answer some common investor questions.
A common query is: when rates are higher, why not leave my money in a term deposit?
“For some investors, term-deposit returns on cash are enough,” says Amy. “They’re more than happy to take those returns after years of really slim pickings in this area.
“But the biggest frustration for many investors who chose term deposits over fixed income last year was missing out on the upside. Both bonds and equities outperformed term deposits in 2023.
“This year, locking in 5% term deposits might sound nice at first.
“But you would also be locking up your capital for a year.
“It makes it harder to move your money around when things change, which means you can’t deploy it quickly or easily to buy the dip if we get a decent correction in markets.”
Tim Hext: What we learned from the latest GDP data
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Tim Hext: What we learned from the latest GDP data
The December-quarter GDP numbers stopped just short of the “no-growth” scenario we were slowly sliding towards last year at 0.2%.
What were the takeaways for markets?
“First of all, rate hikes have worked,” says Pendal’s head of bonds Tim Hext.
“While the fixed-rate cliff has been more of a speed bump, the RBA will be pleased that higher rates are reducing demand.
“Lower immigration in the year ahead will also help. The supply side of the economy has largely normalised.
“This will give the RBA further comfort that the path back below 3% inflation is achievable.
“This opens the door to rate cuts later in the year. We think three cuts – September, November and December.
“By then the US Fed should be well into rate cuts. Inflation – while sticky around 3 per cent – would be considered under control.
“GDP would be allowed to push back up towards 2% or above without threatening the inflation outlook.
“This would be a good outcome for all and meet the objectives of the RBA.”
Amy Xie Patrick: Outlook from the bond enthusiast
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Amy Xie Patrick: Outlook from the bond enthusiast
What are the main factors impacting income strategies right now?
Pendal’s head of income strategies Amy Xie Patrick has just published a deep dive on how her view has evolved in recent months.
Among Amy’s main observations:
- Consumer resilience has been surprising and may be explained by a rise in real incomes as inflation cools
- This limits the ability of bonds to keep rallying since central banks may be fearful of reigniting a new wave of inflation
- As markets entertain the idea of “no landing”, there could be heightened market volatility and bouts of “everything sell-offs”
- If growth remains resilient these bouts should be short-lived and present opportunities for active portfolios.
- A hard landing isn’t off the table, but it’s too soon to position for it just yet
Tim Hext: January inflation – a low point, for now
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Tim Hext: January inflation – a low point, for now
On-demand webinar: How to conquer the interest rate peak
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On-demand webinar: How to conquer the interest rate peak
A cut in the official cash rate by the Reserve Bank is likely around September this year, according to Commonwealth Bank’s Stephen Halmarick and Pendal’s Tim Hext.
Halmarick and Hext sat down together in a new on-demand webinar to discuss the implications of the February RBA rates decision.
Inflation is set to continue falling as the economy slows, thanks to a weak household sector, while the unemployment rate will rise, Stephen believes.
With a soft landing the most likely outcome, the current bond rally should be sustained, Pendal’s Tim Hext argues.
“Bonds still represent some value though they’re not as cheap as a year ago,” Tim says.
“You should have more duration than normal in bonds. You should be comfortable about owning credit, and it’s not a bad environment for equities.”
Click through to watch – CPD points apply.
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