The Point

Amy Xie Patrick: The market’s getting excited about China again, but it may be premature

THE latest message from China’s top decision-making body caused a stir this week when investors noted softer language on property.

For the first time since 2016, President Xi Jinping’s signature slogan that “houses are for living, not for speculation” was missing from a note that followed a Politburo meeting.

That got the market excited about the potential for a meaningful China stimulus push via the property sector.

But the market is getting ahead of itself, says Pendal’s head of income strategies Amy Xi Patrick.

“The line has likely been dropped because it’s simply no longer needed. Buyers are no longer speculating. They are actively selling in an attempt to exit the property game altogether.”

Amy believes there is no silver bullet for the Chinese economy.

The case for bonds as rate hikes push Australia towards recession

Recession talk increased in Australia this week after the RBA’s decision to lift rates for the 12th time in just over a year.

Pendal’s Anna Hong agrees the chance of a recession in Australia is increasing with rate hikes.

That bolsters the case for Australian government bonds, cash and high-grade investment credit, argues Anna, an assistant portfolio manager in Pendal’s Income and Fixed Income team.

Australia is one of only a handful of countries to record a budget surplus this financial year and – not withstanding the threat of recession – remains in good economic shape, she says.

“From an economic perspective, even if things go wrong, the government is in a good position to support the Australian economy.

“Australian banks are world-leading in capital strength. As a result, assets within Australian shores are safer than almost any other part of the world.”

Tim Hext: Inflation remains stubbornly high — but not as high as you may think

The April monthly inflation data from the ABS showed an annual rise of 6.8%, versus an expected 6.4%.

On the surface that should worry the RBA and markets – and increase the chance of another rate hike in June.

But under the hood, the May number looks closer to 5.5%, which means the RBA should be able to hang on till August and reassess then.

How can we tell? The monthly numbers are published as year-on-year outcomes, and you need to back-solve to gain a sense of the monthly pace, says Pendal’s head of bond strategies Tim Hext.

There’s no underlying inflation data yet, and only half the items in the basket are updated every month at the moment.

Pandemic and energy shock subsidies also need to be taken into account, he says.

“The outlook for inflation here and in the US should be mildly friendly over the next few months,” believes Tim.

How Pendal investors helped make the world a better place in 2022

As “stewards of capital”, Pendal undertook 562 ESG-related meetings with investee companies and issuers on behalf of investors in 2022.

These “engagements” – where we seek to influence positive outcomes on ESG matters – are one of the benefits of investing with an “active” investment manager.

Deep, fundamental research capabilities in this area are increasingly important, says Pendal’s Richard Brandweiner in our 2022 stewardship report (which you can find here).

“The challenge for investors is identifying authentic leadership that can leverage non-financial factors to generate real economic value,” Richard says.

“Since many of the basic hygiene factors are already considered, it will become particularly difficult for systematic processes like those used by the mainstream ESG score providers to assess this.”

Fixed Interest wrap: Our views on latest inflation data, the RBA review and YFYS reforms

Yesterday’s March-quarter ABS data showed goods inflation almost flat-lining as supply chains return to normal, while services inflation jumped to 6.1%.

Given it’s a one-third / two-thirds split between goods and services, this leaves the medium-term annual inflation pulse near 4%, says our head of bond strategies, Tim Hext.

“The RBA will be encouraged that inflation is falling,” says Tim. “Their 4.75% forecast for 2023 now looks high and will likely be revised down in May.

“This means no more rate hikes, with the fixed-rate cliff doing the work on the domestic economy for the rest of 2023.”

But those looking for rate cuts late this year or early next year will be disappointed, Tim says.

“The easier work on inflation is done. The harder work of reining in services inflation and the domestic economy, is very much a work in progress.

“It will not be smooth or pretty and will require rates stuck here for the rest of this year.”

“Overall the latest data supports our duration-friendly view on markets, but as always levels will determine our risk.”

Tim Hext: The end of interest rate hikes may finally be near

Almost exactly a year after the Fed started raising rates, it has finally signalled a pause may be near.

Today’s 25-point hike brings us to a total of 4.75% of hikes in nine meetings.

Future hikes no longer “will” be needed but now “may be appropriate”, the Fed says.

Bond markets rallied modestly on the statement but were given a decent boost by Powell’s comments that the Fed considered a pause this time after recent bank wobbles.

“We are now all on ‘break watch’,” says Pendal’s head of government bond strategies Tim Hext.

“Where will we see the next signs of stress after almost 5% of hikes in a year?”

Tim points to commercial property, private equity and the non-bank financial sector as areas that thrived in the zero-rate environment.

“Equities have largely taken it all in their stride. Stresses may be offset by lower rates, meaning it may be a case of picking the sector winners and losers more than the overall market direction.”