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Tim Hext: Dust off the text books as stagflation threat looms
March 09, 2022
Expect to see a lot more mentions of stagflation this year. TIM HEXT explains what it means for investors
WE’VE talked a lot recently about the easy days of central banking ending.
Russia’s invasion of Ukraine has sent this into overdrive.
Stagflation — a stagnating economy combined with rising prices — is a central bank’s worst nightmare. Should they risk sending the economy into recession to tackle inflation?
It is a scenario they haven’t had to face for about 40 years.
Inflation has reared its head since then, but it was always demand led. Slowing the economy was seen as responsible and investors were generally doing well.
Last week US Fed chair Jerome Powell was asked by Senator Richard Shelby if he was “prepared to do what it takes without any reservation” to tackle inflation.
Senator Shelby referenced former Fed chair Paul Volcker who aggressively tackled stagflation in the early 1980s — just before the US moved into a recession.
It was clearly a dig at Powell’s so far muted response to rising inflation.
If taken at face value US rates may need to go far higher than the current 2% factored in by markets.
In Australia, Governor Philip Lowe is still living in 2020, claiming inflation is not yet clearly sustainable within the 2-3% band.
He is sort-of correct — just the wrong way around.
It looks like inflation will be sustainably above 3% this year and next, potentially hitting 5% on an annual basis. No doubt he will be forced to change the narrative soon.
Stagflation will get a lot more mentions this year.
Powell said a clear “yes”.
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Pendal’s Income and Fixed Interest funds
We will have to dust off the textbooks, having not lived or at least invested through it.
Suffice to say it is bad news for most of us, seeing not only our investments but also our spending power go backwards.
Another complicating factor for super funds is that stronger commodities may end up meaning a stronger AUD.
Since more than a third of assets sit offshore unhedged, super funds normally rely on risk-off moves driving a weaker AUD, somewhat reducing the negative performance.
A stronger AUD but weaker risk markets will increase the drag on asset returns.
As long as wages don’t lock in with inflation shocks — creating the vicious circle we saw in the 1970s — supply will eventually return to commodity and goods markets.
It just may not be a 2022 story — or even 2023.
Meanwhile will rate hikes assure another downturn as the cycle lives on?
A Pendal statement on Russia’s invasion of Ukraine
During these tragic times, Pendal’s sympathy lies with the people of Ukraine in their struggle to maintain their freedom.
As responsible investors, Pendal Group and its affiliates J O Hambro Capital Management, TSW and Regnan have taken decisive steps to reduce our already minimal exposure to Russian securities.
We are limiting direct risk in client portfolios and taking decisive steps to comply with evolving sanctions and restrictions. We will refrain from investing in Russian and Belarusian securities for the foreseeable future.
The situation is evolving rapidly and we continue to monitor the emerging risks, which may take an unexpected form as the consequences ripple through the financial and economic systems.
As active managers, our purpose is to navigate our clients through a world in flux to protect their interests during uncertain times.
About Tim Hext and Pendal’s Income & Fixed Interest boutique
Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.
Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.
Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.
The team won Lonsec’s Active Fixed Income Fund of the Year award in 2021 and Zenith’s Australian Fixed Interest award in 2020.
Find out more about Pendal’s fixed interest strategies here
About Pendal
Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.
In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.
This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current as at March 3, 2022.
PFSL is the responsible entity and issuer of units in the Pendal Monthly Income Plus Fund (ARSN: 137 707 996) and Pendal Dynamic Income Fund (ARSN: 622 750 734) (Funds). A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com. The Target Market Determination (TMD) for the Fund is available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund.
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