Aussies have overseas holidays on their minds. But has Zoom impacted corporate travel for good? How will ASX travel stocks fare in 2022? Pendal analyst Sondal Bensan has some answers

• Leisure and corporate travel to bounce back
• Investors have under-priced some ASX travel stocks
• Find out about Pendal Focus Australian Share Fund

Will Zoom kill corporate travel? Or at least wound it?

This is arguably the biggest unknown for travel stocks in the post-Covid world, because corporate travellers are higher-yielding than leisure tourists.

“People had thought there would be a permanent loss of corporate travel demand because of video conferencing platforms like Zoom. But I think it will come back pretty strong with just a bit of a lag,” says Pendal Australian equities analyst Sondal Bensan.

“We always thought leisure would come back strong and business would be a bit of a drag. But it looks like there hasn’t been any permanent damage.

“Before Covid, demand for the sector was growing at a couple of per cent per annum. Now we’ve had two years of interruptions, but the post-Covid starting point should be a trend line above the previous level.

“That reflects both natural growth and a phenomenal wave of pent-up demand.”

A rebound in corporate travel has not been fully priced into some travel stocks, including Qantas, he says.

“The market is pricing in part of the revenue recovery but it’s not pricing in the margin outcome from that recovery.

“The profitability post-Covid from domestics and international travel could be significant. Investors have priced in domestic re-opening but not international.”

Bensan says margins will be higher both because of stronger-than-expected demand from corporate travel and also because airlines in particular have done a very good job at maintaining pricing, even during the pandemic.

“We’ve seen it in the US, New Zealand and here. That’s been a big surprise — the industry’s ability to manage prices.”

Some travel and tourism stocks tumbled when Covid hit, then experienced a massive adjustment period and emerged more efficient. Bensan expects some airlines, including Qantas, will do the same.

Factors to watch

No sector has been hit harder by the pandemic than travel and tourism.

But the best operators have been able to withstand the tumbling revenue and restructure. And as the economy heads towards a post-Covid phase, there are other kickers that will substantially help the sector.

Throughout the Covid period there has been glimpses of what might be for the sector.

“If you look at late last year and then the June quarter, the recovery in travel was quite remarkable. It ramped back up a lot quicker than many people thought.”

There are other factors helping travel and tourism stocks.

Many will have tax losses they can carry forward. Also working capital should benefit balance sheets in the short term, based on the experience of the industry during the June quarter, when travel and tourism re-opened ahead of the most recent lockdowns.

“There will be the initial surge in cash from people starting to make bookings again,” Bensan says, and he expects travellers will make plans further in advance, elongating the gap between payment and travel.  

“People’s attitudes will change. They will book in school holidays well in advance. Booking international travel will be longer duration that it ever used to be.”

Rajinder has over 17 years’ experience in Australian equities and manages our range of sustainability and ethical funds. He is also involved in the development and implementation of our Enhanced and Individually Managed Account strategies. Rajinder holds a Bachelor of Science (Mathematics) and Bachelor of Commerce (Finance) from the University of New South Wales and is a CFA Charterholder.

 

As bond yields remain elevated and investors weigh the implications of inflation, growth and the AI investment surge, understanding the role of fixed income has never been more important, argues Pendal head of government bond strategies TIM HEXT

WHILE higher yields have challenged investors in recent years, Hext explains in his latest video podcast why bonds continue to play a vital role in portfolio construction, particularly during periods of genuine economic stress.

He also discusses the importance of active duration management and why the next phase of the market cycle could create attractive opportunities for long-term bond investors.

Here’s an excerpt from the video podcast:

“Defensive is for the true risk-off events like a recession, like the GFC, like the early part of COVID. That’s what we generally mean by defensiveness.

“If you lock in bonds at six per cent for five years or 10 years, and rates start coming down, you’re still earning that return. And of course, they’re going to become a lot more valuable.

“At some point bonds are going to be very, very attractive to lock in. The big question which I’ve got to manage as an active manager is when.

“There will be a point somewhere in the next six months to 18 months where we will start to extend the portfolio significantly as we tip over into this new environment.”

Watch the full video

Listen to the audio version

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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.

Find out more about Pendal’s fixed interest strategies here

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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.

Contact a Pendal key account manager

After a volatile five years for fixed-rate bonds, an active approach to duration can help investors manage downside risk while capturing opportunities as interest-rate conditions change. Pendal’s AMY XIE PATRICK explains

• Active duration manages risk across rate cycles
• Flexible positioning captures opportunities as yields shift
• Find out about Pendal Monthly Income Plus fund

What we mean by duration

IT IS hard to talk about fixed income and bonds without involving the term “duration”. So let’s make it clear from the start.

The term is largely used to refer to interest rate duration – or the amount of interest rate exposure, be it in a security or a portfolio.

The concept of duration can be thought of as a multiplier that translates yield moves into price returns. For example, a portfolio with one year of duration will suffer a negative 1% capital move if yields rise by 1%. Whereas a portfolio with five years of duration will suffer a negative 5% capital move from that same 1% rise in yields.

The exact return numbers may vary, depending on the contents of these portfolios and other certain technicalities. Nevertheless, thinking about duration as the multiplier from yields to returns is a helpful place to start.

Why have duration at all?

If you’ve looked at fixed-rate bond returns over the last five years and wondered what the point of duration is – that’s a fair question.

We illustrate this in Figure 1 with the total return index of the AusBond Composite Benchmark, as this is the fixed-rate benchmark of choice for many Australian portfolios.

Over the entire five-year period depicted in the chart, the benchmark has returned only a little over 1%. Its largest drawdown was over 13.5%, from which it took more than three years to recover. Since then, volatility has continued to plague this benchmark.

The disappointment is understandable when compared with the prior 10-year period of returns, as illustrated in Figure 2.

In the 10 years following the global financial crisis (GFC), central banks mostly had trouble fighting inflation that was too low while global growth slowly recovered. Perfect conditions for a smooth and upward path of bond returns. If investors bond return expectations were set in this period, then the last five years most certainly have been a disappointment.

Understanding what drives fixed-rate bonds

Bond yields ultimately move according to economic fundamentals. That is, moves and expected moves in inflation, employment and economic growth. At their core, yields are just what the market expects policy rates or cash rates will be in the future, and since the central banks setting those cash rates are trying to navigate their economies to their target levels of inflation, full employment and economic growth, bond yields do not often become dislocated from economic fundamentals, at least not for long periods of time.

So by taking on fixed-rate bonds (or duration) in your portfolio, you are expressing a view on the trajectory of economic fundamentals. As shown above in Figure 2, when those fundamentals are moving in the same direction and supportive of stable or lower interest rates, fixed rate bonds can do really well, providing a source of income and capital return to portfolios without much volatility. The perfect description of how defensive assets should behave.

However, Figure 1 shows a backdrop of very different economic fundamentals, ridden with over-heating economies, supply-shocks, labour shortages, all against a backdrop of a higher and more uncertain climate for inflation. This is not a straightforward and supportive backdrop for bonds. At times, rampant rate hikes have brought recession fears to the fore. More recently, inflation trends have been fluctuating, sometimes giving hope to quieter times ahead, only to be interrupted by tariffs, wars and Middle East oil shocks.

Bonds, or duration, as it turns out, are not able to provide defensiveness to portfolios structurally. But doing away with them entirely would mean losing a defensive lever for portfolios should the economic backdrop start to sour.

An active duration approach

Instead of an all-or-nothing approach, the Monthly Income Plus Fund takes an entirely active approach to duration. As the periods illustrated in Figures 1 and 2 have shown, duration isn’t always helpful, and at times it can be very harmful if stability and drawdown control are what portfolios are seeking.

At a high level, an active duration approach should use duration according to where we are in the interest rate cycle. For example, someone with a mortgage should choose to fix their borrowing rate while it’s low but then switch to floating when rates are high and likely to fall. Duration within a portfolio is the same, but just flipping in the opposite direction, since we’re earning the interest, not paying it.

But it gets more nuanced than simply choosing to have a floating-rate portfolio when the RBA is hiking the cash rate, and a fixed-rate portfolio when they are easing. Markets have a way of moving ahead of central banks to price in what may be coming. Sometimes, the market consensus can be wrong about the extent to which the central bank will hike or ease interest rates, leaving room for active and contrarian views to profit within the cycle.

As Figure 3 shows, over the last five years, the RBA has engaged in one large hiking cycle, one mild easing cycle, and started another hiking cycle towards the end of last year. Yet Australian 10-year government bond yields have gone through far more ups and downs than that.

Within Figure 3, all red arrows point to occasions where the market either under- or over-shot what the RBA would eventually end up doing.

It will often be shifting fundamentals within a rate cycle that cause bouts of volatility in bond yields. By adopting an active stance on duration which looks to the signals in these shifting fundamentals, these bouts of volatility can be avoided when yields are rising (and having duration would be harmful) but embraced when yields are falling.

A strong approach to active duration ought to navigate the broader interest rate cycle well, particularly adding duration before an easing cycle begins which locks in a higher level of income for portfolios as interest rates fall. A purely floating rate credit portfolio will see its income levels fall alongside the fall in cash rates. In addition, within cycles, a successful active duration lever within an income portfolio will be able to put bouts of bond volatility to use to create added sources of return.

Where does that leave us today?

The current environment is a case in point. The US Federal Reserve’s decision to hike rates in September caught markets off guard, only to be reinforced by stronger US economic data since then. Yields have continued to climb because none of the economic fundamentals (inflation, employment and growth) are currently supportive for bonds.

For the Monthly Income Plus Fund, our active duration process prioritises leading signals about these economic fundamentals. Long before the market realised that a Fed hike was probable, we had positioned the fund for exactly that outcome. Since then, the portfolio remains fully floating-rate, earning a high level of income on offer from currently higher policy rates. There is no need for any duration in this environment, but we continue to monitor for signals of economic change. As has often been the case over the last five years of inflation and economic uncertainty, the portfolio stands ready to use its ability to take on up to five years of interest rate duration to capture the more meaningful turns in the cycle and deliver a defensive outcome for our investors.

The goal shooter

As a mother to three tall daughters, I am deep in the Saturday morning netball years, so please indulge me as I end with this sporting analogy.

Your midcourt players are in every passage of play. Centre, Wing Attack – they work to keep the ball and move it down the court. I liken this to floating-rate credit in a portfolio. Always working and contributing.

However, you need a Goal Shooter to put points on the board. She doesn’t get involved in every phase of play. Some games, she will spend long stretches waiting for the ball to come to her end of the court. But when conditions are right and the team gets the ball to her, it’s up to her to convert. That’s the job of duration in a portfolio.

A portfolio without duration is a team that has left its Goal Shooter on the bench because the ball has been in midcourt all quarter. With yields where they are today, the ball is getting closer to her circle.

As AI fuels a wave of data centre investment, the industry’s ability to earn and maintain community trust is becoming a critical factor in its long-term success. ELISE MCKAY explains

SOCIAL license is emerging as one of the most important non-financial risks facing companies and in this video podcast, Elise McKay, analyst and portfolio manager in Pendal’s Australian Equities team, discusses how active investors can help ensure the growth in data centres is delivered responsibly.

Here’s an excerpt from the video podcast:

“The way I think about social license is it’s the informal approval or permission that you need from the community in which you operate to operate your business,” she says.

“You might have all the planning approvals and legal permits in the world, but if you don’t have community backing, that could ultimately prevent you from being able to grow and move your business forward.

“Social license is the most important non-financial risk that data centres face in today’s world.

“The key issue with non-financial risks is that ultimately one day they may become financial risks.

“If data centres locally lose their social license, that limits a huge growth engine not only for the data centre industry but for our economy overall.”

Watch the full interview

Listen to the audio version

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About Elise McKay and Pendal Australian share funds

Elise is an investment analyst and portfolio manager with Pendal’s Australian equities team. Elise previously worked as an investment analyst for US fund manager Cartica where she covered a variety of emerging market companies.

She has also worked in investment banking and corporate finance at JP Morgan and Ernst & Young.

Pendal Horizon Sustainable Australian Share Fund is a concentrated portfolio aligned with the transition to a more sustainable, future economy.

Pendal Focus Australian Share Fund is a high-conviction equity fund with a 16-year track record of strong performance in a range of market conditions. The Fund is rated at the highest level by Lonsec, Morningstar and Zenith.

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management. 

Contact a Pendal key account manager here

In a volatile market, AMY XIE PATRICK explains why income portfolios need deliberate duration, quality credit and flexibility.

IN THIS video podcast, Amy Xie Patrick, head of income strategies at Pendal, shares her perspective on how duration can still play an important role when used deliberately, and how active investors can navigate uncertain rate settings.

She also discusses tight credit spreads, the rise of hyperscaler bonds in Australia, and the importance of quality, liquidity and flexibility in defensive income portfolios.

Here is an excerpt from the video podcast:

“Just because inflation is high and yield volatility is high; it doesn’t mean that you should completely say no to duration.

“Your duration allocation at any point in time should be very deliberate and considered and intentional.

“The job of active investors is to be able to make decisions when faced with uncertainty.”

Watch the full video interview

Listen to the audio version

In this video podcast, Pendal head of government bond strategies TIM HEXT explores how shifting interest rates, accelerating AI investment and evolving macroeconomic conditions are creating opportunities across fixed income markets

An excerpt from this interview with Pendal’s head of government bond strategies Tim Hext:

“Australia’s had two great investment booms this century,” says Hext.

“The first one was the mining boom, and that was huge. In fact, in terms of scale, it’s bigger than the current IT boom we’re seeing now.

“But in the US, the current IT boom, particularly around the well-known story of data centres and AI, is bigger than anything they’ve had, and of course that puts pressure on capital.

“The promise of high returns means people borrowing the money are happy to pay more, so you start to get this term premium increase, and real interest rates go up. It’s a great spot for investors.”

Watch the full video

Listen to the audio version

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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.

Find out more about Pendal’s fixed interest strategies here

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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.

Contact a Pendal key account manager

The common belief is that if investors want to gain exposure to the AI thematic they have to look offshore, but Pendal’s ELISE MCKAY debunks this myth in her latest podcast interview

You can also listen to this podcast on Apple or Spotify

An excerpt from this interview with Pendal portfolio manager Elise McKay:

Where are the opportunities for ASX investors wanting AI exposure?

“When I think about AI, there’s five layers to the AI stack,” says Pendal portfolio manager Elise McKay.

“Firstly, you’ve got power, secondly, you’ve got chips, thirdly, infrastructure, fourth is models, and then the fifth layer is applications.

“Whilst the US has chips and models locked up, Australia has infrastructure, and this is what we’re really good at.

“Australia is quite uniquely placed to provide AI infrastructure to the world.

“The opportunities are in that infrastructure layer and that extends from the resources that are used, so the copper metals that are used as inputs into the server equipment, through to building out the grid to support more than our fair share of data centres.

“We have a huge amount of investment that’s going into building out and supporting that grid. We have the actual data centres themselves, and finally we have this emerging category called the neoclouds.”

Listen to the full podcast above or learn more about Elise in her latest Pendal profile interview.

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About Elise McKay and Pendal Australian share funds

Elise is an investment analyst and portfolio manager with Pendal’s Australian equities team. Elise previously worked as an investment analyst for US fund manager Cartica where she covered a variety of emerging market companies.

She has also worked in investment banking and corporate finance at JP Morgan and Ernst & Young.

Pendal Horizon Sustainable Australian Share Fund is a concentrated portfolio aligned with the transition to a more sustainable, future economy.

Pendal Focus Australian Share Fund is a high-conviction equity fund with a 16-year track record of strong performance in a range of market conditions. The Fund is rated at the highest level by Lonsec, Morningstar and Zenith.

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management. 

Contact a Pendal key account manager here

The role of equities in a defensive income portfolio may seem counterintuitive – until liquidity becomes critical. Pendal’s AMY XIE PATRICK explains

• When conditions deteriorate, corporate and bank bond spreads widen
• Higher yielding bonds less volatile, but equities keep an income portfolio defensive
• Find out about Pendal Monthly Income Plus fund

MOST income funds look, at first glance, quite similar. They hold corporate bonds, collect coupons, and distribute income periodically. The differences only become apparent when markets turn.

When conditions are calm, reaching down the credit quality spectrum — into lower-rated or less-liquid bonds — is a quiet and effective way to generate additional yield.

The income lands in investors’ accounts. The risk is largely invisible. But credit markets are asymmetric by nature: the cost of that extra yield is not paid in calm markets. It is paid precisely when you can least afford it.

When conditions in non-government bond markets deteriorate, as they did sharply in March 2020, corporate and bank bond spreads widen significantly.

Fund managers facing redemptions generate selling pressure at exactly the moment market liquidity is declining — and bond dealers, constrained in their ability to take on more trades, respond by widening bid-ask spreads or simply refusing to quote prices at all.

Credit market liquidity conditions deteriorated in a similar way during other crisis events and market shocks, such as Liberation Day in April 2025.

Unlike the US, where fixed income dealers are subject to minimum market-making obligations, there is no regulatory floor on Australian credit dealer participation.

When balance sheets run against internal risk limits, dealers widen their bid-offer spreads — or opt not to quote prices at all.

An active manager who needs to de-risk a portfolio in stress will find themselves holding assets they cannot sell, at prices they cannot trust, at exactly the wrong moment.

Figure 1: Corporate bond liquidity in different market environments

What equities actually do in this portfolio

The instinct to exclude equities from a defensive income portfolio is understandable. Equities are volatile. They do not pay contractual coupons. In a drawdown, they fall.

But volatility and illiquidity are not the same thing.

ASX equity market turnover and trade frequency have trended up over time — and activity actually peaked in March 2020 at the height of COVID-related volatility.

While bond market makers were withdrawing from the market, the equity market continued to function. Investors could act. Prices were continuous and transparent.

In the Monthly Income Plus Fund, equities serve a specific and deliberate role: accessing higher sources of return without jeopardising portfolio liquidity.

When credit spreads widen sharply — as they did in March 2020, and again during the Liberation Day tariff shock last year — we need the ability to de-risk quickly and, crucially, to re-risk when value re-emerges.

Equities give us that option. They are the part of the portfolio we can actually move.uction is falling as supply chains adapt.

Figure 2: Active de-risking, intentional re-entry

In fact, as Figure 2 highlights, our entire equity process has been focused on avoiding the shocks that can temporarily derail equity markets by reducing the portfolio’s equity allocation.

Usually, this de-risking has started ahead of market downturns. We are just as assertive at rejoining the market so the portfolio can then participate in recoveries.

Even if liquidity conditions allowed some trading in times of market stress, the portfolio could never achieve this type of active positioning through corporate bonds. We would also have to pay more in transaction costs to constantly reposition the portfolio.

In short, permitting a small equities allocation in an income portfolio is what allows the core credit portfolio to quietly do its job of earning stable and regular income, while the more active risk component is managed dynamically through equities – far more liquid and easier to move at short notice.

Equities vs higher-yielding bonds

There is a cost to our approach. Our core bond portfolio will always exhibit a quality and seniority bias because we know moving down the quality or ratings spectrum will cost the portfolio in liquidity and therefore flexibility.

By intentionally leaving liquidity premia on the table, our core credit portfolio earns less income than those with riskier or less liquid bonds. The active equities allocation in MIP allows us to replace those foregone returns potential with something we can actually shed when the portfolio needs to act fast.

While higher-yielding bonds exhibit less volatility than equities, that does not translate into portfolio defensiveness if we can’t exit those positions before their prices drop.

To us, defensiveness isn’t about picking the exposure with the lowest perceived volatility and just sticking with it. It’s about preserving the ability to act – whether to protect capital when conditions deteriorate or to participate as they recover.

Higher yielding bonds may be less volatile, but equities are what keep MIP actively defensive.