What’s the outlook for inflation in Australia, how will the Reserve Bank react and is it time to consider going overweight bonds? Pendal’s TIM HEXT outlines his view in this fast podcast

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

Should investors be thinking about government bonds now, given what they’re yielding?

Market pricing – as in what you can achieve by buying securities – has three-year rates in Australia up through 3%.

If you buy a three-year bond today, you are going to get a 3% return for the next three years.

Forget where your term deposit or cash rates are today. The market is already factoring in 3% cash rates and believes we’re going to get there almost by the end of this year.

I think they’re probably going to end up closer to 2% than 3%, but the point is the market pricing.

So if you buy a bond today, you are buying the expected interest rates in the future, which are quite high.

A 10-year bond is now 3.5%.

Last time we spoke we were heading through 2.5%. I said then, if you are underweight bonds, you might want to start thinking about getting back to neutral.

I think they’re starting to get into the territory where you could even look at going overweight bonds.

I do believe inflation eventually heads back 2.5% to 3%. And I believe real interest rates – in other words the return you get above inflation – shouldn’t move a lot higher than where they are now, which is around about 1% for 10 years.

In other words, if you give the government your money today, you are in a sense locking in an inflation rate, somewhere around 2.5%, plus an extra 1% return on top, which in my mind for a risk-free asset is quite a good return.

(We’re not trying to compare it to equities because they’ve got very different characteristics.)

My advice now is people should be thinking in the medium-to-long term about bonds starting to represent good value.

Listen to the full podcast above

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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

Growth in China has been slowing amid headlines of widespread Covid lockdowns. In this fast podcast Pendal’s AMY XIE PATRICK explains what it means for Aussie investors

You can also listen to this podcast on Apple or Spotify

An excerpt from this podcast

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Amy Xie Patrick, Pendal’s head of income strategies:

Some leading indicators for China’s growth are back at levels last seen at the start of the pandemic.

The recovery path is uncertain as long as Beijing sticks to its zero-Covid policy.

What does that mean for the global economy – and specifically for fixed income investing?

“This kind of growth slowdown in China will ultimately impact the rest of the world,” says Pendal’s head of income strategies, Amy Xie Patrick.

“The reason we’ve all been sheltered so far is because our comeback from Covid – thanks to a lot of fiscal stimulus around the world — has helped buffer some of these headwinds coming out of China.

“But the other side of the picture, at least in the short term, is these lockdown measures are leading once again to bottlenecks in supply chains and logistics.

“Unfortunately for the time being, global inflationary pressures will grow as long as Chinese lockdowns continue to intensify.

“Those opposing forces mean different things for fixed income.

“Slowing growth should mean that bonds have their heyday again.

“But in the near term it’s difficult to say this is the turning point in bond yields, because inflation is still a worry.

“If the growth situation in China gets materially worse – which isn’t our base case –fixed income portfolios that look a lot like equities portfolios with a lot of credit and high yield in them will fare poorly.

“But if you are concerned about the growth picture – and you are willing to once again dip your toe into more pure fixed income portfolios that rely much more heavily on that duration lever – those portfolios will be more reliable at delivering a defensive performance profile if the worst scenario eventuates out of China.”

What does the dramatic fall of the Japanese Yen mean for investors? Pendal’s NUDGEM RICHYAL, co-manager of Pendal Global Select Fund, explains in this fast podcast

You can also listen to this podcast on Apple or Spotify or read an edited transcript below

An edited transcript of this podcast

The depreciation of the Yen has been one of its fastest moves in 50 years, says Pendal’s Nudgem Richyal.

“The data on my Bloomberg terminal only goes back to 1971. At one point it was falling most every day.”

Many investors expect this to continue as money flows out of the Yen into US bonds for example.

What does that mean for global equities investors?

“At this stage we wouldn’t be keen to step in and say, well, actually this [Yen depreciation] has gone too far, we need to get involved on the other side,” says Nudgem, who co-manages Pendal Global Select Fund.

“From a portfolio perspective our views are much more medium-to-long-term and it wouldn’t make too much difference.

“We have a couple of Japanese exporters and we’re not suddenly going to sell them because we think ‘well, this yen move means that so much more can be priced in.

“Trends go on longer than most people expect. I’m not going to call a top, because it’s too dangerous to stand in front of a steam roller.”

Nudgem does advise investors to keee an eye on US 10-year bonds.

“The one macro variable that may put pause to this is if the 10-year [yield] in the US stops going up. It could be that inflation’s peaked. It could be the Fed has broken something. That may put a pause to this move.

“We take currency seriously in our beta view of the market and we think you cannot afford to be oblivious to it.

“Currency is one of the mechanisms that will help or hurt you. This is a great example right now.”

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About Nudgem Richyal

Nudgem Richyal co-manages Pendal Global Select Fund with Chris Lees. The pair have been working together in global equities investing for more than 20 years.

Nudgem has 22 years of industry experience, joining J O Hambro Capital Management (a wholly owned subsidiary of Pendal Group) with Chris in 2008. He was previously an investment director with the Global Equity Group of Baring Asset Management, where he worked closely with Chris since 2001.

About Pendal Global Select Fund

Pendal Global Select Fund is a global equities portfolio with a distinctive, yet proven approach.

Fund managers Chris Lees and Nudgem Richyal have worked closely together for more than 20 years.

They manage a portfolio of 30-60 stocks using quantitative analysis and fundamental research based on decades of experience.

The team draws on the experience of 40-plus investment professionals at JOHCM and Regnan.

Contact a Pendal key account manager here

Almost all millennial investors say they are interested in sustainable investing according to a recent US survey. Pendal Group’s ANDREW PARRY explains the opportunity

• Inheritance is bringing younger clients to financial advisers
• Younger generation has acute awareness of changing social norms and environmental concerns
• Opportunity for advisers to educate the market

MANY investors wrongly believe sustainable investing implies a trade-off that involves giving up returns, says Pendal’s Andrew Parry.

This misperception is an opportunity for financial advisers to educate their clients, says Parry, who heads up investments at Pendal’s Regnan and J O Hambro Capital Management businesses.

“This is one of the education matters that we’re all going to have to deal with because we have to get over this barrier that integrating ESG considerations to your investment decisions costs money,” says Parry.

“I think a better way to frame it is that if you’re not thinking about these issues, you can’t have the complete picture and therefore you’re more likely to introduce more uncertainty by not having the full information when investing.”

Integrating environmental, social and governance considerations in investing is of critical importance for advisers because younger investors are increasingly demanding their money is managed sustainably.

More advisers offer sustainable investing

More than 40 per cent of advisers in Australia now offer responsible investment options, according to surveys by Wealth Insights.

The number is expected to pass 50 per cent this year and 65 per cent in the next few years.

“That’s going to continue to grow largely because of consumer preferences,” says Parry.

It’s not just greater awareness across society, but also a demographic shift in investors from older to younger generations, who have a more acute awareness of changing social norms and environmental concerns.

“We’re beginning to see generational shift that is going to continue for a long time,” he says.

Almost 80 per cent of US investors and 99 per cent of millennial investors say they are interested in sustainable investing according to research by Morgan Stanley in December 2021.

“People are beginning to ask their investment advisers for advice on how to make the change — 75 per cent of millennial investors are planning to change the way that they invest to reflect their sense of social justice.

“There is a vast amount of money that is going to be inherited over the next 10 to 20 years.

“This is something that is going to reshape the demand for these products for many years to come.”

Parry was speaking at a recent Pendal webinar titled How making a difference can make money.

The presentation can be viewed along with other recent Pendal webinars at pendalgroup.com/webinars (free registration required).

Fast growth for sustainable investing

The past three years have seen an explosion in interest in sustainable investing which is showing no signs of stopping.

“On certain projections it’s expected that some $50 trillion of assets will be invested with some form of ESG target or integration by 2025,” Parry says.

“It’s not about ESG as a label — it’s about ESG as an input into all our decision-making.

“Why wouldn’t you think about the environmental influence on business models and on economic activity?”

“Why wouldn’t you think about the social consequences of how COVID is recalibrating the ability of companies to attract workers/.

“By missing out these inputs, you may be missing valuable and material information.

“ESG is not about the label — it’s simply finance 101.”

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About Andrew Parry

Andrew is Head of Investments for Pendal Group’s sustainable investing business Regnan as well as our UK-based asset manager J O Hambro Capital management.

He has more than 30 years of asset management experience with a focus on equities, investment strategy, business development, leadership and strategic client relationships. Over the past decade Andrew has developed a special focus and indepth knowledge of sustainable and impact investing.

Bond yields have been rising and fixed interest investing is gaining advocates. But not all income funds are well positioned to take advantage. Pendal’s head of income strategies Amy Xie Patrick explains

You can also listen to this podcast on Apple or Spotify

An excerpt from this podcast

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Amy Xie Patrick, Pendal’s head of income strategies:

Two-year yields in Australia have risen well over 200 basis points, even just in the last year.

One year ago, to invest in risk-free bonds in Australia, you were getting paid virtually nothing. And now you’re getting paid nearly 2.5%.

For most income funds in Australia, within the fixed interest asset class, our income targets are relatively modest, around 2% to 3%. You can get most of the way there now without even having to take credit risk, or equity risk.

But if you don’t have the flexibility within your portfolios to take advantage of this higher-yield environment, then this is a really large prize that you are being forced to forego in this environment.

The reason we highlight this today, on the podcast, is simply to say to investors that you need to look at what kind of income fund you’re getting into.

Is it a buy-and-hold, steady as she goes, let’s not do much about it, kind of income fund?

Or has your income fund actually been incredibly active to insulate you against the rising interest rate risks, the rising macro risks, that have occurred over the last 6-to-12 months?

The latter is definitely the one positioned with more flexibility, and more dry powder, to take advantage of the higher yields that we have today.

It’s now clear the humanitarian tragedy in Ukraine is a major inflection point in history. Pendal Global Select Fund co-manager CHRIS LEES explains what that means in this fast podcast

You can also listen to this podcast on Apple or Spotify

An excerpt from this podcast

“Number one, obviously [Russia’s invasion of Ukraine] it’s a tragic humanitarian disaster,” says Chris.

“Because it’s such a geopolitical inflection point, this is also a genuine financial market regime shift.

“We’re seeing things like the rotation from growth to value seems to have stopped since the Ukraine invasion.

“Now there’s a rotation from value to defensive, low beta, quality, growth stocks for example. Those are the type of medium-to-long term things that we think people should be looking for.”

Chris explains more in this 8-minute podcast

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About Chris Lees and Nudgem Richyal

Chris Lees co-manages Pendal Global Select Fund with Nudgem Richyal. The pair have been working together in global equities investing for more than 20 years.

Chris has more than 32 years of investment industry experience. He joined Pendal Group’s UK-based asset manager J O Hambro Capital Management (JOHCM) in 2008 after spending 19 years at Baring Asset Management, ultimately as head of its global sector team.

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About Pendal Global Select Fund

Pendal Global Select Fund is a global equities portfolio with a distinctive, yet proven approach and a 17-year track record of outperformance. Since its inception, the underlying strategy (JOHCM Global Select Fund) has delivered top-decile performance in Lipper and 2nd decile in Morningstar.*

Markets are anticipating plenty of rate hikes. How does that affect your bond-buying decisions today? Pendal’s head of government bond strategies TIM HEXT explains in this fast podcast

An excerpt from this podcast

“There’s a view that US cash rates will peak towards the end of next year somewhere between 2.5% and 3%.

“So a lot of hikes are priced in, which means if you buy a bond today, you’re getting all those future cash rate hikes implicit in the price.

“This is an important point to make to people. Bonds don’t sell off once rate hikes begin, they sell off well in advance.

“Often by the time rate hikes are actually beginning, bonds are close to peaking,” says Pendal’s head of government bonds Tim Hext.

“There’s been a good case for being underweight bonds over the last couple of years because yields really were just far too low, given inflation. And yields even outside of inflation – which we call a real yield – were negative.

“Right now, though, we’re back to positive real yields – in Australia anyway and the US is starting to get there. And inflation expectations are quite high.

“I would suggest people who are underweight bonds should at least be looking to get back to their benchmark, or what they consider neutral in a balanced portfolio.

“I wouldn’t be going overweight bonds yet because I think this has a bit more to play out and you might see some better levels.

“But certainly bonds will at some stage perform at a strong defensive task for your balanced portfolio.

“It’s early days, but certainly I would be back to neutral in my allocation to bonds right here.”

Listen to the full podcast above

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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

Which global equities sectors look good in the current environment? Pendal Global Select Fund portfolio manager NUDGEM RICHYAL explains

• Rate rises are the only certainty
• Fed more worried about inflation than investors
• Consumer staples, healthcare relatively attractive

INFLATION, politics and war makes for a challenging environment for investors.

About the only sure thing is that interest rates will rise, though by how much remains unknown.

By lifting the official interest rate last week and laying out a timetable of rate increases for the rest of the year, the US Federal Reserve joined a host of other central bank in a tightening cycle.

“There was already a political inflation issue in the US and the crisis in Europe has exacerbated the inflation pressure in the United States,” says Nudgem Richyal (pictured below), co-manager of Pendal Global Select Fund. “The US Federal Reserve Fed had little room.

“It shows that the stock market, which was up 29 per cent last year in the US, is not the Fed’s priority at the moment.

“Its priority is to try and tame inflation — and there’s political pressure to do so because President Joe Biden is on the record saying the inflation is something the Fed fixes.”

Add to that mid-term elections later this year where control of the House of Representatives is up for grabs, and inflation is clearly the number one public policy issue for the Fed.

“Many Americans live on low incomes and feel inflation acutely,” Richyal says. “People who are living pay check to pay check really care about gas prices and food prices and rent payments.”

Another complication is that sharp, upward moves in crude oil often precedes a recession.

“The Fed could find itself raising rates to curtail demand to try and get inflation under control.  But the energy price is itself curtailing demand.

“So, you have this non-negligible risk of the Fed raising rates into a slowdown.

“The Fed may even be raising rates into what we realise, ex-poste, is a recession. That’s when you get stagflation.”

Which sectors look best in this environment?

“If equities and bonds fall together, then that’s a market proxy for inflation, so we have to look at what tends to work in that environment.

“Historically the sectors that do best, in a relative sense, include consumer staples and healthcare,” Richyal says.

“They are sectors where businesses have pricing power and can pass on the cost of goods — where goods have limited substitute products.

“Relative earnings in those sectors will start to look better. The tend to have a more stable earnings profile. They will be crimped to some extent but will do relatively better.”

Unknowns ahead

But there are still plenty of unknowns in the quarters ahead, cautions Richyal.

“If the Fed capitulates and goes back to printing money, you’d get asset inflation and that would be great for markets.

“But it wouldn’t be good for society and the people living hand to mouth. That’s not going to happen because inflation is politically unpalatable.

“If there’s a commodity price induced recession while the Fed is raising interest rates, then that will do some of the central bank’s job for it, and they may not lift rates as much.

“If the whole issue of supply chain disruptions resolves itself, and the war is over quickly and supply chains improve, it’s possible that economies could move back into structural disinflation.

That would be great for the person in the street and might be good for market participants as well.

“But that seems a bit of a long shot right now.”

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About Nudgem Richyal

Nudgem Richyal co-manages Pendal Global Select Fund with Chris Lees. The pair have been working together in global equities investing for more than 20 years.

Nudgem has 22 years of industry experience, joining J O Hambro Capital Management (a wholly owned subsidiary of Pendal Group) with Chris in 2008. He was previously an investment director with the Global Equity Group of Baring Asset Management, where he worked closely with Chris since 2001.

About Pendal Global Select Fund

Pendal Global Select Fund is a global equities portfolio with a distinctive, yet proven approach and a 17-year track record of outperformance. Since its inception, the underlying strategy (JOHCM Global Select Fund) has delivered top-decile performance in Lipper and 2nd decile in Morningstar.*

About Pendal

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management. Pendal Group includes Pendal Australia, J O Hambro Capital Management, Regnan and Thompson, Siegel and Walmsley (TSW).

Contact a Pendal key account manager here

China looks to be stepping away from its zero-Covid policy — and that could have a major impact for investors. Pendal’s Head of Income Strategies AMY XIE PATRICK explains

• Stepping back from zero-COVID policy a powerful tool for Beijing
• Signs authorities are readying population for change
• Boost to Chinese economy will benefit companies globally

YOU won’t hear it from President Xi, but there are signs China’s Covid zero-tolerance policy is easing, even as case numbers climb.

“It looks like internally China is setting up to gradually step back from the zero-Covid policy — and that is the most powerful stimulus tool Beijing has at its disposal,” says Amy Xie Patrick, Pendal’s head of income strategies.

China has shut down whole cities in an effort to crush variants of the coronavirus. That’s having severe economic consequences, with factories closing, output falling and global supply chains faltering.

That in turn effects businesses (and their investors) from Apple iPhones to BHP’s iron ore exports.

A nuanced approach

“Beijing isn’t, and won’t, come out and drop the policy,” Xie Patrick says. “There’s not going to be any big headlines about it,” Xie Patrick says.

“It’s more nuanced.

“China has started allowing imports of the Pfizer pill and it’s covered under public medial insurance as a treatment for Covid,” she says. The Pfizer drug has been found to cut the risk of hospitalisation or death in people at risk of severe Covid-19 by up to 90 per cent.

“They are setting up the hospital system to deal with different levels of urgency of Covid cases – reserving hospital care for those most affected,” Xie Patrick says.

“One of the most important signals is that state media in China is talking more about Covid and emphasising the much milder symptoms of the Omicron variant.

“Beijing is using the state media to influence public opinion to try and change the public perception of Covid.

“The simple fact is that case numbers are intensifying despite the doubling down of lockdowns.

“Authorities have to realise they can’t keep operating like this. Every day it costs a certain amount of GDP and lockdowns are not an economically viable solution.”

It means investors can discount some of the doomsday scenarios around the Chinese economy, Xie Patrick says.

While the official growth forecast this year is 5.5 per cent, many market watchers are forecasting much less.

Xie Patrick believes achieving 5.5 per cent will be a challenge because of the downturn in the property market.

But dropping of the zero-COVID tolerance policy, covertly, is a policy tool Beijing can use.

“Retail consumption can thrive again because people will be allowed to go out again. When Chinese people change their mentality of living with COVID, then economic activity can return to normal.

“It’s the strongest policy tool China has to stimulate the economy.”

The Australian Real Estate Investment Trust sector is looking strong despite significant changes in the retail space. Pendal portfolio manager Julia Forrest explains in this fast podcast

An excerpt from this podcast

“If you look at the performance of the REITs sector during the month of February, retail was actually the strongest sector. 

Even though there was a lot of disruption during the period because of Covid – and there was rental relief granted and earnings were a bit softer – the actual operating metrics themselves were improving. 

So you’ve seen improving occupancy levels, leasing spreads are improving, interest in pre-leasing is improving. 

Interestingly, we’re still seeing foot traffic down 20 per cent on 2019 levels, but it’s been more than compensated by the average spend which is up about 30%. 

So people know what they’re going to buy when they go to shopping centres. They’re not there for particularly long. They don’t go as often as they used to, but they spend more.