Bond yields should rise slightly higher next year and will continue to be a strong defensive asset says Pendal’s TIM HEXT in this fast podcast

An excerpt from this podcast

“By the time the Reserve Bank is actually tightening rates, the market has already factored that in. And that’s what we’ve seen this year,” says Tim Hext, head of government bond strategies at Pendal.

“But I think it’s fair to expect bond yields to finish next year slightly higher than where they are now.

The market is looking for official rates to be around 75 basis points higher,” he says.

Hext thinks that is too much.

“With that in mind, bonds are not bad value around the current levels. And of course, bonds are a defensive asset. It’s not the central case scenario but if everything goes wrong, bonds will perform that function,” he says.

“Are you going to make a lot of money out of bonds next year? Probably not. But will they be a good defensive asset given where yields are. The answer is yes.”

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

CHINA’S property-led economic slowdown shows no sign of ending. In this week’s The Point podcast, Pendal portfolio manager Amy Xie Patrick explains what that means for Australian investors:

An excerpt from this podcast

“The market assumes the Chinese government won’t let the Chinese economy fall below 5 per cent growth. But I think the pain threshold is lower this time.

“Normally, that’s really bad news for the Australian economy. But Australia’s reliance on resource exports has gotten a lot more muted, especially with respect to China.

“For investors, it means you need to be a lot more region specific when looking at your portfolio construction, especially for a fixed income portfolio.”

The number of “impact bonds” more than doubled in 2021, but demand is still outstripping supply, says Pendal portfolio manager George Bishay in this fast podcast.

Impact bonds provide a financial return as well as a positive impact on the environment or society. The money is ringfenced and can only be used for pre-determined objectives.

In this short podcast George explains how the secondary market in impact bonds is driving performance:

An excerpt from this podcast

“If you are able to get hold of them, [impact bonds] perform very well in the secondary market because everyone wants them,” says Pendal’s George Bishay.

“They outperform vanilla bonds due to this huge demand.

“It’s a really powerful way to deploy capital. The only real negative is the concept of greenwashing – where an issuer comes to market and talks up their credentials only to fall short from an ESG perspective.

“We buy securities from an issuer that has a very good credit rating. That allows for the secondary market activity.”

Carbon credits and futures can provide higher returns and a smoother investment journey with positive benefits for the planet. Pendal senior portfolio manager STUART ELIOT explains how in this fast podcast

Listen to the podcast above or read the transcript below

Interviewer Sean Aylmer: Welcome to The Point podcast from Pendal. Today I’m talking to Stuart Eliot, senior portfolio manager at Pendal Group. Stuart, tell me what are carbon credits and carbon futures?

Pendal Senior Portfolio Manager Stuart Eliot: I’ll start by talking about what our carbon credits.

There are two types of carbon credits. There are regulated ones and voluntary ones.

With the voluntary credits, imagine you’re a farmer who decides to plant some trees, then you can go and claim some credit for the carbon that you’re going to sequester.

Then on the other side of that, let’s say you’re someone who wants to offset the emissions of taking a flight somewhere.

You can actually go and purchase the carbon credits to offset the carbon of your flight. This is a bilateral transaction.

The voluntary credits have a mixture of value and credibility and quality, and they’re quite inefficient to transact.

There are some moves in place to try to put these on the blockchain to make them more efficient, but it’s still early days.

With regulated credits, which is the main carbon market in the world at the moment, you might have an example such as the European Union’s cap-and-trade system.  

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That covers about half of all of the EU total greenhouse emissions, which is currently around 10,000 installations in airlines and things like that.

The important thing from the futures perspective is that these emissions are standardised so that leads to a large and incredibly liquid futures market.

The way their cap-and-trade system works is by regulating an increasing number of industries into scope while simultaneously reducing the number of allowances that are available each year.

So you have more and more companies that are emitting in the system and they’re all competing for fewer and fewer allowances.

Interviewer Sean Aylmer: Okay. So they’re becoming more prominent, purely on the back of necessity now. People understand that they need to achieve carbon neutrality or most people understand that. And so this is actually a way for them to do that. Hence this market has been created.

Pendal Senior Portfolio Manager Stuart Eliot: Yes, exactly. And it’s governments also driving or creating incentives for the right sort of behaviour by companies.

So when we talk about carbon credits, it’s really a shorthand. These things actually cover carbon dioxide, nitrous oxide and nasty gases from things like producing aluminium.

The way the carbon credits are allocated each year is that the regulator will allocate about 40 per cent of them to, say, hard-to-abate industries. And then the other 60% are auctioned off.

So there’s this competitive environment where companies are trying to estimate what their emissions will be this year and try to buy the permits to offset the cost of that.

At the end of the year, each mandatory participant must report what their emissions were in that year and then surrender the number of permits for their emissions on that year.

If they don’t have enough permits, they’ll actually have to go out into the market and buy the remaining permits at whatever the price is, in order to cover their emissions.

If they’ve been good corporate citizens and have a lower emissions, then they can actually monetise that difference by selling their remaining permits.

Interviewer Sean Aylmer: Is this an investible market? I understand what you’re saying from a company’s viewpoint, but is it something that investors can get exposure to?

Pendal’s Stuart Eliot: Yep, absolutely. The easiest way to access it is through the futures market.

In the futures market the way the contract is designed is that one contract covers 1000 tons of carbon allowances.

Why would you do that? Well, it’s a way of increasing the portfolio returns while at the same time having positive externalities, which is a good thing in two ways.

Interviewer Sean Aylmer: Just explain that.

Pendal’s Stuart Eliot: Let’s say that I have an investment thesis, which is the price of carbon emissions will go up. Then I can buy the futures in my portfolio. And if I’m right and the price goes up, then my investors will profit from that.

But at the same time, because I’m buying some of the limited quantity of carbon credits, then at the margin that drives up the price of emissions, which is where you get the positive externalities side of things.

Interviewer Sean Aylmer: So what other reason might an investor have for being interested in carbon credits?

Pendal’s Stuart Eliot: An investor might have a buy-and-hold exposure in their portfolio to hedge the impact of rising carbon prices on emission-exposed portfolio holdings.

Let’s say if you have an aluminum smelter in your portfolio, then you might hold the carbon credits to hedge the risk of that.

Interviewer Sean Aylmer: So how and why does Pendal use them in your diversified fund?

Pendal’s Stuart Eliot: Precisely for those reasons. We are trying to increase returns for investors.

Also we try to do that in a way that’s efficient in terms of not adding too much risk to the portfolio while you’re generating returns.

You achieve that by diversifying over a whole range of different types of assets.

Because of the nature of the carbon market – part of it is the supply and demand related to economic activity but you’ve also got this government intervention, which is deliberately trying to force up the price – then that is less correlated to other assets in the portfolio.

That leads to a sort of a more efficient outcome. So essentially you’re getting higher returns in a smoother journey, which is what we’re all about.

Interviewer Sean Aylmer: Stuart, thank you for talking to The Point. That was Stuart Eliot, senior portfolio manager at Pendal Group. I’m Sean Aylmer.

Sean Aylmer is an economist, a former editor-in-chief of The Sydney Morning Herald and host of leading Australian business podcast, Fear and Greed.

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About Stuart Eliot and Pendal’s Multi-Asset team

Stuart Eliot is a senior portfolio manager with Pendal’s Multi-Asset team. Stuart has day-to-day responsibility for the monitoring and management of all portfolios within the Multi-Asset team.

Stuart’s expertise includes portfolio construction, risk analysis, development and implementation of systematic investment strategies.

Pendal’s diversified funds provide investors with a variety of traditional and alternative asset classes and strategies.

Led by Michael Blayney, the team manages our multi-asset portfolios with a focus on strategic asset allocation, active management and tactical asset allocation.

Find out more about Pendal’s multi asset funds:

• Pendal Multi-Asset Target Return Fund
• Pendal Sustainable Balanced Fund
• Pendal Sustainable Conservative Fund

Contact a Pendal key account manager here

Investors can expect green innovation to accelerate after the COP26 climate change conference because more countries are seeing that it makes good economic sense, says Regnan’s Maxime Le Floch in this fast podcast

Listen to the podcast above or read the transcript below

Interviewer Sean Aylmer:  Welcome to The Point from Pendal. Fresh from the United Nations climate change summit in Glasgow, I’m talking to Maxime Le Floch, investment analyst at responsible investing leader Regnan. Maxime, welcome back to The Point.

Regnan impact investment analyst Maxime Le Floch: Hi, thank you very much.

Interviewer Sean Aylmer: Maxime, does COP26 in Glasgow get a pass mark?

Regnan’s Maxime Le Floch: I think it’s really good progress we’re seeing. Obviously we are nowhere near where we need to be in terms of commitment from countries.

This is what matters for COP (Conference of the Parties to the UN convention on climate change). This is international negotiations where countries are pledging action and trying to coordinate things.

Overall I’m very optimistic that we’ll see an acceleration in action.

First, when you look at the national policies that countries have put together ahead of COP, we were already looking at 2.4 degrees global warming, which is much lower than what we had even back at the Paris agreement in 2015.

So, so there is a ratcheting up and I think this will accelerate.

And one of the reasons is we also have an accelerating cycle whereby those national policy contributions that a country needs to submit – the NDCs (Nationally Determined Contributions which contain a country’s emissions targets strategy) – they used to be on a five-year review cycle, and now they’re on one year.

So already next year countries will have to go back to the COP and show their increased commitments to decarbonisation.

When you look at the texts of the actual Glasgow climate pact, you’ve got a lot more focus on mid-term targets.

It’s not just about net zero by 2050, it’s also about what are you doing now, for the next 10 years, to really implement that into how you produce renewable electricity, how you produce cement, all those industries that need to decarbonise.

I think it’s a good outcome. We’re seeing the US, China in general getting more serious. Of course you still have things that are not perfect. India is trying to push for a watering down of some of the ambitions around coal.

But there is a lot of progress where China and India already are committing to net zero targets. It’s not yet in their national plans, but this is going to accelerate dramatically, I think.

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Interviewer Sean Aylmer: Okay, so that sense of urgency has really come out in the last couple of weeks, which is great. Of course, we’ve paid a lot of attention to it – and the media has paid a lot of attention to Glasgow in in the last few weeks in the run up to it. But it’s really just the pointy end of a much deeper trend, isn’t it?

Regnan’s Maxime Le Floch: That’s right. One of the reasons we see an acceleration at this kind of international event is that we’re seeing that the economics of decarbonisation are getting a lot better.

And so countries are saying it just makes good economic sense to develop renewable energy, to have smart grid technology, electric vehicles, batteries and so on.

I think this is what you’re seeing with countries like China, which has very good technologies in all those domains. They’re saying, actually this could be a very interesting economic opportunity for this country to export.

This is what we think also as investors. Those markets are getting increasingly attractive to generate good financial returns while making an impact in terms of decarbonisation.

We just published last week a piece of research on green innovation. We’re saying there’s a deeper trend here – what we expect to be a new innovation cycle – that will be driven by green innovation.

Already, when you look at patent data, you see that the amounts of green patents within all kinds of global patents, is 10 per cent today, up from 6 per cent 20 years ago.

So there is an acceleration and this is creating a lot of opportunity. And we’re seeing that reflected in the outcomes for COP.

Interviewer Sean Aylmer: So bringing that back to the investor, that means there must be opportunities for investors in that area?

Regnan’s Maxime Le Floch: Yes, exactly. One of the major ways of decarbonising is to bring innovation.

There is a very big technological angle to this. Of course it’s not everything, but it’s a very important angle. And it’s particularly important for investors because innovation brings product to markets, brings revenues and bring profitable growth for those companies. So ultimately good returns.

Cement, for instance, is an industry that has not done much radical innovation. In the last decade it’s been mostly process improvements that are quite incremental.

But we’re seeing new approaches. One of the companies in which we invest, Hoffman Green Cement, has brought to the market radical innovation in the sector – a new kind of cement that doesn’t require the production of clinker, which is really where most of the emissions happen for cement.

Because of that, they can cut emissions from cement by a factor of six.

So it’s very, very radical. And you have to bear in mind that cement is a very big part of the carbon equation. If the cement industry was a country, it would be the third-largest emitting country after China and the US.

Interviewer Sean Aylmer: Okay, so what other general areas are of interest where you think there are technology breakthroughs that have happened or are happening?

Regnan’s Maxime Le Floch: One of the areas we are very interested in is the area of industrial software.

ON of the areas we are invested in is simulation software. A company like Ansys in the US is really helping accelerate innovation. It enables you as an R&D engineer to run very complex simulations that involve multiple physics.

You can simulate on a computer what would happen to an electric engine, for instance, depending on different scenarios for heat and pressure in real-world conditions.

[The software] helps those engineers run thousands of simulations on a computer instead of resorting to a physical prototype.

So it makes innovation cheaper, more effective, faster. It enables you to also include from the design phase of products, parameters such as environmental impact. So you can optimise for the carbon footprint of the product from the design phase, as opposed to as an afterthought. This would be a very important piece of accelerating innovation we think.

Interviewer Sean Aylmer: Maxime, thank you for talking to the point. That was Regnan’s Maxime Le Floch, investment analyst at Regnan. I’m Sean Aylmer.

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About Maxime Le Floch

Maxime is an analyst with Regnan’s impact investment team. He focuses on Regnan Global Equity Impact Solutions Fund. Maxime has more than 10 years of experience in sustainable investment. Before joining Regnan he was an investment analyst with Hermes where he helped launch and manage the Hermes Impact Opportunities Equity Fund.

A cat-and-mouse game between central banks and markets means fixed income is no longer a case of sitting on “a whole bunch of bonds for the coupon”, says Pendal portfolio manager AMY XIE PATRICK in this fast podcast.

Listen to the podcast above or read the transcript below

Interviewer Sean Aylmer: Welcome to The Point podcast from Pendal. Today I’m speaking to Amy Xie Patrick, portfolio manager at Pendal Group.

We’re seeing something of a disconnect between central banks and markets at the moment. Certainly investors expect central banks to start moving on interest rates soon. Even if some like the Reserve Bank of Australia, are determined to be, in their words, patient.

Amy, can central banks go as hard as what the markets have priced in?

Amy Xie Patrick, portfolio manager with Pendal’s income and fixed interest team: That’s a great question, Sean. I think central banks are very reluctant. As you rightly said, the RBA wants to be patient.

The Fed has used the overarching phrase of “average inflation targeting” to hide behind.

I think it would be difficult for central banks to go quite as hard as what the markets have priced in.

But let’s be cognisant that what the markets have priced in, is somewhat of an over-reaction in terms of the liquidity and the sheer size and positioning that had been, especially at the front end of yield curves over the last few months, because the market has bought in to the central banks rhetoric.

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Now, given the kind of moves that we saw last week, it is again interesting to me that at the very end of last week, you had major central banks like the Bank of England come out and essentially do a backflip on what they had prepared the market for.

So this is again a demonstration that when the markets price in more than what the central banks are prepared to do, they will be more concerned about reining it back and pacing those expectations of the markets rather than chasing them.

Interviewer Sean Aylmer: It’s almost a cat-and-mouse game in a funny way.

Pendal’s Amy Xie Patrick: It really is. It’s a big question right now as to whether the markets have it right, or whether the central banks have it right.

But the central banks are determined to tell us that inflation is not a problem for the longer term.

Interviewer Sean Aylmer: It comes down to the issue of credibility. And if you take the Reserve Bank of Australia, for example, where’s their credibility sit at the moment, given how they let go of the yield curve control in the last couple of weeks?

Pendal’s Amy Xie Patrick: I would say considerably poorer, especially given how they let go of the yield curve control.

I think it’s the first time that we’ve seen a policy move from the RBA implemented in such a way as to simply do nothing, as opposed to announce something.

The way they let go of yield curve control at the end of the prior week was simply to no longer purchase those 2024 bonds at the yields they had previously committed to, rather than announced a policy shift as it were.

Interviewer Sean Aylmer: Policymaking is never going to be particularly easy. Though something we’re seeing at the moment, which you have mentioned before, is that central banks have shifted away from being pre-emptive. Particularly under Dr Philip Lowe, they are waiting to see the data before moving. Certainly some of his predecessors and other central banks are much more pre-emptive than they are now. Is that fair to say?

Pendal’s Amy Xie Patrick: I would say that if anything, they’re moving even more towards driving through the rear-view mirror. For 10 years or more central banks like the RBA and like the Federal Reserve in the US have failed again and again in their inflation forecasts.

Right now the fed is now emphasising the mandate of full employment, almost as if it comes before inflation, as far as they’re concerned.

We know that employment is a lagging indicator for the economy.

So by the time they see employment being too tight, the wages market being too hot, inflation is already going to be running far ahead of what they’re comfortable with.

So they’re telling us that more so than what they’ve done for the past 10 years, they’re going to be even more lax and they want to stay even further behind the curve.

Interviewer Sean Aylmer: Of course all of this is about inflation. The current inflation spike — why are we seeing it and do you think it’ll last?

Pendal’s Amy Xie Patrick: Good question. So the current inflation spike — a lot of ink has been spilled on the supply chain bottlenecks that we’re seeing around the world.

That’s to some degree to be expected because of the huge shock to demand you’ve had — and therefore to supply as well because of Covid. And then the recognition of that demand and supply simply can’t keep up.

That’s relating to goods inflation. And goods inflation for developed countries like Australia is typically not a massive component of our inflation baskets.

What is more important is the inflation that is potentially yet to come. And we’re expecting this to be a 2022 theme.

That wave of inflation will come in services and to a degree in shelter as well.

Services, you can imagine that as demand picks up and people start paying for experiences again – as opposed to over-ordering online goods to satisfy their boredom while they’re in lockdown – the second wave in services will be significant.

We will have to closely watch wages and labour market participation to see if the second wave in services becomes more of a persistent problem that central banks cannot ignore.

Interviewer Sean Aylmer: Services you would think would actually be more permanent than transitory though? Because once prices go up in services, it’s probably harder to bring them down. Is that right?

Pendal’s Amy Xie Patrick: You’re absolutely right. Absolutely right. Goods will come in waves, but services inflation is very stable through time. Once you get that stepwise change, it’s very hard to go backwards from that.

Interviewer Sean Aylmer: And you mentioned shelter, just explain that?

Pendal’s Amy Xie Patrick: That’s just in terms of the housing market being very hot. It literally feeds through to what people pay in rent. So that’s what we call the shelter component of inflation.

Interviewer Sean Aylmer: Okay, so what are the near-term speed bumps that might calm all this sell-off in bond markets?

Pendal’s Amy Xie Patrick: The near-term speed bumps could be if you get some other Covid variant that becomes disruptive again. I do think — apart from China where they continue to enforce a zero tolerance to any Covid — the rest of the world is starting to adapt to life with Covid.

Other speed bumps that we see is a mid-cycle slowdown in the US. The kind of economic slowdown that you’re seeing right now is being dismissed by many, because it’s typically what you see halfway through a cycle.

But I don’t think it can be so easily dismissed when you consider the amplitude of this particular economic cycle.

So even if it is just a mid-cycle slowdown, you’d expect that the size of that would be much greater than any previous, mid-cycle slowdown we’ve seen before.

And then once again, we have to worry about our close neighbours in China and the very self-engineered slowdown that they’re going through there.

There’s a famous phrase, “when China sneezes the world catches a cold”, and I don’t think we can escape from that relationship just yet.

Interviewer Sean Aylmer: Okay, so the bottom line to all of this, Amy. What’s the message for investors?

Pendal’s Amy Xie Patrick: The message for investors is that within your fixed income portfolios, it’s no longer such an easy ride as it has been for the last 30 years of simply going along a whole bunch of bonds and sitting on them for the coupon.

You have to be a lot more nimble.

For our portfolios, for the short term we prefer to stay relatively close to home or look for opportunities to actually go short on bonds.

But it also means with this backtracking being seen by central banks – including the RBA, including the Bank of England – that for now, the central banks aren’t going to do anything too surprising.

So it’s probably a clear run for the risk parts of your portfolios going into the end of this year.

Interviewer Sean Aylmer: Amy, thank you for talking to The Point.

Pendal’s Amy Xie Patrick: You’re welcome. Thank you.

Interviewer Sean Aylmer: That wasAmy Xie Patrick, portfolio manager at Pendal Group. You have been listening to The Point podcast from Pendal. I’m Sean Aylmer.

Sean Aylmer is an economist, a former editor-in-chief of The Sydney Morning Herald and host of leading Australian business podcast, Fear and Greed

Most of Earth’s global CO2 emissions are now covered by net zero targets, which means big new markets are forming. Regnan impact investment analyst MAXIME LE FLOCH explains

Listen to the podcast above or read the transcript below

Interviewer Sean Aylmer: Welcome to The Point podcast from Pendal. Today I’m speaking to Maxime Le Floch, investment analyst at Regnan.

Maxime, the United Nations COP26 climate change summit kicked off in Glasgow this week. Why does COP26 and UN conferences like this matter?

Regnan impact investment analyst Maxime Le Floch:  Well, the UN conferences are really important because climate regulation is an extremely valuable service. But the problem is, it’s a global public good, which means that it requires some kind of international co-ordination to protect it.

Otherwise, there is a risk of a free-rider effect where some countries could emit emissions while others reduce. So the countries need to agree on some sort of globally agreed targets. And this is what they’ve been trying to do with those Conferences of Parties (COPs).

Now the issue is that the current policies – even though they’re getting a lot better and we’ve seen a massive change in the last few years – the current policies put us on track to 2.7 or 3.1 degrees of global warming, which is not enough.

Now with the COP26, this is the time since the Paris Agreement where countries need to update their national plans for reduction in greenhouse gas emissions. So this is why this is really important.

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And I think this year the International Energy Agency has really set the tone, saying that to reach those climate targets there needs to be a lot more action.

For instance, the annual renewable electricity investment need to grow three times by 2030. So there’s a need for a lot more investment. There’s been a lot of investment in clean technology already, but that needs to grow further.

Interviewer: So as an investor, do you hope from COP26 you will see these roadmaps – but also real money – to build the infrastructure and the capability to have a carbon-neutral world in 2050? Which obviously means potentially there’s things to invest in.

Regnan’s Maxime Le Floch: That’s right.What’s really important with those COPs is what is done at the country level in particular. So long-term commitments from major countries, but also particularly the mid-term targets to 2030.

Now we’ve seen massive change very recently. Twomonths ago China committed to net zero by 2060. Also just this week, remarkably, India committed to net zero as well, which was unthinkable just a few years ago.

So this means that 84% of global CO2 emissions are now covered by net zero targets.

This is really important because that then shapes policies for renewable energy, electric vehicles, smart grids – for a lot of those investments. So that’s supportive.

In particular, something that many people expect is more in terms of carbon markets, because that could be a very clear signal for where companies need to go.

Interviewer: Soin a very tangible sense COP26 – if it’s successful – makes companies think differently about climate change and ESG, which obviously has flow-on effects for what you’re investing in or not investing in?

Regnan’s Maxime Le Floch: Yes, it’s really important.

Something I think we need to bear in mind is that there are also deeper forces.

The reason why we are seeing a lot more at the moment is that there’s also a deeper economic force at play here.

There’s a lot of green innovation accelerating. There are opportunities throughout many sectors for decarbonisation… many opportunities to make processes more efficient and reduce the energy footprint of operations. We often have a good return on investment for companies implementing them.

Those dynamics are really helping the global common action because they make the transition a lot more appealing economically.

And that’s a very powerful force for countries, but it’s a fantastic opportunity for investors.

Interviewer: Does it actually open up the investment horizon with more options now because of things like COP26 pushing companies to become more carbon neutral?

Regnan’s Maxime Le Floch: Yes, exactly. For instance, something we’ve been looking at recently is patents for green technology, where we see that kind of acceleration.

There’s been a lot of growth in those patents which really signals that innovation is accelerating and bringing new opportunities to market.

If you look at global patents in the 1990s, environmental technologies patents were just 6% of global patents. Now they’re 10%.

So they’ve been growing quite a lot.

Some technologies in terms of patent trends have been growing at 20%-30%, over the last decade in things like electric vehicle (EV) charging, autonomous vehicle technology, et cetera.

That really plays into what the International Energy Agency was saying about needing to triple investments in renewable energy.

And you can look at opportunities beyond that. Hydrogen production we need to grow 700 times compared to the level it is today. Public EV charging [needs to grow] 150 times Battery storage technology 170 times.

These are very big markets that are forming and that are accelerating.

So the more we get to net zero target, the more those markets are set to see exponential growth.

Interviewer: FinallyMaxime, are you happy with how COP26 has progressed so far? It was a rocky start with G20 but it certainly has picked up pace since then.

Regnan’s Maxime Le Floch: It has. The move from India was a big step. Something that was holding back some of the discussions was the fact that the old industrial countries were seen as responsible. A lot of things have changed with China and India becoming a bigger part of the emissions equation and they recognise that.

And again, countries like China and India recognise that there’s a cost-benefit equation whereby the cost of mitigation – the cost of reducing emissions, investing in new environmental technology – is reducing dramatically and can give you benefits.

China has very good technology in batteries, electric vehicles, smart grids. These things you can actually export as a country so it makes good business sense.

At the same time, the recognised they are exposed as countries to the physical risks of climate change. That cost is now seen as higher than it used to be and the impact is nearer than expected with issues around extreme weather events accelerating and impacted those countries more.

So it’s a decent start. We are just in the beginning. Let’s hope there’s more tangible action, and in particular commitments.

The commitment by individual countries are particularly interesting to look at.

Interviewer: Maxime, thank you for talking to The Point.

That was Maxime Le Floch, impact investment analyst at Regnan. You’ve been listening to The Point podcast from Pendal. I’m Sean Aylmer.

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About Maxime Le Floch

Maxime is an analyst with Regnan’s impact investment team. He focuses on Regnan Global Equity Impact Solutions Fund. Maxime has more than 10 years of experience in sustainable investment. Before joining Regnan he was an investment analyst with Hermes where he helped launch and manage the Hermes Impact Opportunities Equity Fund.

Pendal’s head of multi-asset MICHAEL BLAYNEY takes investors on a whistle-stop tour of the major asset classes and where to find value right now

Listen to the podcast above or read the transcript below

Interviewer Sean Aylmer: I’m joined on The Point podcast by Michael Blayney, head of Pendal’s multi-asset investment team. Michael, essentially your job is to look across asset classes and identify opportunities globally?

Pendal Head of Multi-Asset, Michael Blayney: Yes exactly.

Interviewer: Michael, what’s the outlook for equities?

Michael Blayney: Equity markets have obviously had a very strong run. As a result, they have become somewhat expensive to varying degrees. Australian equities [are on] on the slightly expensive side, US equities on the much more expensive side.

Now the counter to that is that earnings have been very strong and we’ve seen earnings revised up strongly around the world, including in Australia.

The other element is that price momentum is still very strong in the market as well.

So when we put those things together, it makes us a little bit more cautious than we were. However at this stage we’re not at a point where we’d be recommending to underweight equities in portfolios.

Rather we’d be looking to take risk in areas that are relatively cheaper – to try and find those pockets of value around the world. So for example some selected emerging markets and UK equities would both be examples of that, as would real estate securities.

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Interviewer: I’m going topush on the emerging markets. So UK, but what emerging markets do you like at the moment

Michael Blayney: Specifically we quite like Mexico. It has been neglected by investors for a long time. It has started to rally a bit, but it’s still at very, very cheap levels. That would be the main one.

Other than that, there are obviously other markets in Asia, which were very cheap, but have rallied more strongly. So they’re less of an opportunity.

We’d be a bit more cautious on China at the minute, in spite of the fact that valuations there aren’t too bad. Obviously there’s a number of significant macro risks associated with China.

So we tend to prefer emerging markets outside of China at present.

Interviewer: Okay, what about credit?

Michael Blayney: Within credit, it’s fair to say that credit spreads – which are the extra yield you get paid to take on the credit risk of lending to someone who’s not a sovereign – they have come in a lot since their highs of March last year.

As a result of that, if you look at things like high-yield spreads in the US, you’re really not being paid very much. You’re barely being compensated for what an average default cycle could knock off in terms of your returns.

So at this stage, we’re relatively cautious on credit. We do think it still has somewhat of a role to play in investment portfolios, but we would tend to hold a little bit less credit than usual.

We would tend to favour investment grade simply because even though the spreads are tight, the default experience is seldom bad in investment grade. So you’re still getting some compensation for the risk that you’re taking, but we would certainly shy away from high yield at this point.

Interviewer: Okay, government bonds?

Michael Blayney: Government bonds are an interesting one. Obviously we’ve seen yields rise very strongly early in the year. They’ve had a bit of a retracement of that and come back and then they’ve come back again.

So it’s quite interesting now. We’ve obviously seen markets become more concerned with inflation and that has been reflected in higher bond yields.

Now, the reality is that bond yields in absolute terms are still at relatively low levels. And with the heightened inflation risks due to all of the fiscal stimulus and the re-opening of economies, while we still obviously have quite accommodative monetary policy, the risks of inflation spikes are certainly elevated relative to history.

So we’re a little bit cautious on government bonds. But equally they do still serve a defensive role in a portfolio. They’re liquid. In time when equity markets sell off, while they don’t always provide protection, they do provide protection more often than not.

So we believe investors should maintain some government bonds in portfolios, but should be underweight relative to a normal level of exposure at this point, given the heightened inflation risks.

Interviewer: Okay Michael, what’s the outlook for listed real assets, infrastructure and real estate?

Michael Blayney: That’s an area of the market that we quite like – selectively, of course. But real estate is an area which suffered a lot with Covid. (Here I’m talking about listed real estate rather than residential, where Covid obviously had the opposite effect).

Listed real estate is a beneficiary of that re-opening, if you think about people going back to the office, going back to shopping centres. Obviously there is a bit of diversification within listed real estate because you do have industrial exposure, which gives you still some exposure to e-commerce.

But overall that listed real estate sector, particularly globally, is looking relatively cheap. We think it’s an area that is potentially attractive.

Also given that while the sector itself is interest rate sensitive in terms of the valuations that the market puts on it, the underlying cash flows tend to have a degree of inflation protection over time.

So we do think it’s attractive from that perspective as well.

In respect to listed infrastructure, we like to be quite selective there rather than just buy broad, listed infrastructure indexes.

We do think there’s some attractive opportunities, particularly in Europe, to get exposure to listed renewables which generally provide you with a decent yield – be thinking 4% to 6% yield. A little bit of growth as a nice way to get some stability in portfolios because they tend to have quite a low sensitivity to what’s happening in the broader market and a reasonable degree of income in a world where income is still very hard to find.

Interviewer: So where is the relative value when we look at equities, credit, government bonds and listed real assets?

Michael Blayney: At present we’d still prefer equities to bonds.

Bonds do provide that diversification in sell-offs and equities are getting a bit expensive. But the reality is that earnings growth is still strong. Economic growth, while it’s coming off a bit, it’s still strong.

In that type of environment, we would still prefer equities to bonds.

We would prefer listed real estate to broad equities. That would be primarily on the basis of valuations.

Credit’s an interesting one. From investment grade you don’t get huge amounts of return, but we would just see some exposure to investment grade as being a way to get a little bit more yield in your defensive assets. But it’s something that we wouldn’t have a huge allocation to at this point.

Interviewer: Michael, thank you for talking to The Point.

Michael Blayney: Thank you very much, Sean.

Interviewer: That was Michael Blayney, head of the multi-asset investment team at Pendal. Thank you for listening to The Point podcast. I’m Sean Aylmer, have a great day.

About Pendal’s multi-asset capabilities

Pendal’s diversified funds provide investors with a variety of traditional and alternative asset classes and strategies.

These include Australian and international shares, property securities, fixed interest, cash investments and alternatives.

In March 2024, Perpetual Group brought together the Pendal and Perpetual multi-asset teams under the leadership of Michael O’Dea.

The newly expanded nine-strong team will manage more than $6 billion in AUM and create a platform with the scale and resources to deliver leading multi-asset solutions for clients.  

Michael is a highly experienced investor with more than 23 years industry experience, including almost a decade leading the team at Perpetual.

Find out more about Pendal’s multi asset funds

Contact a Pendal account manager here

Re-opening 2.0 is perfectly timed for retail property, but the office market is also surprisingly robust, says Pendal’s Julia Forrest in this fast podcast

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Interviewer Sean Aylmer: We’re talking about property and particularly retail and office real estate. New South Wales and the ACT are emerging from lockdowns. Victoria is about to. From an investor’s point of view, what does it mean for retail property?

Pendal Portfolio Manager Julia Forrest: Well, it’s exciting times and what a time to open – leading into summer and Christmas. They couldn’t have got their timing better. We have been in lockdown here in Sydney for 102 days. So we’re re-emerging.

The first point of call will probably be services. We’ll see all of the services at all of the shopping centres fully occupied, probably from 8am in the morning to 8pm at night. Everybody’s raring to get out and get their hair done, maybe update their clothes and their jewelry because of course we are leading into party season.

So I am expecting a very buoyant time in terms of retail and shopping centres. Partly it’s timing, partly it’s that we’ve been locked down over two lots of school holidays.

People have money to spend. I don’t know about you, but I didn’t have a lot of confidence booking holidays for December. I have two teenage daughters and looking forward to spending some money on them.

So in terms of timing, it couldn’t have been better for shopping centres to be opening.

I think what will differentiate this reopening versus the previous reopening last year is that we’re coming out into a period of surging asset prices.

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So when we emerged last year in May-June, people were still uncertain. We have seen house prices up 20% to 25% since then, and also stock prices up a long way.

People have cash in their banks and they’re feeling wealthy. So I’m expecting a pretty buoyant time for retail.

Interviewer: If you go to some of those shopping centres today — and particularly the ones in Sydney – there are still some boarded-up shops. Do you think many retailers won’t come back?

Julia Forrest: Unfortunately, that is a likelihood. We’re probably opening up into a period of less supply, whether it’s cafes or apparel. Retailers have used this time to close their bottom 5% to 10% of stores – particularly if they are in hold-over (ie there wasn’t an active lease on the premises).

So we probably are opening up into a period where they will be less supply. One of the issues for retailers is whether they actually have had the confidence to order enough inventory ahead of reopening.

So that will be an issue, as well as whether they have sufficient staff. So that complicates things a little as well.

Interviewer: Let’s move on to office. People presumably will return to work in coming months. Though perhaps not at the same levels as they have been pre-pandemic. What do you think about the outlook for the office market?

Julia Forrest: I’m actually sitting in the office at the moment. There are very few people here, but I suspect that most people will be back in December for Christmas parties and lunches.

Because everybody has been locked down for a long time and they’re probably missing their colleagues.

So I guess the big returning time, in earnest, will probably be sometime in January where you’ll see this continuity of people back in the office.

But I think the cycle of “work-from-home” is quite well established. I suspect we’re only going to see people in the office probably three days a week from here on, which will obviously impact demand for office property. Probably more in the reconfiguration of space.

I think that employers really need to get people back in the office to work together, to collaborate. But I think they probably need to “earn the commute”, to quote Lend-Lease. They need to make the office vibrant and compelling for people to really want to come back into the office.

Interviewer: So for investors, the big question is: what’s the medium and long-term outlook for retail and office?

Julia Forrest: For retail, we have seen a number of transactions announced in the last two weeks. We do expect a couple more, which really put a floor under prices.

Prices have been marked down in the last year and a half. They’re probably off somewhere between 7% and 20%, depending on the quality and the dominance of the centre.

I think we’re book values are now we’re seeing quite a lot of support. So for retail things will improve from here. You have seen rents marked down and I think they’re probably more at sustainable levels now.

The surprising thing has really been office.

The demand for office assets has been robust. Book values have held and that’s despite what we can see is probably going to be slower demand, but also continued supply.

The reason why supply is continuing, is that office values have held their values.

It makes sense for developers to continue developing, because they can continue selling assets at book value, even though the underlying demand may not be there.

So we’re pretty optimistic on retail, in terms of net operating income and in terms of values.

The office book values are holding, but we can see rents continuing to be under pressure for the next two-to-three years.

Stagflation is a buzzword in global markets at the moment. Is it really back to the 1970s? And what would that mean for investors? Pendal portfolio manager Amy Xie Patrick explains in this fast podcast

Listen to the podcast above or read the transcript below

Interviewer Sean Aylmer: Stagflation. It’s a word we hadn’t heard for a long time, but in the last few weeks or months, suddenly it’s getting an airing again. What’s behind that?

Amy Xie Patrick, portfolio manager, Pendal Income and Fixed Interest team:

Absolutely. I think the last time we heard about the word stagflation, and when it really was a theme, was when we thought about the oil shock crisis that happened in the ‘70s.

I think what’s happened again this time round is that commodity prices, and these energy shortage stories — all the way from Europe, throughout China and hitting a lot of emerging markets as well — is making people think we’re going through the same set of circumstances again, which could trigger stagflation this time round.

But I do think that for stagflation you need really growth to stall – not just slow – and you need inflation to be skyrocketing.

I think stagflation as a word to characterise what we’re going through right now is a bit of an exaggeration.

Interviewer: Okay, so they’re overplaying the slowdown in growth and they’re overplaying the rise in prices – and that’s why we’re hearing stagflation?

Amy Xie Patrick Exactly. I think what’s behind the rising prices is several fold.

Obviously because of the Covid pandemic and the crisis that ensued, there was a massive drop-off in demand.

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Whenever there’s such a massive drop-off in demand, the capacity always adjusts. The same goes for commodity capacity. The same goes for energy and fuel capacity.

When that capacity falls, it takes a long time to come online again. Furnaces don’t just get switched back on. Miners don’t manage to suddenly turn on a lot of capacity very easily.

As a result, as you’ve seen demand recover from the depths of the pandemic, the supply hasn’t been able to really catch up.

So this is the first point that goes against this thesis of stagflation.

Demand is recovering. Vaccination rates are starting to really climb globally, even for those parts of the world that were really lagging at the beginning of the vaccination drive.

And as we see economies continue to open up, that demand recovery will continue to underpin some of the overall growth recovery that we’re seeing globally.

So by no means do I see a picture where growth is suddenly stalling or going backwards.

And then on the inflation side, it’s not just supply bottlenecks that are causing the fuel price rises and the commodity price rises. The demand side of the picture also seems pretty robust.

On the supply side, we have been told by a lot of policymakers in the central banks, not to worry about inflation because it is transitory. But some of them are starting to scratch their heads and think about how transitory.

I do think it probably leaves you with an inflation outlook that is slightly less comfortable than what we’ve been used to for at least the past five years.

Inflation – both headline and core – is likely to sit at or slightly above what central banks have as their targets.

Australia perhaps is one of the exceptions, because the RBA does target the middle of their ranges – 2.5 per cent as opposed to the rest of the world which largely targets 2 per cent.

But overall, just because inflation will sit at a slightly higher level than what we’ve been used to for the past five years, it doesn’t mean an inflation surge that suddenly becomes out of control.

Interviewer: So bringing that back to portfolio construction, if I’m hearing you right, we still have the same problem that we had six months ago. We may still have the same problem in six months time.

Amy Xie Patrick: Absolutely. You may not see yields go back to their all-time lows.

But by no means, are you going to see yields come back to the comfortable 4 per cent, 5 per cent or 6 per cent ranges where we can happily accrue a loss of income from our traditional fixed income portfolios.

Therein lies the problem for a lot of fixed income investors globally – and in fact portfolios as a whole.

If you’ve got still a lot of risk in your portfolio that is much more equity-beta driven, how then do you offset some of that risk with something that can be negatively correlated when those equity markets get into trouble – and in the meantime is still able to generate you sufficient income to offset some of those transitory or structural inflation concerns that are coming up?

I think that is the real challenge right now for fixed income portfolios.

For us at Pendal it really means thinking about using all the tools available to you in your toolkit.

Breaking down those traditional thinkings about the boundaries between asset classes and the boundaries between bonds and equities.

Thinking about where you can derive income from and where you can best use your levers to generate that alpha and those returns for still a very low-yielding world.

Interviewer: So how should we think about portfolio construction?

Amy Xie Patrick: Naturally it means you get pushed further out along the risk curve within fixed income.

You rely less on high-quality government bonds in the portfolio to provide you with that income, but you still leave enough of an allocation to those government bonds for safety.

For times, when you do get that sudden knee-jerk drop in equity market prices.

In the interim you search for income further along the risk curve in areas such as high-quality corporate bonds, but also diversifying into assets such as emerging market sovereign credit.

And that is ultimately the philosophy of how we make our income products.

The idea is to be able to generate steady enough income, that won’t be jeopardised by the quality and default risks within your income-generating engine of the portfolio. And still keep some of that protection going with an allocation to government bonds in the background in case you need it.