Rising oil and gas prices mean boom times for emerging market energy exporters such as Brazil, Mexico and Russia, says Pendal EM manager JAMES SYME
- Rising oil prices are lifting energy exporters
- Boom times for countries that sell energy
- Brazil, Mexico and Russia the picks
GLOBAL equity investors should look to Brazil, South Africa and Russia in 2022 as rising oil and gas prices deliver widespread economic growth to emerging market energy exporters, says Pendal’s James Syme.
Shifting attention to commodity exporters would be a change for many global investors who have been enamoured with China’s internet sector and the big semi-conductor stocks in recent years.
Syme — who co-manages Pendal Global Emerging Markets Opportunities Fund — agrees that has been the right approach for the past decade.
“But the Chinese economy is not particularly strong at the moment, and while it’s been a long time coming back for some of these other emerging markets, everything is starting to look good,” he says.
The oil price at around US$90 a barrel is at its highest levels since 2014 amid surging demand, while European near-term gas futures — which normally trade between EUR 10-20/MWh — recently spiked above EUR 180.
Syme says it’s not surprising that energy prices are rising as a long period of low investment in new capacity is followed by a sudden post-Covid resurgence in demand.
Western Europe has been reducing domestic gas production for environmental reasons, lifting its reliance on Russian gas. Germany has been steadily decommissioning nuclear power, including shutting three of its last six nuclear plants on December 31.
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And recent weather patterns have also played a role. Over the past few years Europe has had unseasonably cold winters and warmer than usual summers — which both lift energy use — while relatively windless autumns have capped power production at wind plants.
At the same time, Russian domestic demand for gas is rising and Russia’s gas exports to other countries, including China, have been increasing.
‘Boom times’
“Rising energy prices and the resulting inflationary push are going to be an economic and political problem for energy consuming nations,” says Syme.
“But for the countries that sell energy, this is fantastic.
“It’s just boom times.”
Syme says the boom is not limited to energy, with many other agricultural and mining commodities also seeing price rises, which benefit Brazil and Russia, and other commodity exporters like South Africa.
“And we haven’t really seen the reaction in terms of what that might mean for domestic stocks or currencies that we would expect to see.
“That’s why we continue to have positive view towards some of these markets and think they’re overlooked.”
Higher commodity prices flow directly through to economic growth in exporting nations.
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More export earnings mean companies can lift capital investment, hire more staff and pay higher wages, boosting consumption. Higher exports also improve a country’s current account balance and support its currency.
The resulting growth flows through to tax revenue, allowing governments to lift spending or cut taxes.
“It’s positive across the board,” says Syme.
Natural gas is also benefiting from its potential role as a bridge in the transition to lower carbon emissions.
“Both in terms of production and consumption, the carbon emissions per unit of energy for natural gas are lower than oil and much, much lower than coal.
“Notwithstanding the geopolitics, Europe could significantly reduce its carbon emissions if it switched power generation from coal to natural gas.”
So where to focus investment attention?
“We think this is a good time to own Latin America, where we prefer Brazil and Mexico” says Syme.
“We also think it’s a good time own South Africa and Russia.”
About James Syme and Pendal Global Emerging Markets Opportunities Fund
James Syme is a senior portfolio manager of Pendal’s Global Emerging Markets Opportunities Fund with Paul Wimborne.
The fund aims to add value through a combination of country allocation and individual stock selection.
The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.
The stock selection process focuses on buying quality growth stocks at attractive valuations.
Find out more about Pendal Global Emerging Markets Opportunities Fund here
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
One of 2021’s takeaways is that Covid is cyclical, says Pendal’s JAMES SYME. That means investors should be on the look-out for opportunities among over-sold reopening stocks
- Sell-off in the reopening trade provides opportunities
- Strong balance sheets with attractive valuations will reward investors
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ONE of the big lessons of 2021 for investors is that Covid is cyclical.
“It has these short-term cycles,” says James Syme, who co-manages Pendal’s Global Emerging Markets Opportunities Fund.
“Things get bad and then they get good and then they get bad again. And when things are getting bad, it’s not the end of the world.
“The speed of that cycle is much faster than a business or interest rate cycle. It’s measured in less than a year. That’s one of the key take-aways of 2021.“
When investing in this type of environment, it’s important to stick to fundamentals, and not get too swayed by trends, he says.
“If you buy good businesses with strong balance sheets at attractive valuations, you’re doing the right thing. We’re investors. We aren’t trading stocks.”
Opportunities among over-sold re-openers
Global conditions may not be optimal for emerging markets right now, but there are opportunities to be found partly because the recent selloff in the re-opening trade has been overdone says Syme.
“A combination of tightening monetary policy by the US Federal Reserve, a stronger US dollar and a slowdown in China creates a difficult environment.
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“If you think about what fuelled the boom in emerging markets from 2002 to 2008 it was relatively soft US monetary policy and a huge boom in China,” Syme says.
But there are opportunities, in part because Syme believes the selloff in the re-opening trade has been overdone.
“We always think about the opportunity in emerging markets, rather than the opportunity of emerging markets,” he says.
“Leisure, airlines, hotels and even bits of retail have been sold, and that’s accelerated in the last month by fears about the new Omicron variant of Covid-19.
“But I think some of the sell-off is too much. We are going to get back to normal at some point.”
Where the opportunities are
Syme has been considering reopening opportunities, and recently added a Korean entertainment business to the fund he manages, Pendal Global Emerging Markets Opportunities Fund.
In Brazil, the fund holds an airline and a brewer.
He still sees opportunities in emerging markets that are reliant on commodity prices.
“Commodity prices remain elevated, notwithstanding some have come off a bit,” he says.
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That helps other parts of commodity producing economies, he says, nominating retail in South Africa, where mineral exports have been extremely strong.
There are also opportunities for the reopening trade in the Middle East.
“We own a real estate name in the UAE which is a beneficiary of higher oil prices. Because it’s in Dubai, it also benefits from the normalisation of travel and tourism,” he says.
Syme acknowledges the risk that the short-term performance of some of these stocks may disappoint.
“But the next couple of quarters of cash flow may not reflect the overall value of the business.”
He emphasises the need to find opportunities within emerging markets and some bourses he remains underweight.
“In Russia we’re concerned about political risk and the Ukraine.”
About James Syme and Pendal Global Emerging Markets Opportunities Fund
James Syme is a senior portfolio manager of Pendal’s Global Emerging Markets Opportunities Fund with Paul Wimborne.
The fund aims to add value through a combination of country allocation and individual stock selection.
The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.
The stock selection process focuses on buying quality growth stocks at attractive valuations.
Find out more about Pendal Global Emerging Markets Opportunities Fund here
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
Trouble in China is obscuring strong performances in other emerging markets, demonstrating the importance of a country-by-country approach in this asset class, says James Syme
- India, Mexico and South Africa performing well
- With each Covid wave economic impact lessens as economies adjust
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INVESTORS in emerging markets have experienced challenges in recent months, but the underlying story is more nuanced.
Falls in the MSCI Emerging Markets Index since February’s peak are almost entirely dominated by shares in China and South Korea — masking strong performances in countries as disparate as India, Mexico and South Africa.
This demonstrates the importance of taking a country-by-country approach to emerging markets investing says James Syme, who co-manages Pendal Emerging Markets Opportunities Fund.
“As we always say, even if emerging markets as a whole is not an opportunity, there’s always going to be individual opportunities within the emerging markets sector,” says Syme.
India is booming
Much of the news coverage of India in 2021 focused on its steep Covid second wave, which in May was killing more than 4000 people a day.
But Covid has subsided and economic stimulus has supported an economic boom.
“Now, we’ve got capital inflows, a rising stock market, rising property prices — India is in this fantastic boom.
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“Valuations are challenging — but that represents the fundamental strength of the economy.”
India’s strength is even more impressive given the strong US dollar, high oil price and higher US bond yields, which would normally be expected to lift inflation, blow out the trade deficit and be a drag on Indian stocks.
But inflation in India is contained, coming in at 5.3 per cent to August, versus more than 10 per cent in other emerging markets like Brazil, and the trade deficit is rising slower than economic growth.
“So India looks great. It’s one of our favourite markets and one of our biggest overweights.”
South Africa stronger
Similarly, South Africa has emerged from its political unrest in July to perform more strongly. Its mining sector is growing strongly and the domestic economy is recovering from Covid.
“Traffic stats, credit growth, vehicle sales — they all look pretty strong and there have been big upgrade in growth estimates from the central bank,” says Syme.
Fears of rising Covid cases knocking emerging markets economies off course were misplaced.
“It’s becoming more manageable. With each successive Covid wave, companies and populations and governments learn how to cope.
“The first wave was terrible. There was no toilet roll, no eggs and no one knew what to do.
“Now, if you get another Covid wave every one knows what to do — the kids go home, the lessons are on Zoom, the parents work from home, food delivery picks up again. People adapt.
“With each wave, the economic impact is less because economies adjust to deal with it.”
About James Syme and Pendal Global Emerging Markets Opportunities Fund
James Syme is a senior portfolio manager of Pendal’s Global Emerging Markets Opportunities Fund with Paul Wimborne.
The fund aims to add value through a combination of country allocation and individual stock selection.
The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.
The stock selection process focuses on buying quality growth stocks at attractive valuations.
Find out more about Pendal Global Emerging Markets Opportunities Fund here
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
Where to next after today’s Reserve Bank cash rate cut? Pendal’s head of cash strategies STEVE CAMPBELL explains
IN a unanimous decision at its meeting today, the Reserve Bank eased monetary policy by 25 basis points to 3.6%.
Similar to July, the market priced this cut as all but certain. This time there was no surprise.
The RBA also provided updated economic forecasts in its quarterly monetary statement. Some things change, some things stay the same.
That’s not surprising given its prior forecasts in May were set against heightened uncertainty from the tariff man.
The following table shows the RBA’s latest forecasts:
The big factors remaining unchanged are headline and trimmed mean inflation, as well as unemployment rate forecasts.
Changes to the growth forecast are particularly noticeable.
Growth is revised lower by 0.1% to 0.4%. These downward revisions aren’t a reflection of our trading partners – a modest revision lower over the next 12 months is followed by a pick-up from mid-2026.
One of the drivers in the lower growth forecast is a lack of productivity growth which affects supply in the economy.
In her press conference, Governor Michele Bullock pointed out that the RBA doesn’t forecast productivity growth.
Its forecasts for employment and inflation have been close to what’s been occurring.
Economic growth, however, has disappointed – which the RBA has reconciled by lowering productivity growth assumptions.
Weaker public demand growth and business investment also contributed to this weaker growth outlook. Offsetting this was a better outlook for household consumption and dwelling investment.
Where do the economy and rates go from here?
We don’t expect a follow-up cut at the RBA’s September meeting without a sharp deterioration in the global environment.
November remains more likely.
Quarterly inflation data remains key, with the next release due in late October. This is more comprehensive than the monthly inflation data series which prompted some concern and was a key catalyst for remaining on hold in July.
Also key is the labour market, with the quarterly Wage Price Index and monthly employment data due in the two days subsequent to this meeting.
There are mixed messages about the strength of the labour market.
The RBA’s business liaison shows that firms continue to report difficulties finding staff while unit labour costs continue to increase. In contrast, the RBA notes that the rate of job-switching has declined notably from its 2022 peak.
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Should the unemployment rate move higher quickly or should inflation come in under expectations, the RBA can respond.
Policy settings aren’t overly restrictive.
With 75 basis points of easing delivered to date, the RBA would be encouraged by a pick-up in household spending and see little pressing need to ease policy again quickly.
Overall, nothing today makes me change my view that we will get one more rate cut this year at the November meeting.
What happens beyond year’s end will be significantly impacted by global events, but markets will still price for one or two more cuts in 2026 for now.
About Steve Campbell and Pendal’s Income and Fixed Interest team
Steve Campbell is Pendal’s head of cash strategies. With a background in cash and dealing, Steve brings more than 20 years of financial markets experience to our institutional managed cash portfolio.
Find out more about Pendal’s cash funds:
Short Term Income Securities Fund
Pendal Stable Cash Plus Fund
Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.
What can investors expect following the Reserve Bank’s cash rate surprise? Pendal’s head of cash strategies STEVE CAMPBELL explains
THE Reserve Bank of Australia (RBA) surprised the market today by leaving the cash rate unchanged at 3.85%.
The market had priced in more than a 90% probability that the RBA would ease policy. Expectations for a cut had been set higher at the RBA’s previous meeting in May, where the case for a 50-basis point cut had been discussed.
Throw into the mix the weak first quarter economic growth data (+0.2% for the quarter and +1.3% for the year) and the set of conditions were seen as being in place for the RBA to ease.
At today’s meeting, however, the vote was 6-3 in favour of no change.
In justifying the decision not to move, the RBA noted that the monthly inflation was, at the margin, slightly stronger than expected and that 50 basis points in cuts have already been delivered.
This is buying the central bank time, with the Board noting it had “judged that it could wait for a little more information to confirm that inflation remains on track to reach 2.5 per cent on a sustainable basis.”
The information that the RBA needs will come via second quarter inflation data to be released in late July.
On economic growth, despite the weak first quarter result, the RBA does see some cause for optimism.
Domestic demand picking up over the past six months, along with a rise in real household incomes, were cited. The labour market also remains tight.
Uncertainty around inflation and growth, however, remains elevated due largely to US trade policies that remain unresolved.
The RBA sees monetary policy settings as being well positioned to deal with the fall-out should economic growth deteriorate sharply or should inflation fall more quickly.
Leading into today’s decision, the market had priced the cash rate ending the year just above 3%. That has moved closer to 3.25%.
For August, it is priced that the RBA is more likely than not to cut policy. But as today’s decision shows, the market doesn’t always get it right.
At her previous press conference, RBA Governor Bullock was somewhat dismissive of the monthly inflation data series. Today that data series gave the RBA enough to remain on hold.
The quarterly data series still reigns supreme and all eyes will be on 30 July when it is released. If it comes in line with expectations, then it is likely that the RBA eases policy in August.
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About Steve Campbell and Pendal’s Income and Fixed Interest team
Steve Campbell is Pendal’s head of cash strategies. With a background in cash and dealing, Steve brings more than 20 years of financial markets experience to our institutional managed cash portfolio.
Find out more about Pendal’s cash funds:
Short Term Income Securities Fund
Pendal Stable Cash Plus Fund
Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.
Here’s what the latest monetary policy adjustments mean for investors, according to Pendal’s head of cash strategies STEVE CAMPBELL
THE Reserve Bank of Australia eased monetary policy for a second time this year, cutting the cash rate again by 25 basis points to 3.85%.
Monetary policy settings do remain in restrictive territory.
The market had flirted with the prospect of a 50-point cut after the turmoil that ensued from Donald Trump’s Liberation Day tariffs announced in early April.
This was pared back following a 90-day pause in tariffs and a plethora of other headlines which saw a diminished case for a bigger cut.
The RBA remains attuned to the risks to global economic growth and inflation.
Its statement noted that “the Board considered a severe downside scenario” and that “monetary policy is well placed to respond decisively to international developments if they were to have material implications for activity and inflation in Australia”.
Accompanying today’s decision was the RBA’s latest set of forecasts through its Statement on Monetary Policy, as shown in the table below.
The RBA has revised its trimmed-mean inflation forecast lower by 0.1% across the forecast horizon.
(The trimmed-mean measure removes the most extreme price movements, providing a more reliable indicator of the underlying trend in inflation.)
The most recent annual trimmed-mean rate of 2.9% fell within the target band for the first time since 2021. The inflation outlook is more supportive for further policy easing if required.
Real household income in the nearer term has been revised higher, by 0.2% to 3.3% for the year ending June and by 0.1% to 2.6% for 2025.
The labour market, based on what the RBA is looking at, remains tight and employment continues to grow.
Today’s statement conveyed a sense that domestically the RBA remains comfortable with the inflation outlook and where policy settings are at. The upside risks to inflation have been diminishing further.
As with all central banks currently, uncertainty over US trade policy and the ramifications from that reign supreme.
However, the RBA is well positioned to ease more aggressively should the economy require stimulus.
There are signs the rate cut earlier this year is helping households, though the majority of the cut is being saved – not spent.
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A fall in petrol prices to their lowest level post-Covid is also assisting. Wages growth is finally exceeding the cost of living.
We maintain the view that two more cuts are forthcoming, likely around the quarterly cycle in August and November.
For investors, bonds continue to offer good defensive value in this environment.
And in the meantime, international events will still keep things lively and any uncertainty will see plenty of opportunity for active managers.
About Steve Campbell and Pendal’s Income and Fixed Interest team
Steve Campbell is Pendal’s head of cash strategies. With a background in cash and dealing, Steve brings more than 20 years of financial markets experience to our institutional managed cash portfolio.
Find out more about Pendal’s cash funds:
Short Term Income Securities Fund
Pendal Stable Cash Plus Fund
Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.
In this video profile Pendal’s head of cash strategies Steve Campbell explains how the team’s approach to managing cash puts us in a market sweet spot
AS a “safe-haven” asset, cash can be the best-performing asset class when markets come under pressure.
But liquidity in cash is key, says head of cash strategies Steve Campbell, who likens it to “the Steven Bradbury of asset classes”.
“It’s the best-performing asset when others come under stress – and we’ve seen that over the past ten years through various experiences, like Covid,” he says. “But the main thing with cash portfolios is our investors need to know that when they want their money back, that they’re able to access it.”
In this video, Steve – who has more than 25 years of experience in cash and dealing roles – explains how he structures portfolios for Pendal’s broad client base in a way that aims to balance risk and return.
“I will never compromise a slightly higher return by trading that off against liquidity, where I might not be able to get my money back to the client,” he says.
Portfolio decisions are supported by a broader team dynamic which promotes a cross-pollination of ideas and “a better understanding of the risks before you implement portfolio decisions”.
Pendal’s size is one of its strengths, he adds. “One of the advantages that we have is we’re in the ideal sweet spot in the Australian market … Our size is big enough that we’re important, but also small enough that it means our investors are getting the best result at the end of the day.”
Watch the video to learn more about Steve and Pendal’s active approach to cash investing.
Get to know the rest of the team better in these individual profile videos:
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About Steve Campbell and Pendal’s Income and Fixed Interest team
Steve Campbell is Pendal’s head of cash strategies. With a background in cash and dealing, Steve brings more than 20 years of financial markets experience to our institutional managed cash portfolio.
Find out more about Pendal’s cash funds:
Short Term Income Securities Fund
Pendal Stable Cash Plus Fund
Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.
While policy remains in restrictive territory for the RBA, today’s rate cut is unlikely to be a one-and-done affair. Pendal’s Head of Cash Strategies STEVE CAMPBELL explains
AT its meeting this week, the Reserve Bank of Australia eased monetary policy by 25 basis points – taking the cash rate to 4.1%.
The move came with little surprise — the market had priced in an 80% chance of a cut.
This followed the RBA’s comment in December that it was “gaining some confidence that inflation is moving sustainably towards target”.
The central bank also saw an easing in wage pressure and upside risks to inflation — a view supported by fourth-quarter inflation data released in late January, showing annual trimmed mean inflation of 3.2% for 2024.
In its November monetary policy statement the RBA had forecast annual trimmed mean inflation to hit 3.4% by the end of 2024. The weaker inflation result was enough for the central bank to remove some of the monetary policy restrictiveness.
Policy does, however, remain in restrictive territory.
Strong labour data
While the RBA may have breathed a sigh of relief following the inflation figures, the same cannot be said of recent labour market data.
The RBA had forecast the unemployment rate ending the year at 4.3%; it ended at 4%. Meanwhile, the participation rate of 67.1% is a record high.
For those looking for no change this month, the labour market and lack of productivity were cited as key reasons for the RBA to remain on hold.
At its meeting today, the Board revised down materially where it sees the non-accelerating inflation rate of unemployment (or the NAIRU) from 4.5% to 4.2%.
Where to from here?
In this week’s statement, the RBA said: “The forecasts published today suggest that, if monetary policy is eased too much too soon, disinflation could stall, and inflation would settle above the midpoint of the target range.
“In removing a little of the policy restrictiveness in its decision today, the Board acknowledges that progress has been made but is cautious about the outlook.”
As is the case now for all February, May, August and November meetings, the RBA’s decision also coincides with the release of updated economic forecasts though the Statement on Monetary Policy.
The following table shows the RBA’s forecasts released this week:
Some of the key forecast revisions to note:
- Trimmed mean inflation has been revised lower by 0.3% to June 2025 and 0.1% for 2025.
- The unemployment rate has been revised lower by between 0.2% and 0.3%.
- Wage inflation was revised up by 0.2% to 3.4% for 2025.
Where does this leave the RBA?
It is highly unlikely that it is a case of one cut and they’re done – so the focus will now move to when the next policy easing will occur.
The next meeting in April marks the first for the new Board structure, which separates it into a monetary board and a governance board, and comes into effect from the start of next month.
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Prior to its next decision on 1 April, the key domestic data will include wage price index data (due 19 February) and two labour market reports that will be key in determining whether the RBA goes back-to-back.
Even if it doesn’t cut in April, it is unlikely to be a one and done. Further policy easing could occur towards the middle of the year.
Leading into today’s announcement, the market had priced in at least three cuts for 2025. There had also been plenty of talk leading up to today about a hawkish cut – the RBA delivered that.
The RBA also didn’t give anything away; forecasting trimmed mean inflation at 2.7% until mid-2027 means we really don’t know how it will all unfold.
Any further policy easing in the second half of the year will depend on how inflation evolves. The RBA remain cautious and data dependent.
About Steve Campbell and Pendal’s Income and Fixed Interest team
Steve Campbell is Pendal’s head of cash strategies. With a background in cash and dealing, Steve brings more than 20 years of financial markets experience to our institutional managed cash portfolio.
Find out more about Pendal’s cash funds:
Short Term Income Securities Fund
Pendal Stable Cash Plus Fund
Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.
Anyone looking at policy easing in the near term will be left disappointed, says head of cash strategies STEVE CAMPBELL
THERE was no change from the Reserve Bank of Australia at its November meeting, with the cash rate left unchanged at 4.35%.
No surprises there – if only picking the winner of the Melbourne Cup was as easy.
Anyone looking at an easing of policy in the near term will be left disappointed.
Headline inflation fell sharply in the third quarter due to the effects of energy rebates and some state subsidies. The trimmed mean – one of the RBA’s preferred measures – stripped out these effects and showed annual inflation at 3.5%, in line with the RBA’s forecast.
We also got an updated set of economic forecasts via its Statement on Monetary policy (SoMP). These forecasts show the RBA not seeing “inflation returning sustainably to the midpoint of the target until 2026”.
Inflation is moving in the right direction but remains too high for the RBA to comfortably entertain the idea of policy easing anytime soon.
As has been the case for a while, the level of uncertainty remains high.
Looking at household consumption, its contribution to economic growth has been poor recently due to falling real incomes.
The RBA does expect this to turn, however, with household disposable incomes forecast to rise by 3.9% by the middle of next year.
The labour market also remains tight. The participation rate is at record-high levels and employment growth over the past quarter has been strong.
The RBA forecasts unemployment at 4.3% by the end of this year, before rising to 4.5% by the end of 2025. That does not sound like easing anytime soon.
What about other central banks that have started easing policy – shouldn’t we be following suit?
The following graph shows policy rates over the past 20 years.
Australia and Norway are the last to the rate cut party. Japan doesn’t want to join the party at all after hiking in July, with the prospect of further tightening possible.
The RBA noted that other central banks have eased because they’ve become more confident that inflation is moving back towards their targets.
Expecting the RBA to follow suit in the near term is likely to lead to disappointment. The next move from the RBA will be a cut, but we don’t need to immediately follow the actions of others.
The period pre-GFC shows the US Federal Reserve and Bank of Canada easing against the RBA hiking – different circumstances, with the mining boom sucking up a lot of labour resource and driving wages higher.
Similarly, the period from mid-2016 had other central banks tightening and the RBA remaining on hold in an environment of tepid domestic inflation. The RBA didn’t tighten as early nor as aggressively as other central banks.
Policy is tight, but as the labour is showing it is not so tight that it is strangling the economy. And with disposable incomes likely picking up, the market timing of a first rate cut in May does not seem unreasonable
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About Steve Campbell and Pendal’s Income and Fixed Interest team
Steve Campbell is Pendal’s head of cash strategies. With a background in cash and dealing, Steve brings more than 20 years of financial markets experience to our institutional managed cash portfolio.
Find out more about Pendal’s cash funds:
Short Term Income Securities Fund
Pendal Stable Cash Plus Fund
Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.
Australia is still unlikely to join the rate-cutting club before 2025, argues Pendal’s head of cash strategies, STEVE CAMPBELL
THE Reserve Bank left rates unchanged this week as expected, but the more interesting insights came from its latest economic forecasts.
These were contained in the RBA’s quarterly Statement on Monetary Policy which sets out the central bank’s outlook – on which it bases its interest rate decisions.
The latest outlook revealed large downward revisions to headline inflation expectations due to the effect from electricity rebates.
Annual inflation for 2024 is now forecast at 3%, down from 3.8%.
However the RBA does not expect the rebates to be renewed, which would drive an upward revision of 0.9% to the 2025 headline inflation forecast as they roll off.
That would mean headline inflation of 3.7% for 2025.
This is why the RBA favours a trimmed mean, giving a more accurate representation of the true inflation in the economy.
To that end there was not much change.
Trimmed mean is expected to be 3.5% for 2024, returning to the top end of the band in late 2025. The revisions over the forecast horizons were either flat or +0.1%.
No rate cut anytime soon
The RBA will need to see a higher unemployment rate before taking comfort that inflation is a thing of the past.
Due to a tight labour market, the central bank is not yet convinced that wage inflation pressures won’t re-emerge.
Those looking for a rate cut anytime soon will be disappointed – in the absence of some large shock event.
An unemployment rate of 4.3% by year end doesn’t warrant policy easing.
However Pendal’s forward-looking indicators suggest the risks are skewed to that being higher than lower – and may set the case for monetary policy easing occurring early next year.
Public demand was also notably revised higher, supporting economic growth and offsetting the sluggish outlook near term for dwelling investment and business investment.
Uncertain forecasts
It’s clear there is a high level of uncertainty in the RBA’s latest forecasts.
Plenty of factors were offered as to why the economy could evolve on a different path to that forecast:
- The lagged effect from past tightening
- Slowing growth against excess demand and how firms pricing behaviour responds.
- A tight labour market and wage inflation and how that evolves.
- Unit labour costs and productivity, household consumption, the savings rate, the external environment.
These were just some of the factors.
There have been significant moves lower in yields since the start of July.
The US look as though they will ease monetary policy in September following the weaker non-farm payrolls report and the rise in the unemployment rate.
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In New Zealand the RBNZ produced a backflip worthy of an Olympian – and now looks like it might be easing multiple times this year.
The Bank of Canada has eased at consecutive meetings. The Bank of England kicked off its cutting cycle earlier this month.
The RBA remains the outlier with most other developed central, the other exception being the Bank of Japan.
How quickly the RBA joins the rate-cutting club will depend on how quickly it can garner certainty that inflationary pressures are a thing of the past.
At this stage that is not a 2024 story.
About Steve Campbell and Pendal’s Income and Fixed Interest team
Steve Campbell is Pendal’s head of cash strategies. With a background in cash and dealing, Steve brings more than 20 years of financial markets experience to our institutional managed cash portfolio.
Find out more about Pendal’s cash funds:
Short Term Income Securities Fund
Pendal Stable Cash Plus Fund
Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.