The Russian economy has been performing strongly, but the outlook is now uncertain as global sanctions bite. Here is the EM view from Pendal’s JAMES SYME
THE investing environment for Russian assets is clearly extremely uncertain right now.
Geo-political risk is intense — possibly the highest of any Emerging Market in the modern history of the asset class.
However, recently the Russian economy has been benefiting significantly from current demand levels and prices for major commodities. The equity market is incredibly cheap on all measures.
The Russian economy has been performing strongly on the back of commodity exports and a domestic recovery from Covid.
Economic growth in 2021 accelerated to a 14-year high of 4.7%, beating consensus forecasts.
Exports, investment by oil and gas companies and government spending have been all major contributors. Growth was stronger into the end of the year, and the outlook for growth in 2022 is promising.
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Our positioning in Russia was to move from heavily underweight to slightly overweight in January, following the declines in the equity market and the currency despite robust fundamental conditions.
From the October 2021 peak to the end of January, MSCI Russia index fell 24.6% in USD terms, even as the oil price rose through the USD 90/barrel level.
We recognise the intense political risk at the current time and the chance that sanctions mean we will not be given the time to see valuations move to reflect economic fundamentals.
However, we believe that, as index-relative investors, it is risky to not have (careful, scaled, diversified) exposure to Russia, given valuations and fundamentals.
An improvement in the political environment could lead to a very significant move in Russian assets, as we have seen in previous recoveries.
In calendar year 2009, the USD total return for MSCI Russia was more than 100%. From late 2014 to late 2016 it was 63.7%. From October 2020 to October 2021 it was 83.2%.
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We would highlight another facet of emerging market equity investing – there are no ‘safe’ investments.
In the past 12 months previous investor favourites Alibaba, Meituan and Sea Group (all Emerging Asian internet companies) are down more than 50 per cent in USD terms.
In the same period, the highly unpopular Brazilian energy company Petrobras (which has been one of the largest holdings in the portfolio) has returned 114% in USD terms.
We continue to adhere to our successful process, which is to combine economic, political and market risks and opportunities into a top-down view to identify preferred countries, and to apply a rigorous risk-focused portfolio construction process to allocate to those markets.
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.
Deep, country-level analysis is critical in emerging markets investing, says Pendal’s James Syme. India and Mexico are two examples of countries with hidden strengths
- Conventional wisdom says India, Mexico should slow
- Hidden depths to their economies leave them well placed to grow
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LOOKING beyond the headlines is critical in investing, especially when assessing emerging markets, says Pendal’s James Syme.
India and Mexico are two current examples of countries with unexpected, hidden strengths.
Rising inflation and higher commodity and energy prices are traditionally a negative for commodity importing countries like India and Mexico, says Syme, who co-manages Pendal Global Emerging Markets Opportunities Fund.
Yet he likes both countries due to domestic factors that leave them well placed to weather global economic changes.
“Mexico is a major oil producer, but a significant commodity importer that trades on the strength of its manufactured exports to the US.
“India has a long-standing vulnerability to commodity prices both through inflation and the current account balance.
“So why are we positive on these two markets?”
The reason is hidden in the domestic data.
For India, it’s the unsung strength of its computer service exports. For Mexico, it’s the record remittance income from citizens working abroad.
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“It’s easy to overlook the strength of India’s computer services exports. There’s no single trade number that captures things like IT services, software product development, business process outsourcing, data services, engineering services and the like,” says Syme.
“But there’s a central bank survey. In 2013, Indian exports of these types of services were $62.6 billion but in 2021 they were $133.7 billion.
“Because the listed companies make up so much of that market you can almost get a feel for how they are doing by extrapolating from the 20 largest listed business.
“And this year, ending March 2022, should be a really good year.”
This matters because in 2013, India’s oil imports — the key economic vulnerability traditionally feared by investors — exceed its IT services exports by $100 billion.
But in 2021, the deficit was erased.
“A significant part of India’s oil import bill is now being paid by its IT services exports — and they continue to grow significantly.
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“The India of today and the India of ten years ago are not the same country.”
A similar story in Mexico
Syme tells a similar story about Mexico.
As a commodity importer and manufactured goods exporter, Mexico should struggle in times of rising input prices.
But the overlooked factor is the huge and growing remittances being sent home by Mexicans abroad.
“Lots of countries have income from citizens who work abroad, but for Mexico, remittance income is really big. Family remittances were $52 billion in calendar 2021.”
These remittances almost entirely come from the US, where tight labour markets, especially for low paid workers, are proving “exceptionally positive for the Mexican economy”, says Syme.
“One of the main things Mexico exports is Mexicans. Being adjacent to the US is Mexico’s secret strength.
“Like IT services in India, it’s been a story of steady growth. In 2021, remittances in Mexico were up 25% on the calendar year before.
“It doesn’t show up in the trade balance — but we think you have to take it into account.”
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.
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.
COST OF LIVING pressures are creeping in, with more to come.
I’ve lost track of how many politicians have promised to “ease the squeeze”, but with an election early next year it’s probably getting dusted off.
So far the official data is not fully reflecting this, although food and fuel prices should see another healthy headline inflation number for Q3 when released in late October.
All this has happened with subdued demand.
As mentioned many times over the past 18 months this has been — and remains for now — supply led.
However talk of transitory is misleading — unless three years is now considered transitory.
When NSW reopens shortly, high savings and incomes should see a surge in demand, pushing prices higher again.
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Supply will be slower to come back, partly mandated (eg restaurant dining numbers) and partly due to businesses having closed.
Good luck finding a restaurant booking in December. I would imagine proprietors take advantage of this with pricing. Who would blame them after the last 18 months ?
After a subdued September, due to a rare fall in risk assets, market inflation expectations are returning this month, once again nudging 2%. We expect to see 2.5% by year end.
Wagse remains the missing piece for medium-term inflation.
Everyone is reporting worker shortages but so far companies are looking to short-term measures to attract and keep staff — a sign-on bonus here, flexible conditions there.
However the dam wall of ten years of low wage growth is at risk of bursting.
I know if I worked in affected industries — from healthcare to construction to hospitality — I’d be taking advantage of a sellers (workers) market for labour. A recent increase in strike action suggests this realisation is dawning.
At risk of sounding like a broken record, higher inflation is not guaranteed, but insurance remains cheap.
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.
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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.
One more RBA rate hike, but the real story is what comes next as Middle East risks reshape Australia’s inflation outlook. Pendal’s head of cash strategies STEVE CAMPBELL explains
THE Reserve Bank of Australia (RBA) tightened monetary policy by 25 basis points, taking the cash rate to 4.35%.
The vote to hike was 8-1. The one dissent was for no change.
The vote to tighten at their March meeting was 5-4.
This was the third consecutive meeting where the RBA tightened policy and was widely expected. The market priced a 75% probability that the RBA would hike leading into today’s decision.
Much of the language in the statement revolved around events in the Middle East. With 3 consecutive hikes the RBA see themselves in a good position to deal with the challenges that lay ahead.
Their language did not set up expectations for another hike in late June as being more than likely.
The Reserve Bank of Australia’s Statement on Monetary Policy (SoMP), released alongside today’s decision, included an updated set of economic forecasts.
Not surprisingly there have been significant revisions given their previous forecasts were made to prior to the Middle East conflict. The RBA’s baseline forecast assumes that the conflict is resolved soon.
The following tables show the RBA’s latest forecasts and the forecast changes from their February SoMP.
Starting with inflation, and no surprises to see upward revisions in the nearer term.
In their previous forecasts annual trimmed mean inflation was seen to peak at 3.7% in mid-2026.
Trimmed mean for 2026 was forecast at 3.2%, before returning to within the 2-3% target band in 2027.
The updated forecasts have pushed this further out, with inflation hitting 3.1% for the year ending June 2027.
It is then expected to be 2.6% for 2027, 0.1% lower than previously forecast.
The following graph shows the RBA’s annual trimmed mean inflation forecasts since August 2024:
As can be seen there were significant upward revisions in late 2025.
This was in response to a pickup in private demand, a tight labour market and the economy running with little spare capacity.
The RBA had an inflation problem prior to the Middle East conflict. The upward pressure on fuel prices has only added to those pressures.
Inflation is expected to moderate further out as weaker growth leads to the unemployment rate rising.
Economic growth for 2026 was revised 0.5% lower to 1.3%, weighed down by the fall in real household disposable incomes.
The unemployment rate is forecast to hit 4.7% in 2 years’ time.
Where to next for RBA?
The key focus will be on the second-round inflationary effects. The RBA noted in their statement that ‘there are early signs that many firms experiencing cost pressures are looking to increase prices of their goods and services’.
The RBA’s fear is that inflation expectations become embedded.
Those fears would be alleviated somewhat if the labour market slackens and the unemployment rate moves higher. It is too tight at the moment.
If the conflict ends up becoming more protracted, they will favour containing inflation over supporting economic growth. That means further policy tightening.
The market ended today pricing a further rate hike occurring in the third quarter this year.
If you’d like to hear more about how Pendal’s Income & Fixed Interest team is positioning for this environment, please contact us through your account manager by reply email.
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’s inflation pulse quickened further, and it will likely see the RBA announce a third consecutive rate hike. Pendal’s head of cash strategies STEVE CAMPBELL explains
MARCH inflation data was up 1.1%, and 4.6% on a 12-month basis.
Economists were expecting an annual increase of 4.8%. First-quarter trimmed mean inflation rose 0.8%, resulting in the annual trimmed mean rising 3.5%. Consensus was for increases of 0.9% and 3.5% respectively.
Going into the data, the market had priced the odds of the Reserve Bank of Australia (RBA) tightening policy by 0.25% at its May meeting at over 80%.
Post the release the odds dropped back to 70%. The market still has a full two hikes priced in by the end of the year. The RBA will provide an updated set of forecasts via their Statement on Monetary Policy, which will see upward revisions to their inflation numbers where they already had trimmed mean inflation outside of the band for 2026.
The upward revisions will most likely see them tighten policy at their May meeting, taking the cash rate to 4.35%.
Looking at the latest numbers and the following graph shows the annual contribution to inflation by groups for February and March. Month-on-month annual inflation rose by 0.9% from 3.7% to 4.6%.
So what changed from February to March in relation to annual headline inflation?
Looking at the subgroups and not surprisingly the transport group recorded the largest moves, driven by the 32.8% increase in automotive fuel prices. Petrol prices rose by around 30% and diesel prices were up 41%.
Following the surge in fuel prices the transport group is now the second largest contributor to annual inflation, adding 1% to the 4.6% result. The following graph shows the changes to annual inflation by group from February to March:
It was also interesting to see the housing group fall. The RBA had noted the inflation in this group as picking up over the second half of 2025. In mid-2025 this group added 0.3% to overall annual headline inflation. In February 2026 it added around 1.5%.
There are two key areas within this group that has driven the increase. The first is the ‘New dwelling purchases by owner-occupiers’ sub-group. The second is ‘Utilities’, with electricity prices being the key swing factor.
Starting with electricity prices first, and a large part of the increase since mid-2025 is due to the base effect from rebates and state subsidies rolling off from the annual numbers. The annual contribution to inflation from electricity in February was around 0.75%.
In March the annual contribution fell to around 0.55%. So ex-electricity and the housing group still rose. And the area of growth here is ‘New dwelling purchases by owner-occupiers’ sub-group. In mid-2025 this subgroup was adding almost zero to the annual headline inflation number. In February its contribution was around 0.3%. In March this rose further to 0.34%.
There are a few factors at play here. One of them is the labour market is tight, which has been an increasing concern for the RBA. The second is that builders are passing through higher input costs. That will only increase further.
The other group to mention was the 0.2% fall from the Recreation subgroup. This was driven by the domestic holiday travel and accommodation component reflecting a fall in demand from the peak summer holiday period.
What was also noticeable was the lack of contribution from the food group. That will change in the coming months as the second order effect from higher fuel prices start to feed through. Inflation is already above the band and yet to peak. And that is likely to see the RBA tighten for a third consecutive meeting in May.
If you’d like to hear more about how Pendal’s Income & Fixed Interest team is positioning for this environment, please contact us through your account manager by reply email.
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.
Inflation was already too high before the Middle East conflict for the RBA not to act. The knock-on effects from higher oil prices only intensify the inflation risks, explains Pendal’s head of cash strategies STEVE CAMPBELL
THE Reserve Bank tightened monetary policy by 25 basis points for the second consecutive meeting, taking the cash rate to 4.1%.
It was a close call with five members voting to tighten and four calling for no change.
Leading into the decision the market had priced a 70% likelihood of a hike. This had changed quickly from February, when the market priced the probability of a hike at around 10%.
So, what changed? Several things.
First, the RBA had been deliberately emphasising March as a live meeting.
The probability of an increase rose to around 35% after a March 3 speech by RBA governor Michele Bullock. Her comments put a March move firmly in focus.
Earlier, there had earlier been a view that the RBA was more likely to change policy after the next quarterly inflation data was released in late April.
At the time Bullock shot this view down: “I am not making a prediction about March, but it will be a live meeting.”
On March 10, comments by RBA deputy governor Andrew Hauser saw market expectations move above 60%.
The comments came on a podcast, suggesting the RBA was already doing some preparation for the likely heavy criticism a hike would bring.
“If we fail to act decisively enough to prevent inflation staying high or even rising – and expectations of inflation dis-anchor – it will be bad for everyone.
“It’s worth us continuously reminding ourselves just how toxic inflation is.”
These comments changed market pricing. Alongside rising inflationary concerns, the market in Australia moved to price in multiple hikes by the end of the year, as shown in the following graph:
Secondly, hostilities in the Middle East encouraged a focus on a stagflation scenario.
In 2022 it took two weeks for bonds to lose the “risk off” bid and gain a very strong “inflation on” offer.
This time it took less than two hours – and again it is the “inflation”, not “stagnation”, part of stagflation driving interest-rate markets.
So, what happened on the domestic economic data front since the RBA’s February meeting?
January employment data showed a labour market that remained too tight for the RBA, with the unemployment rate staying at 4.1%.
The monthly inflation series showed annual inflation at 3.8% and trimmed mean at 3.4%, both marginally higher than market consensus.
Fourth-quarter economic growth rose by 0.8%, resulting in growth of 2.6% for 2025. The RBA’s forecast was for 2.3%.
None of this data would have comforted the RBA.
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Inflation?
In her speech, Bullock noted that while there were temporary factors at play, some of the inflation pressure was due to demand exceeding the economy’s supply capacity.
The RBA is concerned that the longer inflation stays above the target, the greater the risk that people expect inflation to stay high.
Growth?
Australia’s economic growth over the second half of 2025 surprised the RBA.
Private demand was stronger, the global economy held up better than expected and financial conditions were seen as easier than previously thought.
Throw into the mix the supply side of the economy that is now seen as having less excess capacity to absorb the pickup in demand.
The conflict in Iran?
Obviously this puts upward pressure on inflation and threatens economic growth both in Australia and with our major trading partners.
Both Bullock and Hauser did make a point on the effect of a higher oil price.
Australia is a net energy exporter and “if you assume that the oil price is well correlated with the price of gas and other outputs that we export, there will be some positive demand effect for Australian exporters that offset some of those effects on activity”.
The issue for the RBA was that inflation was already forecast to be above its target band for 2026 prior to the Iran conflict.
The move higher in the oil price only increased the risk that higher inflation expectations become more embedded.
Today’s decision ended up being a close call.
Inflation remains too high.
That was the case before the conflict in the Middle East. Events in Iran only added to inflation risks and the RBA responded. Just.
Where to next for the RBA is anyone’s guess. The next meeting is on May 5. As shown since its last meeting, six weeks is a long time and things can change quickly. Buckle up
If you’d like to hear more about how Pendal’s Income & Fixed Interest team is positioning for this environment, please contact us through your account manager by reply email.
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.
Rates are on hold, but the market is pricing in a 30 per cent chance of a hike in the March quarter. Pendal’s head of cash strategies STEVE CAMPBELL explains what’s changed
THE Reserve Bank left the cash rate unchanged at 3.6% at its December meeting.
No change was expected.
At today’s meeting the RBA acknowledged that inflation had picked up recently – though some of the increase was due to temporary factors.
A new monthly inflation series from the Bureau of Statistics (more on that later) won’t be relied upon by the RBA for a while, but some components are showing a more persistent rise.
A year ago a noticeably dovish twist in the RBA’s December 2025 meeting set up market expectations for a February 2026 rate cut – which was ultimately delivered.
Today a hawkish twist was expected based on the RBA’s November meeting. On Cup Day two options were discussed for nearer-term monetary policy decisions: no change or a rate cut.
At that point, rate hikes didn’t come into it.
The case for a cut was based on a materially weaker labour market or a pull-back in spending and dampened growth due to increased household caution.
If either had eventuated, the potential increase in excess capacity may have warranted further easing.
A change in market pricing
So what’s happened since Cup Day?
Market pricing has moved significantly. Rate cut expectations are gone, replaced by potential hikes.
A rate hike in the March quarter is priced around a 30% chance. The following graph shows market pricing for the RBA cash rate following the November meeting and pricing leading into this week’s meeting:
What was the catalyst for change?
It wasn’t the stronger labour market data which saw unemployment fall to 4.3%.
It wasn’t the better household consumption spending in the quarterly accounts released in early December.
It was the new monthly inflation data released in late November, which saw yields move sharply higher.
The data showed annual trimmed mean of 3.3%. That is outside the RBA’s 2-3% target band and is moving in the wrong direction!
What is the new monthly inflation series and why does it have this impact?
The new ABS series covers the monthly move for 87% of the inflation basket.
The remaining 13% have one-off annual changes for items such as school fees, council rates and health insurance premiums.
There will be some volatility in this new series. It will take time to bed down seasonal adjustments before the RBA uses it to determine if changes to the cash rate are required.
For now, the quarterly inflation series remains the key inflation data input into decision making.
The new monthly data caused some concern but it will be more volatile in its infancy.
To hike or not to hike?
The RBA would be one of the few outliers among most central banks if it was to hike early next year.
Or, indeed, if it hiked at all in 2026.
The other outlier is the Bank of Japan, which is expected to tighten policy at its meeting on December 19.
Other central banks are expected to ease further or remain on hold for most of 2026.
In the United States, the Federal Reserve is priced for around three cuts by the end of 2026.
The Bank of England has two cuts for the same period.
If market pricing was to eventuate it would leave Australia with the highest policy rate among developed market economies by the end of next year.
As you can see, while we’ve had the highest rates at various points we also have tended to move in the same direction as other central banks.
What’s driving the change?
The issue this time – particularly relative to the US – comes down to labour market slack.
Both countries are above their inflation targets.
In the US, expected weakness in the labour market is seen as exerting downward pressure on inflation, providing scope for the Fed to remove some policy tightness.
In Australia, inflation momentum is going the other way at a time of high uncertainty in the labour market.
The RBA looks at the unemployment rate as well as a host of other indicators when assessing the labour market – job ads, vacancies, business liaison.
The labour market has been assessed as remaining slightly tight.
The NAB’s business survey also shows capacity utilisation remaining at elevated levels.
The RBA’s deputy governor Andrew Hauser commented on this in a speech in November, observing that this time around we may not have much excess capacity in the economy.
If economic growth picks up with no improvement in productivity, then inflation outcomes will be less than desirable.
That means rate hikes are coming.
What’s next
What are the key data releases that will determine what’s next for the RBA?
The ABS’s next monthly inflation series is released on January 7, but the fourth-quarter inflation data released on January 28 will be the major factor.
The RBA doesn’t want to swim against the tide. One more upside inflation surprise means the RBA may be close to hiking in the first half of next year.
If you’d like to hear more about how Pendal’s Income & Fixed Interest team is positioning for this environment, please contact us through your account manager by reply email.
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.