A stockmarket rally has left some calling the start of a new equities bull market. But investors should remain diversified with exposure to bonds and alternatives, says Pendal’s MICHAEL BLAYNEY
- Big rallies come in bear markets
- ‘Stay diversified, be a little bit cautious, but be ready’
- Find out about Pendal’s multi-asset strategies
A STRONG rally in markets since the lows of June has left some calling the start of a new equities bull market.
But Pendal’s Michael Blayney says it will pay to stay conservative for the rest of 2022 — and watch for better buying opportunities as the inflation outlook matures.
Better-than-expected inflation figures and a benign US earnings season have fuelled a rally over the past few weeks on hopes the pace of interest rate rises might be slowing.
But Blayney, who heads Pendal’s multi-asset investment team, says it pays to be wary of bear-market rallies. A balanced, conservative approach is the best way to ride out the coming months, he says.
“You have to have cautious — when you look at history, you see the strongest rallies in bear markets.
“Inflation has moderated a little bit in the US but it’s still at an uncomfortably high level.”
Equities
For all the new-found excitement, global markets remain “somewhere between fair and expensive, depending on where you look”, Blayney says.
“Australian equities are probably one of the better-value markets but it’s not a bargain hunter’s paradise out there in any way, shape or form.
“So, we’re not at the point yet where we would want to go overweight equities in portfolios — and infact we’re still a little bit underweight.”
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Blayney says the US earnings season has been more benign than many feared.
“We haven’t yet seen huge pressure on earnings and that’s something that investors need to keep an eye out for.
“If you look at past instances of inflation and monetary tightening, you often see pressure on earnings, particularly if that tightening pushes the economy into recession.”
What to watch
Investors looking to wade back into markets should watch for signs inflation is coming under control, allowing the US Fed to stay its hand and avoid pushing the economy into recession.
But on the flip side, there is still the risk of a return to falling markets. That could create a buying opportunity.
“If inflation doesn’t subside and the Fed needs to hike more aggressively, that would be one trigger.
“The other is if we start to see pressure on earnings.”
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Where to diversify
Blayney says the golden rule is to maintain diversification.
“The first thing is we always maintain some bond exposure. If you look through history, in down markets for equities, bonds will give you a positive return 70 per cent of the time.
“We also leave a certain amount of our global shares unhedged which gives us foreign currency exposure.”
Foreign currency exposure creates a useful automatic stabiliser for Australian investors because in times of trouble the Australian dollar tends to get sold off, lifting the value of foreign assets held by a local investor.
“And something that has really helped support our portfolios this year has been alternatives exposure.
“We invest in a range of assets, including listed renewables and other sustainable infrastructure with inflation linked cash flows, as well as commodity-type assets.
“People love to say the 60:40 portfolio is dead, but the reality is that style of balanced portfolio has stood the test of time.”
“So, the message is stay diversified, be a little bit cautious, but be ready for when those buying opportunities do come along if we see something nasty and everyone starts to panic.”
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.
What does the RBA’s latest monetary policy statement mean for rates and inflation? Here’s a snapshot from Pendal’s head of cash strategies STEVE CAMPBELL
INVESTOR response to the RBA’s monetary policy statement on Friday was pretty much non-existent.
That’s not surprising since the key updated forecasts were included in Tuesday’s rates announcement, when the cash rate was lifted by another 0.5 percentage points.
Not surprisingly Friday’s statement included sizable upward revisions to inflation forecasts, which had already been flagged when the RBA raised the cash rate by 0.5% in June.
The main downward revisions were to economic growth, dwelling investment and household consumption – not surprising given the increase in interest rates and the economy operating at close to capacity.
The unemployment rate troughs at 3.4% later this year, a downward revision of 0.3% for this year before edging higher.
Regardless, the labour market will remain extremely tight for the next couple of years and wage inflation will follow.
The wage price index was revised marginally higher with annual increases of 3%, 3.6% and 3.9% now forecast for 2022, 2023 and 2024.
Some key points from Friday’s monetary statement:
Inflation
- Short-term inflation expectations have increased, but longer-term inflation expectations remain anchored
- Inflation is broad based with about 75% of the basket growing by an annualised rate of 3% or more in the June quarter
- Fair Work Commission and state government increases will see the wage price index pick up
- Building materials inflation is now closer to 20%; dwelling construction is about 10% of the inflation basket
- Passthrough of higher costs continues, though there signs pressure may be easing. (I doubt the passthrough will be quick on the way down)
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Labour market
- Average employment growth of 51k per month over the past quarter versus an average of 21k jobs in the 12 months prior to the pandemic
- Employment-to-population ratio hit a record high level of 64.4% in June
- There are now almost as many vacant jobs as there are unemployed people
- In response to the tight labour market businesses are offering non-wage incentives; hiring lower-skilled people and offering higher wages
- Numbers for overseas students and working holiday makers remain low, particularly affecting accommodation and food service sectors
Investment
- Non-residential construction investment remains constrained by supply issues, weather events and capacity constraints
- Despite higher prices the mining sector is spending only to maintain existing output rather than investing to expand capacity
Housing
- Existing investment pipeline remains strong, offering near-term support; but approvals and commencements are responding to higher input prices and interest rates
- Sentiment is deteriorating with biggest declines in Sydney and Melbourne
- Advertised rents grew strongly in the first half due to low vacancy rates and household income growth
The RBA’s main forecasts and revisions against the May monetary statement:
| Current Forecasts | Dec-22 | Jun-23 | Dec-23 | Jun-24 | Dec-24 |
|---|---|---|---|---|---|
| Trimmed mean inflation | 6 | 5 | 3.8 | 3.3 | 3 |
| Consumer price index | 7.8 | 6.2 | 4.3 | 3.5 | 3 |
| Wage price index | 3 | 3.4 | 3.6 | 3.8 | 3.9 |
| Unemployment rate (quarterly, %) | 3.4 | 3.4 | 3.5 | 3.7 | 4 |
| Employment | 4.4 | 2.2 | 1.4 | 1.1 | 0.9 |
| Gross domestic product | 3.2 | 2.3 | 1.8 | 1.8 | 1.7 |
| Dwelling investment | 1.7 | 2.5 | -0.1 | -2.6 | -4.8 |
| Business investment | 4.9 | 5.9 | 6.6 | 5.7 | 4.6 |
| Household consumption | 4.9 | 2.8 | 2.4 | 2.3 | 2.2 |
| Major trading partner (export-weighted) GDP | 3.3 | 4.8 | 3.4 | 3.4 | 3.5 |
| Revisions | Dec-22 | Jun-23 | Dec-23 | Jun-24 |
|---|---|---|---|---|
| Trimmed mean inflation | 1.4 | 1.4 | 0.7 | 0.4 |
| Consumer price index | 1.9 | 1.9 | 1.2 | 0.6 |
| Wage price index | 0 | 0.1 | 0.1 | 0.1 |
| Unemployment rate (quarterly, %) | -0.3 | -0.2 | -0.1 | 0.1 |
| Employment | 0.5 | 0.2 | -0.1 | -0.1 |
| Gross domestic product | -1 | -0.8 | -0.2 | -0.2 |
| Dwelling investment | -2.6 | -3.2 | -2.7 | -4 |
| Business investment | -0.1 | -2.4 | -1.4 | 0.2 |
| Household consumption | -0.9 | -1.6 | -0.7 | -0.5 |
| Major trading partner (export-weighted) GDP | -0.7 | 0.5 | 0 | -0.1 |
Where to from here
The RBA’s line last week that it is “not on a pre-set path for normalising policy” has been interpreted as the central bank becoming potentially less aggressive.
Inflation data is released quarterly in Australia so we may see the RBA moving in increments of 25 basis points at its next two meetings prior to the release of third-quarter inflation data in late October.
That gets us to a cash rate of 2.35% before a decision on whether a bigger response is needed on Melbourne Cup Day in response to the inflation print.
The inflation forecast of 7.75% seems too high to us. We see inflation as being closer to low 7s for 2022.
Either way it still well above the upper end of the RBA’s 2-3% target band.
We also take the RBA’s forecasting with a massive grain of salt.
As Governor Lowe himself conceded recently, it’s been embarrassing how wrong they’ve been.
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’s next after today’s 0.5 percentage point hike? Here’s a quick snapshot from Pendal’s head of cash strategies STEVE CAMPBELL
THE Reserve Bank raised the cash rate by a further 50 basis points today, taking the cash rate to 1.85%.
Further policy tightening will occur in the months ahead, the RBA says.
Size and timing will be determined by the data and the bank’s assessment of the outlook for inflation and the labour market.
We’ll get an updated set of economic forecasts on Friday in the RBA’s next Statement on Monetary Policy.
Today’s release included a preview of those forecasts including:
- Inflation is forecast to hit 7.75% in 2022; just over 4% in 2023 and around 3% in 2024
- GDP is forecast at 3.25% in 2022 and 1.75% in 2023-24
- The unemployment rate is expected to fall further from 3.5% in the months ahead before rising to end 2024 at a still low 4%
The RBA sees household spending as the major source of uncertainty. But it notes people are finding jobs and longer hours.
Labour scarcity is not something that will be resolved anytime soon.
A large amount of fixed rate mortgages are due to reset over the next 12 months — which means some households will face a significant increase in mortgage repayments.
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Higher food and commodity prices are also weighing on consumption.
Where to from here?
A line in today’s statement — that the RBA is “not on a pre-set path for normalising policy” — has been interpreted as the central bank being potentially less aggressive.
Inflation data is released quarterly in Australia so we may see the RBA moving in increments of 25 basis points at its next two meetings — prior to the release of third quarter data in late October.
That gets the RBA to a cash rate of 2.35% before deciding whether a bigger response is needed on Melbourne Cup day in response to the inflation print.
The inflation forecast of 7.75% seems too high to us. We see it as closer to low 7s rather than high 7s for 2022.
Either way it’s still well above the upper end of their 2-3% target band.
We also take the RBA’s forecasting with a massive grain of salt. As Governor Philip Lowe himself conceded recently, it’s been embarrassing how wrong they’ve been.
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.
Investors are facing the challenge of investing in a high-inflation environment. Pendal’s head of multi-asset MICHAEL BLAYNEY explains what to keep in mind
- Investors face slowing growth and high inflation
- Diversification and active investment are critical
- Equities, bonds, alternatives and currency all play a role
INVESTORS haven’t faced the challenge of investing in a low growth, high-inflation environment for many decades. But that’s the scenario right now.
For financial planners, equities mostly sit at the heart of a portfolio and provide long term growth. Now investors must diversify to protect portfolios, says Michael Blayney, who heads up Pendal’s multi-asset team.
Investors can think about the market in four quadrants, says Blayney:
“First, there’s good growth and high inflation. That’s not necessarily a bad thing for equities. They generally do well, whereas it’s a bad environment for bonds.
“If you have a low growth, low inflation, equities might be lagging a bit, but bonds are doing well.
“Then there’s the good growth, low inflation environment which we have enjoyed since the global financial crisis. We’ve had solid, albeit unspectacular, growth and really low interest rates and that’s been close to a Goldilocks situation for both equities and bonds.
The most challenging time to be an investor is in a low or slowing growth, higher inflation environment – the likely current scenario.
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Pendal Multi-Asset Funds
“We haven’t seen that for a long time. That’s what happened with the dreaded stagflation of the 1970s,” Blayney says.
“That environment is challenging for bonds – they tend to get whacked early when you have the initial high inflation. Once the market adjusts and you get higher yields, they can start being a good investment.”
“Right now, Aussie bonds are about fair in terms of pricing-in higher inflation. Overall, with global bonds, the yields aren’t quite high enough. They haven’t quite priced in the inflationary environment enough.
“But it is an environment where you want to be active because if yields spike, then bonds might be attractive,” he explains.
Inflation-linked bonds are a potential option in the current environment. In their standard index form, they tend to have long interest rate duration and so can still suffer in a rising rate environment.
Blayney says a critical factor for the asset class is not where inflation has been, but where the market thinks it’s going.
“If you see the market start to expect inflation to be higher for longer, than you would expect inflation-linked bonds to outperform nominal bonds of the same maturity – though absolute returns may still be negative if the impact of rising yields is larger than the impact of the increase in longer-term inflation expectations, which has been the case so far in 2022.”
So far, the market hasn’t priced in inflation as a long-term problem, with pricing inferring an inflation rate over five years of 2.6 per cent.
Investing in equities in a low growth, high inflation environment is tricky, Blayney says.
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“A higher bond yield means a higher discount rate applies to equities, so they get marked down. And you will also likely see earnings start to come off, though that hasn’t come through in aggregates of broker estimates yet.
“In periods of rising inflation commodity sectors tend to do better. Further, in periods of both rising inflation and falling growth, sectors with sticky demand and pricing power like healthcare and consumer staples have historically been good places to invest.”
Diversify and stay nimble
The current environment highlights the benefits of diversification and being nimble, says Blayney.
It’s time to look beyond bonds and equities, he says.
“There are assets like commodity futures which have followed the pattern of the early 1970s, though have come off a bit more recently. Real assets can be attractive in the listed infrastructure space, where you can get inflation-linked cash flows.”
He warns that trying to pick exchange rate movements is not straight forward.
“The Australian dollar is a commodity currency, so all things being equal, you’d expect with commodity prices high, the Aussie dollar would be strong.
“But it’s also a ‘risk-on’ currency. If markets struggle a bit, you tend to see those currencies fall. And then there’s the interest rate factor and the US Federal Reserve has been more aggressive than the Reserve Bank of Australia. There’s opposing forces on the currency and it’s difficult to get a clear direction for the Aussie dollar.
“Financial planners should think about the things that provide portfolio diversification away from just equities. And that’s bonds, currency and alternatives.
“Unless you have a wonderful crystal ball, you need to own all of them.”
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.
Investing in a globally diversified portfolio with a mix of equities, bonds, alternatives, property and cash has proven a sound strategy for long-term wealth creation says Pendal’s head of multi-asset MICHAEL BLAYNEY
- Time to consider rebalancing portfolios
- Globally diversified portfolio remains a sound strategy
- Find out about Pendal multi-asset funds
CONTRARY to some claims, the balanced portfolio isn’t dead.
Periods of volatility and changing correlations are a normal part of the market cycle, and that is what’s happening now, says Michael Blayney, head of Pendal’s multi-asset investments team.
“While there are clearly a lot of headwinds to equities at present, Australia is fortunate that the local market is more reasonably valued than many offshore markets. Also, the resources weighting of the ASX helps provide a partial hedge against inflation,” Blayney says.
Blayney’s fund remains modestly underweight equities. But he says Australia, in a relative sense, is one of the more attractive markets globally.
Rising yields have hurt fixed income investments, but on a forward-looking basis Australian 10-year bonds now yield more than 4 per cent for the first time since 2014.
“This higher-running yield provides an attractive level of income relative to cash, and a cushion against the impact of any further increases in yields,” Blayney says.
“While we retain an underweight allocation to bonds in portfolios generally, we do see Australia as relatively attractive compared to other major bond markets.”
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Opportunities
Times of market volatility tend to throw up opportunities.
“While we’re not at the point, yet, of seeing ‘bargains’ like March 2020 or late 2008, the market falls have led to lower valuations across a range of asset classes,” Blayney says.
Now is a good time to rebalance, whereby assets are trimmed after strong price increases and topped up after falls, he says.
“It is one of the simplest and best ways to incrementally improve long-term outcomes.
“In the present environment, this would naturally lead investors to trim cash and alternatives and top up cheaper equity and bond holdings.”
Blayney says equity markets tend to fall about one year in three — meaning they rise the other two.
“Investing in a globally diversified portfolio — with a mix of equities, bonds, alternatives, property and cash — has proven a sound strategy for long-term wealth creation over many decades, through wars, pandemics and a host of economic crises.
“Conversely, panicking after large market falls and selling has, generally, been a wealth-destroying activity for investors.
“You see classic examples of that behaviour at work in 2008 and early 2020.
“While we’ve been somewhat underweight equities and bonds in portfolios this year, these are relatively modest positions in the context of our long-term strategic asset allocations.
“We continue to believe investors should ‘stay the course’ in respect of their long-term strategies.”
Adviser Sam is invested
in making our world
A better place.
Watch as Sam meets a
mum rebuilding her life
thanks to responsible
investing
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.
What does the Reserve Bank’s 0.5% rate rise mean for investors? Here’s a quick overview from Pendal’s head of cash strategies STEVE CAMPBELL
THE Reserve Bank surprised the market today with a lift of 50 basis points, taking the cash rate to 0.85%.
The RBA now joins the 50-point hike club along with the Federal Reserve, Bank of Canada and Reserve Bank of New Zealand.
It’s the RBA’s biggest rate increase since February 2000 and only the fifth time we’ve seen a move of 50bps or more since the introduction of the cash rate target.
What prompted the big move?
The cash rate has been held too low for too long and the RBA is behind the curve. They are moving more quickly to get closer to neutral.
There wasn’t any particular economic data release you could point to — wage price index data was weaker (although they prefer their own business liaison results) and the unemployment rate at 3.9% was pretty much in line with the previous month.
Economic growth was solid but no smoking gun.
Inflation is now higher than expected due largely to the conflict in Ukraine and Covid-related supply disruptions.
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Tightness in the domestic labour market and the effect from the floods on food prices are also putting upward pressure on inflation.
Where to now?
“The size and timing of future interest rate increases will be guided by the incoming data and the Board’s assessment of the outlook for inflation and the labour market,” the RBA said in today’s statement.
“The Board is committed to doing what is necessary to ensure that inflation in Australia returns to target over time.”
I view 50 basis points next month as more probable than 25.
Households are now dealing with rising electricity prices, rising petrol prices and higher repayments for the roughly one-third with a mortgage.
It is going to sting — particularly for households that took out a mortgage over the past year and have not built up large buffers in mortgage offset accounts.
The RBA acknowledges this risk. But it also recognises average household balance sheets are in strong positions — many with solid buffers in mortgage offset accounts.
And the market is moving. This graph below shows the implied three-month rate from the bank bill futures (lack of change further out the curve is due more to lack of liquidity and nothing trading).
This graph below shows change in pricing today:
A cash rate closer to 3% by the end of the year? Market pricing is aggressive. But at the moment I wouldn’t rule anything out.
What does it mean for investors?
The questions for asset owners is: while markets are looking for another 3% of rate hikes in the next 12 months, is the economy ready for it?
The RBA tried to imply the economy would be resilient. But the tide is now going out.
The first 1.5% of hikes will see belt-tightening, but probably no more.
However the next 1.5% could see actual stress, especially in housing. This is an experiment the RBA hasn’t undertaken for more than a decade — and risks of a policy error are rising.
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.
It isn’t an easy market to invest in, but there are opportunities if you know where to look. Here’s a quick tour of the major asset classes from Pendal’s Multi-Asset chief MICHAEL BLAYNEY
- Equities and bonds have faced headwinds in 2022
- Macro environment is challenging
- Cash and inflation linked alternatives are preferred
THIS year investors have contended with rising inflation and interest rates, higher energy prices, the war in Ukraine and lockdowns in China.
There have been plenty of headwinds for both equities and bonds, says Michael Blayney, Head of Multi-Assets at Pendal Group. It isn’t an easy market to invest in.
Cash and alternative investments with inflation linkages are preferred over other asset classes, he says.
Here Blayney offers a quick snapshot of major asset classes.
Equities
Many key equity markets remain overvalued, Blayney says, notwithstanding the sell-off this year. Rising bond yields are also weighing on equity valuation.
Combined with deteriorating macro-economic backdrop, an underweight equities position may be appropriate.
“We continue to prefer better valued markets such as the United Kingdom and Japan, and rotational themes such as value/small cap,” he says.
“In US equities, large caps remain expensive while mid and smaller companies are around fair value.
“While Chinese equities screen as cheap, at this point we remain cautious due to a deterioration in earnings, and ongoing lockdowns.”
Credit
High-yield debt is offering limited reward for risk, Blayney says. Though a recent increase in investment-grade spreads means that asset class is offering decent returns on a medium-term basis.
Within credit, the best value is in investment grade, he says.
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Pendal Multi-Asset Funds
Government bonds
Yields now represent better value but bonds face a significant headwind from inflation.
Blayney recommends retaining some duration exposure for defensiveness within portfolios, though less than usual.
“Where possible, we have a preference for inflation protection and Australian exposure within portfolios.”
Listed real assets
Global real estate investment trusts are expensive, particularly considering higher bond yields, and the backdrop of rising interest rates.
However, there are select opportunities in listed infrastructure securities, Blayney says.
What it adds up to
Overlaying all asset allocation decisions is the macro-economic environment, Blayney says.
“Despite economic indicators still sitting at supportive levels, the momentum of economic indicators continues to soften,” he says.
“This is due to reduced emergency level monetary and fiscal stimulus, negative sentiment from the Russian/ Ukrainian conflict and Covid lockdowns in China.”
While headline inflation has likely peaked, inflation expectations have risen.
“Increasing doubts are emerging as to whether central banks around the world can engineer a controlled reduction of inflation or whether their actions create demand destruction and possibly recession.”
The maturing cycle and event risks suggest a defensive risk stance, Blayney says.
“Cash and alternatives with inflation linkage such as commodities and ‘value exposures’ are preferred.”
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.
Emotion can overwhelm strategy when markets are volatile. Pendal’s multi-asset chief MICHAEL BLAYNEY explains three simple rules to keep in mind
- In times of volatility, don’t panic
- Opportunities occur in every market
- Diversification matters, especially in turbulent times
THERE is no silver bullet when investing, and often in volatile times like these, emotion can overwhelm strategy.
Here Pendal’s Head of Multi-Asset Michael Blayney outlines his three rules for investing in turbulent times:
Rule #1: Don’t panic
Have a well thought-out investment strategy, philosophy and process before a crisis starts.
This helps you stay disciplined despite the noise around you. It’s easy to get swayed by emotion, or worse still, enter a crisis at a risk level that wasn’t right for you to begin with.
A well thought-out, documented strategy enables you to look at each part of your portfolio and say “yes I understand why I own that assets and downturns are a normal part of cycle”.
A well thought out and documented philosophy and process is crucial to any active decision making during a crisis. It helps you keep a clear head when other market participants feel like a deer in headlights.
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Pendal Multi-Asset Funds
Rule 2: Look for opportunities, but at a minimum rebalance
Rebalancing matters.
If you look at history, when you buy things that are cheap, you do well as a long-term investor.
Rebalance your portfolio in a disciplined way, regardless of the headlines and how you may feel. There’s a proven process to top up your holdings at low prices and reduce investments that have done well.
Disciplined rebalancing adds to returns and reduces risk over time compared to letting a portfolio run.
It doesn’t require superior insights or an army of PhDs and investment analysts to help you — but it does require discipline.
Rule 3: Diversification matters
Be diversified and always include enough liquidity (cash) for your short-term needs. You never want to be a forced seller.
Each crisis is a little different. The global financial crisis was different to the COVID crisis. This crisis isn’t as violent as the previous two, but there is inflation which we haven’t seen for a long time.
Inflation isn’t good for bonds, but once they get sold off, and yields rise, they become a more useful asset class again.
Equities have come off high levels and rising bond yields affects valuation metrics. While it makes equities look a bit pricey, there will come a time when its right to re-enter the market again.
Diversification means exposure to a range of assets – including those which might not have done as well for a number of years but could outperform in different circumstances.
Diversified investors know that there’s always going to be some part of their portfolio that’s not working as well.
Then the cycle turns, and they need that part of the portfolio. That cycle can take a decade so an investor must be able to cope emotionally with an underperforming asset for a period.
The key thing people do wrong is panic and sell without a clear view of what their strategy is.
Ultimately you want to be the one with enough liquidity, comfortable with your strategy, and able to take advantage of any bargains that emerge.
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.
What’s next for rates and what does it mean for investors? Here’s a quick overview from Pendal’s Head of Cash Strategies STEVE CAMPBELL
THE Reserve Bank wrong-footed the market this week when it raised the cash rate by 0.25% to 0.35% — compared to consensus expectations of 15 basis points.
The inflation data in late April was too much to stomach.
You might as well lock in a 40-basis-point increase for June now to get the cash rate back to 0.75%.
The cash rate now looks as though it will be closer to 1.75% by the end of the year.
What’s next?
Ahead of updated forecasts that we’ll receive in their Statement on Monetary Policy this Friday, Tuesday’s statement revealed the following RBA forecasts:
- Unemployment to fall to 3.5% in early 2023
- GDP to grow 4.25% in 2022 and 2% in 2023
- Inflation around 6% in 2022 and underlying inflation around 4.75%
- Headline and underlying inflation moderating to about 3% by mid-2024
Forecasting has never been more difficult with conflict in Ukraine driving commodity prices, supply chains affected by China’s zero-Covid policy and a domestic unemployment rate not seen in 50 years.
The RBA’s forecasts previously have missed the mark by a fair way, so I am not giving too much weight to what they are saying with their longer-dated forecasts.
Things change quickly.
It was only two months ago that the RBA board was prepared to be patient.
They are more likely to panic in the coming months as other central banks raise rates by 50 basis points, starting with the Federal Reserve later this week.
Throw the Canadians and Kiwis in the 50 rate hike club as well.
The RBA is not quite in the same situation as the Fed, which has acknowledged it is behind the curve. (In the US the starting point for inflation was higher, the labour market tighter and wage inflation was picking up quickly.)
But they are still behind where they want to be — 0.1% was held for too long in hindsight.
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What does this mean for investors?
Six-month yields are likely to sit closer to 1.65% (from 1.48% pre meeting) so better days are ahead.
Those sitting in term deposits may enjoy having their deposits valued at par — but they are accruing at a much lower rate than other opportunities in the market.
Investor should be wary of investing in short-dated TDs for cash funds.
First and foremost, cash should be there to provide liquidity at all times while preserving capital.
TDs are great at preserving capital. But their liquidity? It’s almost quicker to sell a house than wait for TDs to mature.
I expect spreads to widen on RMBS (residential mortgage-backed securities, or mortgage bonds).
I expect we’ll see more volatility, even by cash fund standards in the coming months.
“It’s also why I think Pendal Stable Cash Plus Fund is well placed in this environment.
“Short-dated, highly liquid assets will quickly reflect the changes that the RBA will deliver in the coming months.”
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.
Soaring fossil fuel prices are testing the resolve of sustainable investors. But sustainable portfolios will deliver better long-term outcomes, argues Pendal’s MICHAEL BLAYNEY
- Oil prices test resolve of sustainable investors
- Expect better long-run outcomes from sustainable portfolios
- Portfolio construction can smooth the ride
INVESTORS are understandably asking whether there’s a long-term cost to being in a sustainable fund when oil is trading above $US100 a barrel.
“The reality is that sustainable portfolios have had a more difficult time of it recently and people are asking whether investing in a sustainable fund might mean a long-term drag on returns because they can’t get exposure to certain sectors such as fossil fuels,” says Pendal’s Head of Multi-Asset Michael Blayney.
“The short answer is we don’t expect to get worse returns from sustainability over the long term.
“Indeed, we expect to get better long-run outcomes from sustainable portfolios.
“But you will see greater variation relative to a benchmark in certain types of environments.
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“If you want a sustainable strategy — and you screen out fossil fuels and weapons and tobacco and gambling and so on — then you have to accept that sometimes you will outperform and sometimes you will underperform.
“We saw a sustainable strategy work really well during Covid. During that period oil prices collapsed.
“Also, many sustainable portfolios have a slight growth tilt to them. And 2020 was a really great environment for growth investors and much of 2021 was pretty good too.
“But if you look at one-year returns of sustainable funds as a category now, they’re not looking as great. And year-to-date has been very difficult.”
Portfolio construction critical
In this environment portfolio construction takes on even greater importance.
“If you look at other asset classes for economic exposures that you’re lacking in equities, that gives you an extra tool to manage through these periods,” Blayney says.
“While we encourage people to focus on the long term, the reality is people do think about the short term and they do think about peer comparisons.”
Investing across asset classes can smooth the road for sustainable investors.
“If your sustainability strategy gives you a slight growth bias then you might want to look for investments that fit your sustainability strategy but also gives you a value bias, for example in your alternatives.
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“Or you might actively seek out a bit of energy price exposure and inflation hedging via commodity futures or certain types of renewable energy infrastructure.”
Beyond Aussie equities
Looking beyond the local equity market is also attractive.
Oil and gas companies have outperformed this year as oil prices have pushed beyond $US100 a barrel.
But oil and gas companies are less than 4 per cent of the MSCI World Index. So in global equities at least, there are plenty of opportunities for investors outside that sector.
“There is no reason to believe the oil and gas sector is going to outperform in the very long term. If anything, because of the decarbonisation economy it has big structural headwinds,” Blayney says.
All investors — including sustainable investors — need to have realistic expectation from the beginning.
“They need to understand that some equities in their portfolio might trail the market over the short term. But that is okay if they have the right strategy, structurally, for the long term,” Blayney says.
“To help them through some of those periods, they should think about sustainable balanced funds which hold some renewables, for example.
“To the extent that they can, investors should look at what they’re missing from equities and then use other asset classes to identify exposures which are consistent with what they are trying to achieve from a sustainability perspective.”
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.