The Point

Tim Hext: Rates are important – but not as much as the Budget

While we all focused on the RBA’s 10th rate rise in a row yesterday, Team Albanese was quietly working on a budget that will deliver hundreds of billions of dollars in spending initiatives and cuts in May.

Monetary policy is in the spotlight 11 times a year, while fiscal policy only has two moments – the annual budget and the mid-year outlook.

But investors would be wise to pay more attention to fiscal policy, says our head of government bonds, Tim Hext.

“Fiscal policy is more likely to determine whether or not Australia is going to have a recession,” says Tim.

“We’ve built a whole system around monetary policy and the wisdom of the independent central bank.

“But fiscal policy doesn’t get enough attention.

“The government spent $250 billion during Covid. Fiscal policy remains the main game for people’s pockets and the economy.

“It explains why the Australian economy is proving more resilient to rate hikes, at least for now.”

Fixed interest: Check your ‘duration’ settings before inflation turns

Fixed interest investors should get their portfolio settings right now, before US inflation tops out and starts falling consistently in the second half, says Pendal’s Tim Hext.

Right now US inflation reports are resetting the mood of investment markets every month, says Tim, who runs government bond strategy at Pendal.

“By the second half of the year, we are going to get a much clearer picture and we are going to see that inflation hasn’t just topped out but is coming down,” he says.

“The big message is that investors have a bit of time on their hands now, but things will start to move quite quickly by the middle of the year. So investors should be getting their duration sorted.”

That means checking the duration of your fixed income investments and their sensitivity to interest rate changes.

“Investors should be getting back to at least where their model portfolios tells them they need to be in the medium-to-long term.”

Investors need two things right now: patience and protection

INVESTORS need two things in 2023 – protection and patience.

Yesterday’s Australian monthly CPI shows the Reserve Bank’s tightening – which started in the second quarter of 2022 – is starting to have an impact.

The monthly CPI indicator rose 7.4% for the year to January – an easing from 8.4% in December.

Monetary policy works with a lag – but it does work.

This can be observed through the two key components of the CPI number: new dwelling prices and rents.

Aussie equities: What we learned in ASX reporting season

ASX earnings season came to a close this week, delivering a more robust-than-expected picture of the economy.

Here a few things we learned, says Pendal analyst and co-portfolio manager Oliver Renton:

• The effect of higher interest rates is yet to fully flow through company P&Ls
• Early signs of higher wages are showing through in company results, but the full effect could take two-to-three years
• Earnings season did not resolve concerns about the outlook for household spending and consumer confidence.

“At a headline level reporting season appeared quite normal, but there’s a lot going on under the surface,” says Oliver.

“Much-discussed macro drivers are only just starting to come through in actual company earnings.

“The same pressures we have speaking about for the past 12 months are not in the rear-view mirror yet.

“The good thing is that the intersection of those macro forces with company specifics continues to create opportunities.”