The Point

Hard, fast rates cycle could mean it’s time for long-duration bonds

The RBA’s hawkish tone could mean a hard landing with a fast turnaround on rates later this year.

That means fixed interest investors should be eyeing longer-dated bonds, says Pendal’s Tim Hext.

In a Pendal webinar this week Tim reviewed the latest economic data with Commbank chief economist Stephen Halmarick and outlined how it affected investors.

With higher rates on their minds, Aussies have begun reining in spending in the past two weeks, says Halmarick, who has a real-time view of the spending habits of the bank’s 16 million customers.

That will be good news for the RBA. But it’s unlikely to change their hawkish approach to inflation in coming months, partly due to strong wage growth.

Still, Halmarick reckons the cycle will be short and rates could fall this year.

Tim Hext says it’s time to consider longer-dated bonds as insurance while locking in a decent income.

“Our advice to clients is if you’ve got quite short duration, you should be looking to lengthen that.

“With 10-year bonds around 4 per cent, we don’t think cash rates are going to be able to get that high. If they do, they’ll only be there very briefly.”

Tim Hext: Powell gives the green light after smaller rate rise

Last week US inflation rose at a slower-than-expected rate, leading to a surge in stocks.

Are sunnier days ahead? Or will this month’s data join earlier false dawns such as July?

“Although not entirely unexpected, lower inflation will continue to provide encouragement to markets that the Fed can slow the pace of hikes (likely 0.5 percentage points in December),” says our head of government bonds Tim Hext.

“Investors should view any decent rallies as an opportunity to de-risk portfolios for the challenges ahead.”

The super-high inflation battle of 2022 may be won. But the outcome of the war is still uncertain, says Tim.

Getting from 9% to 4% next year will be “the easy part”, he says. Commodity shocks from Russia and tight labour markets will likely see inflation get sticky around 4%.

“Unless we tip into a steep recession the US Fed will remain wary about calling victory on inflation soon.”

Crispin Murray: What’s driving Aussie equities this week

Emerging Markets: December quarter shows positive signs after a challenging 2022

IT was a difficult year for emerging equity markets in 2022, but the December quarter was more positive despite ongoing growth and inflation pressures in key economies.

Last year Russia’s invasion of Ukraine drove prices of key commodities sharply higher in an environment where inflation was already high and the outlook for interest rates was difficult.

This was combined with ongoing economic weakness in China.

The MSCI EM Index returned -20.1% in USD terms.

Here is a recap of the main EM themes in 2022 and what we learned in the closing months of the year.