The Point

Rates, China, Trump: Pendal’s Amy Xie Patrick on the trends that will shape 2025

One of the surprises of 2024 was the absence of rate cuts in Australia. What happened and how long will the Reserve Bank sit on its hands? Pendal’s head of income strategies AMY XI PATRICK explains in this review of 2024.

Amy Xie Patrick: How to replace hybrids as they disappear from income portfolios

Pendal’s head of income strategies Amy Xie Patrick recently wrote about the phase-out of hybrids and which kinds of assets might make a good replacement in income portfolios.

And in her latest podcast, Amy runs through some of the options for different kinds of investors.

Retail investors are likely to look for substitutes in term deposits and equities – though neither are a like-for-like solution, she argues.

TDs reduce liquidity and may not be a long-term solution as rates come down, she points out.

Equities with a dividend and franking credits can replace income, but they come with increased portfolio volatility compared to hybrids.

Amy also argues that an actively managed fixed-income portfolio can be a better solution.

As an investor, Amy blends high-quality investment-grade bonds for income, equities to help capital grow, and government bonds to manage the portfolio through the rates cycle.

“We try to bridge that gap between what the investor wants and what is currently available.”

Listen to the podcast here

Fast podcast: What the latest inflation numbers mean for investors

To come

Debunking a myth about fossil fuels and sustainable fixed interest

High fossil fuel prices can understandably discourage investors from allocating to sustainable strategies.

Sustainable portfolios generally exclude exposure to fossil fuels, which may mean underperformance when oil prices rise, for example.

But that’s not necessarily the case across all asset classes, says Pendal’s head of credit and sustainable strategies, George Bishay.

“There’s a perception that all asset classes face these potential performance risks when prioritising sustainability.

“But Australian sustainable fixed-income exhibits minimal sensitivity to oil markets or any other screened activities,” writes George in a new Pendal paper.

Fossil fuel companies typically make up a large part of equities indices (about 15 per cent of the ASX300 in July 2024).

But issuers involved in fossil fuel extraction, exploration or refining are a small component of the Australian fixed-income benchmark.

“This differentiation allows investors to integrate sustainable fixed income into their overall core fixed-interest allocation with minimal additional benchmark risk,” says George.

“By incorporating Australian sustainable fixed income alongside other traditional assets, investors can achieve a robust portfolio while also supporting climate stability or the underserved in society.”

Tim Hext: Why Aussie fixed-income investors can largely ignore a potential August rate hike

Australia appears to be at different stage of the rate cycle compared to international peers – a “lagging cycle compared to the rest of the world”, as Pendal’s Tim Hext puts it.

“Globally, people are looking at very high interest rates and going, ‘We just don’t need them anymore.’

“In Australia, though, inflation’s proven to be quite sticky around 4 per cent in the last couple of quarters. The RBA’s patience is being tested.”

August is a live meeting in terms of potential rate changes and next week’s CPI figures will be key to the decision, says Tim – Pendal’s head of government bond strategies – in a new fast podcast.

A higher-than-expected number could prompt a hike. A lower-than-expected number would mean rates stay where they are.

However, if an August rate hike eventuates, investors should largely ignore it, he argues.