The Point

Why Credit Suisse is a wake-up call for Australian fixed income investors

There is anger among Credit Suisse bondholders who’ve been wiped out as part of the bank’s rescue plan. But there are also important lessons for Australian fixed income investors. Pendal’s AMY XIE PATRICK explains.

SOME $A25 billion worth of Credit Suisse “additional tier one” (or AT1) bonds have been written down to zero value as part of a rescue deal that favoured equity shareholders.

That’s caused anger among bondholders who have lost their money – and fears of wider fallout among investors around the world.

Are broader fears justified? What can Australian fixed income investors learn from the crisis?

Superannuation: Should we be concerned about government intervention?

This week saw an escalation in the political battle over the role of Super after Labor’s decision to cap concessions for those with more than $3 million in their account.

Investors might already have heightened concerns about their Super after federal treasurer Jim Chalmers last month published an essay backing a “values-based approach” to capitalism, which prompted a flurry of positive and negative responses.

What does the Chalmers essay infer about his view on superannuation – and how the $150 billion or so annual new flows into the APRA-regulated, multi-trillion-dollar system should be managed?

Pendal’s Richard Brandweiner – who also chairs Impact Investing Australia – does not believe Chalmers plans to direct superannuation funds where to invest.

Nor does he believe there is any desire or expectation for returns to be compromised.

“He wants to create infrastructure that will support return-driven investment into areas that could lead to better environmental and social outcomes.

“The way the capital in our super system is deployed will impact the world we retire into, and there’s no way around that.”

Impact Investing: where to look for innovative companies now

Regnan’s Tim Crockford spends most of his time searching for smaller companies with an innovative edge in solving the world’s biggest problems.

So where should investors be looking for innovative companies right now?

Probably not among Wall Street’s big tech stocks, which Tim still sees as relatively over-valued.

“I still think they are at levels that aren’t reflecting the post-Covid norm,” says Tim, who leads Regnan’s four-person Global Equities Impact Solutions team.

In contrast, European markets offer better value, he says.

“European equities are almost the mirror image of US equities. You had a lot of bearishness priced in last year because of the conflict in Eastern Europe.

“But the market went too far, particularly in terms of profitability.

“What we are seeing coming through in the first earnings season is that more companies are surprising positively. And this isn’t just in sales, but particularly on the margin line.”

Impact investing: time for small and mid-cap stocks to shine

We can debate whether the era of easy money is over.

But there is less doubt that the era of large-cap, beta-driven, passive investing is over, says Regnan’s head of impact investing Tim Crockford.

Investors should now be considering small-and-medium companies where valuations are more appealing than large caps, says Tim, who manages Regnan Global Equity Impact Solutions fund.

“Over the long-term, small caps have been a powerful driver of returns because they typically grow their earnings much faster than large caps,” he says.

Tim’s team looks for innovation in the small and mid-cap space – particularly those with potential to address pressing environmental and social challenges.

“While valuations have come down, for the right companies fundamentals remain intact.

“Long-term growth expectations for some companies exposed to these transformational themes are too conservative.”

Global equities: Be patient, but ready to pounce

Most global equity markets are in a drawn-out, bottoming process, says Pendal’s Chris Lees, who manages Pendal Global Select Fund.

But several segments are showing improving relative fundamentals, share prices and attractive valuations, he says. These include:

• Quality growth stocks, many of which are down up to 50%
• UK and European global champions, plus Japanese exporters
• Emerging markets domestic consumption stocks
• Stocks exposed to China’s reopening and recovery

“Given the recent rally and 2023 recession risks we will wait to buy the dips throughout the year,” he says.

Lees remains 50% bullish and 50% bearish on equity markets.

“Short-term reasons to be bearish include a recession potentially becoming a financial crisis or a larger event such as a contagion.

“Medium-term reasons to be bullish include the Fed regaining credibility with inflation and interest rates stabilising this year.”