The Point

Fast podcast: Asset allocation tips from Pendal’s head of multi-asset

This year reminded investors of a few things, says Pendal’s multi-asset chief Michael Blayney.

“The first one is that volatility in financial markets is a normal thing,” says Michael in our latest fast podcast.

“It can obviously cause short-term pain, but it also creates opportunities for investors willing to take a long-term view when value arises.

“Secondly, people had assumed bonds and equities would always move in opposite directions with that negative correlation we’ve seen over the last decade or two.

“But the reality is that correlations and diversification benefits of various asset classes do vary over time.”

Beyond bonds and equities, Michael recommends “meaningful allocations to alternative assets.

“Some of the exposures there – particularly those that have given us a bit more energy-price exposure or some commodity-linked exposures – have actually performed quite well in the last year.”

The signals that will bring interest rate hikes to an end

What signs do central banks need to see before they stop hiking?

“The US Fed is looking for inflation not only peaking but coming down very convincingly to its 2% target,” says our head of income strategies, Amy Xi Patrick in a new fast podcast.

“Wage growth in Australia is only at around about 2.5% to 3%. The RBA is comfortable for it to go up to 3.5%, maybe even temporarily to 4%.

“Wage growth in the US, however, is hovering at about 5.5% to 6%, which is clearly not consistent with a 2% inflation rate.

“This means inflation will be stickier than the market expects. Central banks may slow down hikes, but they will be hiking for longer next year than the market expects, says Amy.

Higher-quality fixed income assets will help offer some buffer for future volatility, she says.

Fast podcast: Why bonds look compelling towards mid-2023

There are signs that inflation has peaked and is due to come off in the next few quarters, says Oliver Ge, an assistant portfolio manager with our income and fixed interest team.

“That would invariably take us to a position, maybe in Q2 2023, where it looks quite compelling to own bonds,” says Oliver in our latest fast podcast.

“At that point you’d already see inflation pressures come off and growth indicators start to materially deteriorate.

“Then central banks will in all likelihood tilt their reaction function to be more benign, more dovish.

“They’re not accelerating, there likely won’t be more hikes. That environment is conducive to owning bonds.

“You’re looking at returns of five to six per cent per annum at that point.”

Fast podcast: What the Budget, inflation and rates mean for bonds

What do this week’s Budget and inflation numbers — and next week’s likely 25-point rate rise — mean for 2023? And the role of bonds in portfolios?

“The key takeaway I have from the last couple of days is this inflation issue is not going to solve itself quickly enough to call an end to rate hikes anytime soon,” says Pendal’s head of government bond strategies Tim Hext in a new fast podcast.

“We are getting the ingredients — particularly globally more so than Australia — where in the second half of next year you could be getting a lot of weakness globally feeding through to the need for lower rates.

“My message — and this has been a consistent message for a number of months now — is start to think about getting some bonds in your portfolio as a defensive instrument.

“I don’t think they’re necessarily going to rally hard in the near term. But if you can own those 10-year bonds in Australia at 4% on a two or three-year outlook, I think you’re going to do well out of them.

“And they’re going to give you that buffer should the slow-down prove to be stronger.”

Amy Xie Patrick: Why it’s a myth that you shouldn’t buy bonds in a hiking cycle

Bonds can be an appropriate investment in a hiking cycle – as long as you know what to look for, argues Pendal’s head of income strategies Amy Xie Patrick.

“It’s a common misconception that you shouldn’t buy bonds in a hiking cycle,” says Amy.

“In a lot of hiking cycles, bonds actually do okay on a total return basis – that is, the income you get from the coupon on those bonds, as well as their potential to gain a little in terms of the capital price.

“That’s usually because most hiking cycles are fairly well flagged. The difference with this hiking cycle is the central banks left it too late and now have to catch up.

“Even though central banks may need to keep hiking, now their mantra is well flagged so there’s hope bonds can do better in the second half of the cycle.

“It does mean you probably want to look at having bonds in your portfolio as a defensive pillar, more towards the longer end of curves.”