The Point

FAST PODCAST: The investment outlook for Aussie REITs

Australian Real Estate Investment Trusts could be reasonable value at the moment, “factoring in where we think interest rates will go”, says Pendal portfolio manager Julia Forrest in our latest fast podcast. 

“We’re not expecting any severe stress in the sector, unlike in the GFC. 

“The sector is reasonably well positioned. It’s offering a reasonable dividend yield – 5% to 6% for the yield for the stocks that we like. 

“There is still some earnings growth coming through for some of the larger mall landlords. 

“Given what we’ve seen happen in the last two years – and the concessions that they’ve made to tenants for rents during Covid – we will see some rents coming back. 

“It will to some extent be moderated by rising cash rates and what that does to debt cost going forward. 

“But the sector is reasonably well positioned. 

“I think management still have the GFC in their corporate memories and have positioned their portfolios accordingly.” 

FAST PODCAST: Will country-level ESG become more important after Ukraine?

Will ESG have a bigger impact at country level after the corporate reaction to Russia’s invasion of Ukraine? ESG investing has two main aims, says Pendal ESG credit analyst Murray Ackman in our latest podcast. “One is about avoiding a financial loss or achieving an upside, and the other is about bringing about change.” Can investors bring about change in a country, for instance engaging with sovereign bond issuers? “You can have a lot of influence over businesses, but countries are a lot bigger and a lot harder to influence, though there have been examples such as South Africa. “The Russian example is a little idiosyncratic because there’s widespread sanctions and the speed and scale of condemnation in the west is very unique. “Very few businesses have applied the same standards to other countries that have invaded sovereign nations, though we can see the English Premier League is starting to question this in regard to Saudi Arabia and Yemen, so maybe this will change. “We’ve seen there is a re-setting of the status quo view, so perhaps this is a watershed moment on the way in which we invest in countries.”

FAST PODCAST: Where inflation is heading and how to think about bonds now

How should investors be thinking about bonds now?

The market is factoring in 3% cash rates and believes we’ll get there around Christmas, says Pendal’s Tim Hext in this podcast.

“I think they’re probably going to end up closer to 2% than 3%, but the point is the market pricing.

“If you buy a bond today, you’re buying the expected interest rates in the future, which are quite high. A 10-year bond is now 3.5%.

“Last time we spoke on this podcast we were heading through 2.5%. I said then, if you’re underweight bonds, you might want to start thinking about getting back to neutral.

“Now they’re starting to get into territory where you could even look at going overweight bonds.

“I believe inflation eventually heads back 2.5% to 3%. And real interest rates – the return you get above inflation – shouldn’t move a lot higher than where they are now, around about 1% for 10 years.

“If you give the government your money today, you’re in a sense locking in an inflation rate around 2.5%, plus an extra 1% return on top, which in my mind for a risk-free asset is quite a good return.”

FAST PODCAST: How the China slowdown is affecting Aussie investors

What does China’s slow-down mean for the global economy – and specifically for fixed income investing?

“We’ve been sheltered so far because our comeback from Covid – thanks to a lot of fiscal stimulus around the world – has helped buffer these headwinds coming out of China,” says Pendal’s Amy Xie Patrick in this week’s fast podcast.

“But at least in the short term China’s lockdown measures are leading once again to bottlenecks in supply chains and logistics.

“Slowing growth should mean bonds have their heyday again. But in the near term it’s difficult to say this is the turning point in bond yields, because inflation is still a worry.

“If the growth situation in China gets materially worse – which isn’t our base case – fixed income portfolios that look a lot like equity portfolios with a lot of credit and high yield in them will fare poorly.

“But if you are willing to dip your toe into purer fixed income portfolios that rely much more heavily on that duration lever – those portfolios will be more reliable at delivering a defensive performance profile if the worst scenario eventuates out of China.”