The Point

How Pendal investors helped make the world a better place in 2022

As “stewards of capital”, Pendal undertook 562 ESG-related meetings with investee companies and issuers on behalf of investors in 2022.

These “engagements” – where we seek to influence positive outcomes on ESG matters – are one of the benefits of investing with an “active” investment manager.

Deep, fundamental research capabilities in this area are increasingly important, says Pendal’s Richard Brandweiner in our 2022 stewardship report (which you can find here).

“The challenge for investors is identifying authentic leadership that can leverage non-financial factors to generate real economic value,” Richard says.

“Since many of the basic hygiene factors are already considered, it will become particularly difficult for systematic processes like those used by the mainstream ESG score providers to assess this.”

Fixed Interest wrap: Our views on latest inflation data, the RBA review and YFYS reforms

Yesterday’s March-quarter ABS data showed goods inflation almost flat-lining as supply chains return to normal, while services inflation jumped to 6.1%.

Given it’s a one-third / two-thirds split between goods and services, this leaves the medium-term annual inflation pulse near 4%, says our head of bond strategies, Tim Hext.

“The RBA will be encouraged that inflation is falling,” says Tim. “Their 4.75% forecast for 2023 now looks high and will likely be revised down in May.

“This means no more rate hikes, with the fixed-rate cliff doing the work on the domestic economy for the rest of 2023.”

But those looking for rate cuts late this year or early next year will be disappointed, Tim says.

“The easier work on inflation is done. The harder work of reining in services inflation and the domestic economy, is very much a work in progress.

“It will not be smooth or pretty and will require rates stuck here for the rest of this year.”

“Overall the latest data supports our duration-friendly view on markets, but as always levels will determine our risk.”

Tim Hext: The end of interest rate hikes may finally be near

Almost exactly a year after the Fed started raising rates, it has finally signalled a pause may be near.

Today’s 25-point hike brings us to a total of 4.75% of hikes in nine meetings.

Future hikes no longer “will” be needed but now “may be appropriate”, the Fed says.

Bond markets rallied modestly on the statement but were given a decent boost by Powell’s comments that the Fed considered a pause this time after recent bank wobbles.

“We are now all on ‘break watch’,” says Pendal’s head of government bond strategies Tim Hext.

“Where will we see the next signs of stress after almost 5% of hikes in a year?”

Tim points to commercial property, private equity and the non-bank financial sector as areas that thrived in the zero-rate environment.

“Equities have largely taken it all in their stride. Stresses may be offset by lower rates, meaning it may be a case of picking the sector winners and losers more than the overall market direction.”

Investors need two things right now: patience and protection

INVESTORS need two things in 2023 – protection and patience.

Yesterday’s Australian monthly CPI shows the Reserve Bank’s tightening – which started in the second quarter of 2022 – is starting to have an impact.

The monthly CPI indicator rose 7.4% for the year to January – an easing from 8.4% in December.

Monetary policy works with a lag – but it does work.

This can be observed through the two key components of the CPI number: new dwelling prices and rents.

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.”