The Point

Michael Blayney: How to take a multi-asset approach to sustainable investing

Michael Blayney: Take care with stretched US valuations

The strength of global equities continues to surprise as we near the halfway mark of 2023 – but some markets make more sense than others.

Pendal’s head of multi-asset Michael Blayney is cautious on the mega-tech-driven Wall Street rally.

“The US remains one of our less-preferred markets given stretched valuations and the heightened risk of recession,” he says.

“AI is clearly an important thematic for the next decade, but markets have a habit of getting overly exuberant in the short term when a new theme emerges – and this appears to be one of those occasions.”

Michael prefers Japan, which is up some 20 per cent this year, compared to 1 per cent for the S&P/ASX200.

“We’ve liked and been overweight Japan for some time. Japanese companies have been more profitable recently and are relatively under-leveraged, putting them in a better position as rates rise.”

Overall Pendal’s multi-asset team is “marginally underweight equities and close to neutral on bonds, while holding a little more cash and liquid alternatives, which also gives some exposure to inflation hedging assets”.

Alan Polley: What is r* and how it helps investors analyse rates

We’d all like a better idea of where cash rates are going and what returns we can expect from our investments in the future.

One of the tools our multi-asset team uses to get a better view is r*.

Pronounced “r-star”, it’s a term economists use for the real level of interest rates at which the economy neither expands nor contracts.

“Looking forward, we see the r* around the 1 per cent level – providing a reasonable compensation for the opportunity cost of supplying capital,” says Alan Polley, a PM with our multi-asset team.

“A higher r* means the forward-looking return environment is higher than it has been since the GFC.

“Another nice aspect is valuations – with r* trending down before the pandemic we had valuations going up. High valuations mean more risk looking forward.

“Now that we have r* at more normal levels, valuations are back to more normal levels as well.

“These two things suggest the return outlook is more attractive than it was before the pandemic.”

Michael Blayney: Inflation is still driving investment markets, which means a cautious approach for now

Despite yesterday’s news of a continued easing in Australia’s monthly CPI from 7.4% to 6.8%, inflation will remain a key driver of investment markets, just as it was throughout the first quarter, says our head of multi-asset Michael Blayney.

“While inflation looks to have peaked, it could become sticky in some economies,” Michael says.

“In the US, for example, it could remain around the four to five per cent range with further falls dependent on softening wages and increased labour capacity.”

Investors are pricing in a normalisation of inflation.

“But markets react relative to what’s priced in, so if inflation proves to be more sticky than what’s priced in, that creates risks for both bonds and equities.”

Michael Blayney: How to manage portfolios as regulators play whack-a-mole

The past few weeks have demonstrated the need for perspective as investors manage portfolios through increased volatility, says Pendal’s head of multi-asset Michael Blayney.

The CBOE Volatility Index spiked to its highest levels for the year after the Credit Suisse and Silicon Valley Bank crises.

“We are not at extreme panic right now,” says Blayney. “But we are starting to see problems emerging.

“Central banks have raised interest rates at a rapid pace over the last year. By doing so it was always a possibility, or even a probability, that they’d break something.

“That’s what we are now seeing, and regulators are coming out and playing a game of whack-a-mole.”

Investors now need to decide if the recent sell-off is a buying opportunity, or whether markets are mid-crisis, and there’s further to fall.

Michael Blayney: We’re not in the clear yet on a recession. Here’s why

For all the talk, the US hasn’t fallen into recession.

Corporate earnings haven’t been crushed, despite inflation and a string of interest rate hikes.

It’s looking like the US, Australia and other major economies might escape a recession, right?

Not so fast, says Pendal’s head of multi-asset Michael Blayney.

“A recession is still likely, but it’s going to be pushed further out,” Michael says.

Higher inflation and interest rates take time to hit the real economy, he says.

Turning points in economic cycles normally involve plenty of “noise” – information that can be contradictory and not always conducive to good investment decisions or policy making.

“If you look at the lead story on the television every day and invest on the back of that, you probably won’t get a good result,” Michael says.

“But if you have a disciplined process and follow it consistently through time, you should make money in the long term.”