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Tim Hext: Ready for a spring like no other as darker days fade

We’re getting ready to live with Covid — and we’re getting ready to spend again, writes Tim Hext in his weekly bond, income and defensive strategies outlook

THIS WEEK New South Wales embarked on a journey to re-opening. The state government announced plans to ease lockdowns as key vaccination hurdles are met.

Australia has started down a path of living with Covid.

Many countries are already in the living-with-Covid phase.

The transition will be bumpy. But three pillars will ensure a sustained recovery: increasing levels of vaccination, strong fiscal support and continued monetary stimulus.

Sharp rebounds in economic activity in the US, UK and Canada paint a picture of what Australia could be like in the near future.

Better health outcomes from higher vaccination rates are allowing greater freedom of movement in those countries.

That gives us hope of returning soon to a level of normality.

Recovery: replaying an old tune

Australia had a strong start to 2021 as the recovery from March 2020 gathered steam.

The economy appears to have done a U-turn after the spread of the Delta strain in June.

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Still, the change in circumstances won’t impact the economy as much as it did in March 2020, because measures to support the economy remain in place.

This is a hibernation for many businesses. With savings once again building, lost activity will rebound quickly.

Most of the direct costs of the current lockdowns across the nation are cushioned by state and federal government assistance. That will assist the recovery once lockdown ends, as was observed in the first half of 2021.

Pent-up demand for retail services, travel and recreation, as well as construction activity will rebound sharply once this hibernation ends.

Expect to see similar strong economic data as we did in Q1 2021, a year after the March 2020 Covid impact:

It’s also important to note that current lockdown measures have not had the same level of negative impact on payrolls as they did in March 2020:

Australian consumers are ready to spend for summer. They’re just waiting for the opportunity.

A word of caution

Even as countries such as the US and UK rebound from lockdowns, it is not a complete rosy picture. Infections can still occur, especially among the unvaccinated.

Stark improvements in hospitalisation and death rates for the vaccinated have prompted many industries to mandate jabs for staff:

  • The US Pentagon is making vaccination mandatory for all defence troops
  • New York’s school board requires all public school employees to be vaccinated
  • Delta Airlines has implemented policies with very severe penalties for unvaccinated staff

Concerted efforts to increase vaccination rates and keep the economy open have resulted in strong GDP rebounds in those countries.

This shows high vaccination rates will pave the way forward:

What this means for investors

Our view is the Reserve Bank of Australia will delay any further tapering talk, at least for the rest of 2021.

The RBA has already stopped the Term Funding Facility, capped Yield Curve Control at April 2024 and reduced Quantitative Easing from $5 billion to $4 billion per week from September.

Given current uncertainties they will think they have done enough for now. But they are in glass half-full mode, so they will talk up the rebound.

We think in medium term they will be right — so expect yields higher into 2022.

We continue to expect higher inflation in 2022, so we prefer inflation bonds to nominal bonds for now.


About Tim Hext and Pendal’s Bond, Income and Defensive Strategies (BIDS) boutique

Tim Hext is a portfolio manager with Pendal’s Bond, Income and Defensive Strategies (BIDS) team.

Pendal’s BIDS boutique is one of the most experienced and well-regarded fixed income teams in Australia. In 2020 the team won the Australian Fixed Interest category in the Zenith awards.

With the goal of building the most defensive line of funds in Australia, the team oversees A$22 billion invested across income, composite, pure alpha, global and Australian government strategies.

Find out more about Pendal’s fixed interest strategies here


About Pendal Group

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.

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