The Point

Michael Blayney: Why it’s better to stay the course on sustainable strategies, even when energy prices are high

The nerves of ESG investors were tested last year when oil and gas prices soared, causing underperformance in some sustainable funds.

But research by our multi-asset team shows long-term ESG investors should stay the course through bumpy times.

Analyst Rita Bodrina recently examined MSCI ESG data going back to 2000.

She found companies in the top 20 per cent of ESG-rated stocks were more efficient that those in the middle segment, and sharply better than the bottom 20 per cent.

Rita also found that ESG companies were better valued by the market over time. And based on cumulative returns over 22 years, low-rated ESG companies generally underperformed.

“Paying attention to ESG factors alongside traditional financial factors leads to better returns and better management of risk,” says our multi-asset chief Michael Blayney.

“Investors certainly don’t have to give up returns if they choose a sustainable strategy.”

What’s behind the RBA’s surprise rate hike

The RBA surprised most people with this week’s quarter-point rate hike, just ahead of a similar move by the US Fed.

Justifying the decision, the RBA noted that services inflation remained very high and the offshore experience indicated upside risks.

Productivity growth was also anaemic, exerting upward pressure on labour costs, adding to the RBA’s concerns.

“Previously I expected any policy change would occur more likely in a quarterly sequence following the release of quarterly inflation data,” says our head of cash strategies, Steve Campbell.

“That has gone out the window. This week’s decision means the next RBA meeting in June is also a live meeting.”

Multi-asset: Why it’s time to shift to liquid alternative investments

It’s time to start shifting from illiquid alternative investments to liquid alternatives, argues Alan Polley, a portfolio manager with our multi-asset team.

Illiquid alternative assets are dominated by property and infrastructure and are usually private, or unlisted.

“Illiquid assets have had a fantastic secular tailwind for the last two decades because interest rates have been falling and they’ve been chased by a wall of effectively free money bidding up prices,” Alan says.

But the good times for illiquid assets are over, thanks to an accelerated rate-tightening cycle, he says.

Shifting to liquid alternative investments will be a theme for this year, Alan believes.

“Look for those that offer true diversification benefits and other forms of returns besides traditional equities and bonds.

“Look for assets that have a secular tailwind, such as sustainable investment companies, and investments with inflation linkage.”

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.”

Steve Campbell: RBA likely to wait for April data before a move in May

The RBA is getting close to pausing, but another rate rise is probable in May, says Pendal’s head of cash strategies STEVE CAMPBELL

The Reserve Bank lifted the cash rate for a tenth consecutive meeting earlier this week – up 0.25 percentage points to 3.6%.

“When and how much further interest rates need to increase” would depend on “developments in the global economy, trends in household spending and the outlook for inflation and the labour market”, the RBA said.

The next Australian labour market data is due on March 16.