The Point

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.

Caution warranted after strong market rally

The market’s turnaround from last year’s pessimism is a short-term reaction to a “perfect storm” of positive events – and investors should be cautious, says Pendal’s Alan Polley.

Much of the 15%+ gains in equities this year can be explained by near-term events such as investors closing out last year’s short positions, says Alan, a Pendal’s multi-asset PM.

There is less clarity about the medium-term prospects for shares. Investors should be watching corporate earnings, which is where the effect of higher rates on household spending and business activity will start to show.

So far results are mixed in the current ASX half-year reporting season.

“There’s downside risk on earnings. If earnings are further adjusted down, then equities have more downside risk than upside so there’s not much rationale for material gains at this point, especially after we’ve had markets rally 15%.

“We don’t see reason to have a lot of risk. Our signals are suggesting being reasonably neutral.”

Michael Blayney: It’s time to be patient and wait for an opportunity

Expectations are often more important than absolute numbers, as most investors know.

This week’s US inflation data was “pretty much as expected”, says Pendal’s head of multi-asset Michael Blayney. “Inflation is too high but it’s coming down.”

The CPI data reinforced the high probability of a 25bp Fed hike to 5 per cent in March. Futures markets are implying US hikes will peak at about 5.25 per cent mid-year.

Investor reaction to the CPI was relatively muted. Volatility after an inflation print or Fed rates decision has lessened in recent months, Michael observes.

“For the market, it’s not what the number is. It’s what the number is, relative to what the market expected.”

While rates and inflation remain important, markets have shifted their attention somewhat to recessionary risks and corporate earnings, he says.