Why our multi-asset team is increasing its exposure to bonds

As inflation falls, investors can have more confidence in bonds, argues our head of multi-asset MICHAEL BLAYNEY. Here he explains why

• Inflation has fallen from last year’s peaks
• Investors can have more confidence buying bonds
• Find out about Pendal Sustainable Balanced Fund
• Browse all Pendal’s multi-asset funds

AS inflation falls — while still remaining at uncomfortably high levels — investors can have more confidence investing in government bonds, says Pendal’s multi-asset chief Michael Blayney.

“On the raw numbers, inflation in the United States has come off a long way.

“It peaked above 9 per cent last year and most recently it has come in just below 5 per cent on a headline basis. This has important portfolio considerations.

“It means you can have a bit more confidence in your bond allocation, because the biggest risk to bonds, ultimately, is inflation.

“We have moved to slightly over-weight bonds, and that’s a big change because we previously had been underweight bonds for a long time.”

Global bond yields are broadly in line with Blayney’s estimate of fair value. But he warns that elevated services price inflation and a very tight labour market are key risks for bonds. 

Offsetting this is the risk of recession in which bonds would provide their traditional “risk off” portfolio benefits.

Economists have been forecasting a recession in the US for several months and while the timing continues to get pushed out, it is still likely to occur, Blayney says.

With a slight tilt towards bonds and away from equities, Blayney’s team is running a “slightly cautious” stance.

“It’s one to two years before you feel the full impact of rising rates and we are only halfway through that process. On that basis no-one really knows yet what the full impact of rising rates will be.”

The risk for central banks, including the US Federal Reserve, is that economies fall into recession but inflation remains high, hindering their ability to cut interest rates, he says.

“Realistically I think the Fed will want to see the whites of the eyes of inflation near its target before it starts cutting rates,” Blayney says.

US risks

Risks remain in the US economy, he says.

“There are still deposits being pulled out of US regional banks … and credit will be harder to get. And credit is very important to the health of the economy.

“Also, people’s purchasing power is being squeezed by inflation and there’s rising borrowing costs.

“And there’s a tail risk around the US breaching its debt ceiling. That’s not a very positive backdrop for investing.”

Equities at fair value

Away from bonds, equity markets, in aggregate globally, are around fair value, Blayney says, with Japan and the UK still cheap. But Wall Street and some European markets are expensive.

Blayney says that US equities haven’t priced in the potential for difficult times ahead and are still trading on a forward price-to-earnings ratio of nearly 19 times.

“The US is our key area of concern, and that is where our equity underweights are focused. We believe investors should focus on relative value between markets.

“We like some of the other value equity markets. Australia looks okay, and is one of a number of markets where prices are around fair value.”

About Pendal’s multi-asset capabilities

Pendal’s diversified funds provide investors with a variety of traditional and alternative asset classes and strategies.

These include Australian and international shares, property securities, fixed interest, cash investments and alternatives.

In March 2024, Perpetual Group brought together the Pendal and Perpetual multi-asset teams under the leadership of Michael O’Dea.

The newly expanded nine-strong team will manage more than $6 billion in AUM and create a platform with the scale and resources to deliver leading multi-asset solutions for clients.  

Michael is a highly experienced investor with more than 23 years industry experience, including almost a decade leading the team at Perpetual.

Find out more about Pendal’s multi asset funds

Contact a Pendal account manager here