Interviewer Sean Aylmer: I’m joined on The Point podcast by Michael Blayney, head of Pendal’s multi-asset investment team. Michael, essentially your job is to look across asset classes and identify opportunities globally?
Pendal Head of Multi-Asset, Michael Blayney: Yes exactly.
Interviewer: Michael, what’s the outlook for equities?
Michael Blayney: Equity markets have obviously had a very strong run. As a result, they have become somewhat expensive to varying degrees. Australian equities [are on] on the slightly expensive side, US equities on the much more expensive side.
Now the counter to that is that earnings have been very strong and we’ve seen earnings revised up strongly around the world, including in Australia.
The other element is that price momentum is still very strong in the market as well.
So when we put those things together, it makes us a little bit more cautious than we were. However at this stage we’re not at a point where we’d be recommending to underweight equities in portfolios.
Rather we’d be looking to take risk in areas that are relatively cheaper – to try and find those pockets of value around the world. So for example some selected emerging markets and UK equities would both be examples of that, as would real estate securities.
Interviewer: I’m going topush on the emerging markets. So UK, but what emerging markets do you like at the moment
Michael Blayney: Specifically we quite like Mexico. It has been neglected by investors for a long time. It has started to rally a bit, but it’s still at very, very cheap levels. That would be the main one.
Other than that, there are obviously other markets in Asia, which were very cheap, but have rallied more strongly. So they’re less of an opportunity.
We’d be a bit more cautious on China at the minute, in spite of the fact that valuations there aren’t too bad. Obviously there’s a number of significant macro risks associated with China.
So we tend to prefer emerging markets outside of China at present.
Interviewer: Okay, what about credit?
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Michael Blayney: Within credit, it’s fair to say that credit spreads – which are the extra yield you get paid to take on the credit risk of lending to someone who’s not a sovereign – they have come in a lot since their highs of March last year.
As a result of that, if you look at things like high-yield spreads in the US, you’re really not being paid very much. You’re barely being compensated for what an average default cycle could knock off in terms of your returns.
So at this stage, we’re relatively cautious on credit. We do think it still has somewhat of a role to play in investment portfolios, but we would tend to hold a little bit less credit than usual.
We would tend to favour investment grade simply because even though the spreads are tight, the default experience is seldom bad in investment grade. So you’re still getting some compensation for the risk that you’re taking, but we would certainly shy away from high yield at this point.
Interviewer: Okay, government bonds?
Michael Blayney: Government bonds are an interesting one. Obviously we’ve seen yields rise very strongly early in the year. They’ve had a bit of a retracement of that and come back and then they’ve come back again.
So it’s quite interesting now. We’ve obviously seen markets become more concerned with inflation and that has been reflected in higher bond yields.
Now, the reality is that bond yields in absolute terms are still at relatively low levels. And with the heightened inflation risks due to all of the fiscal stimulus and the re-opening of economies, while we still obviously have quite accommodative monetary policy, the risks of inflation spikes are certainly elevated relative to history.
So we’re a little bit cautious on government bonds. But equally they do still serve a defensive role in a portfolio. They’re liquid. In time when equity markets sell off, while they don’t always provide protection, they do provide protection more often than not.
So we believe investors should maintain some government bonds in portfolios, but should be underweight relative to a normal level of exposure at this point, given the heightened inflation risks.
Interviewer: Okay Michael, what’s the outlook for listed real assets, infrastructure and real estate?
Michael Blayney: That’s an area of the market that we quite like – selectively, of course. But real estate is an area which suffered a lot with Covid. (Here I’m talking about listed real estate rather than residential, where Covid obviously had the opposite effect).
Listed real estate is a beneficiary of that re-opening, if you think about people going back to the office, going back to shopping centres. Obviously there is a bit of diversification within listed real estate because you do have industrial exposure, which gives you still some exposure to e-commerce.
But overall that listed real estate sector, particularly globally, is looking relatively cheap. We think it’s an area that is potentially attractive.
Also given that while the sector itself is interest rate sensitive in terms of the valuations that the market puts on it, the underlying cash flows tend to have a degree of inflation protection over time.
So we do think it’s attractive from that perspective as well.
In respect to listed infrastructure, we like to be quite selective there rather than just buy broad, listed infrastructure indexes.
We do think there’s some attractive opportunities, particularly in Europe, to get exposure to listed renewables which generally provide you with a decent yield – be thinking 4% to 6% yield. A little bit of growth as a nice way to get some stability in portfolios because they tend to have quite a low sensitivity to what’s happening in the broader market and a reasonable degree of income in a world where income is still very hard to find.
Interviewer: So where is the relative value when we look at equities, credit, government bonds and listed real assets?
Michael Blayney: At present we’d still prefer equities to bonds.
Bonds do provide that diversification in sell-offs and equities are getting a bit expensive. But the reality is that earnings growth is still strong. Economic growth, while it’s coming off a bit, it’s still strong.
In that type of environment, we would still prefer equities to bonds.
We would prefer listed real estate to broad equities. That would be primarily on the basis of valuations.
Credit’s an interesting one. From investment grade you don’t get huge amounts of return, but we would just see some exposure to investment grade as being a way to get a little bit more yield in your defensive assets. But it’s something that we wouldn’t have a huge allocation to at this point.
Interviewer: Michael, thank you for talking to The Point.
Michael Blayney: Thank you very much, Sean.
Interviewer: That was Michael Blayney, head of the multi-asset investment team at Pendal. Thank you for listening to The Point podcast. I’m Sean Aylmer, have a great day.
Michael Blayney leads Pendal’s multi-asset team. Michael has more than 20 years of investment management and consulting experience. He was previously Head of Investment Strategy at First State Super and head of Diversified Strategies at Perpetual.
Pendal’s diversified funds provide investors with a variety of traditional and alternative asset classes and strategies.
The team — which also includes Stuart Eliot and Allan Polley — manages our multi-asset portfolios with a focus on strategic asset allocation, active management and tactical asset allocation.
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