Fixed interest: time for tactical moves as big picture emerges

Has inflation peaked and if so, what’s next for fixed interest investors? Here’s a view from our head of government bond strategies TIM HEXT

AMONG the many adages I’ve heard in my career “sell in May and go away” always sticks in my mind.  

The quote apparently originated in London and said in full: “sell in May and go away and come back on St Leger Day” (in September). The “go away” referred to very long summer holidays enjoyed by rich stockbrokers.

In the US equity market November-to-April outperforms May-to-November over time. 

Going back more than a century the Dow’s average return is apparently 5.2% for November-to-April, compared to 2.1% for May-to-October.

In Australia the numbers are 5.1% and 2.4%.  The term could be recoined as “buy in November and sit back”, but that wouldn’t rhyme.

The calm in the storm

This May has been the calm in the storm. But no one can agree if it’s the eye of the storm or if we’re actually through it.

Markets are clutching at any sign inflation has peaked.

In the US it likely has on both on a monthly and year-on-year basis — but will be slow to come down.  

In Australia we are unlikely to see a repeat of the Q1 2.1% quarterly CPI number. But base effects mean annual inflation will peak closer to 6% (currently 5.1%) in Q3 (released in late October).

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We have just finished a deep dive into inflation which we will release shortly as part of our Australian Investor Quarterly newsletter.

As the inflation narrative settles down, all eyes will turn to the impact of inflation and interest rates on growth.

Share markets remain vulnerable to earnings downgrades and weakening growth numbers.

This becomes reflexive, though, as equity weakness in turn causes confidence to fall which may eventually take some pressure off rising interest rates thereby supporting equities.   

We may well spend the northern summer rolling around in this cycle of volatility, heading eventually nowhere as the dynamics try to work themselves out.

What it means for investors

As a fixed interest portfolio manager it means we must look to harvest more tactical trades than big-picture moves for the next few months.

We continue to think short-dated inflation bonds are cheap in outright real yields but also in break-evens (inflation expectations).

The picture for duration and credit is less clear though we do have some positions based on cash rates “only” getting to 2% this year as opposed to markets pricing closer to 2.75%.

With both bond markets and equity markets trashed in the last four months I will ignore the “sell in May and go away” advice as coming way too late — wishing someone had instead advised me this year to “Sell on New Years Day and go away.”

About Tim Hext and Pendal’s Income & Fixed Interest boutique

Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.

Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

The team won Lonsec’s Active Fixed Income Fund of the Year award in 2021 and Zenith’s Australian Fixed Interest award in 2020.

Find out more about Pendal’s fixed interest strategies here

About Pendal Group

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

In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.

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