How are different asset classes faring in these rough economic conditions? Here’s a quick snapshot from our multi-asset chief Michael Blayney

• Opportunities in REITs and infrastructure
• Be ready to shift to bonds if recession looms
• Find out about Pendal’s multi-asset strategies

THE key risk to equities in coming months is how hard profit margins and earnings are hit by slowing economic growth from rising interest rates, and higher inflation, says Michael Blayney, head of Pendal’s multi-asset portfolios.

For bond investors, high inflation continues to be a headwind. But with a slowing economy, investors need to be ready to shift to the security of bonds if a recession looms.

The de-rating of real assets means there’s some opportunities in real-estate investment trusts and infrastructure, Blayney says, while the prospect of recession makes investing in high yield credit markets more difficult.

The silver lining for (new) investors from falling markets during the past six months is the de-rating of assets.

But the rise in fixed income yields makes other assets, which are priced off bonds, less attractive, Blayney adds.

Equities

The valuation backdrop in equity markets has improved, Blayney says.

“We are getting to the position where there’s some opportunities to buy. But we are not at the point of seeing broad based bargains yet.”

“US large cap stocks remain expensive, while Australian equities are closer to fair value,” he says.

“The Australian economy and market are not really in bad shape. Our equity market is a value market … and the resources sector is less negatively impacted by inflation.”

“Globally, small and mid-cap equities are fair value, or even cheap, relative to large caps.”

Blayney says lower valuations of small caps partly reflects market sentiment that they’re more likely to underperform in a recession.

But he adds: “For a longer-term investors cheap valuations represent an attractive entry point, to the extent in which a significant amount of ‘bad news’ has already been priced in.”

Similarly for investors with a longer-term horizon, value stocks continue to provide an opportunity in major markets, particularly Europe, Japan, and the small cap end of the US market.

“In addition, a rising interest rate environment should remain supportive of value as a style.

“Value outside of US large caps is the most attractive area to play a value tilt, given the spread in earnings growth for value versus the broader market has been considerably smaller in most other markets than it has been in the large cap end of the US market.”

Bonds

Bonds remain attractive because of their defensive characteristics, but they still have significant headwinds from inflation.

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“We generally retain some duration exposure for defensiveness within portfolios, but this is at a lower level than usual,” Blayney says.

“Where possible, we have a preference for inflation protection and Australian exposure within portfolios.”

Credit

Investment grade credit offers reasonable returns on a medium-term basis, he says.

“High-yield spreads are now better than they were. However, we believe that the risk of investing in high yield during an economic slowdown outweighs the benefit of higher yields at this point.”

Listed Real Assets

In listed real assets, the increase in interest rates have triggered a de-rating of both global REITs and many listed infrastructure assets.

“Higher bond yields have caused REITs to de-rate significantly, moving A-REITs and global REITs back towards fair value,” Blayney says.

“There are also some attractive opportunities available in listed infrastructure.”

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