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Michael Blayney: How to allocate assets as interest rates near their peak

With global economies slowing, inflation gradually falling and interest rates close to peaking, valuation risks are rife, says Pendal’s MICHAEL BLAYNEY

INTEREST rates may be nearing their peak but the effects will be felt in portfolios for the next few years says our head of multi-asset, Michael Blayney.

“Increases in interest rates usually flow through to the real economy and corporate earnings with a one-to-two-year lag,” says Blayney.

“So there may still be more negative ‘surprises’ to come, and at least an elevated risk of recession in the second half of 2023.”

What does that mean for asset allocation?

“We are slightly bearish on equities, neutral on government bonds slightly negative on credit but selectively positive on listed real assets.”

Global equity market valuations are broadly reasonable, and risks to financial stability appear to be contained for now, Blayney says.

“But history tells us that monetary policy takes one to two years to have a large impact on both earnings and the economy. As a result, the risks remain skewed on the downside.”

“Globally, Japan and the United Kingdom remain cheap under Pendal’s valuation framework, while US large-caps and some European markets are relatively expensive.

“The Australian market is close to fair value,” Blayney says.

“Global bond yields are broadly in line with our estimated of fair value. Inflation is gradually moderating, with the most recent CPI data in the US being very positive for markets.

“However core inflation remains uncomfortably high,” Blayney says.

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Pendal Multi-Asset Funds

“Nonetheless higher yields now provide a cushion against further downside risk.

Bonds would be expected to provide their traditional ‘risk-off’ portfolio benefits in the event of an equity market downturn — particularly if that coincided with economic weakness that brought inflation down further.”


Blayney is less positive on credit markets.

“Relative to history, investment-grade and high-yield spreads appear reasonable. But the clouded economic backdrop leads us to a negative view on high-yield bonds given the heightened risk of material defaults.

“We are more neutral on investment grade but would wait for a better entry point for a meaningful long position given the risk of spreads blowing out.”

Real assets

Blayney says there are opportunity within listed real assets linked to inflation and has a preference for infrastructure over real estate.

“Select listed infrastructure assets with inflation linked cashflows provide good insulation in case high inflation is more stubborn than currently priced by markets,” he says.

“Conversely, the key challenge for global real estate investment trusts is that in absolute terms valuation looks reasonable, but relative to bonds they are somewhat expensive.

“We view unlisted real assets with their stale appraisal-based prices as having material downside revaluation risk.

“In contrast, many listed infrastructure assets already trade at large discounts, providing a margin of safety against any declines in underlying asset valuations.”

About Michael Blayney and Pendal’s Multi-Asset capabilities

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 Allan Polley — manages our multi-asset portfolios with a focus on strategic asset allocation, active management and tactical asset allocation.

Find out more about Pendal’s multi asset funds:

Contact a Pendal account manager here

This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current at July 19, 2023. PFSL is the responsible entity and issuer of units in the Pendal Multi-Asset Target Return Fund (Fund) ARSN: 623 987 968. A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com.

The Target Market Determination (TMD) for the Fund is available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund. An investment in the Fund or any of the funds referred to in this web page is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested.

This information is for general purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation. The information may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information.

Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance. Any projections are predictive only and should not be relied upon when making an investment decision or recommendation.

While we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections. For more information, please call Customer Relations on 1300 346 821 8am to 6pm (Sydney time) or visit our website www.pendalgroup.com

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