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Michael Blayney: Inflation is still driving investment markets, which means a cautious approach for now

Inflation remains a key driver of investment markets, just as it was throughout the first quarter. Here’s how our head of multi-asset MICHAEL BLAYNEY is approaching asset allocation right now

DESPITE yesterday’s news of a continued easing in Australia’s monthly CPI from 7.4% to 6.8%, inflation will remain a key driver of investment markets, just as it was in the first quarter, says our head of multi-asset Michael Blayney.

“While inflation looks to have peaked, it could become sticky in some economies,” Blayney says.

“In the US, for example, it could remain around the four to five per cent range with further falls dependent on softening wages and increased labour capacity.”

Investors are pricing in a normalisation of inflation.

“But markets react relative to what’s priced in. If inflation proves to be stickier than what’s priced in, that creates risks for both bonds and equities.”

Global equity markets have been erratic this year. The first couple of months equities rallied and then they fell back in March.

Where they go to next will be very much about inflation — and it’s similar for fixed income markets, he says.

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Pendal Multi-Asset Funds

“Doubts remain as to whether central banks can engineer a controlled reduction of inflation pressures or whether their actions overshoot and create demand destruction and a deep recession.

“These considerations suggest a cautious risk stance across asset classes,” Blayney says.

How to approach this environment

For investors, the macro-economic backdrop means they need to seek out opportunities and understand relative valuations.


“Global equity markets are around fair value with Japan and the United Kingdom still cheap and the United States and some European markets still expensive,” Blayney says.

“We are marginally underweight overall, still cautious on downside risks to earnings.”

“Equities have ‘de-rated’ and valuations have become much more reasonable across a wide range of markets.

“But the outlook remains uncertain, given the downside potential in corporate earnings and risks from the lagged impacts of monetary policy tightening,” he says.

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Pendal has now moved to slightly underweight government bonds on a shorter-term basis, Blayney says.

“Global bond yields have fallen significantly from their highs, for example Australian 5 year yields are down 0.8 per cent year to date” he says.

“Higher-starting yields — compared to what were on offer two years ago — provide a degree of insulation. But bonds have already priced in economic weakness on the horizon, so further gains are only likely if the economy gets even worse than what’s priced in now.”


In credit markets, both investment grade and high yield spreads are somewhat higher than their long-term medians, Blayney says.

“But the clouded economic backdrop provides a poor risk-return proposition given the asymmetry in potential outcomes from here,” he says.

“The spreads available do not compensate adequately for the risk of a recession.”

Real assets

There are opportunities in listed real assets, Blayney says.

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

“This is particularly true given how the asset class down-rated last year.”

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 March 22, 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. Whilst 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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