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Michael Blayney: We’re not in the clear yet on a recession. Here’s why

A recession is still looking likely for major economies — but it may be further out, says Pendal’s head of multi-asset MICHAEL BLAYNEY

WHY hasn’t the US already fallen into recession?

Why haven’t corporate earnings been crushed given inflation and the number of interest rate hikes?

Does it mean the United States, Australia and other major economies might escape a recession?

The short answer is no. The long answer involves lags in the economy, says Michael Blayney, head of multi-asset investments at Pendal.

“We know from history that it takes a while for inflation to flow through and hit earnings, and we know that monetary policy works with a lag,” Blayney explains.

The recently completed ASX earnings season demonstrates the lag effect, he says.

“Earnings haven’t massively disappointed, but they haven’t been awesome either.

“The word to use is ‘tepid’, both domestically and offshore. There’s been pressure on margins, but not at recessionary extremes.”

Turning points take time

Turning points in economic cycles take time and normally involve plenty of “noise” – information that can often be contradictory and not always conducive to good investment decisions or policy making.

That’s because changes in economic variables, like high inflation and interest rates, take time to hit the real economy, Blayney says.

Another variable in this unusual economic cycle is that consumers have been sitting on piles of cash saved during COVID.

Also, many corporates have fixed rate debt and it will take time for higher repayments to flow through. That is, consumer and corporate balance sheets have been pretty healthy to date.

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“As a result you have to be very careful when saying all is good post earnings season,” Blayney says.

Adding to the argument that a recession is on the way, is the growing view that central banks won’t stop interest rate hikes any time soon.

“Bond yields have been rising, and equity markets falling, because people just have a few more questions around the narrative that inflation is moderating,” Blayney says.

Recession likley — but further out

“The odds are still reasonably good that the US will fall into recession,” he says.

“The playbook says rates go up the escalator and down the elevator. But in the last year, rates have gone up the elevator and that creates a lot of risk.

“While there are things that might delay it – COVID savings for example – ultimately if inflation pressures persist, central banks have to make a choice to beat inflation over short term economic growth.

“A recession is still likely, but it’s going to be pushed further out.”

What does it mean for portfolio construction?

Investors should remain calm and try and look beyond the noise.

“If you look at the lead story on the television every day and invest on that back of that, you probably won’t get a good result,” Blayney explains.

“But if you have our own disciplined process and follow it consistently through time, you should make money in the long term.”

“We are ever-so-slightly on the defensive side of neutral, holding a little more cash than usual and waiting for opportunities.”

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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 15, 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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