Michael Blayney: what the federal Budget means for portfolio contruction
Which asset classes look good in light of this week’s federal Budget? Pendal’s head of Multi Asset Michel Blayney explains
THE federal government Budget, released on Tuesday night, was big spending in keeping with the fiscal stimulus needed to bolster the economy, still recovering from the COVID-19 induced recession.
There were tax breaks for individuals and businesses, as well as large outlays across the economy, including aged care, health and infrastructure.
But what does it will mean for investors? Should the Budget cause investors to think differently about their portfolio?
“Certainly the budget measures should make people think about what they’ve invested in,” says Michael Blayney, who leads Pendal’s Multi-Asset Investments team. “If for no other reason than it locks in stronger economic growth.”
Blayney is relatively sanguine about the ongoing Budget deficit as a result of big spending last year and this year.
Budget forecasts suggest deficits this financial year through the next four will total close to $500 billion.
“While the numbers sound high, there are a few things to keep in context. It’s less than half the debt of many other major developed nations and its quite serviceable, particularly with low interest rates. Ultimately debt is serviceable as long as the economy grows, and that fact can get a bit lost.
“The key investment implication is the stimulatory effect the Budget is having. You have this combination of low interest rates and people not being worried about fiscal discipline.
“That’s a new way of thinking which the pandemic created. At the same time, you have this supply chain disruption, in goods like semiconductors.
“Put together, investors need to be thinking about putting some inflation-proofing into portfolios.
“That’s not about forecasting inflation. It’s about constructing a good portfolio that looks at a possible range of outcomes and includes assets that do well in different economic scenarios,” Blayney says.
Asset classes to consider
Current options to consider include alternative assets, commodities and inflation-linked bonds over nominal bonds.
Also real assets provide an opportunity, such as listed property, though the caveat there is that cash flows of those assets are linked to inflation.
At least in the near term, more value-oriented stocks look more compelling, Blayney believes.
“Having a tilt towards value in a portfolio can help with some of that inflation proofing.”
Blayney says the housing market is something to watch closely, because in Australia it’s “gone bananas”.
Not that there is an imminent collapse about to happen.
“The budget included measures to promote people to get into housing. Viewed in isolation that’s a good thing. But the crux of the problem is that house prices are too high and any government policy that comes along, coupled with low interest rates, encourages prices.
“There’s not an immediate investment implication, but we know from the global financial crisis what happens when housing goes bust. We saw that in the US and Ireland.”
A tick for infrastructure spending
Blayney prefers spending on infrastructure packages to hand-outs, and the latest budget gets his tick of approval on that front.
“Infrastructure spending helps with sustained economic growth whereas cash tends to fuel speculative activity.”
While the economic growth outlook is strong, as demonstrated in the official Treasury forecasts which puts growth next financial year at 4.25 per cent, Blayney is worried about valuations.
“You are starting to see a bit of speculative activity. The poster child here is cryptocurrency. There’s been an explosion in this space and some look highly speculative. The pricing of some cryptocurrencies is also extremely volatile.
“I also think tech valuations have been getting stretched,” Blayney says. “At least the tech companies are still making revenue and earnings.”
The challenge for investors is that they have to invest somewhere, and this is where a long-term view is critical.
For Blayney, the short term might lean towards value investing, but the long term goes the other way.
“People have to think strategically through the cycle and I think they will have to hold more growth stocks than they have historically in order to deal with the economic environment and still earn a decent return.”
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 includes Stuart Eliot, Allan Polley and Rita Fung — manages our multi-asset portfolios with a focus on strategic asset allocation, active management and tactical asset allocation.
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