It means investors need to think about safer assets, argues Anna Hong, assistant portfolio manager with Pendal’s Income and Fixed Interest team.
“That’s government bonds, cash and high-grade investment credit,” Hong explains. “But it’s important that it’s Australian fixed income and cash.”
That’s because Australia is one of just a handful of countries to record a budget surplus this financial year and — not withstanding the threat of recession — the economy remains in very good shape, Hong says.
“From an economic perspective, even if things go wrong, the government is in a good position to support the Australian economy.
“As a result assets within Australian shores should be safer than almost any other part of the world,” Hong says.
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The risk of recession in Australia is very real, Hong says.
While the government can tighten fiscal policy by increasing taxes, that often isn’t politically palatable.
It means much of the heavy lifting in controlling aggregate demand falls to the Reserve Bank.
“The Reserve Bank hasn’t yet been able to reduce inflation enough with the interest rates increases they have already done,” Hong says.
“There are a lot of factors out of their control and they can only affect aggregate demand using interest rates.
“They are in a position where they almost have to break something to contain inflation, which they don’t really want to do.”
The “something” is the economy. It means investors should consider safer assets, she says.
“Anything related to government — federal or state — is backstopped by the federal government and an investor will likely get their money back.
“The RBA regards our major banks as ‘unquestionably strong’ and are well placed to weather any storms. This makes major bank credit a relatively safe place for investors.”
“If you go into high-risk assets, even high-growth stocks, you might invest $100 today and not have $100 in six months because company outlooks can change very quickly now the risk of recession is higher.”
Anna Hong is an assistant portfolio manager with Pendal’s Income and Fixed Interest team.
Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.
With the goal of building the most defensive line of funds in Australia, the team oversees A$22 billion invested across income, composite, pure alpha, global and Australian government strategies.
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
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