Tim Hext: bond markets and economic outlook

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Here is a weekly COVID-19 investor overview covering virus outlook, economic impact and market insights from portfolio manager Tim Hext of our Bond, Income and Defensive Strategies team.

Watch this short video recorded at Tim’s home office or read the transcript below.


My name’s Tim Hext. I’m a Portfolio Manager in the Bond, Income and Defensive Strategies team at Pendal Group.

In terms of crystal ball gazing you need to be a very informed medical scientist to know where this [coronavirus outbreak] is all going. And to be totally honest, we don’t know.

We’re quite hopeful that you will see some antiviral drugs help the situation, but we hear very mixed things about the possibility of when a vaccine may come out.

So we have to face the fact that Australia is doing pretty well at controlling this. The economy itself is likely to have some opening up towards the middle of the year — and probably most of the economy open by the end of the year . But it will probably be well into next year before things go back to what we would refer to as normal.

I think in that situation people want to know are we going to be in a recession, are we going to be in the depression? What’s economic growth going to look like?

I don’t think either of those are particularly helpful. In fact, in years to come we might have a new term like hiber-cession to call what we’ve had.

I think the path out of here is going to be reasonably quick early on, but ultimately quite slow and painful. By that I mean the Australian economy is unlikely to return to the sort of activity levels we saw prior to this for a number of years yet.

With that in mind, it’s important to remember that demand and supply are both going to face issues as they try to come back on board.

On the supply side, importantly, a lot of businesses will come back leaner and trimmer than they were before. That’s going to mean a number of things with jobs and also ultimately for inflation.

From the demand side, of course a number of workers are unlikely to go back to where they were before.

Right now there’s 20% less hours being worked across the economy and unemployment is likely to go up to 10% in the near term and unlikely to really come back to the levels we saw before the crisis for at least another three or four years.

The Reserve Bank has already told us interest rates are going to be stuck down here for probably at least three years. And our view is that it’s considerably longer than that.

Bond markets outlook

So the way we look at bond markets is they’re going to continue to remain very well supported.

There is going to be a continuation of the search for yield that we saw beforehand, but from a lower base obviously.

I think people are going to be far more cautious about the sort of credit they keep on. The way the credit cycle works — like equities, the longer you go, the more upbeat it gets and it’s going to take a lot of time to get back there.

So we continue to like being long duration in bond markets across our portfolios.

We still have a tendency towards government and the more liquid parts, but we do acknowledge that investment grade credit — the more solid credits — have actually now finally for the first time in four or five years reached what we would call good value.

So we’re looking to be overweight duration and overweight investment grade credit, but still avoiding a lot of those high yield credit scores as the default cycle will be running strong for the next year or two.

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