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TIM HEXT: Fiscal support package announced in the UK could make inflation harder to control

The Great British Sell Off: The fiscal support package announced in the UK on the weekend could make inflation even harder to control, TIM HEXT explains.

CENTRAL Banks, led by the Fed, have spent the last few months pushing hard their hawkish credentials.

We have been told that combating inflation is priority one and if it means a recession then so be it. Markets have reacted by selling off risk but also moving rate expectations a lot higher.

However, the new UK Prime Minister Liz Truss and her Treasurer Kwasi Kwarteng have taken a more unconventional approach.

They seem to be focused on avoiding recession and hoping that somehow inflation will sort itself out.

Inflation is at its heart a demand versus supply problem. Central banks can’t control supply so they try to impact demand through rates. Fiscal policy can impact supply but it needs to be very targeted.

As a large energy importer the UK has little control over energy supply, at least short to medium term.

The fiscal support package announced on the weekend is partly an attempt to help address supply problems, but markets have taken it as merely propping up demand that is already too high.

GBP 72 billion of tax cuts were made across national insurance, corporate taxes, stamp duty and income taxes. Much of it will find its way to the wealthy, with more of a propensity to save than spend.

All this is on top of energy price caps that at current rates are worth GBP 160 billion over the next three years. They at least will keep headline inflation in single digits.

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Pendal’s Income and Fixed Interest funds

The Bank of England is now faced with an even harder job to rein in inflation.

Markets have taken it that way, now pricing terminal rates above 5%. This was nearer 4% last week.

However, it is the extra supply that the bond market and currency market are struggling to assess.

At an extreme the price of 30yr UK Debt fell 10% after the mini budget. So far in 2022 UK 30 year debt has halved in price.

This all impacted on global bond markets in another tough week.

UK investors will potentially move money back onshore as their currency and rates become relatively more attractive.

Terminal rates in Australia are now back to pushing near 4.5%. Whilst domestically this looks very restrictive, global investors are not hanging around to find out.

Time will tell whether this huge gamble by Liz Truss pays off.

If global energy prices plummet, then they may get away with it. As it stands now though, markets are taking the view that the UK is falling deeper into a hole.


About Tim Hext and Pendal’s Income & Fixed Interest boutique

Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.

Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

The team won Lonsec’s Active Fixed Income Fund of the Year award in 2021 and Zenith’s Australian Fixed Interest award in 2020.

Find out more about Pendal’s fixed interest strategies here


About Pendal Group

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.

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This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current at September 14, 2022. PFSL is the responsible entity and issuer of units in the Pendal Monthly Income Plus Fund (ARSN: 137 707 996) and Pendal Dynamic Income Fund (ARSN: 622 750 734) (Funds). 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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