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TIM HEXT: Mixed signals will remain into Christmas

Next year is when rate hikes fully kick in and the resilience of the real economy will be tested, writes Pendal’s head of government bonds TIM HEXT

IT’S been an extraordinary year. It’s tiring to think it still has more than two months to go.

The fiscal and monetary policy induced wild asset price party of 2021 has become the mighty hangover of 2022. 

Industry super fund advertisements are now boasting about their 10-year returns, not three-year returns.

Clear air is needed in 2023, but will it arrive?

Policy makers have gone from patience in 2021 to playing catch-up in 2022. For now they’re on message that they are happy for the pain to continue until actual – not anticipated – inflation turns.

Of course the problem is that inflation is a lagging indicator – often by six to 12 months.

However, central banks view an inflation policy mistake as worse than a recession.

Demand destruction is required, even though it means people losing jobs and in some cases forced out of homes.

Waiting for supply to solve the problem is proving too much.

Find out about

Pendal’s Income and Fixed Interest funds

The NZ CPI this week again highlighted the stubbornness of high inflation, stuck above 7%.  

The main driver this time was transport, with airfares up 25%. Not surprisingly after lockdowns everyone is trying to visit family not seen for years.

Out of interest I looked at trans-Tasman airfares. Wow! The Kiwi diaspora in Australia (and indeed the world) is huge, with a quarter of Kiwis living overseas at any one time.

They all seem to want to visit home at once. But it’s almost cheaper flying to Europe now.

Fixing will take time

These pockets show supply/demand dynamics in many industries will take time to fix.

Australia is less exposed given our larger size. But the themes are similar.

Clear air is unlikely until 2024 when a “normal” economy returns.  

By then permanent and student migration numbers should be near 2019 levels, providing relief in the important area of employment and wages.

For now markets are in a holding pattern.

Next year is when rate hikes will fully start to kick in and the resilience of the real economy will be tested.

Maybe finally we can buy bonds as a defensive asset class again. We remain vigilant.

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 a global investment management business focused on delivering superior investment returns for our clients through active management.

In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.

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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 October 19, 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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