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Why our multi-asset team is increasing its exposure to bonds

As inflation falls, investors can have more confidence in bonds, argues our head of multi-asset MICHAEL BLAYNEY. Here he explains why

AS inflation falls — while still remaining at uncomfortably high levels — investors can have more confidence investing in government bonds, says Pendal’s multi-asset chief Michael Blayney.

“On the raw numbers, inflation in the United States has come off a long way.

“It peaked above 9 per cent last year and most recently it has come in just below 5 per cent on a headline basis. This has important portfolio considerations.

“It means you can have a bit more confidence in your bond allocation, because the biggest risk to bonds, ultimately, is inflation.

“We have moved to slightly over-weight bonds, and that’s a big change because we previously had been underweight bonds for a long time.”

Global bond yields are broadly in line with Blayney’s estimate of fair value. But he warns that elevated services price inflation and a very tight labour market are key risks for bonds. 

Offsetting this is the risk of recession in which bonds would provide their traditional “risk off” portfolio benefits.

Economists have been forecasting a recession in the US for several months and while the timing continues to get pushed out, it is still likely to occur, Blayney says.

With a slight tilt towards bonds and away from equities, Blayney’s team is running a “slightly cautious” stance.

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Pendal Multi-Asset Funds

“It’s one to two years before you feel the full impact of rising rates and we are only halfway through that process. On that basis no-one really knows yet what the full impact of rising rates will be.”

The risk for central banks, including the US Federal Reserve, is that economies fall into recession but inflation remains high, hindering their ability to cut interest rates, he says.

“Realistically I think the Fed will want to see the whites of the eyes of inflation near its target before it starts cutting rates,” Blayney says.

US risks

Risks remain in the US economy, he says.

“There are still deposits being pulled out of US regional banks … and credit will be harder to get. And credit is very important to the health of the economy.

“Also, people’s purchasing power is being squeezed by inflation and there’s rising borrowing costs.

“And there’s a tail risk around the US breaching its debt ceiling. That’s not a very positive backdrop for investing.”

Equities at fair value

Away from bonds, equity markets, in aggregate globally, are around fair value, Blayney says, with Japan and the UK still cheap. But Wall Street and some European markets are expensive.

Blayney says that US equities haven’t priced in the potential for difficult times ahead and are still trading on a forward price-to-earnings ratio of nearly 19 times.

“The US is our key area of concern, and that is where our equity underweights are focused. We believe investors should focus on relative value between markets.

“We like some of the other value equity markets. Australia looks okay, and is one of a number of markets where prices are around fair value.”

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 also includes Allan Polley — manages our multi-asset portfolios with a focus on strategic asset allocation, active management and tactical asset allocation.

Find out more about Pendal’s multi asset funds:

Contact a Pendal account manager here

This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current at May 17, 2023. PFSL is the responsible entity and issuer of units in the Pendal Multi-Asset Target Return Fund (Fund) ARSN: 623 987 968. 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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