The Point

Tim Hext: Inflation looks to be softening. Are sunnier days ahead?

Last week US inflation rose at a slower-than-expected rate, leading to a surge in stocks.

Are sunnier days ahead? Or will this month’s data join earlier false dawns such as July?

“Although not entirely unexpected, lower inflation will continue to provide encouragement to markets that the Fed can slow the pace of hikes (likely 0.5 percentage points in December),” says our head of government bonds Tim Hext.

“Investors should view any decent rallies as an opportunity to de-risk portfolios for the challenges ahead.”

The super-high inflation battle of 2022 may be won. But the outcome of the war is still uncertain, says Tim.

Getting from 9% to 4% next year will be “the easy part”, he says. Commodity shocks from Russia and tight labour markets will likely see inflation get sticky around 4%.

“Unless we tip into a steep recession the US Fed will remain wary about calling victory on inflation soon.”

When you realise Apple is worth the same as the UK’s All-Shares index

IT’S easy to forget that newspaper headlines are designed to do only one thing: sell newspapers.

If anyone needed a reminder to look past the headlines, they need only look to the UK, says Pendal’s Clive Beagles.

The headlines have focused on the UK’s political instability, energy market disruption and the prospect of a recession.

Yet UK shares are the best-performing developed market in the world this year — and still offer strong value, healthy dividends and the prospect of growth, says Clive, a senior fund manager at Pendal’s UK-based asset manager J O Hambro.

Consider this: the 600-company FTSE All-Share Index trades at a similar market cap to Apple.

“It’s crackers. One is a two-product company — the other is an extraordinarily diverse index in all sorts of industries. And yet which one have investors got more money in?”

Take care when investing in sustainability-linked bonds

More companies are issuing “sustainability-linked bonds” — debt securities that pay a coupon linked to environmental or social outcomes.

These bonds typically don’t fund a specific project — instead they set overarching goals such as reducing emissions or improving corporate diversity.

If an issuer fails to hit its goal, usually it pays a penalty in the form of a higher coupon.

Sustainability-linked bond issuance hit US$103 billion globally last year — a yearly increase of 803 per cent, according to World Bank research.

But investors should take care that issuers are genuinely making changes and not simply greenwashing, says Pendal Credit ESG analyst Murray Ackman.

“In theory, they are great — but we’re starting to see some things we are not happy about with these structures.”

Beijing is changing policy on Covid and property. Is this bottom for China stocks?

China stocks surged after Beijing finally made market-friendly policy moves on Covid re-opening and property industry debt.

Is this bottom for Chinese equities?

Investors should broadly see this as a buying opportunity for the best-positioned Chinese companies, says Pendal emerging markets manager James Syme.

“We essentially believe China’s policy choices in the past two years broke its economy and equity market. We may now be seeing the beginning of changes that are needed to fix this.

“We have very significantly reduced our underweight position in China.”

Some sectors remain unattractive though, he cautions.  Avoid state-owned banks, private-sector property developers and tech giants with poor corporate governance.