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Fed signals rates pause | Tips for managing volatility | ASX CEO exodus | Climate policy change
Almost exactly a year after the Fed started raising rates, it has finally signalled a pause may be near.
Today’s 25-point hike brings us to a total of 4.75% of hikes in nine meetings.
Future hikes no longer “will” be needed but now “may be appropriate”, the Fed says.
Bond markets rallied modestly on the statement but were given a decent boost by Powell’s comments that the Fed considered a pause this time after recent bank wobbles.
“We are now all on ‘break watch’,” says Pendal’s head of government bond strategies Tim Hext.
“Where will we see the next signs of stress after almost 5% of hikes in a year?”
Tim points to commercial property, private equity and the non-bank financial sector as areas that thrived in the zero-rate environment.
“Equities have largely taken it all in their stride. Stresses may be offset by lower rates, meaning it may be a case of picking the sector winners and losers more than the overall market direction.”
The past few weeks have demonstrated the need for perspective as investors manage portfolios through increased volatility, says Pendal’s head of multi-asset Michael Blayney.
The CBOE Volatility Index spiked to its highest levels for the year after the Credit Suisse and Silicon Valley Bank crises.
“We are not at extreme panic right now,” says Blayney. “But we are starting to see problems emerging.
“Central banks have raised interest rates at a rapid pace over the last year. By doing so it was always a possibility, or even a probability, that they’d break something.
“That’s what we are now seeing, and regulators are coming out and playing a game of whack-a-mole.”
Investors now need to decide if the recent sell-off is a buying opportunity, or whether markets are mid-crisis, and there’s further to fall.
The Albanese government’s plan to revamp a Coalition emissions reduction mechanism raise a number of issues for sustainable investors – and the economy.
To help achieve its climate targets, the government plans to revamp a Tony Abbott-era policy known as the “Safeguard Mechanism“.
The policy was designed to reduce carbon emissions by regulating the amount of greenhouse gases that big industrial facilities could emit.
But baselines were too high and the policy generally was not enforced, say critics.
From July, the Albanese government wants to strengthen the mechanism in a number of ways, including a 4.9 per cent annual cut on allowable emissions for the biggest emitters.
The changes could create winners and losers in investment markets, says Pendal credit ESG analyst Murray Ackman.
But the mechanism still has serious challenges.
It uses offsets which can sometimes be questionable, allows new fossil fuel projects and is susceptible to cost-of-living pressures.
We’ve seen a spate of leadership changes on the ASX recently — including nine new CEOs, nine chairs and 56 non-exec directors in February alone.
“It’s a higher level of turnover than normal and should make investors pause and review their positions,” says Elise McKay, an analyst with Pendal’s Australian equities team.
When investors evaluate CEO departures, they should consider six factors, Elise says:
There is anger among Credit Suisse bondholders who’ve been wiped out as part of the bank’s rescue plan. But there are also important lessons for Australian fixed income investors. Pendal’s AMY XIE PATRICK explains.
SOME $A25 billion worth of Credit Suisse “additional tier one” (or AT1) bonds have been written down to zero value as part of a rescue deal that favoured equity shareholders.
That’s caused anger among bondholders who have lost their money – and fears of wider fallout among investors around the world.
Are broader fears justified? What can Australian fixed income investors learn from the crisis?
March 20, 2023See all
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Recession still likely | What’s driving Aussie equities | What to expect in second-half earnings | Lessons from the SVB collapse
Cockroach theory refers to the belief that problems affecting one company may indicate similar problems with other similar companies.
After the collapse of California’s Silicon Valley Bank (SVB), the market and the media are on the lookout for more cockroaches.
The good news is that SVB was an unusual cockroach. There could be other lending institutions with similar red flags, but the bank’s problems were largely self-made.
The SVB episode highlights a number of broader risks, which our head of income strategies Amy Xie Patrick outlines here.
But the failure also reinforces the investment views of our income and fixed interest team
“The SVB collapse highlights the need to hold a true-to-label fixed income allocation in your portfolios – if only for insurance,” Amy says.
“Since the third quarter of 2021, we have held a defensive stance in our credit and income portfolios, favouring quality and liquidity over stretching for that extra bit of yield or spread.”
Australian stocks have proven remarkably defensive over the past year, compared to global shares and other asset classes, delivering a 6.5 per cent return in the year to February, says Pendal’s Crispin Murray.
A material decline in shares is unlikely in 2023, says Crispin in his new biannual Beyond The Numbers webinar.
Earnings are on track for 2% growth in 2023 and 1% in 2024, he believes.
“However, if we do get the RBA forced to hike rates far higher than the economy can absorb, and we do get a downturn, then we’re going to see much more material downgrades. But it’s not the scenario we expect.”
Four issues will drive the underlying economic picture for Australian companies, he says:
Australia’s economic cycle has gone on longer than expected – and it showed in the recently ended ASX earnings season.
Somewhat surprisingly, most parts of the economy are still in reasonably good shape despite a string of interest rate rises.
The strong jobs market is a factor, helping prop up consumer spending.
“But the expectation is that higher interest rates will likely hurt earnings in the rest of the financial year,” says Brenton Saunders, who manages Pendal MidCap Fund.
“Across the market as a whole, revenue beats were pretty widespread even though many companies missed earnings forecasts at the bottom line. Revenue beats were much higher than profit beats.
“We saw profit margins reduce and that relates to higher costs. In many cases, despite high product price increases, costs increased at a faster rate, resulting in margin pressure.”
For all the talk, the US hasn’t fallen into recession.
Corporate earnings haven’t been crushed, despite inflation and a string of interest rate hikes.
It’s looking like the US, Australia and other major economies might escape a recession, right?
Not so fast, says Pendal’s head of multi-asset Michael Blayney.
“A recession is still likely, but it’s going to be pushed further out,” Michael says.
Higher inflation and interest rates take time to hit the real economy, he says.
Turning points in economic cycles normally involve plenty of “noise” – information that can be contradictory and not always conducive to good investment decisions or policy making.
“If you look at the lead story on the television every day and invest on the back of that, you probably won’t get a good result,” Michael says.
“But if you have a disciplined process and follow it consistently through time, you should make money in the long term.”
THE odds of a 50bp US rate hike next week increased markedly after hawkish comments by Fed chair Jay Powell – but that didn’t last long.
Powell last week told US Congress that if the data indicated faster tightening was warranted, “we would be prepared to increase the pace of rate hikes”.
Stronger-than-expected data suggested “the ultimate level of interest rates is likely to be higher than previously anticipated”, he said.
The comments drove two-year US Treasury yields above 5% for the first time since 2007.
The spread between two-year and 10-year bond yields inverted to -107bp – the biggest inversion since 1980 when then Fed chair Paul Volcker was trying to kill inflation.
However, all this was reversed after the collapse of Silicon Valley Bank (SVB) late in the week, which saw yields fall.
Why fiscal policy matters for investors | The ‘no landing’ scenario | Aussie recession unlikely | US set for growth
While we all focused on the RBA’s 10th rate rise in a row yesterday, Team Albanese was quietly working on a budget that will deliver hundreds of billions of dollars in spending initiatives and cuts in May.
Monetary policy is in the spotlight 11 times a year, while fiscal policy only has two moments – the annual budget and the mid-year outlook.
But investors would be wise to pay more attention to fiscal policy, says our head of government bonds, Tim Hext.
“Fiscal policy is more likely to determine whether or not Australia is going to have a recession,” says Tim.
“We’ve built a whole system around monetary policy and the wisdom of the independent central bank.
“But fiscal policy doesn’t get enough attention.
“The government spent $250 billion during Covid. Fiscal policy remains the main game for people’s pockets and the economy.
“It explains why the Australian economy is proving more resilient to rate hikes, at least for now.”
The forces that will drive Aussie equities in 2023. A wide array of forces combined in unusual ways last year to shape the opportunity set for Aussie equity investors. This…
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