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The RBA’s upcoming decision
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FY24 first-half outlook
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The benefits of an ethical FI portfolio
There’s a perception among some that there’s a tradeoff between investing ethically and good performance and ultimately, returns. In reality, ethical investing offers strong long-term performance.
Fixed income portfolios are ideally aligned to ethical investors’ objectives instead because the largest components of fixed income benchmarks are dominated by the largest issuers: government issuers for whom the provision of social services like health, education and welfare are core to their operations.
The Reserve Bank of Australia has at least one, if not two, rate rises this year. It’s not a matter of dispute that inflation has peaked and is now sitting at around 6%. What is in dispute is whether inflation is going to track back to their target of half that within what the RBA considers ‘within a reasonable time frame.’
Many are predicting, and me among them, that the RBA meeting tomorrow will see the Reserve Bank make another hike. Employment is up and there is still sufficient strength there to indicate that unemployment’s going to be sustained around these levels.
We are past the peak, but do we get to target? The RBA aren’t going to tolerate running at the top of the inflation band forever – since the RBA review they have advised they want to see inflation return to the midpoint within a “reasonable timeframe” and they’re going to want to say that they now have confidence that they’ll be within the target band by the end of 2025 when they publish next week’s Statement on Monetary Policy. The RBA won’t be able to start loosening fiscal policy until there is confidence that inflation outcomes are consistently tracking back towards its 3% target.
Also read: Floating Rate Bond ETF Hits $1b in AUM
How quickly they’re able to retreat from restrictive policy levels and return to a neutral level is very dependent on how quickly the economy starts to show signs of deterioration in 2024.
My concern – shared by many and in particular, mortgage holders – is how well households will be able to adjust to these higher rates as they roll off fixed-interest loans through the latter half of 2023 and into 2024. Friday’s retail sales figures indicated a -0.8% decline and could indicate the beginnings of a significant slowdown on the consumer side.
While we are cautious about credit markets longer term, due to recession risks and the potential for credit spreads widening from where they are now, we do see some opportunities in shorter dated credit.
Despite the uncertainty, with the return of attractive yields, the core role of bonds is back. While the slow, steady and reliable nature of bonds might not appeal to everyone, and after the volatility of the past three years their yields should attract investors to allocate to fixed income to balance their equity portfolios.
With 10-year yields, which are currently running at 4.1% in line with the current cash rate, it appears that the market is starting to believe this may be an acceptable long-term neutral, and we will look to add to duration above these levels.
I’m also looking forward to a continued spotlight in the green bonds space, with the Commonwealth Government planning to issue a green bond in 2024. From my position, where every investment we carry under Australian Ethical is fed through ethical screening, I’m interested to learn what type of assets they will include in the green backing for that bond.
Green bonds need to show that there is a commitment to driving new investment in renewables rather than simply tagging assets that have existed on the books for the last three years. We also wouldn’t want to see gas projects being included in a green bond. To turn the needle, I’d like to see some hefty new renewable energy projects included. It would be one of the clearest ways to drive change for the economy.
In short, the outlook for fixed-income portfolios is positive for this next year and the past couple of months have proven the inherent value of bonds. Investors should consider how they could include these assets to hedge against future volatility.
