The areas of fixed income offering cheap valuations

Schroders fixed income bonds term deposits asset allocation investment grade RBA central banks

17 April 2024
| By Laura Dew |
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Schroders’ fixed income managers Adam Kibble and Kellie Wood have shared their views on Australia’s monetary policy and whether term deposits should play a role in clients’ portfolios.

Speaking on a client webinar, Wood discussed whether Australia is likely to see a soft landing or fall into a recession. 

Wood, deputy head of fixed income, said: “Activity [in Australia] has started to weaken, growth is growing below trend, but we still have an inflation problem where core inflation is still above 4 per cent on a year-on-year basis, and that puts the RBA in a difficult position.

“We could see activity slow in the second half of this year before we see real progress on inflation and in that environment then the RBA will have a decision whether to ease as activity slows even if we haven’t seen good progress on inflation. If they do ease, they will be able to engineer a soft landing. 

“If they decide to keep rates higher, that reflationary environment higher for longer, then there’s a real chance that Australia will move into recession as activity collapses and they keep policy too restrictive.”

Meanwhile, multi-asset fund manager Kibble discussed the role of term deposits (TDs) and whether they have a role in client portfolios. 

“TDs were the worst performer last year as you are stuck in them the whole time, you have no flexibility to exit and reinvest at a higher rate if those opportunities present themselves. 

“In a period where we think we are going to see more volatility, being more flexible and having a wider opportunity set is more advantageous to achieving your investment objective. I don’t think it’s fair to say there is no risk in a term deposit; if you need to break and exit it early, then the bank will take some capital from you which is the impact of the duration on that term deposit plus a break cost.”

He said Schroders is currently finding cheap valuations in three specific asset classes amid a high dispersion of valuations, two of which are in Australia.

“There is lots of dispersion in valuations between cheap and expensive assets at the moment, so having a global platform, we can pick and choose as we don’t have to own the expensive assets.

“For example, US corporate investment grades and high yields are at the most expensive quintile they have been in the history of their spread. So we are exiting those and we are holding European investment grade, Australian investment grade and Tier 2 Australian subordinated debt from the big four major banks as cheap relative to their history. 

“These are providing better value and better return for the risk you are getting.”

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