Managers should use a range of investment strategies to optimise returns from Australian fixed interest in the current environment, according to Zenith.
The “2017 Australian Fixed Interest Sector Review”, which examined inflation and the changing composition of the Australian bond market, found that Australia was susceptible to inflation contagion from other G7 countries, including the United States.
Zenith’s head of income and multi-asset research, Andrew Yap, said: “A common theme that emerged during the sector review process was the expectation that under the Trump regime, US inflation would increase over the short to medium-term”.
“The consensus was that the Republicans will implement pro-cyclical fiscal policy to stimulate growth; academic research has shown that Australia is susceptible to inflation contagion from other G7 countries, including the United States.”
Zenith said it believed that in a rising inflation environment, there was greater scope to add value from active management and this extended to outright duration positioning, forecasting changes in the shape of yield curve and potentially exploiting anomalies in nominal versus real yields.
Therefore, through active management, the Australian fixed interest peer group was equipped with the tools that would help protect against rising inflation.
As far as the changing composition of the Australian bond market was concerned, it would have two major implications.
“Firstly, Australian fixed interest managers will need to become more proficient in the use of active interest rate strategies, and secondly, it will become more difficult for credit to be the ‘heavy lifter’ of investment returns,” Yap said.