After the Hayne Royal Commission many advisers decided to steer away from large dealer groups in favour of becoming self-licensed. In the last six months, however, that trend has taken an abrupt turn.
While known for being the flagbearer for financial product providers, the Financial Services Council is now making serious inroads into the financial advice sector.
Investing through inflation and growth uncertainty
In their latest quarter fixed income outlook, titled ‘Investing Through Inflation and Growth Uncertainty’ global asset manager Neuberger Berman has flagged somewhat of a non-consensus view on the outlook for inflation, growth and fixed income assets.
As the title suggests, the group is expecting the one-way street of falling bond yields to result in a more complex and volatile environment for nearly every asset class. “Global growth uncertainty has accelerated whilst inflation appears likely to persist” the committee explains, highlighting the impact of the Ukraine-Russia war, spiking commodity prices and the shift in central bank policy.
Despite this backdrop of growing uncertainty, they believe that ‘central bank tightening expectations have likely peaked’ meaning interest rate and bond market volatility may have reached their top as the market over prices what is likely to occur. The result, in their view, is that “neither recession nor stagnation” is imminent.
Explaining their views, they split the analysis into three key drivers, which have important implications for fixed income portfolio construction. These drivers are: ‘global growth uncertainty is rising’; inflation is set to persist; and central bank tightening expectations have peaked.
The commencement of monetary tightening by the likes of the US, New Zealand and the UK mean that the global growth upswing is unlikely to sustain, something highlighted by the unexpected contraction in US GDP last quarter. That said, a recession “seems unlikely this year” which will benefit both higher and lower-rated credit given the broadly strong financial position the business world is in.
“We do not see commodities as a dire threat” as most recessions following periods of overinvestment or problems in the financial system, not a spike in prices or the cost of capital. Similarly, Europe appears to have “gotten the message that coordinated economic support should expand beyond monetary policy” and looks set to support a struggling region through fiscal spending.
“Inflation to persist” remains central to the need for flexibility in fixed income, however, Neuberger believes that inflation will peak over the coming months, albeit leaving conditions at ‘uncomfortable levels’ for central banks. The result is likely to be six more rate increases and an environment where global central banks will remain “front-footed” on rates.
Market expectations of central bank tightening appear to have moved ahead of the market, with management suggesting ‘growth uncertainty” will allow policymakers to look through elevated inflation and adjust strategy over the next 12 months, rather than persist with rate hikes should conditions deteriorate.
The result could be “an early end to tightening” in the US, combined with a similar risk in Europe should the war and energy crisis continue impacting on growth. In fact, there is a 10 per cent chance that the ECB may be required to “recommit to emergency programs”. Ultimately, the result is strong conditions for ‘spread sectors’ in corporate credit.
Allocators are advised to ‘prioritise liquidity and position themselves for more two-way markets’ with key areas of opportunity in investment grade credit, securitized products and high yield. Liquidity will be key to capitalising on opportunities, as will a focus on short duration and under valued sectors identified through fundamental analysis.
