Mr Walter brings extensive experience and a strong track record in credit markets. He joins Schroders from Macquarie Asset Management, where he served as senior credit strategist in the fixed income team. Prior to this, Mr Walter worked at AMP Capital, Commonwealth Bank of Australia, Westpac, and Royal Bank of Scotland (RBS), in a variety of credit analyst roles. His experience at RBS was gained in London, affording him international credit market expertise.

In his new role, Mr Walter will focus on credit research and portfolio management, working closely with Helen Mason, head of credit, and the broader team, to drive further growth in Schroders’ fixed income strategies.

Ms Mason said Mr Walter’s appointment reflects Schroders’ commitment to strengthening its credit business.

“We welcome Chris to Schroders. He brings with him a wealth of experience and a strong reputation in the market, which will be invaluable as we build on the strength of our credit team and strategies,” said Ms Mason.

Kellie Wood, head of fixed income, added, “Chris is a highly respected professional in credit markets, with broad experience and we he will be an asset to our team. His experience will play a critical role in supporting our ambition to grow and deliver exceptional outcomes for our clients.”

Mr Walter’s appointment underlines Schroders’ strategic focus on delivering innovative and robust credit solutions for clients.

The Australian fixed income division has $6.9bn funds under management*, reflecting strong client demand and a continued investment in market-leading capabilities.

———-

*As at 30 September 2025, includes fixed income assets run for internal multi-asset funds and offshore clients.

The post Schroders strengthens credit capability with new fund manager  appeared first on AdviserVoice.

Sebastian Mullins

As global economies chart a course through a new era of government-driven growth, investors must prepare for a landscape defined by both significant opportunity and rising volatility in 2026.

A panel of Schroders Australia’s investment leaders, including Martin Conlon, Sebastian Mullins and Kellie Wood, say the coming year will be one of divergence, where careful stock selection and a tactical approach will be vital, with the Australian market presenting a compelling picture.

Sebastian Mullins, head of multi-asset and fixed income, says that while the world economy continues to expand, the balance of risks has shifted considerably.

“A surge in government spending, shifting politics, and inflationary pressures will provide global markets with both opportunity and instability,” Mr Mullins says.

“We are now seeing a recovery taking hold in Australia, with growth expected to rise to around 2 per cent as household consumption finally takes the baton from government infrastructure spending. This is supported by an improvement in consumer confidence and a remarkably strong job market.”

However, Mullins notes that this positive momentum faces a key constraint.

“The counterbalance is that inflation remains strong, limiting the ability for the Reserve Bank of Australia to cut rates. Investors need to adapt to this new fiscal-driven landscape.”

A primary concern on the global stage is the concentration of market value in US technology stocks. Mr Mullins says soaring valuations and a surge in corporate debt issued to fund AI infrastructure are increasing the risk of a sharp market correction.

“One lingering concern is whether the strong performance in US tech stocks is a sign of an AI bubble,” Mr Mullins says.

“If we were to see a large equity market sell-off, this would impact the wealth effect of wealthy Americans, likely leading to reduced consumption. In this scenario, the stock market may lead the economy as opposed to the other way around.”

Mr Mullins says that while the largest AI players remain highly profitable, the funding environment is changing in a way that introduces new risk.

“Historically, AI investment was made from free cashflow, but companies like Oracle and Meta have started to use debt to fund their expenditure,” Mr Mullins says.

“US investment-grade issuance from AI big tech firms has risen from less than US$40bn per year to more than US$120bn year-to-date. If more debt enters the system, this will likely lead to a bubble that could pop. Any near-term weakness would be driven by a valuation unwind rather than a full-scale bubble collapse.”

Kellie Wood, head of fixed income, says global markets have entered a new regime where fiscal policy, not monetary policy, is steering the economic cycle.

“Globally, easing cycles are underway. US growth has reaccelerated, with momentum clearly stronger than in early 2025,” Ms Wood says.

“We expect the global economy to accelerate in 2026 after a short-term soft patch caused by lingering tariff effects. The potential for upside surprise remains high and US recession risk low.”

Ms Wood identified credit markets as a standout performer in 2025, and she sees ongoing potential, particularly closer to home.

“We see compelling opportunities in the Australian credit market. Ongoing market development has created pockets of value, supported by increasing breadth and depth across sectors. Both domestic and offshore issuers are drawn to the Australian market by its limited execution risk, even for larger transactions.”

The next phase of the cycle will reward active, tactical positioning.

“As we approach 2026, global markets are contending with a complex and evolving macro landscape. The post-COVID recovery has revealed a shift – economic growth cycles are no longer synchronised and divergence is becoming the norm,” Ms Wood says.

“In this new regime, active risk management becomes essential. Structural shifts are creating winners and losers across asset classes and regions.”

Martin Conlon, head of Australian equities, said today’s markets reflect deep structural imbalances created by network economics and rising government deficits.

“This era has created an environment where disequilibrium has become the norm. Traditional economic forces that historically corrected imbalances are proving less effective, creating both risk and opportunity for investors,” Mr Conlon said.

“The markets we’re seeing today are unlike those of the past. Large companies now dominate global networks, generating extraordinary profits with minimal tangible assets or workforce. The rise of AI is shifting competitive dynamics globally, and this is driving new market behaviours and valuations.”

While Australia is influenced by these global trends, Mr Conlon highlights that the local equity landscape is uniquely shaped by three key sectors: mining, financial services, and construction.

“The extraction of raw materials is a small but crucial sector globally, but it is much larger in Australia. Our financial services sector is oversized due to Australia’s appetite for housing debt and its large superannuation system. And as a high-immigration country, construction represents a much larger share of our economy than in almost any other developed market,” Mr Conlon says.

“The fate of these sectors will always have a disproportionate impact on returns for Australian investors.”

In this environment, Mr Conlon says the market remains one of aggressive yet uneven valuations.

 “Often, the companies commanding the highest prices are not the ones with the strongest fundamentals. Short-term earnings growth and hype around sectors like defence, critical minerals, and AI are drawing far more attention than long-term business sustainability,” Mr Conlon says.

“In markets where speed and overreaction are often mistaken for efficiency, careful, considered investing is increasingly proving its worth.”

The post Tailwinds and turbulence: Schroders 2026 market outlook highlights opportunities amid rising volatility appeared first on AdviserVoice.

Sebastian Mullins

As global markets reach the midpoint of 2025, a complex and uncertain macroeconomic landscape is fuelling volatility fatigue, according to Schroders, in a new outlook released last week.

The outlook suggests that investors are increasingly ignoring the ongoing geopolitical risk, economic volatility, and policy uncertainty, and instead are choosing to look to fundamentals in an environment where stretched valuations, policy divergence, and asset price inflation dominate the narrative.

Global macro: markets muddle through murky fundamentals

Despite headlines dominated by trade tensions, inflation divergence, and geopolitical uncertainty, global markets have shown remarkable resilience. The current rally has occurred largely without excess sentiment or broad participation, pointing instead to a defensive reweighting toward neutral positioning, says Sebastian Mullins, head of multi-asset & fixed income at Schroders.

While ceasefires and tentative trade agreements have eased some short-term concerns, structural issues remain. Sluggish global growth, fiscal stimulus without productivity reform, and an embattled US Federal Reserve all contribute to a highly uncertain outlook. Inflation remains contained for now, but the potential for fiscal-driven yield curve steepening is growing, particularly in the US.

“Markets are no longer reacting sharply to geopolitical developments, they’re fatigued,” said Mr Mullins. “This leaves us uncomfortably neutral across all asset classes, as valuations remained stretched and expected returns remain muted. But the cycle remains intact, albeit uncomfortably slowing.”

Australian macro: short-term strength, long-term questions

In Australia, the macro backdrop remains stable and supportive in the short term. Inflation is moderating towards the Reserve Bank of Australia’s (RBA) target, and growth remains resilient (though private sector activity is weak), despite the RBA holding interest rates this month.

The upcoming August reporting season is anticipated to provide further insights into corporate performance and expectations for the year ahead. However, questions remain about the sustainability of these dynamics.

“Australia, like much of the developed world, is grappling with stagnating productivity growth and GDP per capita,” said Martin Conlon, head of Australian equities.

“Fiscal imbalances are obvious, with governments showing little intention of aligning spending with tax revenues. While equity markets benefit from their relative size and liquidity, bond markets become volatile. We’ve seen the gap between earnings yields and bond yields reach concerning levels – this reflects a market environment where asset prices are increasingly detached from economic reality.

“Asset prices continue to outpace wage growth, leading to increased wealth for asset owners and a widening divide with the rest of the population. The Australian economy is heavily leveraged, with property prices now four times the country’s GDP, raising concerns about affordability, resource misallocation, and long-term growth prospects. Lower interest rates are unlikely to stimulate productive investment, given capacity constraints in sectors like housing and infrastructure, and instead risk fuelling further asset price inflation,” added Mr Conlon.

Fixed income: a positive outlook for 2025

Yield curves are steepening globally, particularly in the US, as inflation approaches central bank targets and fiscal concerns grow. A potential change in leadership at the Federal Reserve could accelerate this trend, embedding a higher term premium in long-dated bonds.

“The Australian fixed income market has benefited from a stable macro environment, with strong demand for new issuance and average deal subscription levels around 3.8 times covered. Execution risk for new issuance remains very low, and the market is still catching up to Euro and US credit spreads. The July interest rate hold, subdued growth, and softening inflation underpin a positive outlook for fixed income performance through year end,” said Kellie Wood, head of fixed income.

Multi-asset: neutral positioning amid uncertainty

The stance in multi-asset is broadly neutral across all asset classes, reflecting stretched valuations and muted expected returns. While the economic cycle is slowing, it remains intact, and the persistent volatility and policy uncertainty make it difficult to take strong directional views. Globally, equity markets have rebounded sharply from earlier lows, with the S&P 500 rising over 25% from April to June despite ongoing geopolitical risks and muted investor sentiment.

“Most investors have only moved to neutral positioning, and excessive gains across asset classes are considered unlikely given the prevailing macro and policy uncertainty. Short-term volatility is expected to persist, and asset allocation decisions are likely to remain cautious, with investors wary of headline-driven moves and stretched valuations,” said Adam Kibble, portfolio manager.

Credit: strong demand for local securities

In Australia, the credit environment is characterised by healthy demand, solid corporate fundamentals, and a favourable technical backdrop. Corporate balance sheets are solid, with robust margins, especially among infrastructure and utility companies, which are favoured for transparent cash flows and low earnings volatility.

Activity in the subordinated corporate space is increasing, with recent hybrid and Tier 2 issuances. Since March, Tier 2 paper has underperformed senior debt, with some spread widening due to supply in late May and early June, but this was largely retraced as supply diminished and geopolitical tensions rose.

While the US credit market is becoming increasingly expensive and susceptible to volatility, Helen Mason, portfolio manager, believes that strong demand for Australian securities is expected to help mitigate some of this risk, especially with a projected decrease in Tier 2 supply in the second half of the year.

“The credit market has recovered, but the outlook is one of caution due to the potential for further market swings and an uncertain policy backdrop. Investors are advised to remain vigilant, as the environment is likely to remain volatile and sensitive to shifts in fiscal and monetary policy,” said Ms Mason.

Australian equities: fundamentals under pressure

Investors face a challenging environment where valuation discipline and a focus on fundamentals are increasingly difficult to maintain amid regulatory and market pressures, according to Mr Conlon.

“The Your Future Your Super regime and the rise of passive investing have redefined ‘risk’ as simply not holding enough of the largest index constituents, such as CBA. This has meant CBA being bought at ever-higher valuations, regardless of its fundamental value, exposing investors to almost certain loss.

“This distortion is not limited to CBA. The market’s obsession with businesses that employ minimal capital and promise rapid economic value creation, with little regard for business duration, is detached from economic reality and history. Companies have become skilled at offsetting current bad news with future optimism.

“The market’s fixation on revenue growth and momentum leaves opportunities in more mundane sectors, such as energy and materials, largely ignored, except for gold. We see abundant opportunity in these less fashionable corners of the market,” said Mr Conlon.

“We remain committed to a disciplined, risk-adjusted approach to value creation, even as market forces and policy settings make this increasingly uncomfortable. We will continue to seek out opportunities where the crowd is not looking, and to resist the pressure to follow the herd into overvalued territory,” added Mr Conlon.

The post Volatility fatigue: Schroders 2025 mid-year investment outlook appeared first on AdviserVoice.

Kellie Wood

Growth down and inflation up. The policy mix that may get Trump booted out! The pace of Trump 2.0 and the administration’s pro-growth and isolationist policies are introducing volatility back into markets, with the US Fed again needing to tread carefully between supporting demand in a growth slowdown and ensuring higher inflation expectations do not get entrenched.

Market Outlook

Trump 2.0 is inflicting a great deal of volatility into global markets as we enter into 2025. Growth is slowing and inflation is likely to rise with the US Fed trying to strike a balance by keeping cash rates on hold for 2025. There are two key risks that may force the US Fed to act. One is the risk that Trump’s various policies and the overall chaotic environment set off a confidence cascade. The second is that tariffs, coming on the heels of pandemic inflation, result in an entrenchment of high inflation expectations over the longer term.

The data is signalling some early signs that both risks might be materialising and reinforcing each other. There are signs that the consumer is reacting badly to the disorderly environment and the expectations for higher prices which could result in a pull back on spending. At the same time, we are seeing a pickup in long-term inflation expectations consistent with entrenchment.

Our current view is that growth will hold up near term. Consumer sentiment surveys have not been good predictors of short-run economic outcomes in recent years. For example, spending has been extraordinarily strong over the last two years, despite choppy and range-bound sentiment. We tend to think that business confidence is a better lead on economic outcomes, especially as it is business leaders that generally make the cycle-defining decisions on hiring, investment, and inventories.  Here, the evidence has been decidedly mixed. US manufacturing posted its highest reading in over two years in February, and small business confidence also jumped after the election. However, the services sector has retrenched for two straight months. The US economy is projected to slow below a 2% pace over the course of 2025 and possibly into the low 1%, as tariffs and immigration restrictions impact growth.

Since the election, we’ve believed that the US Fed would find itself in a trade-off between supporting demand in a growth slowdown and maintaining stable long-term inflation expectations. We think this trade-off is becoming more stark and more imminent. Looking ahead, we will need to see how seriously policymakers are taking risks to long-term inflation credibility, and whether these risks are acting as a constraint. The evolution of the labour market remains key for both the outlook for rates and risk assets. The February jobs report will be a key test of economic resilience after a raft of weak confidence and retail reports to start the year.

Back home, the RBA has joined other advanced economy central banks in easing policy by delivering a 25 basis point (bp) rate cut at the February RBA Board meeting. The RBA is not easing into a weakening economy and so in no hurry to cut rates. Growth is picking up as the pressure on households ease. Labour demand has remained resilient, and the unemployment rate is close to full employment. Inflationary pressures are also easing with underlying inflation expected to be within the target band by mid-2025. It is the moderation in inflation which has enabled the RBA to begin to remove restrictive policy. We expect the cash rate to be lowered gradually with a further 50bps of cuts and a cash rate of 3.6% by the end of 2025.  For the RBA, the expected easing cycle could be one of the shallowest seen since the late eighties, with rates staying structurally higher for longer in this new regime.

Every advanced economy is in a different stage of the cycle that is providing opportunities in both rates and credit markets. In Europe, there is a need to pay for the ‘price for peace’ where Germany should ultimately ease fiscal policy to become independent from the US. Tariffs create a short-term growth risk to Europe. However, this should not obscure the significantly more lasting impact on the rates market of a shift in European fiscal policy.

Positioning

Against this backdrop of increasing stagflation risk in the US, we continue to like US rates positions that will perform if growth slows and inflation remains sticky, where the front end of the yield curve remains anchored as the US Fed stays on hold and the slowdown in growth is priced into the long end as bond yields fall. US inflation-linked bonds will also be a strong outperformer in a stagflationary environment, and helps the portfolio hedge against upside inflation risk. Whilst bonds have benefitted from the market moving to price in lower growth, we also see several other developments that are supportive of further bond market performance with the US Fed considering an earlier end to Quantitative Tightening (QT) and US Treasury Secretary Bessent’s explicit exertions that he wants to improve the attractiveness of long-term Treasuries for investors.

With the RBA easing cycle underway, the market is already pricing a cash rate of 3.5% over the next year, which is in line with our expectation of policy easing. Given this pricing, we have taken profit on our long Australian interest rate risk and moved our exposure out to the long end of the yield curve to capture the beta to US rates as the growth slowdown starts to be priced into markets. Across the continent, we have maintained our long positions as Europe still remains a target for tariffs and the risk the European Central Bank (ECB) may have to take cash rates lower to support growth. We have reduced exposure to the back end of European curves with the risk of expansionary fiscal policy resulting in more bond supply to fund this spending.

Credit markets have continued to show resilience to bouts of equity market volatility which we see as warranted given more attractive valuations and stable fundamentals. US credit is where we see the biggest risk of repricing, where spreads are very expensive and vulnerable to a repricing of US exceptionalism. We remain underweight US High Yield and no exposure to US investment grade credit. The US Fed cannot afford to be proactively cutting rates in a world of policy uncertainty and above-target inflation. The unexpected downside may be that higher inflation will bring down growth putting US equities and credit markets at risk. We remain constructive on credit markets in both Australia and Europe where valuations are more supportive and both economies will benefit from policy easing and fiscal support through 2025. Australian and US mortgages remain attractive in a higher for longer environment, offering attractive high quality yield and where we are seeing little signs of credit stress in economies.

Overall, high quality fixed income assets are now becoming a better diversifier of equity risk with growing policy uncertainty and slowing growth. Fixed income is now primed for outperformance both from an absolute and relative perspective vs cash and equities. We continue to access high levels of quality yield across the global fixed income opportunity set in those sectors and regions that have more attractive valuations and a supportive economic cycle.

By Kellie Wood, head of fixed income, Australia,

The post Double trouble: Trump policies see confidence down and inflation up appeared first on AdviserVoice.

Kellie Wood

For investors seeking stability and income, the expected moderation in inflation could create opportunities for fixed income investments, while US equities are likely to perform well under a Trump administration and small cap stocks could continue to catch up to larger companies, according to Schroders portfolio managers.

“Investors should be prepared for a landscape where bonds may not only serve as a safe haven, but also as a source of income amidst fluctuating equity markets,” said Kellie Wood, head of fixed income, Australia, at Schroders.

“As we shift to a new investment regime involving higher inflation and greater macroeconomic volatility, fixed income’s defensiveness is likely to be useful in different ways compared to past decades. The key roles of fixed income will be to generate income, and to provide shelter in a weakening global economy.”  

According to Ms Wood, higher bond yields should improve fixed income returns compared to equities, which, along with higher cyclical risk in equities given relatively high valuations, could result in a flatter efficient frontier.

“60/40 portfolios are arguably challenged by the possible correlation shift. This argues for a strong role for fixed income as an income generator.”

She said the key shift for investors in fixed income allocations is likely to involve lower duration bonds, absolute return strategies and high income products investing in diversified credit. 

“We retain a mildly positive view on global duration. While the macro backdrop has become less favourable, it is also true that bond valuations have improved significantly over the fourth quarter, as markets now price a less aggressive profile for interest rate cuts from the US Federal Reserve, which has pushed up Treasury yields.”  

Schroders is most cautious on the US, retaining a preference for European and Australian bonds, where the macroeconomic environment is more conducive for interest rates to decline and bond prices to rise. 

“We continue to hold inflation protection via inflation-linked bonds in both the US and Australia. These positions offer some protection for a more permanent move to a higher for longer environment where inflation could remain stuck above central bank targets as growth stays elevated,” Ms Wood said.

In terms of interest rate cuts, Ms Wood points to sticky inflation: “This sets up the Reserve Bank to undertake later and shallower rate cuts than our peers, underpinning sustained yield support for Australian fixed income assets over the near and medium term given attractive valuations and a supportive cycle,” she said.

Meanwhile, an incoming Trump administration could lead to a period of strong economic growth in the US, potentially outpacing inflation, according to Sebastian Mullins, head of multi-asset and fixed income at Schroders.

“The US economy has surprised expectations in 2024, and the incoming Trump administration’s policies may be about to put the US Federal Reserve in a very tight spot. Investors will need to question whether his pro-growth policies will be enough to offset the inflationary forces of his protectionist agenda,” Mr Mullins said.

“We believe 2025 will be another year of US exceptionalism. Growth is likely to remain strong as other economies stumble out of their doldrums. We are cautious that inflation is likely to rise and will create volatility, arguing for more active asset allocation and stock selection as markets decipher the winners and losers of these new policies,”  he said.

Mr Mullins is also optimistic about US equities due to the expected policies of the new Trump administration, which could lead to even higher nominal GDP growth in 2025. However, Mr Mullins is also cautions that inflation could re-emerge and create volatility in the market. He suggests that active asset allocation and stock selection will be crucial to navigate this environment.  

“Investors would be wise to be more active in their asset allocation and more prudent in their stock selection. From a more strategic standpoint, this will result in pro-cyclical or unstable correlations between bonds and equities, which reduces fixed income’s diversification benefits through time.

The key role of fixed income will be to provide high quality income, and to provide shelter in a weakening global economy. In the most basic sense, the efficient frontier is likely to bear flatten, as the returns of bonds is higher but the diversification benefit reduces,” Mr Mullins said.

Mr Mullins predicts a continuation of the US rotation trade in 2025, with more cyclical companies catching up with the ‘Magnificent Seven’. He suggests investing in the Equal Weight S&P 500 as a way to play this theme, as it has a higher weighting in sectors like industrials and financials and less in technology and communications.

“US small companies likely have further room to run, but we prefer to play this theme with the Equal Weight S&P 500, which has a higher weight to sectors like industrials and financials and less in the technology and communication sectors. This is not to say we’re against the ‘Magnificent Seven’, they are phenomenal companies with margins almost double the S&P 500, but we argue for careful stock selection through active management in this space,” he said.

The post US shares could rally on Trump administration, bonds to provide income appeared first on AdviserVoice.

Helen Mason

Schroders has launched an actively managed Australian credit strategy designed to meet the needs of investors seeking to diversify their equity or term deposit allocations whilst preserving capital, through exposure to the compelling, but historically difficult to access, Australian wholesale high yielding credit universe.

The Schroder Australian High Yielding Credit Fund seeks to deliver returns of 2.5 to 3.0 per cent above the cash rate, before fees, over the medium term, and offers daily liquidity unlike Term Deposits.  The Fund has been running since 2001 as an allocation within Schroders Fixed Income and Multi-Asset strategies, and is now available to retail investors as a standalone fund for the first time.

Head of Fixed Income, Kellie Wood, said the strategy provides easy access to complicated wholesale credit markets and is managed by an experienced team with a robust and proven investment process.

“The fund is managed by Helen Mason, who has more than a decade’s experience as a fund manager and a senior credit research analyst at Schroders, and has been with the company since 2005.  She is supported by a skilled local team with proven experience across fixed income and multi-asset investment, as well as by Schroders’ global network of credit analysts.”

Ms Mason said the strategy addresses the need for a higher-yielding income option beyond diversified, traditional equity and cash-based products, while seeking to avoid the liquidity challenges associated with private equity, structured and private debt markets.

The Fund can invest across the senior, subordinated, rated and unrated credit universe in Australia. This includes debt issued by Australian domiciled companies in any currency and offshore companies accessing the AUD capital markets (Kangaroo Issuers).

“Following years of rates at near zero, yields have been restored and fixed income assets are back in play. Inflation remains sticky while growth and employment are holding up, forcing central banks to maintain rates at elevated levels.”

“The Fund incorporates top-down and bottom-up views to identify the most compelling assets to own at any given point in the cycle and aims to provide attractive income opportunities, offering daily liquidity while effectively managing default risk.”

“It has the flexibility to invest across the Australian credit universe, unconstrained by benchmarks, to capture returns with appropriately managed risk.”

“The targeted result of this strategy is a diversified portfolio of investment-grade rated credit securities with the potential to deliver consistent returns above cash and term deposits but with lower volatility than equities,” Ms Mason said.

“This has been reflected in the strong 11.01% p.a. (gross of fees1) return, 6.70% above the cash rate, the Fund has delivered over a 1Y period, whilst also maintaining consistent outperformance over the long term, achieving relative return of 2.80% p.a. (gross of fees1) and 2.79% p.a. (gross of fees1) over the past 5 and 10 years respectively.”

The Fund has been awarded a Recommended rating from Zenith Investment Partners.

The post Schroders launches new Australian High Yielding Credit Fund appeared first on AdviserVoice.

Kellie Wood

Bond markets globally are set for broad-based outperformance, with the potential for monetary policy easings by central banks in the second half of 2024, however, Australian bonds are likely to underperform, according to Kellie Wood, Schroders head of fixed income.

“Bond markets are in a really good position to deliver strong returns to investors in absolute and relative terms in coming months,” Ms Wood said.

“We are seeing a broad-based slowdown in the global economy and the conditions for fixed income to deliver very strong returns are set in place; we’ve got moderating inflation, economic growth is slowing, and central banks globally are cutting interest rates,” Ms Wood said.

“That is exactly the environment where fixed income delivers not only very strong absolute returns, but also very good relative returns compared to other asset classes like cash and equities,” Ms Wood said.

However, Australian government bonds could underperform other bond markets given that Australia faces higher inflation than most other developed nations, according to Ms Wood.

“Australia has been the market we have been more cautious with inflation stickier and the RBA holding policy higher for longer. The Australian economy looks a little stagflationary, with core services inflation is still running at around 5 per cent, but we have seen economic growth starting to slow,” she said.

“That puts the Reserve Bank of Australia (RBA) in a difficult position because that is an environment where it can’t cut interest rates with inflation still too high. We think the Australian economy is about six months behind the US and the rest of the world, as we are still waiting for inflation to moderate.

“We do not expect the RBA to ease monetary policy this year unless we see a collapse in economic growth. We are more likely to see the RBA start to cut rates in 2025. Given this lag, that is an environment where we expect the Australian bond market to underperform bond markets in the US, Europe, the UK and Canada,” she said.

“The labour market also remains relatively tight, with much stronger jobs growth than had been expected. The market is now priced for the RBA to begin the easing cycle in Q4 2024.

“Our valuation and cyclical framework had us preferring credit over government bonds where we have seen very strong performance from Australian credit and mortgages both in the US and Australia.

“As the cycle progresses, we are likely to be leaning against valuations and the strong performance we have seen from credit markets and rotating into government bonds that have lagged. We have already started this transition, reducing exposure to expensive sectors such as US investment grade credit and high yield into US government bonds,” Ms Wood said.

The post Economic conditions favour bond market outperformance appeared first on AdviserVoice.

Due to the structural changes to these teams, Stuart Dear will leave Schroders after 11 years with the business.  He was most recently the head of Australian fixed income, a role he held since July 2021. Mr Dear leaves Schroders Australia with the team’s very best wishes for his future success.

Schroders Australia CEO, Simon Doyle, said Mr Mullins and Ms Wood are solid investment leaders with strong track records, are well known to the market and will work closely to lead this combined team.

“In making these adjustments to the Fixed Income and Multi-Asset team structure and leadership, we believe we are positioning ourselves for future success in these two important asset classes, to which we remain firmly committed.  Sebastian is a talented investor and natural leader. Having worked closely with Sebastian in the Multi-Asset team, I’m confident he will continue to deliver exceptional investment outcomes for our clients.  He will be a strong, future-focussed head of the combined multi-asset and fixed income capability.

“Kellie’s promotion is also well deserved, and her passion for fixed income and her talent as a fixed income investor is rewarded with this opportunity. Sebastian and Kellie are supported by 13 investment professionals within the merged local team and the Schroders global investment teams of over 400 investment professionals in numerous countries.

“Schroders is optimistic about the outlook for these asset classes and remains committed to delivering active fixed income and multi-asset solutions to our clients in Australia and New Zealand. These changes seek to ensure we are making the best use of our local resources and signify our strong commitment to providing leading investment solutions tailored to our clients’ needs.

“Schroders has an expansive global investment platform and presence in 38 locations.  In Australia, we have a long-standing 60-year commitment to serving and partnering with clients through locally based investment manufacturing capabilities in equities, fixed income, multi-asset, and private assets.  We are uniquely positioned to assist Australian clients to solve their investment challenges.”

The post Schroders Australia combines Australian Multi-Asset and Fixed Income teams, makes team leadership changes appeared first on AdviserVoice.

Kellie Wood

Bond markets have performed well recently as concerns over near term growth have increased. But we believe we are entering a consolidation phase, waiting for central banks to signal the gradual unwinding of the emergency policy settings, amid the uncertainty of the future path of inflation.

A resurgence in concern over weakening global growth dominated market moves in July. Global government bonds benefitted from their safe-haven status and yields fell sharply, generating positive absolute returns. Recent yield behaviour does look similar to previous mid-cycle slowdowns where markets have been focused on the sharpness of the US growth deceleration on the back of a declining reopening impulse and negative fiscal impulse. New Covid-19 outbreaks are weighing on growth which puts at risk further recovery in the lagging parts of the services sector and slower growth overall. While we think there will be a slowdown, the recovery remains on track with high vaccine efficacy against severe infections resulting in fewer restrictions going forward and a reduced drag on economic activity. Market pessimism around the durability of the recovery and peaking growth rates for this cycle looks overdone, though could take some time to reverse.

US output and labour market gaps are still closing even with slowing growth, and markets normally price in substantial rate increases into the yield curve when the US Federal Reserve is closing in on its mandate of full employment – this argues for a higher level of intermediate and longer maturity yields. Although we still believe this to be the case, our recent reassessment of the economic outlook suggest these gaps may take longer to close and therefore the upward repricing of yields may not be quite as front loaded in 2021, presenting downside risks to yields in the short term. The upcoming labour market reports should offer some insight into the time frame – large above-trend job gains could allow for a faster return to higher yield levels, whereas more modest gains could leave bond yields in limbo.

In Australia, the Reserve Bank of Australia (RBA) showed a steady hand at its recent meeting, maintaining the new guidance and policy commitments laid down in July. A month ago, the board announced a step back in bond purchases and that the yield curve target would ease. Prolonged lockdowns are likely to weigh on growth more heavily than previously expected in spite of recently announced fiscal support for businesses and households. The RBA is likely to incorporate this by lowering near-term growth projections and continuing to support the economy with very accommodative policy. On policy rate guidance, virus headwinds and recent data confirming underlying price pressures remain subdued and considerable labour market slack is likely to keep the bank steadfast in its guidance that rate hikes are unlikely until 2024 at the earliest. In recent weeks, the extent of interest rate increases priced into the market have started to unwind, and we see risks for a further extension of these moves.

We are firmly in a mid-cycle environment which is normally good for credit assets and conventional wisdom is that financial markets are awash with excess liquidity. On the surface, this argument makes a lot of intuitive sense: zero rates, continued quantitative easing and ample fiscal stimulus are all supportive of risky assets. Besides, households are flush with cash, businesses are expanding profits and investor optimism is high. What could go wrong?

In our view, these forces explain why both equities and credit markets have performed very well and compressed risk premiums, but with risky assets now at very expensive valuations most of these stimulative forces are either spent or priced in by markets. Central bank support is being progressively withdrawn and corporate earnings remain at risk of a sudden and unexpected earnings shock or disappointment. Key leverage metrics are improving with the strong earnings; however, the longer term build up in leverage leaves key credit markets vulnerable to earnings shocks together with the very real likelihood of higher interest rates. Going forward, all this suggests we could see increasing risk of periodic setbacks for risky assets.

Portfolio positioning

After a volatile start to the year, markets have now reassessed the growth outlook as we move through the second half of 2021. We have moved past the point of peak expectations in growth and inflation with further moderation expected in the near term. This delays any action by central banks to tighten policy as further progress is needed to fulfill their goals. This outlook keeps us neutral portfolio duration against the benchmark. We remain long in those markets where we see value, particularly in Australia. Canada and Korea are also attractive markets where several official interest rate increases are already priced in. In the US, where there is the most upside cyclical pressure, we are maintaining a short position and a relative inflation position. Over the last month we have continued to take profits on our strategic yield curve flattening positions in Australia and the US as well as holding Australian inflation-linked exposure.

With this cycle being much more advanced and dynamic than recent cycles, market pricing in credit has moved well ahead of corporate fundamentals, leaving some asset classes at very expensive valuations. In the near term, asset classes like US high yield are vulnerable to a correction and our most recent adjustments to the portfolio was to add some further protection against spread widening. Our preference remains for higher quality carry, short duration credit assets like Australian investment grade, although we recently added some protection given the broader asymmetric risk in credit markets.

The longer-term outlook for credit will be shaped by a tug-of-war between low interest rates fostering easy financing conditions versus contributing to a build-up of excessive risks. The recent volatility in Chinese credit markets is a good example of heightened liquidity and refinancing risks in high yield issuers as the government takes action to increase regulation. Even though we are expecting near-term volatility to stay elevated, valuations in this asset class are looking very attractive compared to developed credit markets.

We are maintaining our modest exposure to Asian credit to help diversify, alongside US securitised debt and emerging markets. Overall, we are well positioned for this consolidation phase in bond markets where our key positions include owning higher quality investment grade credit alongside some protection in lower-rated credit, positioning in longer-dated government bonds in those markets where we see value but also looking to capture relative value opportunities between countries. We also remain focused on taking advantage of the shorter term moves in markets as this served us very well in 2020 and early in 2021.

By Kellie Wood, Fund Manager, Fixed Income

——–

Important Information: This article is intended for professional investors and financial advisers only and is not suitable for distribution to retail clients. Opinions, estimates and projections in this article constitute the current judgement of the author(s) as at the date of this article. They do not necessarily reflect the opinions of Schroder Investment Management Australia Limited, ABN 22 000 443 274, AFS Licence 226473 (“Schroders”) or any member of the Schroders Group and are subject to change without notice. In preparing this article, we have relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources or which was otherwise reviewed by us. Schroders does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this article. Except insofar as liability under any statute cannot be excluded, Schroders and its directors, employees, consultants or any company in the Schroders Group do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this article or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this article or any other person. This article does not contain, and should not be relied on as containing any investment, accounting, legal or tax advice. You should note that past performance is not a reliable indicator of future performance. Schroders may record and monitor telephone calls for security, training and compliance purposes.

The post Bumpy road ahead for bonds appeared first on AdviserVoice.