Text on screen: James Maunsell, Account Manager
Welcome to this month's trade floor update. Today I'm joined by portfolio manager Rob Mead. Rob, while a rate cut wasn't expected, has the recent strength in domestic data shifted Governor Bullock's tone and has the most recent meeting indicated a shift in domestic easing policy?
Text on screen: Rob Mead, Co-Head of Asia-Pacific Portfolio Management
Yes, you're right James, the decision was really based on a fact that there's been a slight cyclical uptick in the data. There is a delayed effect from rate cuts having come through and impacting the economy. But I guess the most important takeaway for us is we think policy is still restrictive.We think there's still more for the RBA to do. We think rates are going to end up closer to 3% than 3.6 where they are now.
If you look at other countries that have had similar cyclical data upticks, like Canada and New Zealand, it faded quite quickly and the central banks were forced to start to cut again.
The other thing to think about is it's not just an inflation story anymore. We do get another two inflation prints, legitimate ones, this year. We get the Q3, CPI, and then we get the first full monthly CPI, in November. So there's a lot of data to come for the balance of the year. But as I mentioned, we still think that destination for rates into next year is closer to 3%.
And the other thing to watch is unemployment. So unemployment's been reasonably sticky. We think there's some potential for upside in unemployment, which will also be driving the RBA's decisions down the track.
Maunsell: Given the structural shifts in domestic markets, Rob, particularly concerns around domestic private credit, and the phasing out of hybrids, investors are coming to us looking for solutions around income and defensive characteristics within portfolios. With your portfolio management what on, what are some of the things you should be thinking about as an investor in today's market?
Mead: Yes, we really didn't expect to be here, in all honesty. 12 months ago we wouldn't have thought some of these things that would play out like they have. So I think it's an opportune time to do exactly as you said, put my portfolio management hat on and think about how to approach some of these markets, especially the private credit space.
And I may get a little bit technical, but I think it's really important. So first thing is, whenever I'm building a portfolio, you want to avoid crowded trades. That's priority number one. If there's a plethora of managers looking for a finite opportunity set, things typically don't end that well.
Second thing is diversification versus concentration. There's a whole global market out there. There's no reason to be too narrowly focussed. Think about cross correlations in the portfolio. Think about things that are truly diversified, that are not going to be correlated when periods of stress come.
Third thing is, think about structural subordination. This is something that's a very powerful tool for bond managers to use. It really means that you're investing in a capital structure where someone else takes the first loss, the equity holder takes the first loss. So things like asset based finance, a very, very powerful tool there.
Fourth thing is liquidity. Don't give up your liquidity unless you're getting paid. Infrequent mark to market’s okay. But as long as you're getting compensated accordingly.
And the final thing, and again, something that's really important for all investors is just keep it simple. When you've got a market that's daily liquid, that's still got high yields as we mentioned before, RBA didn't cut rates. We can take advantage of higher yields in the daily liquid market and take advantage of that for longer. So all of those things suggest be cautious. Be careful. Think through your portfolio construction and apply some really key investment disciplines.
Maunsell: Thanks, Rob. For clients, as we've heard today, the RBA remains on hold. But there is a broad opportunity set for domestic investors in liquid markets and in global private credit. For any further information, please reach out to your PIMCO account manager.