While fixed and relative income assets remain attractive in a climate of falling cash rates, investors should prepare for likely changes to nominal income in the economy, says UBS Global Asset Management.
“While it’s expected that cash rates will be cut, indicating that you shouldn’t quit fixed income yet and go back to cash, I think there’s a bit of a shock to the level of nominal income in the economy ahead,” UBS Global Asset Management head of fixed income Asia Pacific Anne Anderson told InvestorDaily.
“Our relative export prices are trailing off compared to where they’ve been and it’s unlikely that wages will increase meaningfully,” she said.
“Service-side inflation is likely to abate as wages remain stagnant and there’ll be a bit more slack coming from the fading of the resources boom,” she added. “We’ve already seen jobs being pruned and attrition in industries such as manufacturing and tourism, but whether that’s enough to see a severe rerating of the equities market – like we saw in the US at the end of last year – remains to be seen.”
A climate of falling cash rates calls for a non-aggressive approach to duration, a trend which UBS Global Asset Management analysts say is already gaining traction. “Clients are becoming more defensive on duration,” Ms Anderson concurred, advising that investors should focus on “getting maximum yield out of what you’ve got.”
Yet despite the projected shock – and the apparently rosy outlook of equities analysts of late – Ms Anderson does not foresee a mass migration away from fixed income allocations.
“Into the New Year there has definitely been a greater risk appetite and, accordingly, we’ve seen money flow into equities,” Ms Anderson said.
“But this is largely not out of fixed income but from cash and/or money seeking more risk.
“So even though equities markets rallied at the end of last year, we’re not seeing Australian investors reallocating money away from fixed income and that’s largely a reflection that bond yields are not likely to increase dramatically.”
Nonetheless, Ms Anderson anticipates a conservative year for fixed income investment, suggesting that “moderate returns” of four to six per cent are realistic.
