November 2024 Update from the Australia Trade Floor

Text on screen: David Orazio, Head of Distribution, Global Wealth Management  

Hi and welcome to this month's trade floor update. Today I'm joined by portfolio manager, Adam Bowe.

Adam, let's start with the big news, the US election. Now putting politics to one side what does it mean for markets in particular and also bond portfolios?

Text on screen: Adam Bowe, Portfolio Manager

Yes, the first impact for markets has been higher volatility.  It's a fantastic environment for active bond managers. But stepping back from the daily volatility, regardless of who won the election we are expecting a couple of things.

First is that, most central banks around the world have started their easing cycle, and we expected that to continue.

And secondly, regardless of who's in the White House, US deficits, we were expecting in the range of 6 to 7% for the near term, and that wasn't going to change. And based on that expectation leading into the election, portfolio positioning was broadly for steeper yield curves.

So as central banks around the world were lowering front end rates and deficits were keeping long end rates elevated, steeper yield curves, and underperformance of US duration relative to other parts of the world that didn't have the fiscal deficits that they do, and where we expected terminal policy rates in these easing cycles to end up at a lower place than the Fed.

Overweight, modestly high quality credit, that we expect to perform really well in a global environment where growth is slowing but not crashing. And then keeping duration fairly close to benchmark weight. We've already seen a material adjustment, higher interest rates. And we always keep in mind that relative to the last time Trump won the presidency,  ten year yields in the US are already  200 basis points higher.

So interest rate risk in the portfolio is pretty close to benchmark. So leading into the election we saw the Fed ease again and then out of the election, if anything our conviction around those themes have increased.

One thing under a Trump presidency we're conscious of is that US tariff policy is probably more aggressive. I think ultimately that's negative growth for everyone. But even if you believe that near-term fiscal spending is positive US growth, I don't think you can just apply that to everyone else in the world.

If anything, a more aggressive tariff policy is negative to other parts of the world in terms of growth. So, potentially further interest rate cuts and lower interest rates than previously expected.

So that theme of divergent growth, divergent policy, is an important one for the markets over the next couple of years, I think, and probably means that a stronger US dollar over the medium term, particularly versus those currencies in tariff crosshairs like the Euro, like the CMY, like the Canadian dollar. So we've been adding to those positions.

Orazio: Great. Now let's turn domestically. Do you think any of the potential economic momentum that the US has probably felt post the US election translates to the Australian economy? And really, what does this mean for the RBA in its path forward in terms of its rate cycle?

Bowe: Yes, so there's a lot of uncertainty about just what the growth trajectory in the US will be. You have the negatives from tariffs. You have a bit more fiscal maybe. But even if you think it's positive near-term the US, externally the US is an important factor into Australia's growth and policy mix.

But I'd argue that Asian growth and policy, and particularly China, is more important. So through all the noise of the US election we also had an MPC meeting in China during the election week where they announced another range of fiscal support, given growth has been so sluggish over there. There's nothing that we saw coming out of that, even though the numbers are big, that'll materially have moved our expectations for growth in China next year. And certainly not expecting anything in the near term in terms of new policy announcements that would be really positive for bulk commodities and therefore Australia.

So if we incorporate the fact that we're in a more aggressive tariff regime now, probably expect Asian growth and particularly China to be more of a headwind rather than a tailwind for Australia next year.

So from an external perspective, still pretty challenging. And then locally when we look at what's happening in Australia, outside of public spending and hiring there's been very little growth in household spending, very little real growth in business investment or private sector hiring. And we expect that to continue, and that's why I think we're seeing inflation come back towards central bank targets, the RBA's 2 to 3% objective. We're seeing wages ease and we're seeing a gradual loosening in the labour market.

So in Australia I think, we haven't really changed our expectations for next year. We're expecting that sluggish growth environment to continue. We’re expecting inflation as we navigate our way through 2025 to be back within the band and that will enable the RBA to start a gradual easing cycle.

Orazio: Thanks for your insights Adam. Now with equity markets reaching new highs and uncertainty over the magnitude of policy outcomes under a new US administration, we believe investors should be focusing on building resilient portfolios to withstand a wide range of economic outcomes.

To this end, PIMCO's global platform and resources is well placed to deliver resilient income and diversification for client portfolios given high levels of starting yields across many global fixed income markets.

If you have any questions please reach out to your PIMCO account manager or visit our website.