Investment Podcast #2 – Fixed Income – Transcript

James Whelan
Hi, how are you now and welcome to the Ensombl investment podcast brought to you by Morningstar. My name is James Whelan, VFS, group investment manager, and I’m here to represent you, the humble advisor doing their best to walk the line between client interests and asset class selection. We’re trying to find the things that are not only appropriate, but also actually that work, and maybe try and find the right time and the right weight for clients. So get set, because myself and Morningstar are going to do our best to answer some of the questions that have come up on the ensemble platform. And obviously, all information contained is general in nature. So here we go. Well, it’s been a wild few years in which I saw people go from zeros to heroes in their understanding of how bond yields work, whilst at the same time keeping up with daily COVID numbers and mask mandated policies, I believe, and this is I believe that the phrase has to be said before you do anything in this regard that the phrase, bond prices rise when yields decline, was inducted as phrase of the year in 2020. By the by the dictionary, then 2022 happened and all my didn’t make a lot of people look a little bit foolish, liquid hilarious as well. And now we are balanced right at the precipice of some of the safest tell you that some of the safest, fixed interest assets in the world returning a near Guaranteed Rate backed by some of the backed by the US Navy, and near guaranteed rates that only recently, if you’re an equity advisor, you dream of receiving these almost guaranteed returns. And as usual, we go into the holding of these assets that makes up such an important part of the portfolios. Why? To hold them where I do want to be invested. Therein lies the game. Fortunately, we’ve got some people who are a little bit more, not only invested, but also a little bit more knowledgeable than even me with everything that I know, accumulated over the last 20 minutes. I’m joking. This week, it’s all about fixed interest, and I couldn’t think of two better guests to get into it with we’ve got Chris Siniakov, who is the managing director of fixed income at Franklin Templeton. They’re pretty reputable, in true long duration fashion. He’s He’s always telling it a decade at Franklin Templeton, which says a lot about the place says a lot about him and says a lot about the sort of industry that he’s into, which is fantastic. Also joining us is Matt Wacher. I got that seriously. I will get that next time, CIO of Morningstar for APAC. Chris, Matt, how are you now?

Chris Siniakov
Hello, James. Nice to be here. Thank you.

Matt Wacher
Hi, James. Great to be here as well. And don’t worry, everyone gets it wrong. The name, that is.

James Whelan
We’ll get we’ll get to stats will look. It’s part of my job. It’s gonna happen. You get that on the big jobs. Now. Look, Chris, everyone. I’m gonna start with you, Franklin Templeton, our guests, our guests from the fund managing side. Everyone gets the same mood set in question, which is a really easy thing. And it introduces us to who you are, and what you do. And how do you make money? Chris, can you fill us in?

Chris Siniakov
Thanks, James. Yeah, look, as the as the title sort of says, I’m a specialist in fixed income markets, based in Melbourne, Australia, and providing solutions to Australian investors as well as investors offshore in in broad fixed income markets. We follow and and we invest in different economies and markets around the world. And so we have a task ahead of us, probably just as big as the one we’ve just been through. So let’s see how we go over the coming 12 or 24 months.

James Whelan
Fantastic. Well, I’ve just I’ve just added a note into here to to cross back into that and where you see the challenges coming up on that. Before we get to that, though, going with the CIO, of morning stuff, or AIPAC is probably going to be a good person to sort of start with what our first of our advisor questions. Now, I’m gonna let you know, we get advisor questions coming in through the ensemble platform, my job is to ask them to people who know the answers of those things. And if they don’t give me the right answer, I’m gonna keep on asking it until they give me one that I find appropriate. For the most part they actually do. So these are questions from you, the advisor, if you’ve got any more, put them into the platform, and we’ll be able to answer them without without help and with the assistance of Morningstar as well for be able to do it. Now, here’s a really good, easy, broad question that we can get. So Matt, let’s go start with Morningstar. It’s the advisor question for you. We’ve had decades high rates of inflation, decades, high rates of inflation all around the world. That’s interesting. What does this mean, in a macro and policy sense? I’ll tell you what you might have to you might have to work with that one. Okay, Matt. So look, I’ve given you a bit of a funny one.

Matt Wacher
Now Oh, good. I mean, I think that we’re at a point where, you know, inflation is really peaked at this point in time. Sorry, I’m gonna have to start again there. Your allergies today? Yeah, the inflation is really at a point where we peaked and it’s starting to fall. But but whether it falls enough for central banks is really the key, I guess. And, and so we’ve hit like, 9.1% in the US, we’re down to about three point two now Australia, I think we peaked at about seven, just just under 8% 7.8%. We’re down, you know, the other day to around 4.9. There’s a headline levels, though. And when you look at the core levels, they’re a bit stickier. Those, though that strip out some of those volatile items, but inflation has come down a lot. Now that gets the key question for the central banks is, whether they think that that’s, that’s, you know, the we’re on a trajectory that’s going to continue or whether inflation is going to remain, you know, elevated above, where they’re, where they, where they’re comfortable. Now, I think that, you know, there’s a few other issues out there for central banks, no doubt, we’ll dig into them. But, you know, on employment levels, and in particular unemployment at such low levels, historically, low levels across the world. You know, I think that that’s a key issue. What’s happening in China is another key issue and whether that starts to impact the slowdown there starts to impact the rest of the world. You know, really the question for central banks is how much damage do they want to inflict on on economies? We’re starting to see things start to slow down a little bit. And can they control that slowdown? I might leave it there. And then Chris, feel free to to add anything I’ve missed.

James Whelan
I hit that Christmas, same question. Same question to you just on? Look, I think the maybe the wording we’ve that the inflation that we’ve seen is added is that a decade’s high level? What do you see it meaning and sort of from a macro and policy sense?

Chris Siniakov
Yeah, I think I think Matt’s touch on the key point, which is it’s been high, and it looks like it’s coming down, how long it will take to settle back into, you know, our sort of collective preferred area in that sort of two to 3%. area, our time will tell but the fact that inflation is they are trending lower is restoring some really important really key relationships across financial markets. And we’ve kind of seen micro examples of that this year. What I mean, there is that 2022, we had correlations between markets shift significantly because of inflation. Now, it’s still high, but it’s coming down. And the micro example I referred to so far in 2023, was when the banking crisis emerged in March, we basically had equity valuations take a bit of a hit. But importantly, bond yields rallied in that environment. And that wasn’t happening last year, unfortunately, everything was going down last year. And so I think we’re really back into the sort of regime that we’ve all become accustomed to over the preceding three decades or so, in general, low inflation environments. And so yeah, we can argue and nuance how long it might take to get back to target levels. But one of those key sort of consequences, I feel has already been resolved,

James Whelan
then sort of going with that as well. And this is a conversation that I have with my own investment committee and and with various people around the industry, where 2022 saw that correlation to the downside where there was there was nowhere to hide. And we’ll get to this in a second talking about a 6040 portfolio and that there was no real place to hide in the bond or equity markets at all. As as everything sort of came off in a in a strange way. The correlation, and yes, you said that it is sort of dissipating a little bit now on the upside, but you’re buying I’m buying bonds and buying equities at the same at the same moment at the same at the same time, I will be and I am and I have and I have been but as yields drop, so we see data get worse, potentially, and or inflation data drop, and we’re seeing that sort of bad news actually means good news, which means the yields are coming off and yield forecasts are coming off, which then means that equities rise, so is that where it is the advantage in holding a bond over just holding an equity since you know that both of them have gotta go off? Gotta go up in a decreasing inflation environment? That’s the that’s the end of a very long question. I’m sorry, Chris, I’m gonna go with you on that one. If you’re gonna do it again, then I’ll do it again.

Chris Siniakov
No, no, I’m happy. I’m happy to sort of have a first tackle on that question. I guess, you know, if you if you get back to the underlying basics of the respective markets, equities and fixed income, if we’re going into an economic downturn, which is why the yields are likely to decline to then try and provide some support and stimulus to that deteriorating economy. If that’s the environment that we’re in, then the underlying characteristics of the respective sectors are important. So if you think about a company facing challenges on the top line, ultimately filtering through to the bottom line, and things like dividends start to get curtailed because they discretionary management teams can determine whether or not they’re going to pay an income depending on how they’re managed. their balance sheet, you start to see how the initial rally starts to sort of take a bit of a head fake, because people start to realize, Oh, gee, these companies actually are not in great shape in this environment. And and that sort of lower yield stimulating asset purchases is short lived. Contrast that with fixed income, where we basically have very formulaic relationships between yield and price, as you’ve already discussed in your introduction, but importantly, the income is not discretionary. It’s contractual. So you know, if there’s a bond and ANZ bond or National Australia Bank bond that, you know, has a 5% coupon, they have to pay it, if they don’t they go into default. So I think, you know, there are a couple of reasons why I think, you know, fixed income has a role to play in that sort of environment.

James Whelan
In that, okay, let’s just sort of go into the contractual obligation that’s there. It’s basically having the same effectively that both of them will go up. For now, one with slightly less volatility, and one with slightly more of a guaranteed outcome, I think is if, if I could summarize that too. And I sort of agree with me on this one, Chris? I think that’s fair. Yes. Okay. Very good. Very good. Now, okay, let’s go into 2022. This was amazing. I actually had some clients and talking to myself as an advisor of the retail level, I did have some clients who even at the beginning of 2023, did come back to me and we’re so sort of decide what happened in 2020. To change this is very strange. We’re looking at our portfolios, and, and they haven’t, they haven’t had the user performance was just like I told you many times it was in the news many times that this is sort of between bonds and equities, there’s really not that many places that we could have that we could have gone. Just how and that was something that disgust it’s fine. It’s coming back now. And we’ll get into that in a second. But just how unusual was 22? In the scheme of things with with the ability to, with with there being very minimal places to hide? I’m getting morning stuff that is fine. Yeah, sorry, I should have mentioned

Matt Wacher
that. I started in the markets in 94. And I don’t think we’d seen a CQ, and if that there wasn’t anything, even nearly like 2022, except the equities and bonds sold off for a period in 94 as well. But But I mean, I think that the 2022 was, is a bit of a left tail event for bonds. You know, considering what happened, I think, you know, when we’re multi asset investors, and we really focused on valuation, we didn’t have a lot of duration going into it, because we thought the bonds was significantly overvalued, coming into 2022, we, we held lots of cash. And yeah, that was a drag on real returns. But, but we felt that, you know, bonds just weren’t providing you any diversification benefit at all. Now, now and got moving through 2022, we were able to add duration it was we have thought quite flexible. And I know we’re gonna get to the 6040 portfolio where quite fit flexible mandates who were able to add, as the diversification benefit that we’ve talked about already became more prevalent in bonds, as yields rose. And we could actually take advantage of that. Now. I think that that’s, you’ve really we want it when in the bond market, you want to focus, you certainly have these contractual obligations to be paid, you can get security around that. But you You don’t you don’t necessarily want to be investing when there’s not really a benefit to you there, especially a diversification benefit, which is a key role that they play.

James Whelan
Yeah, that’s that’s Well, Chris, did you have anything to add to that? What about how how unusual 2022? was, I mean, you would have been right there at the coalface just what, what was there to do? I like to sort of go into this sort of situation for people. Yeah,

Chris Siniakov
I know, you know, a lot of investors currently questioning why would we do anything but hold cash was actually last year was actually the year to hold cash. And so, you know, if you didn’t like the characteristics of fixed income, and Matt’s touched on it beautifully, that you know, smart investors were underweight, fixed income or maybe 08, fixed income. That made sense back then, you know, if I look back at our own Australian bond index, the Australian us bond composite bond index in January 21, the yield was point seven 0.7%. And its duration sensitivity was at a record high 6.3. So very high sensitivity to changes in interest rates. So they’re there that those dynamics those attributes are the wrong way around, you kind of want your yield to be higher than your interest rate sensitivity provide your buffer. And so it was completely flipped. And so it made sense for people to move out. But yeah, being in fixed income markets and you know, managing assets or against the index and you know, outright markets was was very, very challenging. And last year was really the year for people to be in cash if they were attuned to inflation picking up in the way that it did. Well, now

James Whelan
that now that we’ve sort of moved into it as well, and I remember signing that came up last year, the Bank of America Fund Manager survey that ended a lot of last year with its survey, which is a significant survey that is quite quite well followed and watched and talked about saying that it asked its participants, participants it asked its participants that what it saw the 6040 portfolio as being its performance, and it was actually it was regarded extraordinarily low for what its 12 months outlook was actually going to be. And I know that this was the case, because I’ve spent a lot of time on TV and radio disagreeing with that case, saying that no, actually, if you look at the 6040 portfolio, we’re going to see that that that yields are fairly high, and then potentially that that may start to come around bonds are going to rally. And as that happens, then equities are going to that. That has proven to be the case. I’m not saying yeah, I was right or going in I was just like, but you can see that a massive the market that wasn’t the 6040 portfolio. Does it still? Does it still have the outlook? That it that it has now which you would think that it was? Where do you sort of see that see that as falling? Now, I know that the Morningstar are embedded with the portfolio allocation side of this one? So we’re gonna go with the Morningstar side on this one.

Matt Wacher
Go, I mean, I think that that, at the moment, yeah, the 6040 portfolio looks reasonable, you’re gonna get a reasonable long term return out of the 6040 portfolio from this starting point. You know, it’s not gonna it’s not great, but it’s not not the worst, it’s certainly not December 2021, or January 2020, when when it looked terrible, in 20, sorry, 2020, it look terrible. From an equities perspective, I think, January 2020, to December 2021, that looks sick, forward looking returns for a 6040 portfolio look terrible from both a bond and equities perspective. But now we’re gonna we’re gonna get reasonable returns out of the 6040 portfolio, you know, and mainly, that a lot of that’s been driven from the diversification benefit you can get from the bond side with yields being up around, you know, to above 4%. Now, it’s not the best environment to be investing in a 6040 portfolio, but you know, it’s a reasonable we get reasonable expected returns, well, what we would say is that, you know, being anchored to a 6040 portfolio is probably not the best way to think about investing, generally. And that the more flexibility you have the unit to be able to go into, into cash, generally wanted to be in cash before 2022 started from a bond perspective, but the more flexibility you have, the better you’re going to be able to manage those outcomes. So so the 6040 portfolio, the moment looks good, is look terrible at other times, and it’ll look good, and even better and terrible again, at other times as well, for my expected return perspective.

James Whelan
No, outstanding good. And so now let’s talk there’s a question for for both of you with regards to your, as an advisor, you need to invest across the spectrum of, of assets. What does it mean, if you can get four or 5% in a near guaranteed area? And I always use left to right when I’m visualizing this thing left being the safest asset? Right, right being the more risky side of things, we’re talking about the risk return spectrum, we’re not going to go into that area too much on this one. But what does it mean for your investment for your portfolio, delivering to something to a client, if you’ve got that safe area, which is now bigger, that you can allocate a larger amount to it and have and have that same return? What does it mean for the rest of your investments? So we’re going to stick with Morningstar on this one? And then And then Chris, I want you to sort of kick in and just sort of say, what does it actually mean for the rest of the spectrum? Where if you’ve got more of that investment go into that? What does it sort of mean flowing through to the rest of the market?

Matt Wacher
Yeah, so So I think from from a portfolio construction perspective, in a multi asset portfolio, having, you know, fixed income, and I’ll start with the more growth, the end of the risk profiles, you know, so 7030 8020 6040 type of portfolio, having bonds at at sort of above 4%, up to even four and a half percent, is really great ballast for a growth of your portfolio. In fact, if you think that, you know, there’s there’s a chance of recession, but there’s also a chance that we avoid recession, then you can even afford to hold some more cyclical assets in the equity side of your portfolio because you’re getting some diversification benefit. You’ve got some balance there from a fixed income perspective. Now, it also helps a lot when you’re looking down at at, obviously, when you’re trying to achieve shorter term returns for say, a conservative or a moderate investor, you know, you’ve got to be able to, you know, generate those returns, especially with inflation falling you know, Real yields are much higher than they were. And you’re getting, you know, you’re getting actually bang for your buck from a return perspective, from bonds as well. And I think, you know, some of those trade offs that Chris will be able to talk about much more deeply than I around, you know, emerging market bonds versus credit versus high yield bonds, versus as you say, just the risk free government bonds that you get, you know, me Ozzie government bonds, or, or US government bonds, you know, that that’s a really challenging part of the market at the moment to take the the extra yield that you might be able to get from taking a little bit more risk in other fixed income asset classes? Or do you? Or do you stick with the risk free government rates that you can get which, at this point in time,

James Whelan
I’m super keen to actually really unpack that, Chris, if you want to, if you could possibly, and very kindly go into the actual specific areas that you can go into in the in the fixed interest spectrum? And, and, and unpack sort of their maybe with your outlooks as well, that’d be pretty cool. And I’ll make sure that I take notes, because I’m looking to sort of fix a few things around here as well.

Chris Siniakov
Yeah, I’ll try to do that. And it might take a couple of questions back and forth. But this is this is where fixed income is a really interesting asset class and, and very well suited to active management. There are many dimensions in fixed income, you know, we, we say yields are high, for example, it’s very simple high level statement. But you know, what, what’s very interesting about the market at the moment is the shape of yield curves, yield curves a flat, and in some countries their inverse. So on that left to right spectrum, James, shorter maturity bonds are yielding more than longer maturity bonds, it’s an unusual, sometimes, you could say a rare kind of status. But it does actually provide a signal to markets as well. And in the United States, where inverse curves provide a very strong signal, they proceed and warn of difficult economic environments, namely recessions. So that’s kind of the current status, the US yield curve has been inverse between the two and 10 year maturities up to 100 basis points. So I could earn 100 basis points more by buying a two year security and the government bond versus a 10 year security. So you can see how immediately, we get the chance to be active and position our portfolios in different segments of just the Treasury curve. That then sort of also extends out to other markets. So once you get away from the risk free Treasury markets, you start to consider spread or credit markets. And the first level of credit risk that most people tend to associate with is investment grade risk. And here in Australia, we had a quite a quite a material revaluation last year. And we have seen some retracement in 2023. But we’re still above longer term averages. Whereas in the United States, they took a hit last year, but not as much as Australia, Australia actually widened more on that credit spread basis than the United States, but they’ve fully retraced. And so now you can see how we can compare, you know, another alternative being credit relative to proceeding or historical valuation levels, but also between countries as well. And so you can see how the dimensions are really starting to open up.

James Whelan
I’m going to Chris, I’m just going to cut it and just and just can you, for a lot of our listeners just explain the importance of credit spreads and why they why they are so why they need to be paid attention to.

Chris Siniakov
Yeah, so if you think of the credit market, it is a group of issuers, non government related entities that are borrowing from the capital markets, and we as investors are effectively lending to them. So they’re they’re all in yield consists of two principal components. One is the base or risk free rate. And then the second component is the credit spread. So the risk free rate is just the local government treasury curve. And then the spread is what compensation you receive for taking on the risk of that entity, when you lend them money. And so if they’re a, you know, a dodgy garage operation, which doesn’t tend to happen in capital markets, but you, you get the point, if they’re a lower or sorry, a higher risk entity, the spread or compensation over the risk free rate is greater. And when it’s a higher quality entity, the spread is narrower, but these spreads move higher and lower on market sentiment every day. And it’s time Yep, sorry. No, you’ve

James Whelan
got it. Sorry that as they get bigger, that it’s telling you that something might might be a little bit SAS.

Chris Siniakov
That’s correct. So last year was a widening environment people were getting concerned about the city banks tightening so severely so rapidly. And and so they started to think about the next two or three years being a difficult environment for those entities that are using the capital markets. And so they increased those spreads to compensate those, those investments. So, that’s that’s kind of how I’ll let you go. And I’ll let you go over there, Chris. Sorry for that. Yep. No problem. So so at the moment, in terms of our view, we do like high quality investment grade opportunities, we’re seeing, you know, really good opportunities in this space, that have already had some widening of spreads. So you’re being compensated to by these, but when you do put it over this new level of base rate or Treasury risk free rate, you’re getting yields in excess of sort of six and a half 7%. And I’m talking here about, you know, some of the strongest organizations in our system, for example, the Australian banks are offering bonds, you know, typically with, say, a five year maturity, with, you know, firms 6% yield opportunities for investors, we recently participated in an opportunity that came into the Australian market from offshore, Lloyds Bank, so the largest bank in the UK, outside of HSBC, they came out to Australia to borrow some money, they issued a bond out to 2028. So a five year maturity, they did it in a tier two category, so just slightly subordinated below the senior unsecured. And the yield on that was 7.08%. Now, you know, we kind of have to ask ourselves, why would we invest in investment grade credit at this point in time, if we’re going to go into an economic environment that’s deteriorating? Well, if you think of those two component parts, the risk free yield and the spread, the spreads may indeed widen, if we do get the global economy deteriorating, at a significant enough pace, but the base yield that Treasury yield will rally harder than spreads will widen and the all in yield, will potentially decline. So we feel very secure in high quality investment grade credit, because of those component parts, working in opposing manner. But really being overwhelmed by the Treasury rates rallying harder than the spreads are widening. As you Yeah, sorry, kick, I’m

James Whelan
gonna get out of your way, Chris. Just just you’d wind it up, and you don’t want it up, you are winding up, you’re doing perfectly I’m sorry.

Chris Siniakov
And so that’s, that’s a high quality investment grade. But if you do start to then venture a bit further out onto the credit spectrum, and you start to consider markets like high yield markets or opportunities, well, then that component over the Treasury rate, the spread, you need for compensation for that level of risk must be wider than the investment grade. And what comes with a wider base spread is also greater volatility. And so if you think of that scenario, where the economy deteriorates, credit spreads get revalued, the higher volatility in the high yield market will likely overwhelm the rally in the risk free Treasury yield. That’s the base component of the all in yield. And so it’s not as clear cut that high yield investments offer a great sort of opportunity in the next, say 12 or 24 months. And indeed, most projections at the moment, that the default rates in the high yield markets around the world, both the traditional high yield markets that we’ve all participated in, but also the growing loans markets, which have emerged on on on global opportunities for investors, but predominantly has a great history in the United States. These markets are really starting to factor in higher default rates over the next 12 to 24 months. And so you need to be very careful with your security selection in those areas.

James Whelan
So you just want to go further up. I’m gonna say up the letter up, deliver ratings of your various ratings agencies and try and stay away from anything with a B and go towards something with more of an eye.

Chris Siniakov
That’s exactly our preference. Yes.

James Whelan
Very good. And emerging markets. I’m going to ask you, me being me being an emerging markets fan. I’ve always got to ask back itself interest on this one.

Chris Siniakov
Yeah, emerging markets. Now emerging market is the same. So it is really difficult to summarize it neatly. I would say in our part of the world, China is facing the most significant challenges its faced in the last 40 years of this amazing emergence of China as a potential superpower. And that’s going to be interesting to see how that plays out. You know, we’ve recently seen the officials in China Pull back the release of unemployment of their youth population, which is up around 20%, they’re not going to publish that number anymore. They’re getting to this sort of stage where it’s so ugly, they don’t even want to talk about it.

James Whelan
Zimbabwean sort of style of doing things.

Chris Siniakov
Yeah, it’s a great, it’s a great example that you use with Zimbabwe. And so and so, you know, I think, you know, that that’s going to have sort of ripple effects across all of emerging markets, but obviously, in the Asia region, as well. But we, you know, we had so many changing winds in the cross currents in the emerging markets, if you just think of, you know, the world’s reaction post COVID, to globalization, and, you know, security of certain goods that they want to sort of manufacture closer to home. You know, that’s really going to be an environment for some winners, but also some losers as well.

James Whelan
That’s right, man, I’m gonna ask you the same question on emerging market debt, because I know that you sort of hinted on it before.

Matt Wacher
Yeah, I mean, I think that there’s still a small opportunity there. I think that we still have some holdings in our portfolio in emerging market debt, but it’s coming to an end, I’d say, the spreads are getting pretty tight relative to developed markets at this point in time, you know, historically tight. I think one thing that emerging markets and I agree with Chris’s point on China, there’s, it’s a, it’s, it’s a really lots going on there. But but one of the things that people should note about emerging markets is a lot of them are already into a rate pretty significant rate cutting cycle, you know, they they raise raise rates way harder and faster than some of the developed economies in a lot of places. And now they’re, they’re cutting rates in lots of boats. Now the issue for for holding emerging markets debt there is that then becomes the currency. So any, any yield you’re getting from the bonds can get pretty significantly wiped out. If you’re holding Brazilian government bonds, and the rial tanks, then then that, you know, in a good position there if you’re holding local emerging market, local current currency, government bonds, but we thought it has been a good opportunity, and we’re starting to download that now, given the spreads have tightened so much.

James Whelan
Yeah. And I’ve seen that as well. Remember, there was a time not that long ago, when there was a lot of people from around the world that we’re looking at the Chinese at the Chinese bond yields, and just thinking, we’ve got to get some of that it’s, we’re in a world where there was a lot of zeros around and there was actually paying something switching back around. Now. I think that we can take that away from what you’ve said, not only economically, but just on those on those other numbers that they are in a rate cutting cycle to end, and we’re waiting for the next thing to happen. Now, I’m gonna get to the next one of their advisor questions here. You know what, let’s just talk about actual methodology that we can get into it. Because it was funny what you said there, Matt, I’m gonna segue this put on one of my gifts. Funny what you said there, Matt, which is talking about this the emerging market debt that you can get into and checking what the currency actually is. Because you can find if you go into one of these, say, a basket, say an ETF, which is the way that a lot of people access this stuff is, is that it’s actually you find that it’s actually denominated in a currency that maybe you didn’t want to think about this particular thing. And if you want to have potentially a bullish or bearish case in US dollar, you have to look at what currency that debt is actually priced in. So I’m going to sort of leave that in this way that people actually have to know what’s what’s under the hood. Chris, I’m gonna start with you. And then and then Matt will bounce it there. But what are the different ways that investors can actually access fixed interest investments across their portfolios?

Chris Siniakov
Certainly, it’s evolved significantly. And this is what I really like about working with the advisor network in Australia these days that, you know, the the evolution of their sort of approach to investments has really provided a lot of opportunities and certainly for advisors that now run, managed accounts style of allocations. You know, using the expertise of someone like Morningstar to help them understand where to asset allocate, they can make decisions very quickly. And fixed income, like other asset classes now gives you different opportunities. Certainly, in different markets around the world, you can invest in some opportunities directly. Australia doesn’t have a great direct sort of retail opportunity for bond investors. It’s typically been restricted to the Australian bank hybrids, which is you know, a unique segment of the market. But in Australia, managed funds have been around for a long time. And increasingly now ETFs are becoming popular vehicles for accessing fixed income markets and you know, we are slowly seeing more and more active ETFs coming into the market. So it’s not just about getting the market beta, but getting you know, Well run ETFs into portfolios.

James Whelan
That’s right. Matt, do you have any ideas on this one?

Matt Wacher
Yeah, I mean, I think that everything that Chris said, totally agree, I think, you know, in the Australian market that that ETF market is really starting to develop, they’re, they’re developing ETFs that look across the curve, I guess, different different, you know, one to three years, five to seven, seven to 10. And so, you know, you can really, if you know, what you’re doing can implement, you know, reasonably sophisticated fixed income strategies just using ETFs in the Australia are listed on the ASX. You know, generally speaking, we’ll use some of those ETFs in the E separately amount, separately managed account products, the SMA is that we run the managed accounts. And you know, they’re really useful to be able to do, I think, you know, your point on managing currency is a really good one. It’s, you know, understanding what’s under the hood in some of the International ETFs and whatnot, whether they’re active or passive, and the risks that are involved is really, really important.

James Whelan
All right. And look, I think that we’re almost ready to wrap it up. Now. So the last few of the advisor questions that are here, inflationary outlook, and what it means for global financial policies. Look, let’s let’s start with Matt. And and then we’ll go to Chris.

Matt Wacher
Yeah, look, I mean, I think that we think that inflation will normalize back into that band. But it’ll take time, we think that it’s not, it’s that two to 3% band, we think, you know, it’s going to take, it’s going to take a little while. And, you know, the risk is fairly balanced, whether whether central banks need, you know, another rate rise or not. We think that but if the rate rises, are we simply all coming to an end? And I guess the key risks that we see, say in the near term, is whether central banks go too far, and push economies into recession, I think, you know, economies at the moment, you know, may avoid a recession, I think there’s certainly a growth slowdown on the horizon. But but a bit too much in terms of rate rises will push, you know, put a lot of pressure, particularly in Australia, on household budgets. They’re already under a lot of strain. And I think that that that could really tip things into into recession if central bank if the RBA goes too far.

James Whelan
Chris over to you inflationary outlooks?

Chris Siniakov
Yeah, I’m a bit concerned about inflation in the sense that it ultimately will end up in central banks creating a very difficult, uncomfortable environment. Either inflation stays persistently high, and they have to tighten more, which is a very low scenario, it seems now, or this stickiness that people refer to persists for longer. And central banks, at least hold these current policy settings. for an extended period, I think both of those scenarios are going to be really challenging for the global economic environment. You know, people sort of say to me, but you know, you look outside the window, you know, people seem to be doing okay at the moment. And you know, Brian’s predicting the perfect sort of soft landing for the global economy. These changes that we’ve had in policy in the last 12 or 18 months, are unprecedented in magnitude pace. Anyway, you want to sort of shape it, or define it. And the consequences of it take a long time to come through. You know, Matt touched on the Australian households. What’s great here is that there’s a lot of knockers for the RBA. And they’ve maybe made some phobias over time, but they actually they actually know where the debt seats, the debt sits in our households. And so if you actually look at our map, our mortgage rate, while we’ve been one of the lowest in terms of Adjustments to Cash rates in the world, our adjustment to our mortgage rate is higher second highest in the world. So, you know, there’s this transmission in Australia from policy setting to mortgage rates, which is very direct. And we’ve seen in Australia through COVID, when the central bank, artificially suppressed Official Cash rates and, and Treasury yields down to you know, 0.1%, we saw the largest round of fixing of mortgages that we’ve seen in Australian mortgage history. And those mortgages are now rolling off those fixed mortgages for two or three years or rolling off as we speak. And so, you know, we’ve we felt it in markets for the last two years, but the economy is only just starting to feel it now. And and so I’m concerned that if the central banks really think They can keep the cash rate at these elevated levels for a long time, then we’re going to be in a whole world of fundamental pain. And that’s true. Also, for other economies like the United States over there, it’s not so much a household issue, but certainly a corporate issue, but even at the government level, but they are sort of, you know, the world’s safe haven currency. So, you know, they kind of get away with it. But, you know, corporates all turned out their debt through 2021 into 2022. That debt has a longer maturity profile than Australian mortgages, it’s more like, say, five years, but that wall of refinancing is going to come, it’ll come in 2025. And so if yields stay persistently higher, it makes it very difficult for business operating models to survive in that sort of environment. So I really, I really hope that central banks can be pre emptive. Here, they’re not sending that message. And unfortunately, that that’s kind of not sitting well, with me, I, I do hope it is a bit like my old football club. You know, football clubs, and the boards always give the coach their full support, right up until the morning, they fire them. And I just hope that central banks are talking their book at the moment. And that what they really aim to do is pull back on policy settings in the next 12 months or so, just in a moderate since, you know, in Australia, we’re at 4.1 in the US up around that sort of five and a quarter, five and a half level. But they both believe that the neutral rate of policy is somewhere like two and a half or three. Well, if you see that the effects of your tightening, actually working in the economy, then pull your policy setting down, not back to stimulatory levels, but maybe just less less restrictive. That would be really great, because unfortunately, the last couple of decades, we’ve only seen the extremes of policy settings, ultra ultra easy zero interest rate policy, or, as we are now at a very restrictive levels. And I think if they keep swinging the pendulum like that, but it’s just really difficult operating environment for economies. So, you know, I’m really looking for central banks to be more proactive in their policy, at least back to that neutral area, in the next 12 months.

Matt Wacher
I really agree with Chris there. And I think people don’t really realize this slow moving train wreck that we’re on every time that someone needs to company household needs to refinance. They’re doing it at a rate that you know, at least in Australia, about 4% higher than they were doing a couple of years ago. And in the US five and a half, six, seven, for high yield companies get a 12% rate of 12% Those sorts of levels. So it’s a lot of pressure coming for anyone that needs to refinance.

James Whelan
Well, that’s a slow moving train wreck is probably about where I’m going to want to wrap this podcast up on that one, thanks very much for that one. But couldn’t ask for a better word, I am going to call for last beads. If anyone’s got anything more to put on, I always give people a last chance to go in, maybe not necessarily talk your book. But if there’s anything that you think that needed to be covered, please speak now forever hold your peace. Solids, oh, my God,

Chris Siniakov
I will just sort of finish off on my statement about this high yield environment. It’s in this environment that fundamentals really matter, as some people can can deal with high yield, some companies can deal with high yields, others can’t. Whereas, you know, the last decade we had free money, everyone prospered. So I think if you haven’t already, you really need to move out of passive betta sort of type of strategies into active strategies. Now that that is talking my book, I’ll be upfront, now go into fundamentals really matter at this level, as I was talking to earlier in terms of, you know, working out whether your business model can survive, you know, in a high yield environment. And so now that brings in all sorts of opportunities for investors, stock picking, geographic allocations, currencies we mentioned. So active management’s really key in the next two or three years for certain.

Matt Wacher
Yeah, I’d agree that I think that yeah, I concur. I think the 2010s were very unusual environment. Markets tried to get their 2010s mojo back again at the start of this year, but But it’s much harder, much higher hurdle with with rates where they are.

James Whelan
I think I think that we touched on it during the duration, during the duration during the duration. That’s a that’s a bond joke. Everyone, the weed went through this podcast talk. We talked about geography. We talked about China. I wanted to talk about India, but we’re not going to do that. We talked about sort of where our outlook was. We talked about being able to pick apart an actual underlying, underlying asset and the car untying, which is used. I think that based on the feedback was based on the answers that we had to the questions here, it’s pretty obvious that that there is active management advantages based on all of those things, as opposed to just going, I’m just going to invest in a simple passive index. And there we go. And we’re going to hope that the best that has answered that question, and then it’s even better to specifically answer that question. On that note, hits. We will close the podcast at the high, we got it off a slow moving train wreck, and we got it on to a more of an active, moving profitable train wreck. We’ll go with that might edit that later. Chris, Chris Siniakova, Managing Director of Fixed Income at Franklin Templeton, thank you for joining us. Thanks for having me. And Matt Wacher CIO of Morningstar for AIPAC, thank you so much for coming along.

Matt Wacher
Thanks a lot. Really appreciate it.

James Whelan
Thanks, everyone. Now, if you want more information, go to the ensemble platform put in more questions. We will have more answers for you go to the various websites at the link in this podcast. And we’ll be happy to help you. My name is James Whelan. VFS investments. I will talk to you later.