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18 Jan 2024 - Australian Fixed Interest: Unveiling the road ahead in 2024

By: Janus Henderson Investors

Australian Fixed Interest: Unveiling the road ahead in 2024

Janus Henderson Investors

December 2023

Bond markets have experienced a heightened level of volatility and recent drawdown having emerged from a period of exceptionally low yields. In the aftermath of the Global Financial Crisis (GFC) and the pandemic, policy makers tested zero and even negative yields in a bid to fight the low growth, low inflation environment with artificial and extraordinary central bank interventions.

Today, in a bid to fight the exact opposite, policy has again driven yields to new post GFC highs. Market participants now readily accept, for a variety of reasons including the great energy transition, 'friend-shoring' and geopolitics, that inflation and therefore yields are likely to be higher on average over the decade ahead. However, what perhaps is missing in this view is that cycles can still co-exist amongst these structural trends. The next year is one where we believe the cycle will come to the fore.

Macro themes in an uncertain future

The macro environment as we enter 2024 looks to be uncertain and uncomfortable future, and one in which things are likely to come to a head. Our central case sees a slow deflation of the excess demand meeting limited supply difficulties, but there are a myriad of risks. We believe the Reserve Bank of Australia (RBA) will be on hold through most of 2024, with a modest easing cycle commencing late Q3 next year. GDP growth will remain below trend, and weakness will progress from households through to the investment side of the economy. Finally, we think inflation will moderate back towards, but not quite reaching, the RBA's 2-3% target.

Strong population growth and housing dynamics risks further RBA tightening, but this is balanced against the pressures generated from the 4.25% tightening seen so far. Population growth should ease up to the pre-pandemic trend. We see the slowing economy leading to a slowly rising unemployment rate, which will move the economy back toward equilibrium. Downside risks come from slowing global growth, and China in particular. Geopolitical pressures are also being watched closely, as they have the potential to weigh on growth and push inflation higher. Locally, we watch for cracks in spending and the path of fiscal policy.

Markets on the other hand have toyed with the 'higher for longer' and 'policy likely to grip' themes. Today the market has very little priced in terms of an easing cycle, with an average cash rate over the next half decade of 4 to 5% and even a little higher over the subsequent 5 years. This, in our assessment, is unlikely to be validated by the RBA over time.

Meanwhile corporates are facing a more challenging environment after having enjoyed a couple of years of above-average profits buoyed by ultra cheap debt funding costs, an ability to pass through cost inflation and having benefited from strength in nominal revenues. In 2024, these very corporates are likely to face a constrained consumer, ongoing cost pressures and elevated refinancing costs. It will be a year of the haves and have nots in the corporate space; those with prudent balance sheet management in resilient industries separated from others exposed to consumer cyclical, interest rate sensitive industries. Investment grade companies for the most part remain well placed to weather an economic slowdown. Lower credit quality segments (and in particular leveraged companies, related to construction, housing, non-conforming asset backed securities and consumer finance) stand to be tested in the year ahead, at the very least with mark to market drawdowns but potentially with permanent loss of capital for investors.

With the cycle maturing, our preference is to be concentrated in higher quality credit which remains the sweet spot for investors with equity like return prospects. We remain wary of the more complex, levered or subordinated credit segments, especially those lower in quality. In seeking opportunities, we remain patient as we seek meaningful future high yield, loan and emerging market debts.

The road ahead

Looking to 2024, the fixed interest asset class provides a compelling proposition as a genuine diversifier with attractive yields offering strong competition to a number of growth asset classes; a privileged position following years of the opposite. However, the latter stages of the economic cycle will likely deliver higher levels of volatility, creating opportunities for those investors who have to tools, skills and risk taking heritage to be able to take advantage of.

In 2024, our 'north stars' remain that:

  • Duration is becoming increasingly a better tool, albeit one that needs to be actively navigated
  • Pockets of dislocations are to be expected late in the cycle, creating opportunities
  • It is better to take larger positions in safer segments rather than simply pursue yield, and
  • Opportunistic allocations to controversial segments such as senior debt of A-REITs, analysed, stressed for various scenarios and sized correctly have to potential to deliver outsized returns for investors.

Author: Jay Sivapalan, Head of Australian Fixed Interest, Shan Kwee, Porfolio Manager and Emma Lawson, Fixed Interest Strategist - Macroeconomics

Funds operated by this manager:

Janus Henderson Australian Fixed Interest Fund, Janus Henderson Australian Fixed Interest Fund - InstitutionalJanus Henderson Cash Fund - InstitutionalJanus Henderson Conservative Fixed Interest FundJanus Henderson Conservative Fixed Interest Fund - InstitutionalJanus Henderson Diversified Credit FundJanus Henderson Global Equity Income FundJanus Henderson Global Multi-Strategy FundJanus Henderson Global Natural Resources FundJanus Henderson Tactical Income Fund

This information is issued by Janus Henderson Investors (Australia) Institutional Funds Management Limited ABN 16 165 119 531, AFSL 444266 (Janus Henderson). The funds referred to within are issued by Janus Henderson Investors (Australia) Funds Management Limited ABN 43 164 177 244, AFSL 444268. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Past performance is not indicative of future performance. Prospective investors should not rely on this information and should make their own enquiries and evaluations they consider to be appropriate to determine the suitability of any investment (including regarding their investment objectives, financial situation, and particular needs) and should seek all necessary financial, legal, tax and investment advice. This information is not intended to be nor should it be construed as advice. This information is not a recommendation to sell or purchase any investment. This information does not purport to be a comprehensive statement or description of any markets or securities referred to within. Any references to individual securities do not constitute a securities recommendation. This information does not form part of any contract for the sale or purchase of any investment. Any investment application will be made solely on the basis of the information contained in the relevant fund's PDS (including all relevant covering documents), which may contain investment restrictions. This information is intended as a summary only and (if applicable) potential investors must read the relevant fund's PDS before investing available at Target Market Determinations for funds issued by Janus Henderson Investors (Australia) Funds Management Limited are available here: Whilst Janus Henderson believe that the information is correct at the date of this document, no warranty or representation is given to this effect and no responsibility can be accepted by Janus Henderson to any end users for any action taken on the basis of this information. All opinions and estimates in this information are subject to change without notice and are the views of the author at the time of publication. Janus Henderson is not under any obligation to update this information to the extent that it is or becomes out of date or incorrect.

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