Back on top

Commonwealth Bank of Australia, long a powerhouse in the research and analysis sector, returned to the top of the pile in the research categories of the KangaNews Fixed Income Trading and Research Poll 2023. Key team members speak to KangaNews about the direction and deployment of their insights.

  • Belinda Allen Senior Economist
  • Joe Capurso Head of International and Sustainable Economics
  • Stephen Halmarick Chief Economist and Head of Global Economics and Markets Research
  • Anthony Kritikides Managing Director, Institutional Sales

Commonwealth Bank of Australia (CBA) changed the structure of its research operation during 2022. What changes were made and what was the rationale?

HALMARICK We moved high-grade bond strategy – government, semi-governments and SSAs [global supranational, sovereign and agency issuers] out of the research team and into the global markets team. We also shifted credit strategy, again with the whole team now located in global markets.

The idea was to put the strategy team much closer to the client base – to have it embedded in the business rather than in the research department. Research and economics remains ‘behind the wall’: our views are independent from the bank.

KRITIKIDES It was a really big change. The idea is that the economics team is and should be separated from the business, accessing and using internal data to drive its analysis. Whereas we were finding in the fixed-income business – credit and rates – that there would be a benefit to the strategists sitting within sales and trading, working with the team to come up with trade ideas, market commentary and responding to what is happening on a daily basis.

We have been very clear with clients that the strategists now sit within the sales and trading business – that we believe there are benefits from this. We now have Adam Donaldson, who until recently ran the high-grade and rates sales desk, moving back to run macro strategy, with Philip Brown and Tally Dewan in the team. Gus Medeiros is running credit strategy, as he has done since joining us from Deutsche Bank.

To some extent this reflects the way our business has evolved in the past five years. We are now much more international, with a lot more clients trading bonds, rates and credit – so we are responding to client need. The combination of research and strategy is a powerful one.

Where do you think the CBA research offering stands out when it comes to process and delivery?

KRITIKIDES We often host client roadshows or roundtables that include economics and strategy, which we find to be the most powerful combination. It allows us to present an economic house view accompanied by specific analysis on what clients can do with it.

HALMARICK I agree with this. On the delivery side, we have complemented traditional distribution of research with podcasts, video and these types of client events – from big gatherings with 200 people in the room down to one-on-one meetings. We are also using LinkedIn more actively. Taken together, I believe we are hitting all our clients, across multiple channels, very consistently and with high-level insights.

I would also like to mention our internally generated data. This comes down to the idea that we are there to provide insights, not commentary. Anyone can read the latest data print. It is the insights that matter, and our internally generated data is a real point of difference for our Australian macro team.

We were already using some of this when I joined the team in 2018, but it wasn’t very systematic. We have started to really take advantage of the fact that CBA is the largest bank in Australia so our sample size on sectors like credit and debit card spending is unique. Roughly 30 per cent of Australian financial transactions flow through CBA on a daily basis. This lets us see what Australians are spending their money on, and what is happening with wages and income.

“We are expecting interest rates to be higher in the near term, which means weaker economies in the medium term and therefore a more abrupt cycle. Picking the turning point will be critical.”

Regarding forecasting the Reserve Bank of Australia (RBA) cash rate, the CBA economics team was quite bearish for most of 2022. How are you thinking about the view now?

ALLEN It’s safe to say a lot of houses have had to upgrade their view on terminal rates in recent months – we are certainly not alone! Actually, I believe the narrative we have been telling about the RBA has been fairly accurate. Getting monthly calls right has also been very helpful to clients.

At present, we have one more RBA hike in our forecast – in August. We are certainly more bearish on the Australian economy than some – we have a faster return of inflation to target band than some, and a faster increase in unemployment – which means we anticipate rate cuts sooner than most.

What is most important, though, is having a narrative that fits together. I think this is what our clients have valued over the past year.

The Australian research complex does not typically have dedicated environmental, social and governance (ESG) analysts. How and why has CBA invested in this area?

HALMARICK When I started in my role, in 2018, one of the things Andrew Hinchliff – who is now head of institutional banking and markets (IB&M) – impressed upon me was that as well as ‘traditional’ economics we wanted to add what is now called sustainable economics to our suite. Sustainability in general is a significant priority for CBA and for IB&M – to help Australia and Australian firms transition to a low-carbon future.

There were already a couple of people in the team who could pivot into doing more sustainability-related work, and Joe Capurso was appointed to run this team. We have since hired one specifically sustainable economist – soon to be two.

CAPURSO We published our first note literally weeks before the pandemic shut the world down. Since then, we have published around 40 deep dive notes on ESG issues. We have focused on four areas: carbon markets, biodiversity, corporate disclosure and the circular economy.

As Stephen suggests, what we are doing is integrating our ESG research into our existing analysis. For example, our mining and energy analyst, Vivek Dhar, now does a lot of work with an ESG flavour – he didn’t used to write about lithium or carbon markets, but he now does.

There is really strong appetite to understand local and global ESG issues across our institutional and corporate client space. We started by looking outward, because Australia was lagging when it comes to government policy. We studied what was going on in Europe, the US and China, uncovering implications for Australia.

With the change in government, Australia is on the same path as the rest of the world. We are now focusing on Australia. We have written about carbon and biodiversity markets, and the next step is to delve into sustainable agriculture – because agriculture is important to Australia and Australian agriculture is important to the world.

The global sustainable finance market is working on developing a common language and making sustainability reporting as quantifiable as financial reporting. How will this affect ESG research?

CAPURSO What differentiates ESG research from other areas is that we still don’t have a common understanding of how to add things up or classify them – we are still in the process of understanding how taxonomies and the like will work. The global trends will once again be set in Europe and North America.

Developments like the new ISSB [International Sustainability Standards Board] disclosure standards make me confident that we will get a common language and reporting. This will make the job of analysts like myself, and investors, much easier: we will be able to compare like with like and then talk to our clients about it.

What do you expect to be the focus of research over the coming year?

HALMARICK From a macro perspective, we appear to be in the final stages of the global monetary tightening cycle, though there may be a few rate hikes still to come. Rates are going a bit higher in Australia than we initially thought, so the path to a smooth landing will be narrow.

It is a similar story globally: we are expecting interest rates to be higher in the near term, which means weaker economies in the medium term and therefore a more abrupt cycle. Picking the turning point will be critical. This is another area where our internal data can help us: working out when the RBA has done enough and when it can start cutting.

KRITIKIDES For the strategy teams, the important thing will be what this means for bonds, semi-governments, swaps and the yield curve – and how to trade it. Markets have consistently mispriced central banks and we saw heavily inverted yield curves, especially in the US but pretty much everywhere, before a big steepening after the July RBA decision. This doesn’t really make obvious sense after a 50-50 on hold decision. Making sense of how to trade these moves is hard.

In credit, the big questions are what higher yield is going to mean for credit spreads and the impact of the ongoing roll-off of the term funding facility. Banks are effectively repaying debt at 0.1 per cent and re-borrowing at much higher cost. We don’t have the same issues in the regional banking sector as the US, but cost of funding will inevitably still place a lot of pressure on some banks.