Schroders on the hunt for income and buying the stocks momentum left behind

Findings from Schroders' global investor survey show that volatility and geopolitical risk dominate concerns: 90% of Australian investors expect higher market volatility over the next 12 months, with conflict in the Middle East and AI-driven disruption cited as top risks.

The survey also shows 53.7% of Australian investors are seeking income in a decumulation environment, and around half of Australian investors are broadening geographic diversification beyond the US, adopting a more opportunistic stance toward volatility.

Schroders Australia hosted a briefing this week to unpack the survey findings and how the firm is positioning across asset classes in response.

A different playbook to the last cycle

Sebastian Mullins, Head of Multi-Asset and Fixed Income, argues investors are underestimating how much has changed since the low-rate, low-inflation decades that followed the GFC.

“The big flip there is that fiscal stimulus has come back to the forefront quite aggressively,” he says. “I hate to say this, but the developed world is like an old house that needs to be renovated,” pointing to the advances in Asia in the energy transition, transport and infrastructure.

“Now we are in the world of supply shocks. We had COVID, we had the supply chain issues, we had revenge spending, we then had the Ukraine war, we then had tariffs, and now we've got another war. 

"One-off supply shocks that continue to happen every single year end up creating a decade of inflation.”

Mullins expects inflation to settle in a three-to-four percent range going forward. "That means more volatility, more uncertainty, and more people looking for diversification, downside protection, and active management."

The knock-on effect is a change in how equities and bonds behave together. For most of the past 20 years, bonds rallied when equities fell, giving portfolios a natural hedge. Mullins says that relationship can no longer be relied on.

"Higher inflation leads to higher correlations. We've seen that since 2022: equities and bonds fell together because inflation was high, and that hasn't gone away."

He also warns against assuming last year's hedges will work again. In 2025's "Liberation Day" sell-off, the US dollar fell, gold rallied and bond yield curves steepened. This year, an oil price shock did the opposite.

"If you were hedging the exact same way this year as last year, you would have been wiped out."

Where the income is coming from

With bonds no longer a reliable offset, Mullins says the hunt for income has shifted toward credit. Investment-grade credit in Australia is currently paying five-to-six percent, against roughly four percent for global high yield only a few years ago.

He's particularly drawn to Australian triple-B rated corporates in utilities and infrastructure - airports, railroads, energy networks - where earnings, not the bonds themselves, carry inflation protection.

"Their earnings themselves are inflation-protected... if inflation goes up, they get paid more, meaning the company becomes safer in a more risky environment."

On broader positioning, Mullins is cautious on Australian equities, neutral on government bonds after recently taking profits, and prefers Australian credit for its wider spreads relative to the US and Europe. The team took a two-day window to buy Australian 10-year inflation-linked bonds at a 2.8% real yield before yields fell back to around 2.3%.

On private credit, Mullins flags caution after a period of rapid retail inflows. Schroders has been reducing private credit allocations over recent months. "I would be more cautious on the asset class...my personal view is that the risk-reward is not justified for the next year or two."

The passive money problem

Where Mullins is shifting positioning day to day across asset classes, Head of Australian Equities Martin Conlon is holding a much longer lens on individual stocks, and starts from a different concern - not the macro backdrop, but the mechanics of the market itself. 

He points to the SpaceX IPO, with a $1.75 trillion valuation set by floating less than $100 billion of stock, as a case study in how rules-based flows can distort prices.

"As long as you can engineer a supply-demand imbalance...then you can push a price," he said. "A size-based approach to investing in the stock market is easy and cheap, which is why passive took off."

Conlon says that dynamic has fed into earnings momentum becoming the dominant strategy in markets, with active managers increasingly chasing it too, at the expense of contrarian investing.

The result, he argues, is a market that isn't actually pricing stocks any better than it used to.

"We've got a lot of people charging us a lot of money for simple mathematical calculations, and I don't see tonnes of progress toward more efficient markets."

Chips, hype and how long it lasts

On AI, Conlon describes himself as a sceptic, not because he doubts the technology, but because of how the spending is showing up in earnings.

"The big spenders in AI are all capitalising it, so it's not hitting their P&L, and yet it's appearing as revenue and earnings in all the beneficiaries...That is deceptive in the long term."

His bigger worry is the mismatch between the speed of that spending and the speed of the payoff. "The danger in any massive capex boom is it's unlikely to be smooth; they will probably over-invest at some stage," he says. "When that over-investment happens and the revenues haven't kept pace...they turn into deep cyclicals."

He also flags that the market is treating today's boom conditions as permanent rather than cyclical. 

"Duration is the value in most companies. They are pricing them in perpetuity here."

"If they were a resource stock, people would say this was a commodity cycle."

For Australian investors, the more direct AI exposure isn't in local tech, but in resources. Conlon points to BHP and Rio Tinto benefiting from copper demand tied to data centre build-out.

The cost of chasing momentum

Conlon's approach to IPOs follows the same logic as his stock-picking generally: understand the business first, worry about the price second.

"We generally look at it and think if we don't understand it, we can't value it. If we can't value it, we won't buy it. 

Most people don't take that attitude. Most people take the attitude that if there's an IPO and it's hot, and you think you can make 20 percent on day one, leave all your other rules at the door."

He's still unconvinced by some of the market's more popular growth names, including Megaport (ASX: MP1). "A lot of times, I'm still not sure I can give you a simple explanation of what they do and how they make money."

On momentum-driven re-rates more broadly, Conlon is sceptical of how cleanly the market signals a turn.

"No one ever rings a bell and says the momentum's over. 'When the stock changes direction, we change our mind' - it's like, when is that? Three days of it going down? Five days? I don't quite understand how you determine when a stock price has lost momentum."

It's part of why his team looks in the opposite direction to the momentum trade, buying into healthcare names that have been left behind, including Cochlear (ASX: COH).

"The stock was trading at 18 times earnings with no debt... we are paying nearly the same multiple for BHP at commodity prices that we perceive are above normal, not below."

The same discipline applies to popular growth names more broadly. Conlon points to Xero (ASX: XRO) and WiseTech (ASX: WTC) as examples of quality businesses still priced for a lot to go right.

"People are still buying them as though they need to double and triple their earnings and then sustain them forever to be sensible investments."