Brenton Saunders: Which ASX midcap sectors are looking well positioned right now

While others reposition amid today’s market ructions, Pendal’s BRENTON SAUNDERS has seen volatility before – and is focused on the midcap opportunities now emerging

• Volatility revives active opportunities in sold-off midcaps
• Energy, infrastructure benefit; SaaS de-rated
• Find out more about the Pendal MidCap fund

Across three decades, Brenton Saunders – portfolio manager of the Pendal MidCap Fund – has navigated everything from the 1997 Asian financial crisis and the dot-com bubble to the global financial crisis and Covid.

He says the current situation in the Middle East is different in its particulars, but the ripple effects may feel familiar.

“This is a very geographically focused issue that is slowly permeating into different parts of the economy globally, beyond the obvious beneficiaries and companies suffering as a direct result of it,” Saunders notes.

Even so, he isn’t making material changes to the fund’s midcap positioning, preferring to build portfolios designed to weather a range of market scenarios.

“We see ourselves as portfolio planners, not market predictors. We try to build portfolios that are resilient across environments by diversifying properly and avoiding unintended macro exposures,” Saunders explains.

That balance matters during rotations and volatility. Recent swings have been driven by the conflict in the Middle East as well as investor concerns about AI-enabled competition for SaaS providers.

Volatility can create active opportunities

Saunders says periods like these can favour active management.

“When we have big geopolitical events, the market extrapolates what that means for the economy – assuming it will persist,” he says.

“That has created opportunities in companies that have been sold off.”

Historically, Saunders and the Pendal MidCap team have been able to use episodes of market volatility to identify and add value via opportunities in individual companies.

Against that backdrop, Saunders says parts of the energy complex are among the more obvious potential beneficiaries.

“You’ll likely see individuals and governments looking to shore up supply lines—becoming more self-reliant in procurement and refining of oil, for example, and more broadly in the procurement and generation of power,” Saunders says.

“Companies that produce energy are obvious beneficiaries.

“Alternative sources of energy such as lithium – given its role in batteries – could also get an added impetus from heightened energy-security concerns.

“Nuclear energy, too, is getting more attention globally than it has in some time as an alternative.”

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Brenton Saunders,
Portfolio Manager

Saunders also expects governments to duplicate and reinforce parts of their fuel-supply infrastructure, creating a tailwind for engineering and construction companies.

“Some contractors we can invest in – companies like Worley – are well placed to help design and manage the construction of facilities such as LNG plants, as well as oil and gas infrastructure that may need repair in the Middle East.”

Pendal MidCap Fund owns a position in Worley.

AI not necessarily an ‘existential threat’

SaaS providers, meanwhile, have faced significant de-rating following a wave of new generative-AI product releases.

But Saunders believes the fallout has been a bit overdone.

“These software companies will no doubt have to adapt to an AI-heavy environment, but most are solid businesses,” he says.

“We haven’t seen a clear impact from AI in their earnings so far. And we think many are likely beneficiaries if they incorporate AI into their products in a meaningful way.

“The notion of AI potentially disintermediating  software companies shouldn’t be dismissed – but we think the market narrative has swung too far.”

The sell-off has pushed valuations to levels Saunders describes as attractive – both relative to history and in absolute terms.

“Our assessment so far is that many of these high-quality software and SaaS businesses are exceptional. They benefit from incumbency… and they’re among the most tech-savvy companies we deal with.”

Saunders notes that many software companies also have access to proprietary data that generic AI applications may not be able to access via the public internet.

“So there are more strings to their bows than I think people are giving them credit for.

“Over time, there may be instances where products are replicated or competition increases, which could show up in pricing. But I don’t think it’s necessarily an existential threat for most of them – at least not yet,” Saunders says.