Investors can view their accounts online via a secure web portal. After registering, you can access your account balances, periodical statements, tax statements, transaction histories and distribution statements / details.
Advisers will also have access to view their clients’ accounts online via the secure web portal.
THE most constructive US inflation data this calendar year drove bond yields lower and helped the US equity market reach new highs last week, led by tech names.
The US Federal Reserve left rates on hold and was quite hawkish, signalling only one rate cut this year in its dot plots. However, the market wasn’t buying that given the better CPI print.
Apple’s developer day also helped tech sentiment; AI and all that it touches seems to be the only narrative that matters.
The S&P 500 gained 1.62%, but equity markets fell elsewhere.
The Euro STOXX 50 fell 4.17% on political concerns triggered by France’s snap election, while Japan’s TOPIX 500 was off 0.47% as the Bank of Japan struck a hawkish tone, possibly mindful of a weaker yen.
The S&P/ASX 300 fell 1.71% – led by Resources, with battery metals weaker and iron ore down again.
We also saw some FY25 downgrades feeding through the market, reflecting a softer economy.
Domestic employment data was better; underlying trends indicating a softening economy but nothing too severe and certainly no window for rate cuts. As with the US, the growth part of the market continues to outperform.
Inflation
The headline Consumer Price Index (CPI) returned 0% month-on-month, versus the 0.1% expected.
The Core CPI measure was up 0.16%, which was well under the 0.3% expected and the lowest reding since August 2021.
This was well received by the market and supports the case that higher inflation data in recent months was tied to backward-looking factors, such as annual price hikes and insurance.
For example, half of the difference between the expected and actual Core numbers was related to insurance – which had been running at 15%-20% annual increases and turned negative in May – as well as lower airfares.
Some of these factors may partially unwind, but the signal is positive.
The preferred “super core” number – which excludes rent and owner’s-equivalent rent – fell 0.04% month-on-month, helped by Core services falling to 0.22%. Rent inflation does remain more persistent than expected.
The measures of “sticky” inflation, as measured by the Atlanta Fed Sticky Core CPI, are also falling materially.
This good news was compounded by lower Producer Price Index (PPI) data, with Headline falling 0.2% in May, versus expected growth of 0.1%. Core PPI was flat month-on-month, versus the 0.3% forecast.
This data can be used to project May’s Personal Consumption Expenditure Index (PCE) – the Fed’s preferred measure – coming in at 0.11% to 0.13% month-on-month, which is well below the 0.32% average in the first four months of the year.
Year-end expectations for annual PCE are being shaved down by 0.1% to 2.7%.
Inflation bulls believe the economy has slowed enough to reduce corporate pricing power and return to more traditional promotional activity which supports this lower year-end forecast.
Bonds rallied and the market has shifted back to two rate cuts in 2024 on this data.
Fed meeting and interest rates
The Fed left rates unchanged and issued a hawkish statement which saw the median dot plot of rate forecasts shift to imply only one rate cut in 2024.
Chairman Powell reinforced the notion that the Fed would need to see a series of better inflation data.
He also noted that the Fed had increased the non-accelerating inflation rate of unemployment (NAIRU) by 0.1% to 4.2% and that the unemployment rate would only impact its decision if it went above its expectations.
On face value this was negative, implying a higher bar for cutting rates.
However, while this happened after the CPI release, it was clear from the press conference that the latter had not been factored into the dot plot.
Given that eight members of the FOMC still expect two cuts – with Powell widely perceived as one of them – the inflation data trumped the Fed’s statement and the market moved to price in more cuts.
The implied probability of zero or one cut in 2024 has shifted from 55% on 7 June to 30%, with the chance of two or more cuts rising to 70%.
This has been good for bonds, which are now seeing positive signals in terms of technical price action.
It has also been important for equity sector rotation.
Finally, we note that the hit that Trump’s betting odds took following his conviction has unwound and the RCP Betting Average now has his chance of election back above 50%.
Pendal Focus Australian Share Fund
Now rated at the highest level by Lonsec, Morningstar and Zenith
French President Macron’s snap election – which came after the right-wing National Rally (RN) trounced his own centrist grouping party’s in the European elections – triggered a mini bond crisis in Europe.
French bond spreads widened 25 basis points (bps), which cascaded through to EU periphery nations and raised concerns of a more general flight to safety.
The key concern is that RN have historically had policies which are market unfriendly, such as nationalising private roads, as well as looser fiscal settings as a result of tax cuts.
The reaction looks overdone at this stage, given the degree of unknowns.
We note that national parliamentary elections follow a very different structure, with two rounds of voting (occurring on 30 June and 7 July), and that it is also effectively 577 small elections – that is, local candidates running in a “winner beats all” approach.
Voter turnout will likely be a lot higher; there is apathy toward European elections as they have less bearing on day-to-day life. However, some potential outcomes include:
Fear is driving markets in the short term, as this was a risk that few were expecting. But on a probability basis, pricing looks to have gone too far.
It is a salient reminder of the unpredictability of politics and relevant given the upcoming US election.
Employment rose 40,000 in May versus the 25,000 expected – with full time employment up 42,000. Unemployment fell from 4.1% to 4.0%.
The underlying trends are slowing, with three-month annualised job gains at 25,000 versus 51,000 in April.
Hours worked also fell from the previous month, indicating slowing domestic activity.
All this paints a picture of an economy slowing, but not falling into a hole, and on track to delivered subdued growth.
This means rates look set to remain on hold for the balance of the year.
The combination of lower inflation driving lower bond yields as well as subdued economic growth and falling pricing power limiting earnings growth, is supporting companies with their own earnings growth dynamic.
This is primarily US tech names and utilities on the AI power demand story.
Looking at year-to-date in the US, there are some interesting observations.
The divergence between the outperforming tech sector and the broad-based Russell 2000 has widened in the last seven weeks and accelerated further last week.
Japanese equities, which had been a leader this year as they reflected a more positive outlook for global growth, have begun to stall.
This highlights how the market is getting more wary of industrial earnings relative to tech – a view reinforced by the fact that the financial and industrial sector did not participate in the S&P 500’s breakout to new highs last week.
There is a lot of debate about the lack of breadth in the US market as a sign of building weakness in the rally. This is a fair concern as historically, breadth is a lead indicator of markets though the lag can take a lot of time.
The data on concentration is clear.
In 2019, one company moved to more than 6% of the S&P 500 – the first time this had happened in a data set running back to 1990. There are now three companies weighing more than 6%.
On a calendar-year basis, 2024 is second only to 2007 in terms of top ten index weight concentration in years with positive performance (76.5% concentration versus 78.7% in 2007). The year 1999 was another example of high concentration (54.5%) driving performance.
Both years led into bear markets.
However, looking at the ten historical instances in which 40% or more of S&P 500 calendar year returns are attributable to the top five contributors, only 1999 and 2007 preceded falls the following year.
Markets continued to rise in remaining eight instances.
So, in our view, breadth is not a clear signal for the following year.
The alternate perspective is that we are seeing a unique market event with a small number of stocks demonstrating significant sustainable earnings power and real cash flow being generated, as opposed to just speculation, and that this is a platform for material continued earnings growth.
We note that the basket including Microsoft, Nvidia, Amazon, Alphabet and Meta has seen 38% growth in consensus 2024 EPS since June 2023, versus 0% for the S&P 500.
Apple’s developer day was the latest example of how companies with a coherent AI strategy are being rewarded.
It has described its strategy as “AI for the rest of us”, mirroring the successful 1980s Mac campaign of a “computer for the rest of us”.
Apple proposed embedding AI in productivity features, proofreading, mail prioritisation, text to image (including “genmojis”) and so on.
While some of these features are already available on Android, Apple’s appeal lies in consumer privacy, as the company plans on using an Apple data centre with Apple chips – or the phone itself – rather than relying on the public cloud.
The expectation is that this will drive a faster upgrade cycle as it requires the chipsets from the most recent models, which led to a 3-6% EPS upgrades. The stock broke to new highs, helping the broader market reach new highs.
This narrative, plus the earnings appeal, is reinforced by ETF flows into the sector.
This dynamic appears unlikely to break in the next few months, as liquidity remains supportive and valuations are not yet at historical relative extremes.
The key risk is inflation forcing rates to stay higher for longer and hurting the economy or the AI theme to run out of steam. Neither appears to be occurring.
The ASX was soft relative to other global markets, with Resources off 4.17% and Industrials also weaker (down 0.9%) as the market began to factor in lower 2025 earnings.
Previous expectations of close to 10% FY25 earnings-per-share growth in Industrials are looking stale given the softer economy.
Battery metals was the weakest part of Resources as lithium prices look to be rolling over again – with supply returning from China and Africa and demand a little lighter as the popularity of hybrids grows relative to battery electric vehicles.
Growth stocks continue to outperform, reflecting the appeal of companies generating growth in a more subdued economy.
Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and leads one of the largest equities teams in Australia. Crispin’s Pendal Focus Australian Share Fund has beaten the benchmark in 12 years of its 16-year history (after fees), across a range of market conditions.
Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.
This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current at June 17, 2024. PFSL is the responsible entity and issuer of units in the Pendal Focus Australian Share Fund (Fund) ARSN: 113 232 812. A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com.
The Target Market Determination (TMD) for the Fund is available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund. An investment in the Fund or any of the funds referred to in this web page is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested.
This information is for general purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation. The information may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date.
While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information. Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance.
Past performance is not a reliable indicator of future performance. Any projections are predictive only and should not be relied upon when making an investment decision or recommendation. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections. For more information, please call Customer Relations on 1300 346 821 8am to 6pm (Sydney time) or visit our website www.pendalgroup.com