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The Point
Quick, actionable insights for investors
Australian Equities
Crispin Murray: Pollution law shows investors need to keep a close eye on government
Government policy is a significant risk to investors, particularly in the resources and energy sectors, says our head of equities, Crispin Murray.
Sovereign risk can be more unpredictable than competitor risk, Crispin told a recent AFR conference.
“Competitors are largely focused on returns, so you can anticipate what they’re likely to do. But governments overlaying policy agendas can create quite unpredictable risks.
As an example, Crispin points to the federal government’s “safeguard mechanism” law which will regulate Australia’s 215 biggest polluters from July.
“They are still negotiating on details, but it means we’re asking mining companies, as an example, to quickly cut their scope-one emissions.
“That means cutting diesel emissions over the next seven years – and there’s no solution to that.
“I think we will see carbon price go up more than people realise. And it’s not beyond the realms of possibility we’ll see a carbon price by the end of the decade.”
How Pendal investors helped make the world a better place in 2022
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How Pendal investors helped make the world a better place in 2022
As “stewards of capital”, Pendal undertook 562 ESG-related meetings with investee companies and issuers on behalf of investors in 2022.
These “engagements” – where we seek to influence positive outcomes on ESG matters – are one of the benefits of investing with an “active” investment manager.
Deep, fundamental research capabilities in this area are increasingly important, says Pendal’s Richard Brandweiner in our 2022 stewardship report (which you can find here).
“The challenge for investors is identifying authentic leadership that can leverage non-financial factors to generate real economic value,” Richard says.
“Since many of the basic hygiene factors are already considered, it will become particularly difficult for systematic processes like those used by the mainstream ESG score providers to assess this.”
Crispin Murray: Four government intervention areas investors must watch
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Crispin Murray: Four government intervention areas investors must watch
Investors should keep a close eye on a growing trend toward government policy intervention in business, says Pendal’s head of equities, Crispin Murray.
“As investors our focus is on the practical reality of the market environment,” Crispin says in his biannual Beyond The Numbers webinar.
“One key shift we have seen is the number of companies referencing the growing influence of government policy on their outlook.”
Investors should be aware of government influence from four perspectives, he says:
1 Determining award wages
2 Power and gas policy
3 The carbon reduction pathway
4 Potential new regulations for the big banks
Crispin Murray: Four issues driving the economic outlook for Aussie equities
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Crispin Murray: Four issues driving the economic outlook for Aussie equities
Australian stocks have proven remarkably defensive over the past year, compared to global shares and other asset classes, delivering a 6.5 per cent return in the year to February, says Pendal’s Crispin Murray.
A material decline in shares is unlikely in 2023, says Crispin in his new biannual Beyond The Numbers webinar.
Earnings are on track for 2% growth in 2023 and 1% in 2024, he believes.
“However, if we do get the RBA forced to hike rates far higher than the economy can absorb, and we do get a downturn, then we’re going to see much more material downgrades. But it’s not the scenario we expect.”
Four issues will drive the underlying economic picture for Australian companies, he says:
- The risk of a US recession
- The outlook for Chinese growth
- Interest rates and their impact on the Australian economy
- The growing influence of Australian government policy
What’s driving Aussie equities this week
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What’s driving Aussie equities this week
THE odds of a 50bp US rate hike next week increased markedly after hawkish comments by Fed chair Jay Powell – but that didn’t last long.
Powell last week told US Congress that if the data indicated faster tightening was warranted, “we would be prepared to increase the pace of rate hikes”.
Stronger-than-expected data suggested “the ultimate level of interest rates is likely to be higher than previously anticipated”, he said.
The comments drove two-year US Treasury yields above 5% for the first time since 2007.
The spread between two-year and 10-year bond yields inverted to -107bp – the biggest inversion since 1980 when then Fed chair Paul Volcker was trying to kill inflation.
However, all this was reversed after the collapse of Silicon Valley Bank (SVB) late in the week, which saw yields fall.
Aussie equities: What we learned in ASX reporting season
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Aussie equities: What we learned in ASX reporting season
ASX earnings season came to a close this week, delivering a more robust-than-expected picture of the economy.
Here a few things we learned, says Pendal analyst and co-portfolio manager Oliver Renton:
- The effect of higher interest rates is yet to fully flow through company P&Ls
- Early signs of higher wages are showing through in company results, but the full effect could take two-to-three years
- Earnings season did not resolve concerns about the outlook for household spending and consumer confidence.
“At a headline level reporting season appeared quite normal, but there’s a lot going on under the surface,” says Oliver.
“Much-discussed macro drivers are only just starting to come through in actual company earnings.
“The same pressures we have speaking about for the past 12 months are not in the rear-view mirror yet.
“The good thing is that the intersection of those macro forces with company specifics continues to create opportunities.”
Crispin Murray: What’s driving Aussie equities this week
Crispin Murray: What’s driving Aussie equities this week
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Crispin Murray: What’s driving Aussie equities this week
Crispin Murray: What’s driving Aussie equities this week
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Crispin Murray: What’s driving Aussie equities this week
A LOW point in the VIX volatility index last week proved to be the signal for a correction in the recent rally.
There was no specific macro news to prompt this. The weight of buying faded and the market shifted to a cautious position ahead of this week’s Fed meeting.
US ten-year government bond yields rose 9bps and the S&P 500 fell 3.4%. Brent crude oil fell 11.1% and is now down for the year to date, as the market worries about a downturn in demand.
China’s re-opening appears to be happening faster than expected.
The iron ore price rose 9.6% as a result, and is helping underpin the Australian equity market.
The RBA hiked rates 25bps, as expected, and struck a more cautious tone on inflation.
We also saw the federal government launch a new energy policy which at first glance looks under-prepared. The policy introduces price controls that would likely make the power problem worse in the future.
There are six big macro issues going into next year:
1. The persistence of inflation — and how tight financial conditions will need to be in response
2. The scale of economic slowdown in the US and developed markets. (Real-time signals are benign, but the yield curve is a very negative signal)
3. The earnings leverage to that downturn — and whether nominal growth buffers earnings
4. Whether markets have already priced in economic downturn. The bear view is that markets bottom during recession, not before. Bulls point to a falling oil price, a weaker US dollar and lower bond yields as evidence of lessening headwinds for equities
5. What China’s economy does as it exits zero covid
6. Whether the RBA can engineer a soft landing in Australia
Crispin Murray: What’s driving Aussie equities this week
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Crispin Murray: What’s driving Aussie equities this week
Crispin Murray: What’s driving Aussie equities this week
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Crispin Murray: What’s driving Aussie equities this week
Crispin Murray: What’s driving Aussie equities this week
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Crispin Murray: What’s driving Aussie equities this week
The medium-term outlook for markets depends on the degree of economic downturn and its impact on company earnings.
But there is debate about how much the downturn will affect earnings, says our head of equities Crispin Murray.
“Historically, recessions have led to an average 20 per cent fall in earnings,” says Crispin.
“But this is often in a low-inflation environment, when nominal GDP (a proxy for corporate revenue) is low.
The bulls argue that three factors may mitigate earnings decline, says Crispin:
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Companies will benefit from higher nominal growth, supporting revenue and helping cover fixed costs
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Materials and energy companies will see continued strong earnings, given lack of supply
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The potential re-opening of China may offset weakness in Europe and the US
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