Takeover interest in ASX mid-caps can help highlight undervalued companies. Pendal portfolio manager BRENTON SAUNDERS explains what is attracting buyers

• Cyclical pressure creating valuation opportunities
• M&A activity can validate strategic value
• Find out more about the Pendal MidCap fund

CORPORATE activity is rising among Australian mid-caps — a segment Pendal portfolio manager Brenton Saunders describes as a “sweet spot” for larger companies seeking attractive opportunities.

“One of the reasons mid-caps do well, and better than some of the other sectors of the market over time, is just because there’s elevated corporate activity in the space,” says Saunders.

“These are companies that aren’t super big, they’re typically still growing quite quickly, and often they’re fairly progressive and entrepreneurial at that stage of their development.”

Three factors appear to be driving mergers and acquisitions (M&A) interest in mid-caps: cyclical pressure creating valuation opportunities, operational underperformance attracting private capital, and structural or regulatory change increasing strategic value.

Cyclical pressure, underlying value

Cyclical industrials with durable market positions but temporarily depressed earnings or valuations are attracting potential buyers.

Saunders points to Reliance Worldwide as an example of how housing market weakness and cost inflation can weigh on a high-quality, cash-generative business.

Reliance sells plumbing materials and retail items in the US, predominantly through major hardware retailers such as Home Depot and Lowe’s Home Improvement.

Global investment firm Brookfield made several offers for Reliance, which has now accepted a bid valuing it at $4.1 billion.

“Reliance had been cyclically battling with the fact that the US housing market has been experiencing very high interest rates. The company had also been battling with fairly high procurement and materials inflation,” explains Saunders.

“It had earnings downgrades over the past couple of years for mostly those top-down reasons and less to do with the company specifically.

“But that got it to a point where the dividend yield on top of the share buyback that they’ve been doing just got more and more attractive. In our view, it is still a very high-quality and cash-generative company.”

Hear more on the midcap space from Brenton:

Private capital eyes operational upside

Cleanaway illustrates how operational challenges can attract private capital.

The waste management company has agreed to a $9.3 billion takeover by Swedish private equity firm EQT. The offer represents a 34.5 per cent premium to Cleanaway’s three-month volume-weighted average share price to 12 August 2026.

Saunders says Cleanaway’s subdued valuation before the offer largely reflected scope to improve operational execution.

“Consensus earnings estimates for the company just kept getting marked down weighing on the share price,” he says.  

“The downgrade cycle that this company found itself in was more self-inflicted than it was necessarily a function of the macro overlay or anything else.”

Pendal MidCap Fund holds positions in both Reliance and Cleanaway.

Regulatory change unlocks strategic value

Japanese financial services firm Daiichi Life’s $7.8 billion bid for annuities provider Challenger highlights a third driver: regulatory changes that make Australia more attractive to international buyers.

From mid-2026, the Australian Prudential Regulation Authority (APRA) introduced new capital requirements for decumulation products, such as annuities.

The changes aimed to make annuities less capital-intensive to write, potentially attracting new providers to a market with limited participants.

An annuity is a contract with an insurance company that provides a guaranteed income stream, either immediately or in the future, and is often used in retirement planning.

Challenger (ASX:CGF) is one of the few Australian investment management companies offering annuities.

Once the changes were made clear, Saunders and Pendal analyst Graeme Petroni predicted Challenger would likely attract the attention of a larger international player.

Pendal MidCap Fund also holds a position in Challenger.

“Australia always had a different and more onerous version of capital requirements for annuity companies, and it created some inefficiencies around the amount of capital and assets that these companies had to carry against their annuity liabilities,” explains Saunders.

“This made them very susceptible to having to sell the most volatile parts of their investment portfolio at the worst times.

“The capital requirements have effectively been aligned with companies globally, which means that international companies are now much more inclined to look at this market as a target market for annuities – and the big players in that are typically the Japanese and the US companies.”

Together, these examples highlight how active investors can identify strategic value in mid-cap companies before it is reflected in share prices.

Here are the main factors driving the ASX this week according to Pendal portfolio manager JIM TAYLOR. Reported by portfolio specialist Chris Adams

• Find out about Pendal Focus Australian Share fund

QUESTIONS around AI continue to dominate headlines.

Last week saw Nvidia CEO Jensen Huang working hard in a CNBC interview to shore up market support for neoclouds.

But on the negative side, we saw i) Microsoft pull out of an anchor tenant lease at a planned AI factory in the UK on electricity delays, ii) neocloud Coreweave’s debt continue to trade down, and iii) AI-related capital market activity stalling and falling with public listings being delayed and cancelled. Elice, a South Korean AI cloud and data-centre provider, did proceed with its listing but fell over 30% on its first day of trading.

Meta’s quarterly results provided some very encouraging indicators on the benefits of and demand for AI, while SpaceX’s result beat expectations for the quarter and delivered guidance ahead of the market, driven by a surge in AI revenue.

However, at this point the market is focused on the funding side of the equation.

Elsewhere US quarterly earnings season remains broadly constructive, notwithstanding some pockets of cost inflation across energy, freight and other core inputs. Consumer and credit trends remain healthy and travel demand strength continues to surprise on the upside.

This week will be a big one, with earnings releases for heavyweights like Microsoft, Alphabet, Bank of America, Coca Cola, Visa and Amazon.

The S&P 500 shed 0.5%, but market movement was more a reflection of rotation rather than outright selling, as the equal weighted S&P 500 outperformed by 160 basis points (bps). The S&P/ASX 300 was down 0.2%.

US 10-year bond yields fell 8bps. Fixed income performing as a defensive asset during equity market weakness was a return to old school norms; let’s see for how long.

Brent crude oil rose 6.2% and is back well over US$110 despite flows returning close to prewar levels, driven primarily by the growing view that the conflict escalates post the US midterm election. Gold fell 4.0%.

Comments from the RBA on inflation shifted the domestic market, in contrast to US Federal Reserve officials who are in blackout ahead of the Federal Open Market Committee (FOMC) meeting this week.

It is a big week for central bank enthusiasts, with meetings at the Fed, European Central Bank, Bank of Japan, Bank of Canada and Reserve Bank of New Zealand, with the latter two priced for interest rate hikes.

Macro & policy Australia

RBA Deputy Governor Andrew Hauser was blunt and direct at last week’s Citi conference. His message: the inflation outlook is materially worse than the August projection.

The situation has deteriorated in each of the three key drivers of inflationary pressure since August:

1. The Iran conflict has become more prolonged than expected and the oil price is 30% higher.
2. AI demand has continued to grow, with potential upside to previous projections.
3. There has been no relief on domestic capacity pressures.

He noted the threat of unanchored inflation expectations as “the central banker’s nightmare”.

In this regard they are “beginning to see some signs that some people in the community are not sure if we’re going to bring inflation back to target at all, or certainly not for an extended period”, and that “an increasing share of businesses” are perhaps seeing 3% to 3.5% inflation as the new normal.

He was adamant that the RBA can’t allow expectations to shift away from target, meaning hard choices and “laying shorter-term pain on top of pain” to prevent worse outcomes down the track if higher inflation expectations are locked in.

The implied chance of a rate hike at the meeting on 2^nd/3^rd November shifted from 27% to ~60% following Hauser’s comments.

It is interesting to note the recent impact of rates on the consumer. While foot traffic growth is strong over six and 12 months to the start of October in national chains including JB Hi-Fi, Flight Centre, Kmart, SuperCheap Auto, Rebel and Chemist Warehouse, there has been a material slowdown in the wake of the most recent rate hike by the RBA.

Macro & policy US

Housing

New housing starts dropped to 1.221 million in September which was down from 1.288 million in August and below consensus expectations of 1.305 million. New building permits at 1.400 million were a touch softer than the 1.403 million in August, but ahead of 1.385 million expected.

However, the key issue was pending home sales, which fell 7.3% in September, versus -0.5% expected.

The rapid increase in mortgage rates is flowing into transaction activity. That September figure for pending home sales implies existing home sales will fall to ~3.7 million in October – the lowest level since August 2010.

Notwithstanding that home prices have not really moved for three years, a new mortgage at current rates on the median house price would consume 40% of average after tax income, up from 35% in January.

Homebuilders are already sitting on considerable excess inventory. There is a stockpile equivalent to 8.7 months of sales of unsold new single-story family homes in the three months to August, compared with a long-run average of around six months.

Most homebuilders have ignored pressure from the Trump Administration to create more supply and have chosen to preserve margin instead.

It seems a revival in US housing activity still appears to be some way off.

Employment

The labour market remains in good shape. Initial jobless claims declined to 194,000 in the week ending 17^th October, from 200,000 the previous week and below consensus expectations, also at 200,000.

Continuing claims were at 1.728 million in the week ending 10^th October, from 1.703 million the prior week and above consensus at 1.710 million.

Despite higher energy and borrowing costs, firms continue to hold on to labour.

Forward indicators of job losses, such as the WARN measure, remain contained while hiring intentions remain soft, meaning the labour market remains stable.

It also appears that there has been a significant colling of concerns around near-term job-shedding as a result of AI.

AI-related layoff announcements have equated to less than 5,000 jobs in both August and September, after a spike of just under 40,000 in May.

There is some evidence that jobs growth in the fields most associated with AI have seen 10,000/month less jobs created than trend – but this has been offset by higher job creation in the data centre industry.

US earnings

Thus far we have seen 24% of S&P 500 companies report.

• The blended earnings growth rate for Q3 EPS is 29.5%, near the 29.6% expected at the end of the quarter.
• The blended revenue growth rate is 12.7%.
• 83% of companies have beaten consensus EPS expectations (versus 78% five-year average.
• 66% have beaten consensus sales expectations (versus five-year average of 70%).
• In aggregate, earnings are 2.1% above expectations, down from 13.8% one-year average and 7.5% five-year average.
• Aggregate sales are 1.2% ahead of consensus, versus 2.1% one-year average and 1.8% five-year average.

Meta

Meta reported and is something of a poster child for the benefits of AI adoption both internally and by its consumers. Enterprise use cases and the benefits of AI in Meta’s core businesses are unambiguous.

• It is taking huge share in advertising markets, growing at 26% – which is twice the industry growth rate – with global average price per ad up 14%.
• This is due to AI-driven content and can be seen in the use of its various platforms.
  • Instagram has surpassed 3 billion monthly active users, with average time spent per user growing double digits and at all-time highs.
  • Reels have also hit all-time highs, while Threads now have more monthly active users than X (previously Twitter).
• More than 10 million people in the US and Canada set up Muse personal agents in its first six weeks, with 2.5 million using it on any given day. Shopping is the leading use case, with 25% of weekly activity, with average purchases over US$200. This provides early evidence of commercial utility.

The handbrake on Muse is compute intensity, which is constraining global rollout schedules. Meta is targeting greater than 10x improvement in compute cost efficiency over the next year via more efficient models, inference optimisation and better utilisation of off-peak capacity,

Its goal is uniting the ~500 million small-to-medium businesses on the Meta platform with the user base to generate agent-to-agent commercial activity to rival the strength of Alphabet, which has been a player in this space for such a long period of time.

Meta’s comments on FY27 earnings were vague and left the market with the view that opex and capex estimates – currently US$140 billion for FY26 and ~US$210 billion for FY27 – need to be lifted.

The company also flagged a distribution of Class C (non-voting) shares as a precursor to tapping equity markets in CY27 for funding of the ever-growing business plan. Meta’s credit default swaps moved up, and the stock was off 8% the next day.

Space Exploration Technologies (SpaceX)

SpaceX also gave some line of sight on AI demand.

It grew Q326 revenue 161% year/year to US$14.6 billion while adjusted EBITDA was US$8.8 billion, up 306% year/year. This was 14% and 30% ahead of consensus, respectively.

It guided to 1Q27 revenue guidance of US$33-37 billion (versus consensus at US$23 billion) and expects to exit 2027 at an average recuring revenue (ARR) of US$500 billion-US$1 trillion per month – well ahead of consensus expectation.

SpaceX finished Q3 with a nameplate compute capacity of 1.7 gigawatts (GW), saying it has line of sight to 2.5-3.0GW by the end of CY2026 and is confident of adding 10GW in 2027.

This would leave it with ~13GW, versus consensus expectations at 6.1GW.

The company has flagged building 20GW worth of power and cooling capacity in 2027, to prevent this being a constraint.

Pricing for its compute is tracking slightly above the high end of its US$30-50/watt range – with recent prices coming in higher, not lower.

SpaceX is the largest provider of incremental compute and at this stage appears to have significant pricing power. That said, it is pursuing a very short-term rental model in preference to long-term contracts, so would be exposed to a softening demand environment.

The company’s rough goal is a half-and-half split between internal use and third-party rentals of its compute capacity.

The company is guiding to 4Q26 capex of US$35-40 billion, versus consensus at US$21 billion. On its current run rate of spending US$36 million per megawatt (MW), its plan to add 10GW in 2027 implies ~US$360 billion of capex, versus consensus at US$140 billion.

Management pointed to a sub-one-year payback on compute spend, operating cashflow that increasingly funds the build form 1H27, and multiple pools of debt capital while protecting its investment grade credit rating.

At current pricing the whole thing stacks up. However free cash flow gets materially more negative before it improves and, when asked, the company has flagged a mix of debt, vendor financing and customer prepayments to bridge the funding gap – and also flagged the importance of its investment grade rating.

Markets

Takeover activity saw Cleanaway (CWY, +21.1%) and Challenger (CGF, +21.0%) among the best performers in the S&P/ASX 100 last week. NextDC (NXT, -38.9%) was the weakest on an earnings downgrade.

The latter saw Technology (-4.7%) along the weaker sector, though Resources (-7.2%) fared worse as iron ore, copper and lithium prices remained soft. Communications Services (+4.0%) and Financials (+4.0%) did best.

Amcor (AMC, +6.3%), Transurban (TCL, +3.8%), APA Group (AP, +2.6%) and Lottery Corporation (TLC, +3.1%) benefitted from rotation to defensive Industrials in the US market as AI-related stocks sold off. AMC was also helped by stronger than expected volume growth at some of its customers including Proctor & Gamble and Nestle.

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About Jim Taylor and Pendal Focus Australian Share Fund

Drawing on more than 25 years of experience investing in top-performing Australian companies and a background in accounting, Jim manages our Long/Short Fund and co-manages our Imputation Fund. He is a Chartered Accountant with membership of the Australian Institute of Chartered Accountants.

Pendal Focus Australian Share Fund is managed by Crispin Murray. The fund has beaten its benchmark in 14 years of its 18-year history (after fees), across a range of market conditions. 

Find out more about Pendal Focus Australian Share Fund here.

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management. 

China’s property slowdown and weak consumer demand dominate the debate, but they tell only part of the story, argues the Pendal Global Emerging Markets Opportunities team

Key points:

• China’s exports strengthen growth in emerging markets despite domestic weakness
• Technology and industrial exports challenge developed markets
• Learn more about Pendal Global Emerging Markets Opportunities Fund

CHINA’S export-led growth is creating opportunities that may be underappreciated by emerging markets investors. While attention remains focused on the country’s property downturn and subdued domestic demand, Chinese technology and industrial companies are expanding their share of international markets. The Pendal Global Emerging Markets Opportunities team believes this strengthens the investment case for selected Chinese businesses while increasing competitive pressure on exporters elsewhere in Asia.

A powerful export engine, led by technology and industrial sectors, is helping to drive growth as Chinese firms gain share in international markets.

However, the investment implications, both for China and its competitors, are not yet fully reflected, according to the Pendal Global Emerging Markets Opportunities team.

China’s economic narrative is dominated by its prolonged property downturn and slowing domestic demand and consumption.

Both are real. However, in the second quarter of this year, Chinese real GDP still grew by 4.3 per cent year-on-year.

The missing piece of the puzzle is China’s powerful export growth, which has led to a large external surplus (evident in both the trade balance and current account balance).

China’s trade surplus has nearly doubled, from US$670 billion in 2021 to US$1.2 trillion in the 12 months to August 2026, as export volumes have significantly outpaced imports.

The result is an economy that has become increasingly reliant on net exports at a time when domestic demand remains subdued.

How China’s exports are reshaping emerging markets

More importantly, for investors and politicians globally, the composition of China’s exports has fundamentally changed.

As with other Asian ‘tiger economies’, the first wave of Chinese export growth was driven by labour-intensive manufacturing and assembly.

Today’s export expansion is increasingly concentrated in higher-value-added industrial and technology sectors.

Analysts at the US Federal Reserve argue that a ‘China Shock 2.0’ is underway, characterised by growing Chinese competitiveness in areas such as advanced machinery, electronics, power infrastructure and other technology-intensive industries.

Some European economists have described China’s strategy as ‘a growth model aiming at industrial and technological dominance’.

What both agree on is that an undervalued renminbi is key to this approach. The US analysis suggests that the renminbi, the currency of the world’s second-largest economy, is 24 per cent undervalued. This is having a growing impact on the world’s more developed economies.

China is capturing a growing share of global exports, increasingly competing in higher-value sectors once dominated by developed markets.

Chinese industrial overcapacity and exchange-rate management policies are becoming a central feature of policy discussions in Washington, Brussels and European national capitals.

Investment implications for emerging markets investors

For emerging market equity investors, we believe this presents opportunities.

While investor attention continues to focus on cyclical domestic challenges, we believe the strength of China’s export sector is not fully appreciated.

We remain overweight China, including Chinese technology and industrial businesses that are benefitting directly from the country’s growing share of international markets.

By contrast, we remain cautious on several Asian export-oriented industries, including in Korea and Taiwan, where the overlap with China’s export profile is increasing and competitive pressures are intensifying.

We believe the ‘China Shock 2.0’ strengthens the investment case for China.

Emerging markets: frequently asked questions 

Why are China’s exports important for emerging markets? 

China’s export growth is supporting the economy while domestic demand remains subdued. Its move into higher-value technology and industrial sectors is also reshaping competition across emerging markets and developed markets. 

Which sectors are driving China’s emerging markets export growth? 

Export expansion is increasingly concentrated in advanced machinery, electronics, power infrastructure and other technology-intensive industries. 

What does China’s export growth mean for emerging markets investors? 

The Pendal Global Emerging Markets Opportunities team sees opportunities in selected Chinese technology and industrial businesses that are gaining international market share. 

What are the risks for other emerging markets in Asia? 

Export-oriented industries in Korea and Taiwan face increasing competition where their export profiles overlap with China’s growing technology and industrial capabilities. 

About Pendal Global Emerging Markets Opportunities Fund

James Syme, Paul Wimborne, Ada Chan and Roshni Bolton are co-managers of Pendal’s Global Emerging Markets Opportunities Fund.

The fund aims to add value through a combination of country allocation and individual stock selection.

The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.

The stock selection process focuses on buying quality growth stocks at attractive valuations.

Find out more about Pendal Global Emerging Markets Opportunities Fund here
 
Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

Contact a Pendal key account manager here

Here are the main factors driving the ASX this week, according to portfolio manager RAJINDER SINGH. Reported by investment specialist Chris Adams

• Find out about Crispin Murray’s Pendal Focus Australian Share Fund

MARKETS have been buffeted by the unwind of the AI trade, particularly in those areas more leveraged to the thematic.

AI-heavy markets such as US (S&P 500 -1.9%) and Korea (KOSPI -14.5%) were down last week but others were relatively resilient as investors rotated to other sectors.

Bonds were generally stronger as yields retreated from their recent highs, though high credit risk areas remained under pressure. 

More uncertainty in the Middle East and Ukraine saw energy prices rise again (Brent crude +4.9%) while other commodities such as copper (-1.7%) aluminium (-1.4%) and lithium (-9.1%) were softer.

In the US, we saw both September consumer price index (CPI) and producer price index (PPI) inflation data surprise to the upside.

These, along with strong retail sales and industrial production figures, indicate the US economy is experiencing solid economic growth but also generating increasing inflationary pressures.

In Australia, the main release was September labour force data which showed a jump in the unemployment rate. Slowing employment growth pointed to a softening in the labour market and the economy more broadly.

Australian equities were up for the week (S&P/ASX 300 +0.9%) however we saw significant dispersion in the performance of various market components.

Large caps performed well (S&P/ASX 50 +1.5%) while Small Caps (S&P/ASX Small Ordinaries -2.8%) delivered a negative performance.

At the sector level, Materials -2.5%) and IT (-1.4%) were weak while there was rotation into other sectors such as Financials (+3.2%), Healthcare (+3.5%) and Consumer Staples (+3.1%).

Australia macro & policy

There were two releases closely watched last week, given potential implications for the path of domestic interest rates.

First was the RBA minutes from the September monetary policy board meeting. They specified that due to rising global cost pressures, Australia must accept weaker growth in employment and economic demand as the cost of bringing inflation back to target.

They also stressed the additional effect of domestic cost pressures and noted that further price increases, followed with rate rises, could be on the horizon.

Local economists noted that these September minutes were consistent with the hawkish tone struck in the statement accompanying last month’s rate rise announcement.

Then we had the Australian Bureau of Statistics release September labour force data.

It showed Australia’s total employment fell 39,300, versus the increase of 20,000 expected.

This was driven by a decline in part-time employment (73,700) and was partially offset by a rise in full-time employment (34,400).

This led to the overall unemployment rate being “steady” at 4.7%, but only because August unemployment was also revised up to 4.7%. Both were above market expectations of 4.6%.

This provided further evidence of a gradual softening in the labour market, with the unemployment rate averaging 4.6% over Q3 2026, from 4.4% over Q2 2026 and 0.6% higher than the start of the year.

Overall, following the weaker job numbers along with other indicators of slowing in the Australian economy, the market has pushed out the likelihood of another rate rise. The market is now pricing only a 22% chance of a hike at the Melbourne Cup RBA meeting and peaking at an 86% chance of one additional hike by April 2027.

US macro & policy

US Federal Reserve

Despite US Federal Reserve Chair Kevin Warsh’s desire for a “quieter” Fed, we saw several representatives give their views on the central bank’s future interest rate moves last week.

New York Federal Reserve President John Williams reaffirmed his view that the Fed may need to ‌raise interest rates once more this year to lower inflation, though at this point doesn’t think they would need to do more in 2027.

Fed Governor Christopher Waller said the surge in long-term US Treasury yields is helping to dampen demand in interest-rate-sensitive sectors and so doing some of the work of tighter monetary policy.

Warsh himself appeared at an IMF meeting in Thailand, and his remarks conveyed no urgency to further increase rates in the aftermath of the September inflation print.

He stated “the world has broadly conformed to our expectations” since the last Federal Open Market Committee (FOMC) meeting in September, in which the majority of Fed officials indicated one more hike by end of 2026.

CPI and PPI inflation

The headline September CPI increased 0.6% (3.7% year/year) which was in-line with consensus.

However, the core CPI measure came out at +0.3% for the month which was above consensus of +0.2% and 2.6% for the year.

There were notable contributions from airline fares, reflecting elevated fuel price pressures, as well as telecommunication costs.

The number of CPI components printing at above 3% rose to almost half of all categories, indicating broad based inflationary pressure in the economy.

Importantly rent inflation, which is a large component of the basket by weighting, remains relatively anchored for the time being.

The PPI also showed increasing inflationary pressure. Headline rose by 1.3%, substantially above the consensus expectation of +0.6%.

Core PPI increased by 0.7%, also significantly above the consensus of +0.3%.

Producer prices have historically been correlated with commodity prices and energy in particular, and these higher input prices indicate, as they transmit through the economy, upwards pressure to the CPI and personal consumption expenditures (PCE) measures of inflation in coming periods.

Other data

We also saw the release of existing home sales data, with sales rising to 3.99 million in September from 3.93 million in August.

However, given the recent rise in 30-year mortgage rates, existing sales are yet to feel their full effects.

In other releases:

• Retail sales for September came in at +0.8% which was substantially above the +0.3% expected.
• Industrial production increased 0.7% in September with Q3 increasing at an annualised rate of 2.8%.
• The US fiscal deficit was US$1.99 trillion in FY26, equal to approximately 6.2% of GDP.

The surprise CPI, along with strong PPI, retail sales and industrial production figures, indicate the US economy is experiencing solid economic growth but is also generating increasing inflationary pressures from higher AI investment and energy/commodity prices.

The market is now pricing only around ~27% probability of the Fed hiking rates at next week’s October meeting but has fully priced one in by calendar year-end.

A further two rate hikes are now also fully priced in by mid-2027.

AI concerns

Last week saw growing concerns around the durability of the previously robust AI thematic.

The AI infrastructure industry (data centres, neoclouds etc) was in the crosshairs, but the sell-off affected other areas including AI beneficiaries such as chipmakers, memory-makers, contractors and resource stocks, as well as the broader tech sector.

The key change is the market moving from trying to dimension AI upside, to worrying about the ability to access the capital required and the subsequent cost of this funding.

The traditional risks of any development are arising and compounding here; increasing construction and financing costs, with uncertain and possible depressed end asset values, is threatening the business case for many of these investments.

The moves were triggered by a combination of events including:

• Blackstone-backed AirTrunk pulling a REIT data centre IPO in Singapore.
• The Firmus IPO on the ASX aborted in the previous week.
• Doubts on Anthropic’s IPO and valuation over concerns on the state of its latest growth and revenues.
• A hot US CPI print increasing fears of a further rise in interest rates.
• Research firm Gartner estimated that 80% of neoclouds could go out of business by 2030.
• A blowout in the credit and credit default swap (CDS) spreads of Neoclouds such as CoreWeave.
• A five-character post from Elon Musk; “Yikes,” in response to a chart showing CoreWeave’s yields.

Not surprisingly, Nvidia and the most prominent Neocloud – CoreWeave – attracted the most attention.

Starting with the debt components of its capital stack, the yield to maturity of CoreWeave’s 2031 bond rose to over 15% while its five-year CDS moved out from 800 basis points (bps) to over 1000bps during the week.

In terms of its listed equity, it swung wildly and finished down around 25% for the week.

Jensen Huang (CEO of Nvidia) came out in public support of CoreWeave but this had limited impact.

Nvidia’s equity and debt were also affected, but to a much lesser extent.

The other main area of weakness has been in the semiconductor space.

In the US, the semiconductors led the move lower, finishing down eight consecutive sessions. This is the longest negative streak since May 2006 and memory stocks were at the epicentre, with Micron Technology and SanDisk lower in seven out of eight sessions.

South Korea’s Kospi stock index has been one of the largest beneficiaries of the AI investment boom and there are increasing parallels to price action moves in the Nasdaq in 2000.

It is important to remember that to some extent these issues may be self-correcting: any slowdown in future AI capex plans due to funding concerns actually reduces the total capital required and may partially alleviate the overall cost and availability of funding needed.

That said, we may see some further pain in AI players as they all eventually adjust to these new market conditions.

Markets

Meanwhile, despite the significant fluctuations in AI, the broader equity market continues to be hold up reasonably well. This is due to a rotation in the sector leadership with areas such as Healthcare providing stocks with new recent highs.

Even many Tech names, epitomised by the MAG 7, are only back to where they were at the beginning of October while Apple hit an all-time high during the week.

Last week we saw the kick off for quarterly results in the US. Earnings have been steadily revised up due to AI investment etc, but the median stock is still sitting on an elevated but reasonable multiple.

There are multiple ways to assess EPS growth and valuations but one of the simplest ways is the price/earnings-to-growth (PEG) ratio – and this is undemanding relative to history

While there are growing concerns in funding markets, outside of higher-risk areas credit spreads are relatively stable and benign at the moment.

Another area to watch in fixed income markets is in the Euro area, with French and Italian spreads to Germany bonds rising rapidly in recent periods.

While the overall Australian equity market had a solid week, we saw significant dispersion in various market components during the week.

Large caps did well while Small Caps were weak.

At the sector level AI trade linked sectors and stocks (IT, Resources, REITs with data centre exposure) were weak, while “old world” sectors such as Banks/Financials, Healthcare and Consumer Staples performed well.

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About Rajinder Singh and Pendal’s responsible investing strategies

Rajinder is a portfolio manager with Pendal’s Australian equities team and has more than 18 years of experience. Rajinder manages Pendal’s sustainable and ethical funds, including Pendal Sustainable Australian Share Fund.

Pendal offers a range of other responsible investing strategies, including:

• Pendal Sustainable Australian Share Fund
• Crispin Murray’s Pendal Horizon Sustainable Australian Share Fund
• Pendal Sustainable Australian Fixed Interest Fund
• Pendal Sustainable Balanced Fund
• Regnan Credit Impact Trust

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

Contact a Pendal key account manager here

ASX property: How to find the right data centre opportunities | How to approach fixed income amid rising bond yields | What investors may be missing in mid-caps

Here are the main factors driving the ASX this week, according to Pendal’s head of equities CRISPIN MURRAY. Reported by portfolio specialist Chris Adams

• Find out about Pendal Focus Australian Share fund

WHILE the cancelled Firmus IPO dominated local headlines, an easing of bond market concerns helped equities in what was otherwise a quiet week.

There was limited economic data, although purchasing managers indices (PMIs), an indicator of the outlook, continue to suggest the underlying global economy remains firmer than expected.

In the US, the S&P 500 gained 1.2% while locally the S&P/ASX 300 was up 0.4%.

Equity markets saw rotation away from AI/semiconductor sectors, partly due to some noise around OpenAI’s revenue run rate, however there were some issues with the accuracy of these claims.

The market for US Q3 earnings season to kick off for a lead on the latest AI capex updates and insight on the revenue benefits from that investment.

It is interesting to note that any expectation of slowing AI spend is now seen as bond friendly, due to less crowding out, and would lead to less monetary tightening which in turn would support the financial, consumer discretionary and REIT sectors.

In Australia the cancelled Firmus IPO was the main event. It was thwarted by an interplay of valuation, funding and execution concerns as well as a potential stock overhang.

This does not derail the company’s prospects, in our view, but we suspect we will see them undertake another private funding round and any future IPO to be in a different market.

Energy

Somewhat paradoxically, the oil price remains high (brent crude $104/bbl) while the flows through the Strait of Hormuz have returned to pre-war levels.

Around US$20 of the current price is estimated to be risk premium, reflecting the ongoing attacks on tankers going through the strait and fears of an escalation in the conflict either ahead of the US election by Iran – or after it by the US.

There is a significant additional issue with freight, as the movement of oil is relying on using smaller shuttle carriers through the strait, which then do ship-to-ship transfers which can tie up very large crude carriers (VLCCs) for up to 10 days.

In addition, 126 Iranian VLCCs are off the market (~13% of the global fleet) and a number of the tankers are taking longer routes.

All this means there is almost no spare capacity in freight, leading to transit costs rising to ~US$30/bbl and beyond, versus around US$2 to US$5 pre-crisis.

A buyer in China is now effectively paying close to US$140/bbl for oil from the Middle East, which is seeing them bid up for oil from other regions.

The likely outcome is that this will force European hydroskimming refiners (which produce lower-margin fuel oil) to curb production and reduce oil demand to alleviate the pressure, but this will add to the supply pressures on refined products.

There were attempts to alleviate the diesel shortage with the G7 announcing 100 million barrels to be released from emergency stocks over four months.

A portion of this had previously been announced, so it is not necessarily going to shift balances meaningfully, although there will be a greater focus on diesel releases over crude.

The release of Russian diesel announced by US President Donald Trump is also relatively small and likely to have limited impact.

This gets to the core challenge for markets; diesel is very expensive.

The price in AUD has doubled this year and this is an input into a broad range of sectors including mining, goods freight, agriculture, and building materials. We are beginning to hear about surcharges being reintroduced, all of which will continue to put pressure on inflation.

Global macro

There was limited data last week outside of the global manufacturing and services PMIs.

The latter signalled the global economy is getting stronger, despite all the issues with fuel prices.

This is good for equities and earnings but continues to put pressure on central banks to contain inflation.

Regionally the US is strong and in Europe, Germany is picking up.

The Fed and outlook for rates

The Federal Open Market Committee (FOMC) minutes provided the forward guidance that Chair Kevin Warsh is so reluctant to give, essentially signalling a pause in October but another hike before the year’s end and the need for at least two more hikes this cycle.

In addition, Fed Governor Christopher Waller, speaking at a central bank forum in Turkey, noted the reasons why he has pivoted from a previously more doveish perspective. The key factors were:

1. The persistence of disruption from the Iran conflict and the flow on effect to diesel prices,
2. The apparent flow on effect of the AI boom on other prices, and
3. The emergence of new potential tariff pressures (e.g. Canada).

Given inflation has exceeded the Fed’s target for five-and-a-half years, these new pressures may lead to a shift in expectations of inflation.

Markets

Bond markets were calm last week, with US 10-year yields ending down 4 basis points (bps) at 5.24%.

This Wednesday’s (US time) release of September consumer price index (CPI) data will be the next test.

Yields have backed up a lot recently, with the move exacerbated by market positioning and the need to hedge positions.

It appears this pressure has eased and the 10-year yield has found some resistance at 5.35%

The global AI/semiconductor sector was weaker last week, on not a lot of news flow.

Some noise around OpenAI’s revenue run rate may have been a factor, with reports that the end September number was US$50 billion versus previous reports of US$70 billion.

However there appear to be issues around the basis of this measure and accuracy of some of the statements.

Regardless, this does highlight the issue that the AI trade currently relies on Anthropic and OpenAI to underpin compute demand.

Both these companies are private, so don’t provide audited financial numbers and we don’t know how sustainable these revenues are.

For example, there is a view that Anthropic revenue is currently inflated by other companies using their models in the intensive phase of developing their own products but once completed, the likes of Microsoft and Meta may migrate to cheaper, open-weight models.

Overall, the tech sector retains good technical support going into US quarterly reporting season.

What saw a bounce in some of the rate sensitive sectors (REITs, consumer discretionary, utilities) last week, partly on the stabilisation in bonds which reduced the probability of a spike towards 6% yields, helped with the rating on these sectors.

It is also becoming apparent that the rate trade is negatively correlated to the AI trade on the view that the stronger the AI investment cycle, the higher rates will have to go and the more that will impact on rate sensitives.

The key sector to watch is financials, particularly banks, which have struggled since Warsh’s Jackson Hole speech on concerns high rates will negatively affect the economy.

The US financial sector appears technically oversold in a long run uptrend going into results, which start this week.

Australia saw a similar theme with REITs (+3.5%), utilities (+3.6%) and discretionary (+2.5%) performing the best last week.

The rally in rate-sensitive stocks reflects recent economic data showing weakening momentum across housing (building approvals down), manufacturing (PMI back in contraction), broader activity (composite PMI slowing), and consumer sentiment (falling to a six-month low).

If growth slows, this may limit the hikes required by the RBA.

There is risk to this view given the inflationary pressures we are seeing globally and the need for the Fed to continue to raise rates.

Australia is one of the most sensitive economies to rising fuel prices given its diesel usage, which may lead to ongoing inflation pressures even with lower growth.

When it comes to rate sensitives we believe we should distinguish between longer-duration bond sensitive stocks and those with economic risk (e.g. consumer discretionary) as the only reason for the RBA to stop hiking is a weak consumer, which would impact that sector’s earnings.

About Crispin Murray and the Pendal Focus Australian Share Fund

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 flagship Pendal Focus Australian Share Fund is a high-conviction equity fund with a two-decade track record 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. 

Find out more about Pendal Focus Australian Share Fund  

Contact a Pendal key account manager

Pendal Global Property Securities Fund (APIR: RFA0051AU ARSN: 108 227 005) (the Fund)

Investment Manager Update

AEW Capital Management, L.P. (AEW) has been appointed by Pendal Institutional Limited to manage the international property securities and cash of the Fund. AEW has notified Pendal of their intent to terminate the investment management agreement (IMA) between AEW and Pendal. The agreement will terminate on or before 11 December 2026, on a date yet to be determined.

As a result, we have commenced a review of the Fund to determine an outcome that is in the best interests of investors. We expect this review to be completed by 30 November 2026 and will provide investors with an update on the future of the Fund by that date.

During the review period, AEW will continue to manage the Fund in accordance with its investment strategy and will work closely with Pendal to support an orderly transition and the ongoing management of the Fund.

Applications from new investors

Pendal has decided not to accept applications from new investors while the review is underway.

Applications from new investors will not be accepted after 2.00pm (Sydney time) on Friday, 9 October 2026.

What do you need to do?

No action is required. Existing investors can continue to invest and withdraw from the Fund.

What happens next?

We are currently reviewing the future of the Fund and will provide investors with a further update by 30 November 2026. Until then, the Fund will continue to operate as normal and remain managed by AEW in accordance with its investment strategy.

Questions?

We thank you for your continued support. If you have any questions, please contact our Investor Relations Team during business hours on 1300 346 821.

Data centres have moved from a niche property segment to essential infrastructure, fuelled by cloud computing and a continued rise in AI-related demand. Pendal’s PETE DAVIDSON provides more insight

• Where investors can find data centre returns
• Why power, scale and valuations matter
• Learn more about Pendal Property Securities Fund

IN THIS video podcast, Pendal head of listed property Peter Davidson explains the scale and economics of the build-out, where property investors can potentially capture returns, and why access to power, capital and suitable sites matters.

He also examines the growing role of data centres in Australian listed property and the risks investors should weigh when assessing developers and valuations.

Here’s an excerpt from the video podcast:

“Of AI capex, about a quarter of it is data centres.”

“The pure juice in data centres, from a property investor’s point of view—the great returns at the moment—is really to be had in development.”

“The biggest constraint by far is the power—having the power and the power availability.”

“Data centres just become another sleeve of the opportunity set.”

Watch the full video interview

Listen to the audio version

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About Peter Davidson and Pendal listed property strategies

Peter Davidson is Pendal’s head of listed property.

Peter has held financial markets roles spanning portfolio management, advisory and treasury markets over more than three decades.

Specialising in the Property, Retail, Insurance and Infrastructure sectors, he has previously held roles with Midland Montagu Australia, Daiwa Securities and has served as the non-executive director of the Industry Superannuation Property Trust.

Pendal is an Australian investment management business focused on delivering superior investment returns for our clients through active management.

Pendal Property Securities Fund invests mainly in Australian listed property securities including listed property trusts, developers and infrastructure investments.

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About Pendal Group

Pendal is an Australian investment management business focused on delivering superior investment returns for our clients through active management.

Contact a Pendal key account manager

Here are the main factors driving the ASX this week, according to analyst and portfolio manager ELISE MCKAY. Reported by portfolio specialist Chris Adams

• Find out about Pendal Focus Australian Share fund
• Find out about Pendal Horizon Sustainable Australian Share Fund

THE bond market remains at the centre of discussions. 

The US 10-year bond closed last week at 5.28% after touching 5.34%, the highest since 2002, despite a soft payrolls print that effectively took an October US Federal Reserve hike off the table. 

The takeaway is that the long end of the yield curve is no longer pricing the policy path, but it is pricing term premium – compensation for uncertainty over the Fed policy direction, the Iran conflict and energy.  

On the latter, Brent crude held above US$100/bbl despite flows recovering and a further release of strategic reserves, with tightness migrating to refined products and a geopolitical premium that physical supply alone cannot unwind. 

In contrast, iron ore hit 52-week lows. 

In Australia, the RBA delivered its fourth hike of the year to 4.6% (the highest since 2011) but a softer inflation print has reduced the odds of another rate hike in November, and the consumer is visibly slowing. 

Equities have so far looked through all this on the strength of corporate earnings; the upcoming US reporting season will test whether this holds. 

The S&P 500 was off slightly (-0.3%), the Nasdaq gained 0.5% and the S&P/ASX 300 finished +0.1%.

Investors in Australia were quick to buy consumer discretionary on a potential pause in the rates hiking cycle. 

Tech also had its best week since August (+6.8%) driven by stock specific upgrades. 

US bond yields

US 10-year bond yields last week hit their highest point since 2002, piercing through both the 2007 and 2023 peaks.

We touched on the key drivers last week – the shift in Fed rhetoric, the energy shock, strong nominal economic growth and competition for capital from AI-related issuance.

There are two additional points to highlight this week:

First, the composition of the move:

• Friday’s softer payrolls report effectively removed the prospect of an October Fed hike, yet the 10-year yield still rose.
• This suggests long-end yields are no longer rising because investors expect the Fed to do more, but rather despite expectations that the Fed will do less.
• This means the market is increasingly demanding additional compensation for holding duration, reflecting uncertainty around inflation, energy prices, fiscal deficits, geopolitical risks and the future path of monetary policy.

Second, the shape of the curve is notable:

• During previous periods when the US 10-year traded around 5%, the Fed funds rate sat above the 10-year yield and the yield curve was inverted.
• Today, the Fed funds rate (3.75-4%) remains below long-dated Treasury yields, with the curve positively sloped and the 30-year Treasury yielding around 5.6%.
• This means the market is repricing long-term risks independently of the Federal Reserve, with investors demanding higher yields to hold long-duration assets.

Investor demand for duration remains another important question. For example, Goldman Sachs is posing the view that the buyer base for long-dated bonds may have structurally changed over the past decade.

Historically, higher yields would typically attract demand from relatively price-insensitive buyers, including insurers matching long-dated liabilities, sovereign reserve managers recycling trade surpluses into Treasuries and leveraged investors able to earn the carry trade through repo markets.

Goldman argues each of these buyer cohorts may be less important today.

Ageing populations are moving from accumulation to drawdown, reserve managers have increasingly diversified into assets such as gold, while leveraged investors have little incentive to add duration with carry compressed and recent bond-market losses still fresh.

If that assessment is correct, the marginal buyer increasingly becomes the unlevered household sector, which may require materially higher yields before stepping in.

While difficult to quantify, it provides one explanation for why yields have continued to rise despite reaching levels that historically would have attracted stronger demand.

The consequence is that bonds are increasingly behaving like a momentum asset rather than a traditional safe haven, in that rising yields are triggering further selling from systematic investors, hedge adjustment activity and reduced duration across portfolios.

While this dynamic can reverse sharply once buyers return, the catalyst remains unclear.

A meaningful de-escalation in the Middle East, a sustained decline in energy prices or greater certainty around the Fed’s reaction function could all provide relief, but none appear imminent.

For equities, higher yields have so far been offset by resilient earnings and ongoing economic growth.

The key issue from here is not simply the level of yields but the reason they are rising; equity markets can generally tolerate higher rates when they reflect stronger growth expectations, but they struggle more when yields continue rising despite evidence that growth is slowing.

With US reporting season commencing shortly, investors will be watching closely to see whether earnings remain strong enough to justify current valuations against an increasingly challenging bond market backdrop.

Positioning remains surprisingly cautious – Goldman Sachs estimates US hedge fund net exposure has fallen to its lowest level since April 2025 and is close to five-year lows, despite major equity indices trading near record highs.

Investor reluctance to add risk reflects ongoing concerns around oil, interest rates and geopolitics.

Notably, Russell 2000 positioning remains extremely depressed, with systematic exposure near the 7th percentile and leveraged funds carrying record short exposure, suggesting significant short-covering potential should yields stabilise.

Conversely, healthcare experienced significant short covering during the week, while energy remains heavily under-owned despite oil prices remaining above US$100/bbl. 

US macro and policy

Data released on Friday suggests a labour market which is stable with softer payrolls, a slightly higher unemployment rate (+3 basis points to 4.18%) and muted wages (average hourly earnings +0.1% month/month and +3% year/year) not indicative of an economy which is overheating. 

Payrolls increased by 29,000 in September (versus consensus at +90,000) with -60,000 revisions to the prior two months. 

As a result, monthly gains averaged just 51,000 in Q3, down from 81,000 in Q2.

A pause at the Fed’s October meeting, signalled by Federal Reserve Vice Chair Philip Jefferson and New York Fed President John Williams before the employment report, looks very likely with the market only pricing a 22% chance of a hike.

Beyond payrolls, other US data was broadly consistent with a gradual cooling rather than a sharp slowdown.

• Weekly jobless claims remained near cycle lows, suggesting employers continue to hoard labour despite tighter financial conditions.
• Personal consumption expenditures (PCE) inflation was broadly in line with expectations and revisions were marginally dovish.
• Manufacturing surveys continued to point to ongoing cost pressures, reinforcing the view that while the labour market is easing, inflation risks have not fully disappeared.

This combination helped remove expectations of an October Fed hike, although longer-dated Treasury yields continued to rise as investors focused on inflation, fiscal and geopolitical risks rather than near-term monetary policy.

Oil

Brent crude finished the week at $102/bbl despite data showing Middle Eastern crude exports recovering to ~95-98% of pre-war levels, in addition to the US announcing a 40 million barrel strategic reserve release. 

The resilience in prices suggests factors beyond physical crude availability are driving the market. 

First, markets continue to assign a significant geopolitical risk premium to oil.

• While flows through the Strait of Hormuz have largely normalised, investors remain concerned that if Iran cannot materially disrupt tanker traffic it could instead target ports, pipelines or energy infrastructure, leading to a more severe supply shock.
• This risk premium was reinforced during the week by reports the US was considering deploying additional naval assets and troops to the region.

Second, investors increasingly view energy as an inflation hedge as bond yields continue to move higher.

• Higher oil prices contribute to inflation concerns, while inflation concerns support demand for energy exposure, creating a somewhat self-reinforcing dynamic.

The market’s focus has also shifted from crude to refined products. While crude exports have largely recovered, diesel and other product markets remain tight due to ongoing logistical disruption, constrained Middle Eastern product exports, Russian export restrictions and lower Chinese product exports.

As a result, refining margins remain elevated even as crude flows improve. 

The release of 100 million barrels from G7 strategic reserves (split between half crude and half diesel) helps – as well as confirmation by Trump that a US export ban is off the table – but does not fully address the issue. 

For context, a 50 million barrel release over four months is roughly equivalent to 416,000 barrels per day – versus a ~1.6 million barrel/day disruption to diesel from disruption in the Middle East and Russia, in a 30 million barrel/day diesel market. 

The key question from here is what breaks the cycle.

A return to negotiations and continued recovery in Middle Eastern exports could gradually unwind the geopolitical premium and allow inventories to rebuild at lower prices.

Conversely, any escalation in the conflict or disruption to infrastructure could see the current risk premium persist, with inventories needing to be rebuilt at materially higher prices.

Iron ore

Iron ore fell to a 52-week low of US$92.1/t, with Chinese demand seasonally soft during the Golden Week holiday period (through to 7th October).

Free on board (FOB) prices – which reflect production, shipping to port and loading onto the ship – have declined to approximately US$75/t in Australia (-16% since February) and US$48/t in Brazil (-35% since February), while freight costs briefly reached US$43/t last week.

Early signs of supply discipline are beginning to emerge, with three Brazilian producers announcing output curtailments over the past month.

Given the steep and highly elastic iron ore cost curve, lower prices are likely to drive a market rebalancing over time.

Australian producers remain among the lowest-cost suppliers globally, but investor sentiment has deteriorated, with short interest in both Fortescue (FMG) and Rio Tinto (RIO) reaching one-year highs as the earnings impact of lower prices is yet to fully flow through.

Ongoing discussions with China’s centralised unit buying on behalf of steel mills – China Mineral Resources Group (CMRG) – add to uncertainty by creating product placement and demand risks across the sector.e “AI as a tailwind to software” pivot is supportive for Xero, Technology One and Wisetech. But it remains important that these companies deliver positive earnings with any misses potentially interpreted as supporting the AI disruption thesis. 

Australia macro and policy

The RBA raised the cash rate by 25bps to 4.60%, marking its fourth rate increase of 2026 and taking the cash rate to its highest level since 2011.

The decision was unanimous and reflected the Board’s continued concern that inflation remains above target despite signs that household demand is slowing.

Consumer spending softened further through September as households continued to reallocate spending away from discretionary categories and toward essentials.

Higher fuel prices, rising utility bills and elevated mortgage repayments are increasingly absorbing household budgets, with spending holding up in fuel, pharmacy, groceries and travel, while household goods, fashion, dining out and recreation remain softer.

The latest rate increase is likely to reinforce these trends heading into the important Christmas trading period.

Inflation data released during the week was modestly softer than expected, with August trimmed mean CPI rising 0.24% month/month versus market expectations of 0.3%.

The result provided the RBA with some breathing room and saw markets significantly reduce expectations of a follow-up rate hike at the November meeting.

Despite the softer inflation print, several near-term inflation risks remain.

Rising oil and diesel prices continue to place upward pressure on transport, logistics and household fuel costs, while the removal of payment surcharges from 1^st October has prompted a wave of announced price increases across parts of the consumer and service sectors as businesses seek to recover those costs through headline pricing.

As a result, while demand conditions are weakening, inflation is likely to remain uneven across the economy.

The key question for markets is whether slowing consumption and a weaker consumer ultimately outweigh these cost pressures – if spending continues to deteriorate and inflation moderates further, the RBA may be able to leave rates unchanged.

However, sustained energy price inflation and ongoing cost pass-through from businesses could slow the disinflation process and delay any future policy easing.

Markets

In Australia we saw strength in technology (+3.5%), consumer discretionary (+2.6%) and communication services (+1.8%), while healthcare (-1.4%) and energy (-1.1%) underperformed.

Stocks were driven by changing expectations for the rate hiking cycle, M&A activity and the occasional upgrade last week.

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About Elise McKay and Pendal Australian share funds

Elise is an investment analyst and portfolio manager with Pendal’s Australian equities team. Elise previously worked as an investment analyst for US fund manager Cartica where she covered a variety of emerging market companies.

She has also worked in investment banking and corporate finance at JP Morgan and Ernst & Young.

Pendal Horizon Sustainable Australian Share Fund is a concentrated portfolio aligned with the transition to a more sustainable, future economy.

Pendal Focus Australian Share Fund is a high-conviction equity fund with a 16-year track record of strong performance in a range of market conditions. The Fund is rated at the highest level by Lonsec, Morningstar and Zenith.

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management. 

Contact a Pendal key account manager here

Here are the main factors driving the ASX this week, according to Pendal’s head of equities CRISPIN MURRAY. Reported by portfolio specialist Chris Adams

• Find out about Pendal Focus Australian Share fund

MARKETS are focused on the global rise in bond yields which pushed US 10-year yields up 15bps last week – or more than 40bps for the month.

The yield hit 5.16% on Friday and by Monday had passed 5.2%.

This has been driven by a shift in Fed rhetoric earlier this month, as well as high fuel prices, strong economic growth and a high degree of debt issuance.

This has not yet affected US equity markets. The S&P 500 gained 1.2% last week and the Nasdaq rose 2.1%.

This is because economic growth remains supportive, while the debt supply issue relates to AI investment – which is also helping drive earnings.

Energy markets were flat-to-down last week, on evidence of more oil getting through the Strait of Hormuz. Overall, oil flows from the Persian Gulf could be only 3-to-5 million barrels per day below pre-conflict levels.

However, refined product and LNG flows remain more constricted and prices remain very elevated. There is an increasing probability (albeit still well below 50% in our view) of some form of US diesel export restriction, which would be bad for the rest of the world.

Brent crude finished up 0.4% at US$104.3/bbl, while NYMEX Crude fell 7.9%.

The US-China summit was largely uneventful unless you’re a panda enthusiast. But two more meetings are planned this year and dialogue reduces the risk of a renewed escalation in tensions.

Australia saw a slight easing in employment tightness, but nothing of substance to shift expectations of an RBA rate hike this week (currently priced at 90% probability).

The S&P/ASX 300 shed 0.8% for the week.

On the stock front, the launch of Meta’s Muse AI assistant product ignited renewed concerns over companies that rely on consumer inertia in terms of pricing and margin (such as travel, insurers and subscription-related businesses).

Bonds

Markets remain focused on rising bond yields, although the impact on equities has been muted so far.

Yields are rising due to a combination of:

1. The Fed striking a hawkish tone. On September 16 the Fed unanimously voted to raise rates, and language such as “removing accommodation” suggests they are not seeing one hike as enough. They are framing the context as an inflation rate that has been above target for five years, while unemployment rates remain low. The signal is that they are catching up to a sustained problem – rather than reacting to recently inflation data – which suggests more resolve for further tightening.
2. The energy shock. With inflation now above target for five years, the Fed believes it has no buffer to allow another supply shock without a policy response if it wants to maintain inflation expectations and credibility.
3. A strong economy. USD GDP is growing at a nominal 5-6% and we saw very strong global purchasing managers indices (PMIs) last week.
4. Competition for capital. The Fed is focusing on the short end of the yield curve and is letting the market set the 10-year yield. Here, at the long end, yields are not just about inflation and real yields – supply of and demand for debt are also a factor. There were two poorly supported auctions of five-year and 20-year auctions last week, highlighting weaker demand to step in and buy yields at these levels. This reflects concerns about increasing supply as even while the government is shortening its issuance the private sector (driven by AI capex) is adding to supply at longer durations. 

The supply issue is exacerbated by expectations of rising demand for private funding – also mainly driven by AI capex.

Traditional buyers at the long end of the yield curve – such as pension funds and insurers – are understandably wary of stepping in given supply, geopolitical uncertainty, inflation and growth.

This means yields have been pushing higher. While there is an argument they may look cheap, we note they can remain cheap for an extended period.

The other related issue is why this has not weighed on equities. The reasons are:

1. The pace of the rise in yields has been relatively moderate. 10-year yields had held their 4.8% level until this month. The spike to 5.15% in the last two weeks is the first time we have a more material step higher in a short space of time.
2. The rise in yields reflects good economic growth. At the same time debt supply relates to the need for AI investment, which is also broadly positive for equities and for pricing power in certain industries. Therefore the market is not yet viewing rising yields as de-railing the outlook for growth. This can be seen in credit spreads (excluding technology, where supply is an issue) remaining low.
3. Earnings growth remains strong. This has allowed equities to de-rate as well as rise, consistent with the rise in real yields. S&P 500 return on equity (ROE) has also risen materially, supporting the market rating.

In terms of earnings, we are two weeks away from the first third-quarter results.

The market expects a deceleration from last quarter’s 50% year/year S&P 500 EPS growth – but a still-strong level in the high 20%-30% range.

Macro

The September US S&P Global Composite PMI – a leading indicator of economic activity – hit the survey’s highest point since early 2022.

The Composite measure came in at 58.4 versus 56 in August and 53.7 expected.

The Services PMI was 58.7, versus 55.8 forecast, while the Manufacturing PMI was 57 versus consensus at 55.3.

The implied growth in GDP is around 4% for the quarter – well above consensus expectations – while the employment component was at a four-year high.

Most analysis downplayed the survey’s strength as it was not consistent with other manufacturing and services surveys – such as those from the Philiadelphia and Richmond Federal Reserves – which indicate more moderate growth.

This does highlight that the US economy has a very different feel to other parts of the world. A lot of capital is being deployed there due to cheaper energy, a lighter regulatory environment and the tail wind of AI.

It also indicates that US growth remains well supported despite the rise in yields and energy costs.

This can be seen in the Goldman Sachs current activity indicator – a “real-time” measure of growth – which has been rising in recent months and is seeing tailwinds from the manufacturing sector.

This differential is helping support the US dollar.

Energy markets

Global refining capacity is under pressure from closures and disruption in both the Middle East and Russia.

As a result, jet fuel, diesel and LNG have all seen far greater moves in price relative to oil.

In the US, for example, diesel has risen to US$6.50/gallon, up from around US$3.50 before the attack on Iran and well in excess of the previous highs reached in the wake of Russia’s invasion of Ukraine.

Diesel is key input for agricultural industries. As we head into US midterm elections this could affect some key Senate and state contests.

As a result there has seen speculation around some form of diesel export restriction from the US.

This is almost universally seen as bad policy that could potentially create chaos in global refined product markets. The US is a key supplier to the rest of the world and restrictions could trigger a scramble for product.

It could also potentially lead to a cut in supply in the US if it led to a rebuild of inventory to the point where storage costs rose too high and refiner margins fell.

There is a view that any restriction may be only partial and for a limited-time period, which may limit some of the effects.

But there is risk of a further 10-15% increase in refined product prices outside of the US. This would be material for large diesel-consuming countries including Australia.

In terms of oil, there appears to be enough flowing through the Strait of Hormuz to check prices moving meaningfully above US$100/bbl.

The East-West Pipeline in Saudi Arabia is resuming operations. Overall there seems to be a shortfall of about 3-to-5 million barrels per day in terms of oil flows from the Persian Gulf, versus pre-conflict (ie we are at 70-80% of pre-war levels).

This continues to be mitigated by lower demand from China and release of strategic petroleum reserves.

US-China Summit

There were no specific measurable outcomes from talks between Presidents Trump and Xi.

There was a two-month extension to the current tariff waiver (to January 10); additional summits pencilled in for November and December; and the loan of giant pandas Ping Ping and Fu Shuang to the Atlanta Zoo.

That said, it is important that dialogue is ongoing despite issues with AI, trade, Taiwan and Iran.

Beijing eased its Taiwan rhetoric as the US delayed arms sales, though on Iran there was little comment of substance.

Neither side can afford to be more aggressive on trade.

The US remains reliant on critical commodities from China while China relies on imported microchips. Beijing did agree to buy 10 million tonnes of coal in 2027 and 2028.

On AI, China said it “respects” the Trump Administration’s push to rebrand AI as “super intelligence”.  Both countries agreed to a bilateral communication channel, though there was no action on slowing AI development.

Australia

August employment data indicated that tight labour markets have eased somewhat. The unemployment rate rose from 4.5% to 4.6% – the highest in five years.

This was driven by higher participation while labour supply grew – probably as people feel compelled to re-join the workforce for cost-of-living reasons.

Employment rose by 40,000 in the month – more than expected, but all driven by part-time work.

Hours-worked picked up marginally, but was still lower over the last three months versus the prior half-year, which suggest demand is softening.

Overall there was nothing to stop the RBA from hiking this week.

The RBA’s challenge is it needs GDP growth to fall to below 1.5%. Given population growth, government spending and corporate investment, this indicates the consumer has to be slowed, probably to 1% growth or below.

This factor will drive the number of rate hikes.

The only issue that could prevent rates going up more than once more is the housing slowdown or the impact of fuel prices hitting the economy harder.

Either way, we remain wary of consumer discretionary stocks.

About Crispin Murray and the Pendal Focus Australian Share Fund

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 flagship Pendal Focus Australian Share Fund is a high-conviction equity fund with a two-decade track record 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. 

Find out more about Pendal Focus Australian Share Fund  

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