The long-forecast US recession has been delayed once again, says ASHLEY PITTARD, who heads up Pendal’s Global Equities investment team

• Capex spending to boost economy
• Tech stocks selection critical
• Find out about Ashley Pittard’s Pendal Concentrated Global Share Fund

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BANK of America last week became the first big Wall Street bank to reverse its recession call.

Are they right?

“Given the strong capital expenditure numbers we are seeing in the US June quarter earnings season, it’s going to be very hard for the US to have a recession this year,” says Ashley Pittard, who heads up Pendal’s global equities investment team.

“Over the last ten years, US companies under-invested. Since the global financial crisis, only 38c in every dollar that was generated from operations or borrowed, was invested.

“Before the global financial crisis it was 53c.”

Instead, corporate America has spent more on share buybacks, notwithstanding the very low interest rates during the period and a pretty good economy, Pittard says.

But this US earnings season, corporate America looks to be taking a different view.

“What you are seeing in the earnings numbers, and what you have seen the entire year, is that capital expenditure is accelerating – 15 per cent in the current quarter, year-on-year, and 14 per cent in the first quarter.

“It’s very hard to have a recession when you capital expenditure is so high,” Pittard says.

The key reason for the boost in capex is re-shoring of operations, post-Covid in a more fraught geo-political environment.

“A couple of years ago, no-one mentioned re-shoring. This earnings season, mentions have gone exponential,” he says.

That’s the headline outcome of Wall Street’s earnings season.

US earnings are beating estimates

In terms of numbers, earnings have beaten estimates by about four per cent, and by one per cent on sales, Pittard says.

“We are seeing better margins.

“The ‘beats’ are about the historical average, so it’s been a nice earnings season.

“Where you’ve seen most headwinds is in energy, year-on-year, and that’s because prices are lower.

“Materials have come back due to softness in China. And the low-end semi-conductor sector has been weak, cutting their guidance and outlining high inventory levels.”

The outlook for tech

In terms of the Wall Street technology companies, which have outperformed for much of this calendar year, Pittard says investors need to be selective.

“One of the core themes in our concentrated share fund since the beginning of the year was keep the COVID losers but be selective on 2022 losers. And 2022 losers were mostly tech stocks,” he says.

Ashley’s Pendal Concentrated Global Share fund has substantial positions in Amazon, Google, Netflix, Meta and Warner Bros. Discovery.  

“We have been selective. We don’t own Apple, Microsoft, Nvidia and Tesla.

“With Apple, Microsoft and Nvidia, it comes down to valuation.

In the case of Apple and Microsoft, they are trading on a price-to-earnings multiple of 33 times. If they can’t get sustainable growth, then that PE is coming down.

“In Apple’s case, the only thing that grew last quarter was their service business.”

Some of the other tech stocks, such as Meta, Amazon and Google, also have the ability to lower costs, Pittard says.

“They are the businesses which have a better skew towards where the growth is, particularly Artificial Intelligence.”

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About Ashley Pittard and Pendal Concentrated Global Share Fund

Ashley Pittard leads Pendal’s Global Equities investment boutique. He is responsible for setting the strategy, processes and risk management for the boutique and its funds including Pendal Concentrated Global Share (COGS) Fund.

Ashley has more than 24 years of finance experience, including roles in petroleum economics, global energy investment analysis and 20 years as a global equities fund manager.

Pendal COGS Fund is an actively managed, concentrated portfolio of global shares diversified across a broad range of global sharemarkets.

Find out more about Pendal Concentrated Global Share Fund

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, Pendal’s head of global equities ASHLEY PITTARD makes the case for quality banks ahead of a likely US recession

• UBS, JP Morgan, Wells Fargo top picks
• US recession likely; should trigger a steepening of the yield curve
• Find out about Ashley Pittard’s Pendal Concentrated Global Share Fund

THE turmoil among global banks over the past six weeks has created opportunities for investors, with Swiss based UBS and Wall Street giants JP Morgan and Wells Fargo the top picks, says Ashley Pittard, our head of global equities.

“I think UBS is a standout for the next ten years as an investment,” he says.

“You want to invest in a bank that’s one or two in its market, and has high quality management.

“Bank stocks can go down in a crisis environment, but the quality banks don’t go broke and that’s a key point.”

Banks should do well in coming quarters as they reprice credit and achieve higher margins.

“Near term, interest rates have stopped rising and the yield curve is flattish or even inverted.

“But if we fast-forward through the year, we believe there’s going to be a recession in the US. That would likely mean the Federal Reserve will have to cut rates into next year.

“The yield curve will steepen and that’s good for banks because they borrow short and lend long and they are going to get a wider spread. That will feed back in a couple of years’ time into higher earnings.”

The current turmoil could push out weaker lenders who aren’t pricing loans rationally — which would help the top banks.

Short-term risks

Pittard warns there are risks in the short term.

“What are the write-downs going to be, particularly if the recession is hard? That’s the big near-term risk.

“That’s why you want to be with the highest quality banks – number one or two in their market.”

On UBS, Pittard says its metrics are strong. It has just absorbed its second largest competitor, has a 30 per cent plus share in retail banking in Switzerland, and is the number one global bank for ultra-high net worth individuals.

Importantly, UBS has strong management, he says.

“The new CEO, Sergio Ermotti, is the Tom Brady of European banking,” Pittard says, referring to most successful quarterback in US football.

Ermotti left the bank in 2020 after a successful stint, and then took the top job again on April 5.

“He first came to UBS after the global financial crisis and got them out of high-risk investment banking, increased market share in their ultra net worth business, and boosted dividends and the stock price. 

“He just grinds away. He gets costs out of the business, right sizes the riskier parts and gives money back to shareholders.”

Pittard says two US bank stocks worth looking at are JP Morgan, run by the very experienced Jamie Dimon, and Wells Fargo, run by Charles Scharf.

“Dimon is the last remaining US bank CEO who actually went through the GFC,” Pittard says. “Scharf got the CEO job at Wells Fargo in late 2019 and has cleaned it up and ticked all the boxes.”

In terms of why the global banking sector found itself in its current situation, there are several factors, Pittard says.

“There were poor management practices. There’s also been mishandling of the repricing of the rapid interest rate changes over the last year. You’ve also had volatility around what the US Federal Reserve is going to do.”

Pittard says there’s also a regulatory overlay.

“When Donald Trump was in power, he rolled back some of the banking regulations that were put in place directly after the global financial crisis which meant the regulation of smaller banks, like Silicon Valley Bank, was lighter than regulation of the big banks,” Pittard says.

“Also stress testing of the bank last year didn’t consider large jumps in interest rates, which is what actually happened.”

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About Ashley Pittard and Pendal Concentrated Global Share Fund

Ashley Pittard leads Pendal’s Global Equities investment boutique. He is responsible for setting the strategy, processes and risk management for the boutique and its funds including Pendal Concentrated Global Share (COGS) Fund.

Ashley has more than 24 years of finance experience, including roles in petroleum economics, global energy investment analysis and 20 years as a global equities fund manager.

Pendal COGS Fund is an actively managed, concentrated portfolio of global shares diversified across a broad range of global sharemarkets.

Find out more about Pendal Concentrated Global Share Fund

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.

A US recession is highly likely, but it will be shallow and provide compelling valuations for global equities investors, says Pendal’s ASHLEY PITTARD

• Capex to underpin US growth 
• CHIPS and Science Act drives US138bn in spending
• Find out about Ashley Pittard’s Pendal Concentrated Global Share Fund

THE great re-shoring of American industrial production will help the US avoid a deep recession this year and could underpin strong economic growth for the next decade, says Pendal’s Ashley Pittard. 

The Biden government this month opened applications for some US$53 billion in manufacturing subsidies under the CHIPS and Science Act, which seeks to boost domestic semiconductor and high-tech manufacturing. 

Already, US$138 billion of capital spending has been committed from companies including Intel, Samsung, Texas Instruments, Micron Technology and GlobalFoundries. The first new facilities are expected to be operating as soon as this year. 

“It’s just like Warren Buffett says: never bet against America,” says Pittard, who manages the Pendal Concentrated Global Share Fund. 

“The US always was and still remains a powerhouse in manufacturing.” 

The tailwind of bringing manufacturing capacity back onshore will drive capital expenditure back to its pre-2000 levels, believes Pittard. 

“It is going back to pre-peak-globalisation — and should compound 5 to 6 per cent a year which would give you a nice buffer. That’s why we don’t think the recession will be that deep in the US.” 

Capital expenditure a critical driver

Capital expenditure is a critical driver of economic growth, says Pittard. 

“You’re not just putting a digger in the ground. You need to hire people to help with permits, you need builders, you have to buy the equipment, you have to have the equipment installed, you need to find a high skilled workforce. It’s pure Reagan trickle-down economics,” says Pittard. 

It’s a big turnaround for the US, which has long seen companies move production offshore to take advantage of cheaper labour in China and south-east Asia. 

The trend to outsourcing means capital expenditure has grown at an annual rate of just 3 per cent since 2000 compared to the 5 per cent plus clip in the prior two decades. 

The decline in capex growth was largely due to falling spending on technology, consumer electronics and apparel. 

The average American company now outsources between 25 and 50 per cent of production, compared to a 10 per cent outsourcing rate in comparable firms in the UK and Europe, Pittard says. 

“They do it because they get a higher return on capital. They’ve got supply chains and just in time inventory and all that stuff. 

“But what they learned from COVID and China’s lockdowns and war is that the sales that you lose by outsourcing that production just isn’t worth it now. 

“America is saying ‘for the sake of national security, for the sake of jobs, let’s bring it all back so that instead of giving jobs to the rest of the world, we’re bringing them back to the US’.” 

Pittard says onshoring is estimated to create an additional 200,000 jobs a year which is a 1.4 per cent boost to the total US manufacturing labour force. 

US ‘highly attractive’

The upshot for investors? The US remains a highly attractive market, says Pittard. 

“The caveat of course is if the Fed hits us over the head with a hammer by raising rates too aggressively, but there’s a tailwind from this higher capital expenditure which will help buffer the economy. 

“The CHIPS and Science Act is an awesome act.

“It was passed in November last year and this week was the first implementation and already you’ve had the $140 billion in investment that will all kick in over the next two years. 

“Peak globalisation went too far.” 

Pittard says investors should ensure they have a good industrial base in their portfolios and be selective on the big technology companies that benefit from the re-shoring. 

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About Ashley Pittard and Pendal Concentrated Global Share Fund

Ashley Pittard leads Pendal’s Global Equities investment boutique. He is responsible for setting the strategy, processes and risk management for the boutique and its funds including Pendal Concentrated Global Share (COGS) Fund.

Ashley has more than 24 years of finance experience, including roles in petroleum economics, global energy investment analysis and 20 years as a global equities fund manager.

Pendal COGS Fund is an actively managed, concentrated portfolio of global shares diversified across a broad range of global sharemarkets.

Find out more about Pendal Concentrated Global Share Fund

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.

It could be time for US equities investors to take a bit of money off the table in some sectors, says Pendal’s ASHLEY PITTARD

• Wall St earnings season stronger than expected
• Macro-economy remains the wildcard
• Find out about Pendal Concentrated Global Share Fund

THE macro-economy – inflation, growth, employment – drives top-line sentiment among investors.

But earnings in sectors and companies drive the valuation of specific stocks, notes Pendal’s head of global equities Ashley Pittard.

This was demonstrated recently by a better-than-expected result for Facebook-owner Meta which pushed its share price up 25 per cent.

As the graph below shows, it then fell back sharply, albeit briefly, when stronger-than-expected labour force figures in the US hinted at further interest rate rises, taking the steam out of Wall Street.

Still, earnings season allows investors to look beyond the big picture.

“We’re about halfway through US earnings season and we’ve seen earnings growth fall by about 3 per cent, which is marginally better than what was forecast,” says Pittard, who manages Pendal Concentrated Global Share Fund.

Sectors to watch

While the energy sector has been the out-performer, thanks to very high prices, consumer discretionary stocks have been the surprise packet so far this season.

“The worst-case scenarios for the US consumer have been averted and they’re looking okay. It reinforces the view that if there is a recession, it should be mild.”

The laggards, as expected, have been the technology stocks.

“Across the economy, you are now seeing a normalisation of spending on technology and a slowing of cloud build outs,” Pittard says.

“As a result, you are seeing cost savings announcements and capital expenditure cuts in the big tech companies.”

Across the earnings season there have been plenty of signs of easing inflationary and supply chain pressures.

At Amazon, for example, shipping costs as a percentage of gross merchandise value is back to 2019 levels and is trending lower.

Pittard notes one exception is Apple, where the company has been hit hard by production lockdowns in China.

Time to take money off the table

Pittard believes it’s time to “take a little bit of money off the table” when it comes to energy stocks.

“I’m only talking about a couple of percentage points, and I’d use that to invest in the 2022 losers — that’s companies like Netflix, Warner Bros, Meta, Alphabet and Amazon,” he says.

Pittard uses Meta, which owns Facebook, Instagram and WhatsApp, to illustrate his point.

“After Meta’s earnings result its share price jumped 25 per cent. That’s because it was beaten down so much in 2022 – it fell nearly 65 per last year.

“When Meta said advertising revenue wasn’t as bad as people had thought, and they’re taking cost cutting measures and reducing capital expenditure, the share price surged.

“In summary, you want to be fully invested,” Pittard says.

“Earnings are coming through better-than-expected. There’s a lot of hurt in the market already from what happened last year.”

But investors need to be selective.

“You want to keep your financials because the recession will be mild. You want to keep your industrials because of the re-shoring that’s going on.

And you can be selective in technology and consumer discretionary.

“Investors should use the strength of their energy investments to rotate into some of those assets. “

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About Ashley Pittard and Pendal Concentrated Global Share Fund

Ashley Pittard leads Pendal’s Global Equities investment boutique. He is responsible for setting the strategy, processes and risk management for the boutique and its funds including Pendal Concentrated Global Share (COGS) Fund.

Ashley has more than 24 years of finance experience, including roles in petroleum economics, global energy investment analysis and 20 years as a global equities fund manager.

Pendal COGS Fund is an actively managed, concentrated portfolio of global shares diversified across a broad range of global sharemarkets.

Find out more about Pendal Concentrated Global Share Fund

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

In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.

Contact a Pendal key account manager here.

A US recession is highly likely, but it will be shallow and provide compelling valuations for global equities investors, says Pendal’s ASHLEY PITTARD

• US recession is highly likely but should be shallow
• Invest through it with 2022 losers such as Amazon and Netflix
• Find out about Ashley Pittard’s Pendal Concentrated Global Share Fund

A US recession is likely this year – but won’t be as bad as previous downturns, ironically because of Covid and the deterioration of global trade flows in recent years.

That’s the view of Pendal’s head of global equities Ashley Pittard.

“It’s highly, highly likely that there’s going to be a US recession this year,” says Pittard.

“But there’s a difference this time around because of robust capital expenditure. It’s clear this recession is going to be shallow.”

“Yes, we are going to have a recession – but so what? Invest through it, because valuations are compelling.

“There’s been a de-rating of the market and we are going to have earnings growth when we get out of this downturn.

“Inflation has peaked and is on the decline and the Fed is nearly finished raising rates.”

Onshoring drives economy

Breaking that comment down, Pittard says the trend towards onshoring of manufacturing in major economies, including the US, is driving economic activity.

Onshoring is a direct result of the disruption of trade flows — firstly from a deterioration in international relations between major players such as the US and China, and secondly from Covid-induced shutdowns to shipping.

Add in big tax incentives from Washington — particularly for infrastructure and manufacturers via the Inflation Reduction Act of 2022 — and there’s plenty of reason to think some sectors of the US economy will do well, Pittard says.

“Just look at what’s happened in 2023 so far – the market is up 5 or 6 per cent,” Pittard says.

“Why? Well markets pre-empt. Investors are saying there probably will be a recession around the middle of the year.

“But by that time the Federal Reserve will have stopped raising interest rates. All the news about the recession the market already knows — and so has priced it in.”

Earnings decline priced in

Knowledge is flowing through in earnings estimates for 2023, which forecast a fall in income of somewhere between 4 and 10 per cent.

“Let’s say the average is 7 per cent or 9 per cent if you strip out energy,” says Pittard.

“The market has already taken all that into consideration. Right now, on a price-to-earnings multiple, the market is very close to the long-term average.

“Investors are saying ‘yes, earnings will be down’ …. and they’ve brought the PE multiple back four points, from 21 to 17 points.

“But once we get through a mild recession our earnings growth on a three-to-five-year horizon should be pretty good.

“That’s because of capital expenditure. It’s also because of the unemployment rate which is around 3.5 per cent. Even if it went to 6 per cent, that’s still historically low.

“And wages growth is averaging 5 per cent and it’s not going away. Meanwhile, supply chain inflation is reducing, and commodity inflation has declined dramatically.”

What it means for investors

The obvious question is: ‘where should investors be thinking about putting their money?’

“Last year we were pushing the Covid losers – financials and energy — and they’ve done very well.

“Going forward you still want some of those names, but also you need some of the 2022 losers.

“Names like Amazon, Netflix and other media streaming assets. You’ll want to be fully invested.

“You want to have Covid losers plus selective 2022 losers.”

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About Ashley Pittard and Pendal Concentrated Global Share Fund

Ashley Pittard leads Pendal’s Global Equities investment boutique. He is responsible for setting the strategy, processes and risk management for the boutique and its funds including Pendal Concentrated Global Share (COGS) Fund.

Ashley has more than 24 years of finance experience, including roles in petroleum economics, global energy investment analysis and 20 years as a global equities fund manager.

Pendal COGS Fund is an actively managed, concentrated portfolio of global shares diversified across a broad range of global sharemarkets.

Find out more about Pendal Concentrated Global Share Fund

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.

US earnings point to better days for industrials, supply chain and energy stocks following over-investment in tech, argues our head of global equities ASHLEY PITTARD

• Capital spending should soften recession impact
• Industrials and banks the likely market winners
• Find out about Ashley’s Pendal Concentrated Global Share Fund

A WEAKER earnings season in the US is indicating a recession is likely next year, but there is evidence it could be mild and short-lived as capital spending offsets slowing consumer demand, says Pendal’s Ashley Pittard.

Nine in ten S&P 500 companies have reported their third quarter earnings, with results largely in line with analysts’ expectations.

In a market where the average company typically beats earnings forecasts by 2.7 per cent, the overall picture is one of a weakening economy, says Pittard, who heads Pendal’s global equities team.

Pittard says one of the most telling signals out of reporting season was the way companies were punished by the markets when they missed forecasts.

“On average, when a company missed this earnings season its share price fell more than 6 per cent. That’s the biggest average fall ever. What that tells us is that we are at a tipping point in the markets,” he says.

Mild recession

There was also a spike in the number of companies mentioning softening demand in their earnings reports this quarter. That’s a measure that traditionally rises prior to a recession, says Pittard.

“In this earnings season, the number of companies mentioning weak demand is at the same highs as it was in the global financial crisis and Covid,” he says.

Still, indications are that any recession should be mild because there are signs companies are stepping up their investment in rebuilding supply chains post the pandemic.

“Capital expenditure by corporations is up 24 per cent year on year — that’s a real positive that may help any recession be milder,” says Pittard.

“It’s companies ‘re-shoring’ supply chains and bringing jobs back to America.”

To be sure, the strong US dollar is counting against corporate America, with the foreign exchange rate at its highest levels for seven years.

“It’s a mixed bag. It’s like a rip tide dragging out to sea while the tide’s coming in — there’s choppy waters ahead.

“You’ve got all of these positives, but you’ve also got a few negatives.”

Which sectors look good in 2023

For global equities investors, the story of the coming year will be one of correcting a “misallocation of capital” that occurred during the pandemic, says Pittard.

“You don’t want to be in the Covid winners, you want to be in the Covid losers.

“During the last few years there has been an over-investment into technology and the cloud and a misallocation away from industrials, supply chain, energy and those sorts of companies.

“You’re now seeing that misallocation of capital unwind.”

He points to “strong-demand” commentary from companies like Delta Airlines, United Airlines and Visa, alongside negative commentary from Microsoft, Meta Platforms and Google.

United claimed there had been a “permanent structural change in leisure demand because of the flexibility that hybrid work allows”, saying “this is not pent-up demand. It’s the new normal”.

Visa said consumers are “still spending the same amount of money… as they did before”.

Meanwhile Microsoft and Meta announced layoffs, along with a slew of other US tech companies.

Microsoft reported “materially weaker PC demand” and Google noted a “pull-back in spend” by advertisers.

Look to industrial and financial stocks

“It’s that misallocation of capital that will drive the hits and misses on the markets,” says Pittard,

“If you look at new job postings, they are down 50 per cent from their peak of 2021 and 41 per cent of consumers are saying it’s tough paying their bills compared to 38 per cent in Covid.

“There’s no doubt stresses are increasing. There’s no doubt the macro is getting weaker.

“But as an investor, you want to look through it.

“Our cash level is at the lowest that it’s ever been, but you’ve got to have the tide going with you.

“That’s why the answer is the industrial companies and the financials.

“Dividend yield on the banks is more than 8 per cent.

“If you hold those kinds of stocks, you’re getting paid to just wait for the economy to turn around.”

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About Ashley Pittard and Pendal Concentrated Global Share Fund

Ashley Pittard leads Pendal’s Global Equities investment boutique. He is responsible for setting the strategy, processes and risk management for the boutique and its funds including Pendal Concentrated Global Share (COGS) Fund.

Ashley has more than 24 years of finance experience, including roles in petroleum economics, global energy investment analysis and 20 years as a global equities fund manager.

Pendal COGS Fund is an actively managed, concentrated portfolio of global shares diversified across a broad range of global sharemarkets.

Find out more about Pendal Concentrated Global Share Fund

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.

Earnings season is getting underway in the US. Senior global equities analyst SUE SCOTT outlines what investors can expect this quarter

• US Q3 earnings have kicked off
• Post-Covid adjustment still playing through earnings
• Find out about Pendal Concentrated Global Share Fund

COMPANY earnings in the US are likely to cause further market volatility this quarter as investors try to understand how the post-Covid economy is adapting to higher interest rates.

Next week investors will start to get a good look at how US companies fared in the September quarter – and expectations are low.

“There’s no doubt operating conditions remain very, very challenging,” says Sue Scott, a senior investment analyst with Pendal’s concentrated global share strategy team.

“We expect continued volatility. This is partly because the market is finding it very difficult to determine the extent to which a reversal of Covid spending is affecting operating conditions.

“There is also uncertainty around how much interest rates and inflation are affecting the environment.”

Last quarter’s earnings were characterised by cautious commentary about the outlook as management teams focused on cost containment.

A rising US dollar was just starting to emerge as a headwind, particularly for US-based global companies. But there was anecdotal feedback that demand remained resilient.

Shares ended the quarter broadly where they started, trading at about 15 times expected  earnings.

“But that’s only useful if you believe the ‘E’ in the price to earnings ratio,” says Scott. “That’s the big debate.

“The market is still expecting growth — both in the third quarter and in 2023.

“But the real difficulty for investors is making sense of conflicting data points.”

Conflicting data

Over the past three months, US interest rates have continued to rise, the US dollar has hit 20-year highs, oil prices have fallen and commodities have weakened.

“You’ve also had Russia and Ukraine continue to escalate tensions, China-US tensions continue to simmer, further reports of US export restrictions to China particularly in technology, China Covid lock-downs continuing and poor economic data coming out of China.”

The rebuilding of supply chains and a shift in post-Covid consumer demand is also muddying the picture.

This is evident in out-of-cycle results that have come in before the bulk of the earnings season gets underway, says Scott.

“What’s confusing for investors now is that companies are reporting numbers that could reflect deteriorating consumer health or could just be a reflection of some of the dislocation in global trade and spending patterns as a result of Covid starting to normalise.”

“Nike — one of the bellwethers of the US market — said earnings disappointed for the third quarter because of lower margins due to discounting of out-of-season inventory caught up in shipment delays.

“So it was not so much about a weak consumer, but Covid-related logistic challenges.

“We also know the personal computer market was overheated because everyone was working from home and kids were home-schooled.

“But it’s hard to distinguish if current weakness is due to normalisation of an over-heated market – or because interest rates are going up and people are spending less.

“Same with FedEx. They delivered a below-expectation result citing consumer spending shifting back to services from goods.

“As a result of all that, we’ve had consensus forecasts since the end of June revised lower for the third quarter by mid-single digits.”

Consensus estimates for 2023 have also been revised lower by a similar amount.

Scott says these effects are temporary and “we don’t necessarily see them as a massive red flag for the economy.

“But they are going to take some time to play out.

“Average global shipping rates fell 30 per cent in September, which is 60 per cent lower than they were a year ago. But that’s still 170 per cent higher than pre-Covid.”

Impact of the strong dollar

One of the big stories will be the impact of the higher US dollar, says Scott.

“More than 30 per cent of S&P company revenue comes from outside the US, and for some of the big tech companies, it’s more like 50 per cent.”

She says many companies in the sector have been softening up investors for a weaker quarter with talk of a pause in hiring, redundancies or restructures.

“We think some pockets of the technology sector are still very expensive and there is an outsized risk for earnings disappointment.”

But recent presentations from bank CEOs are painting a more optimistic picture.

“The underlying consumer-facing banks business is holding up very well and capital positions are strong.

“They’re benefiting from higher net interest income as a result of lending rates leading deposit rates higher and loan losses are reasonably benign.

“So far they’re not seeing any major signals of a deterioration in consumer activity. And even if they do, the balance sheet of the consumer is in much better shape than it has been historically.”

“Yes, spending patterns are changing away from goods to services — but there’s no real red flags from the banks.”

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The indiscriminate tech sell-off is creating opportunities for investors willing to take a stock selection approach rather than buying the index, says Pendal’s SUE SCOTT

• Indiscriminate sell-off opens opportunity
• Analog semiconductors offer value
• Find out about Pendal Concentrated Global Share Fund

TECH was a stock market darling for more than a decade until last year — providing outsized returns on the back of transformational breakthroughs in personal technology, cloud computing and streaming entertainment.

But higher interest rates in 2022 triggered a sell-off across the sector as the current value of future cash flows reduced and some emerging companies found it harder to raise capital.

“The technology sector was bought indiscriminately on the way up — and now the sell-off is also indiscriminate,” says Sue Scott, a senior investment analyst in Pendal’s global equities boutique.

That means potential opportunities for investors willing to take a stock selection approach rather than buying the index, says Scott.

The rise and fall of tech as a sector disguises the fact it is made up of many different companies that operate in quite distinct markets.

One opportunity emerging in the selloff is the makers of analog semi-conductors, the sensors that collect data on real world events like sound, speed and temperature, she says.

“Analog semiconductors are the eyes and ears of an electronic device, taking real world signals and translating them into a digital message, enabling the device to react.

“As the world becomes more automated, analog semiconductors become more pervasive. The handset and PC market is only a subset of the broader market.

“In a car, it’s the systems that tell you when you’re going to back into the car behind you and monitor cruise control. They also measure battery charge and discharge in electric vehicles.

“It’s air conditioners and household appliances. In sustainable energy. It’s the monitoring of electrical grids. And in healthcare it is medical devices.

“The other area that’s exploding is factory automation. Robots in factories need to know what’s going on around them and need to be able to act with precision.

“We love the diversity that these analog semiconductor companies offer, catering to multiple industry segments and not heavily reliant on any one industry subsector such as handset or PCs handsets for example.”

Analog semis are good example of how an index approach to technology misses the nuance in individual sectors, says Scott.

“Analog semis have a very long lead time and shelf life — once they are designed into a car, it’s not designed out the next year like for instance the digital semiconductors in a mobile handset may be.”

Semi-conductor companies to watch

Analog semiconductor leaders include Texas Instruments — the tech pioneer that made its name in pocket calculators and once made pop-culture icon the Speak & Spell — and Analog Devices.

“Both of them have proven historically that they can make smart acquisitions and integrate them well.

“They have adapted to changes in technology, they pivoted their businesses, deliberately moving away from the consumer market and moved their R&D focus into automotive and industrial.

“Importantly, they have their own manufacturing footprint, which has led to very strong margins and insulated them somewhat from the geopolitical risks associated with outsourcing manufacture.”

She says that despite the underlying structural tailwinds in the sector such as the growth in electric vehicles, in artificial intelligence, machine learning and the Internet of Things, that fundamentally the technology sector is cyclical.

“As long-term investors we want to own technology companies that manage their cyclicality through diversity of product and end customer or have significant barriers to entry.

“We like the comfort of owning companies that have the ability to record higher highs and lower sales lows , that  have the capacity to  invest through the cycle, have the balance sheets to grow their business when the opportunity arises and return significant amounts of free cash flow to their shareholders.”

Scott says technology is an important part of a well-constructed portfolio.

“Technology has the ability to transform other industries and it seeps into everything we do,” says Scott.

She points to transformation of companies like Deere & Co, the century-old agricultural equipment maker that now offers high tech services to farmers, and Caterpillar, the construction equipment maker that has become a world leader in autonomous mining vehicles.

“Deere can identify a weed in a crop and only spray that weed, think of the productivity gains and reduced costs for farmers,” says Scott.

“Caterpillar’s automated mine trucks are already out there in the Pilbara transporting iron ore.

“These are old industrial companies have been transformed by technology. That’s pretty exciting.”

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It’s time to be fully invested in financial markets, not sitting on the sidelines, believes Pendal’s head of global equities ASHLEY PITTARD

• Strong earnings seasons in US and Europe
• Economic news suggests equities won’t tumble
• Find out about Pendal Concentrated Global Share Fund

EARNINGS seasons in the US and Europe have been strong, and there are signs inflation is peaking, which would allow the US Fed to slow its interest rate cycle, says Pendal’s head of global equities Ashley Pittard.

“The Fed was behind the curve in March and there was earnings risk because of high valuations.

“Fast-forward to today, the market is down 20 per cent and the price-to-earnings multiple has come back from 22 times to about 15 times earnings.”

The June quarter earnings season on Wall Street and in Europe has been solid.

On a sales basis, about half the companies beat consensus forecasts. On an earnings basis that rises to nearly two-thirds.

Not surprisingly, the response from investors has been positive.

There have been exceptions to the good news story. Consumer discretionary stocks in the US, such as Walmart and Target, disappointed.

“But when you look at this market, it’s one that you want to be fully invested in,” Pittard says.

“The US Federal Reserve has lifted interest rates sharply and is now ahead of the curve. In March this year they were behind the curve.”

Pittard doesn’t expect the Fed to continue doing 75 basis point hikes, though rates will still rise.

“We are at the point where the Fed might pause for a bit, or only has a couple of rate rises to go and earnings are growing around 5 per cent.

“That’s a good position for equities. That’s because the price-to-earnings multiple on Wall Street has come back to more normal levels on a historical basis.”

Pittard doesn’t expect Wall Street to fall much further.

“What you’ve seen in this quarterly earnings season is lower margins. Earnings expectations have also come down and forward guidance from companies have come down.  

“You only get massive cuts in earnings growth if you go into a sharp recession.

“That might have happened if the Fed was behind the curve. But the Fed is now ahead of the curve,” he says.

Pittard isn’t definitively calling peak inflation, but he believes it’s close, highlighting a recent drop in oil prices as evidence.

“It doesn’t mean interest rates are going back to zero again, but it does mean rates won’t keep rising,” he says.

In the Fed’s favour is time, Pittard says. The Open Market Committee isn’t meeting again until mid- September — plenty of time for new economic data.

“The Fed has six weeks leeway. It will be data-dependent going forward, and that’s important,” Pittard says.

“Something else could happen such as the war in Ukraine pushes prices back up.

“But right now inflation is peaking, there’s negative real interest rates so policy is still accommodative, there’s wages growth of 3-to-4 per cent, there’s capital spending, there’s savings built up, and there’s a bunch of initiatives from the US government which mandate spending for renewables.

“You could argue very strongly that you just want to be invested and cash levels are close to their lows.”

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About Ashley Pittard and Pendal Concentrated Global Share Fund

Ashley Pittard leads Pendal’s Global Equities investment boutique. He is responsible for setting the strategy, processes and risk management for the boutique and its funds including Pendal Concentrated Global Share (COGS) Fund.

Ashley has more than 24 years of finance experience, including roles in petroleum economics, global energy investment analysis and 20 years as a global equities fund manager.

Pendal COGS Fund is an actively managed, concentrated portfolio of global shares diversified across a broad range of global sharemarkets.

Find out more about Pendal Concentrated Global Share Fund

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.

Rates are rising and long-duration assets like big US tech stocks are underperforming. Where should global equities look? Pendal’s ASHLEY PITTARD has some answers

• FAANG stocks continue to face headwinds
• Opportunities in energy, financials, real estate
• Look for pricing power, duopolies

RATES are rising and long-duration assets such as the big US tech stocks are underperforming.

The NYSE FANG+ index — which includes Facebook, Apple, Amazon, Netflix and Google — is down more than 30 per cent this year.

So where should global equities investors put their money?

“Look for duopolies, or even better, monopolies because they tend to have pricing power,” says Ashley Pittard, Pendal’s head of global equities.

“Find companies that can move prices with inflation. Keep away from the FAANG stocks.”

While the road into Covid was challenging for investors, the road out will present just as many challenges.

“The world is normalising — and when the world normalises, people don’t need as many streaming services,” Pittard says.

“People aren’t buying as much stuff online. They are going out again and eating a meal and having dinner.

“That’s why in the current earnings season in the US we’ve seen Amazon and Netflix disappoint but Coca-Cola’s numbers were fantastic.”

“Covid brought forward demand for many of the tech companies’ products” Pittard says. “There are supply chain problems and higher input prices.

“And rising interest rates hurt long-duration assets because the discount rate applying to future cash flows increases.

“Foreign exchange weakness in regions, such as Japan, has also knocked them around.”

Where to look

What should investors be considering?

“You want to be in energy companies, financials, consumer beverage companies and also real-estate companies,” Pittard says. “And you can still be in some long-duration assets.”

Pittard says financial stocks should benefit from rising interest rates, with one caveat – keep a watch on bad loans.

“If the US Fed is able to raise interest rates — and not put the economy into recession — the banks will track sideways before accelerating as investors realise the bad loans they’re expecting aren’t as bad as they thought.”

Coke is it

Pittard is also a fan of beverage companies. “Coca-Cola, for example, is in a duopoly market and it’s got pricing power. In an inflationary environment, that’s what you want.”

There are still some long-duration assets that will suit many investors, he says.

“Think about airports – a utility and long duration. But if the rents they’re charging tenants, and the fees airlines are paying, are inflation adjusted then they are getting good returns.”

Pittard warns interest rate disparities across economies make foreign exchange factors even more relevant.

“In Japan, unlike the US, Europe or Australia, the central bank wants to keep interest rates in a very tight band. It means the Yen has been sold off.

“If you then have a look at real estate companies in Japan, they are increasing in value because it costs more to build those assets, to refurbish those assets, and rents will be going up.

“And the sector trades below book value, or construction cost value. The real estate sector in Japan is very compelling at the moment. “

As global economies emerge from Covid, opportunities abound, he says.

“Rather than say no to FAANG stocks, I’m saying yes to everything else. And that’s because everything else is growing.”

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About Ashley Pittard and Pendal Concentrated Global Share Fund

Ashley Pittard leads Pendal’s Global Equities investment boutique. He is responsible for setting the strategy, processes and risk management for the boutique and its funds including Pendal Concentrated Global Share (COGS) Fund.

Ashley has more than 24 years of finance experience, including roles in petroleum economics, global energy investment analysis and 20 years as a global equities fund manager.

Pendal COGS Fund is an actively managed, concentrated portfolio of global shares diversified across a broad range of global sharemarkets.

Find out more about Pendal Concentrated Global Share Fund

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.