Significant Features: The Pendal Wholesale Plus Active Moderate Fund is an actively managed diversified portfolio that invests in Australian and international shares, Australian and international property securities, Australian and international fixed interest, cash and alternative investments. The Fund has a similar weighting towards defensive assets as it does towards growth assets.
Fund Objective: The Fund aims to provide a return (before fees, costs and taxes) that exceeds the Fund’s benchmark over the medium to long term. The suggested investment timeframe is five years or more.
Dale joined Pendal in 2011 as Portfolio Specialist with responsibility for fixed interest and alternative strategies. In this role Dale was a key link between Pendal’s fixed interest team and the broader business and responsible for providing information and insight to key internal and external stakeholders on Pendal’s fixed interest capabilities. He also looked after our key intermediary research relationships. In July 2018 Dale became Head of Client Solutions, a role where he partners with all Pendal’s Boutiques, Sales and Product teams to position Pendal’s investment capabilities in the most effective and relevant way for clients across all channels.
Prior to joining Pendal, Dale held various senior research roles working closely with advisers on providing product and strategy solutions for their clients, including Head of Product Solutions at Macquarie Private Wealth, and before that Research Strategy Manager at ING dealer groups.
Here are the main factors driving Australian equities this week according to our head of equities Crispin Murray. Reported by portfolio specialist Chris Adams
>> Crispin Murray’s four themes of ASX full-year reporting season 2021
A NUMBER OF issues combined to prompt a pause in equity markets last week following a strong run.
The S&P 500 fell five days in a row. While there was no specific, material market driver, we note these issues:
- Some wariness around central bank tapering balance sheet purchases
- A supply overhang; US$23 billion in new equity has been issued across 32 deals in the US
- Fed officials announced they would liquidate their equity portfolios to avoid conflicts of interest
- Noise around the potential for tax increases as part of the Democrats fiscal package
- Renewed focus on the potential for slowing growth and higher inflation
- Some caution from sell-side research on the US market following its strong run.
We think it is too early to read too much into this drop.
We are still constructive on the outlook for equities, but we are mindful of a number of issues to watch.
We are in a period of shifting policy, which engenders some risk. It is harder to get a read on underlying economic strength at the moment because of the supply bottlenecks.
Cooler weather in the Northern Hemisphere may also have an effect on Covid case numbers.
The S&P/ASX 300 fell 1.3% last week. All sectors lost ground. Real estate (-2.35%) was the worst and communication services (-0.4%) held up best. The S&P 500 ended down 1.7%.
Covid and vaccines
We are seeing new Covid case numbers decline in the US, Europe, Asia and Israel. So far the return to school has not led to a large resurgence in cases, though this is still possible.
There may also be some impact from colder weather. But at this point the trend is positive.
In the US, 41 States (about 83% of the population) are now more than 5% below peak infection levels and the number of hospitalisations is starting to decline.
In Australia, NSW is on track this week to reach 80% of the population with one dose. This is despite a fall in the daily vaccination rate. Second doses are running a month behind.
There are some concerns over the “Mu” variant of the virus.
Newly classified as a “variant of interest”, there is speculation Mu may be as transmissible as Delta and more resistant to vaccines. The latter may be true — as it was for the Beta variant — but it’s not yet clear according to initial studies.
Macro and policy
The European Central Bank struck a dovish tone, signalling a “moderately lower pace” of bond-buying and emphasising that this wasn’t tapering.
In practice, this means reducing monthly bond purchases from EUR80 billion to EUR70 billion, but with flexibility to do more. The next big policy decision moves to December.
Pendal Focus Australian Share Fund
A high-conviction equity fund with 16 years of strong performance in a range of market conditions
Part of Friday’s US market weakness related to a story in The Wall Street Journal which suggested the Fed would signal in this month’s meeting that tapering would be announced in November, start in December and be completed by June 2022.
This is a little more aggressive than current consensus expectations.
The market is concerned that the Fed’s view of current economic softness as Delta-related — rather than a more structural issue — could be incorrect.
As a result, they risk tapering into an already slowing economy.
The market is looking for a read on the strength of the underlying US economy. The Q3 GDP signal continues to weaken. The Atlanta Fed GDPNow estimate — a reasonably reliable indicator — is now below 4% quarterly growth. This is well below the 5-8% range in market consensus.
There is no doubt Delta-driven disruptions and supply chain bottlenecks are playing a major role. Auto and light truck sales have dropped materially, for example, driven by issues with getting stock into the yards.
Inflation also remains an underlying concern, which may potentially place central banks in something of a policy bind. There is plenty of data that demonstrates higher prices.
While iron ore is down a lot, plenty of other commodities are running hot. Some of this is due to temporary supply disruptions, such as in aluminium and natural gas.
But there are also longer-term issues at play, such as the impact of carbon pricing on coal in Europe and higher power prices in China.
In contrast there is still plenty of evidence that points to strong underlying economic momentum.
Despite weak August payrolls, job opening are at record levels. Wages are also strong, which drives consumption. Excess savings also continue to rise, up 12% year-on-year.
If we get a sense that Delta is becoming less of a threat — and if Biden’s plan can drive vaccination rates higher —this may help release some of this pent-up potential demand.
Markets
It is notable that US bond yields are not making new lows despite the weaker economic data.
Falling yields in April and May signalled that the economy was slowing despite strong data. Now the opposite may be true. It is also worth bearing in mind that Quantitative Easing means yields are probably 30bps lower than they otherwise would be.
Australian equities held up better than the US, helped by optimism around the vaccination roll-out and the path for re-opening.
However resources remained weak, driven by concern over China’s property market and rhetoric around weaker steel demand.
There was little news on the stock front last week in the wake of reporting season.
Read Crispin Murray’s four themes of ASX full-year reporting season 2021
About Crispin Murray and 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 Pendal Focus Australian Share Fund has beaten the benchmark in 12 years of its 16-year history (after fees), across a range of market conditions.
Pendal is an independent, 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 here.
Significant Features: The Pendal Wholesale Plus Active Conservative Fund is an actively managed diversified portfolio that invests in Australian and international shares, Australian and international property securities, Australian and international fixed interest, cash and alternative investments. The Fund has a significant weighting towards defensive assets.
Fund Objective: The Fund aims to provide a return (before fees, costs and taxes) that exceeds the Fund’s benchmark over the medium term. The suggested investment timeframe is three years or more.
Anthony is an analyst with over 15 years’ experience covering a range of Australian and international sectors. Most recently his sector coverage included Australian Industrials and Energy, including Building Materials, Capital Goods, Engineering & Construction, Transport, Telcos, REITs, Utilities and Infrastructure. He has previously worked as an equity analyst for AllianceBernstein and Macquarie Group, spending a further two years as a management consultant at Port Jackson Partners and two years as an institutional research sales executive with Deutsche Bank. Anthony is a CFA Charterholder and holds bachelor’s degrees in Commerce and Law from the University of Sydney.
Fund Objective: The Fund aims to provide a return (before fees, costs and taxes) in excess of the MSCI ACWI ex Australia (Net in AUD) over rolling 5 year periods.
Damien provides fundamental analysis for our smaller companies strategies, supporting stock selection through valuation, stock data evaluation and building company investment models. Damien was previously an Equity Analyst at Kosmos Asset Management, where he was responsible for fundamental research focused on non-resource ex-ASX 100 Australian and New Zealand stocks. He holds a Bachelor of Business (Finance & Economics) from the University of Technology in Sydney and has completed level three of the CFA program.
The Reserve Bank is easing off the accelerator instead of tapping the brakes. Pendal’s Tim Hext explains what investors can expect next
THE RBA this week enacted what they would view as stage three of the great stimulus unwind.
Stage one was the end of new money in the Term Funding Facility (TFF). This concluded in June, with $187 billion taken up. This was 3-year money, so it runs off from June 2023 to June 2024.
Stage two was capping Yield Curve Control at April 2024. This was done in early July.
And now Stage three this week is a gentle taper of Quantitative Easing (QE) purchases from $5 billion a week to $4 billion – hardly impactful but a signal things are improving.
Future stages will likely see more QE tapering. The RBA is signalling the next review in February next year.
By then total QE will be nudging $300 billion.
We expect QE to be finished by August 2022. Then we adopt a wait and see before any actual tightenings.
The RBA has been very clear this can only occur once inflation is sustainably within the 2-3% band.
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Pendal’s Income and Fixed Interest funds
We think it will be there by late 2022, but the RBA wont tighten until well into 2023. A modest hiking cycle up to 1.25% should then follow.
Why do we think any tightening cycle will be modest?
Well, it’s important to remember mortgage rates and deposit rates fell by more than 1.5% in early 2020, despite cash rates only falling 0.65%. This was due largely to the TFF flooding the system with cheap term money.
As the TFF unwinds, it is therefore expected mortgage rates will move higher, independent of the RBA.
Hikes of 1.25% by the RBA will look more like 2% in the real economy. This is more than enough to tap the brakes.
Of course all this assumes a world where vaccines do their job. It also assumes a world where inflation edges higher, but largely behaves.
Time will tell.
About Tim Hext and Pendal’s Income & Fixed Interest boutique
Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.
Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.
Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.
Find out more about Pendal’s fixed interest strategies here
About Pendal
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.
Significant Features: The Pendal Active High Growth Fund is an actively managed diversified portfolio that invests in Australian and international shares, Australian and international listed property securities, Australian and international fixed interest, cash and alternative investments. The Fund has a significant weighting towards growth assets.
Fund Objective: The Fund aims to provide a return (before fees, costs and taxes) that exceeds the Fund’s benchmark over the medium to long term.
Brenton manages the Pendal MidCap Fund and natural resources portfolio, drawing on over two decades of expertise across precious metals, derivatives, investment banking, and private equity to invest in large and small cap mining companies.
Brenton has worked with Randfontein Estates Gold Mine & Harmony Gold as a mine geologist and Executive, and at JP Morgan, Deutsche Bank, Craton Capital, Macquarie Funds Group, and Taurus Funds Management in research and asset management roles.
Graduating with honours, he holds a Bachelor’s degree in Science (Geology) and a Master’s degree in Science from the University of Johannesburg. He is a member of the CFA Institute and has previously served on the International Accounting Standards Board.