Here’s what the latest employment data means for the market, according to Pendal’s head of government bond strategies TIM HEXT
THE latest employment data was released today.
Headline employment was slightly weak, with a loss of 2,500 jobs – payback from the very high 87,000 increase in April.
Given volatility from month to month, we look at a three-month rolling average, which remains at around 35,000 jobs – enough to soak up new job entrants.
More importantly, the unemployment rate remains stuck at 4.1%, which the same result for every month so far this year.
Stability like this is almost unheard of.
Currently, any sharp move in jobs is matched by a similar decent move in the participation rate – again showing the limitations of the survey.
The good news for the job market is that full-time job growth is exceeding part-time growth.
This means less spare capacity in the labour market, as some of the 25% of part-time workers who say they are seeking more hours looks like they are finding them through full-time jobs.
This reduces underemployment and, in turn, what is called the underutilisation rate (unemployment plus underemployment).
The underutilisation rate now sits at 9.9%. This is the lowest since early 2023 and almost 1% lower than early 2024, highlighting a healthy job market. If we look back a decade, it is almost 4% below pre-Covid levels.
Our base case
We are less than three weeks away from the RBA’s July decision.
The RBA has forecast unemployment to be at 4.2% by the end of June. This data on its own would indicate no cut. In fact, unemployment is still below its estimate of full employment.
However, weaker consumption data since the May cut and the fact that the RBA looked closely at doing 0.5% in May means our team favours a July rate cut.
Right now, the market is pricing an 80% chance of a cut.
We do not expect it to move far from here pre-July, absent global events. Terminal cash is still priced at 3% by March 2026.
We still like duration despite market pricing. While optimists cling to the hope that we will make it through July without tariffs disrupting markets again, it is not something we think is a base case.
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.
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
DESPITE a 12 per cent rise in the oil price following rising geopolitical tensions between Israel and Iran, equity markets ended close to flat last week.
Markets had been higher prior to the Friday attack, as US-China tariff tensions eased and benign May US inflation figures helped bond yields lower.
The S&P 500 and the NASDAQ fell -0.4% and -0.6%, respectively, while the S&P/ASX 300 closed up +0.3% as equities consolidated following strong performance over the quarter to-date.
The US economy is proving more resilient than many feared, giving the market confidence it can cope with the impact of tariffs.
However, early signs of a slowdown are appearing and most economists anticipate Q4 2025 GDP growth falling to a 1%-2% range.
We believe equity markets remain well supported, but are likely to consolidate over the northern summer as we wait on trade deals and clarity on the economic effect of tariffs.
In Australia, the market was led by energy and gold stocks last week, with REITs also outperforming. Tech names – particularly the strong recent performers – did start to retrace.
We see three key issues for markets in the near term and will look at each in turn:
- rising geopolitical tensions
- tariffs and the US economy
- concern over the US budget deficit and implications for bond yields.
Issue 1: The impact of rising geopolitical tensions
Israel’s attack on Iran triggered a 12% rise in oil prices which, in turn, saw equities sell off and bond yields fall.
There seem to be two catalysts for the attack.
One was the International Atomic Energy Agency (IAEA) announcing earlier in the week that Iran had violated its commitment under the Nuclear Non-Proliferation Treaty. The other was upcoming US-Iran nuclear talks, with Israel potentially concerned over the outcome.
The attacks have therefore been positioned as pre-emptive action to prevent Iran achieving nuclear strike capability.
The likelihood, reinforced by the Israeli rhetoric, is that there will be a series of ongoing strikes given the perceived damage to Iran’s nuclear program is limited so far. Iranian retaliatory strikes may also be a catalyst for escalation.
For financial markets, the focus is initially on the risk to the oil market.
Oil jumped 8% on Friday to US$75 on the news and is now 25% above its Liberation Day lows.
A lot of the move reflected short-covering given previously weak sentiment towards oil.
The key question is whether this will be sustained and if it’s the first part of a bigger move or if it will reverse quickly.
The threat to oil supply comes from two sources:
- Disruption to Iranian oil as a result of infrastructure damage or tighter US sanctions on supply. Iran supplies around two million barrels per day – around 2% of the global market.
- Iran blockading the Strait of Hormuz, through which around 20% of global oil production flows.
There is clearly risk of the first scenario, though this may be limited. The US has indicated it does not want to see oil prices higher as it wants to avoid any inflationary shocks exacerbating the impact of tariffs. It would be reasonable to assume Israel understands this and – as with previous attacks – will avoid oil export-related infrastructure.
We also note around 75% of Iranian oil is believed to go to China, so the prospect of US sanctions will be tied to their broader bilateral discussions.
It also seems very unlikely that Iran would close the Strait of Hormuz given the largest impact would be on China, which is one of Iran’s key supporters. China receives roughly 57% of the oil transported through the Strait.
A blockade would also have a dire impact on Iran’s economy at a vulnerable time. Should Iran try this, it is believed that a military response would unlock the blockage within weeks/months.
The other issue to keep in mind is there remains an estimated five million barrels per day of excess capacity in oil markets, which would be available to partially offset any disruption, albeit with some lags.
The outlook for oil outside of this geopolitical risk is muted, with a slowing global economy and supply growth from both Saudi and non-OPEC nations.
For example, in its baseline view Goldman Sachs forecasts prices falling into the US$50 range. It suggests that prices could peak to near US$90 in the short term in the scenario that Iranian production drops by 90%, with OPEC offsetting half.
At this point we don’t expect a sustained oil price rally; history indicates geopolitical-relate spikes in oil are often short-lived and peak occurs very close to the event.
Issue 2: Tariffs and the US economy
Tariff news flow was better last week following the call between Presidents Trump and Xi and an agreement to lift Beijing’s restrictions on exporting critical minerals and magnets, in exchange for the US loosening controls relating to semis, aircraft parts and Chinese students in the US.
Overall, we are back to the original Geneva deal timeline, which we expect to lead to an agreement announced in September and implemented in October.
Separately, we saw the Court of Appeals extend approval to continue use of the tariffs linked to the International Emergency Economic Powers Act (IEEPA) to the end of July while it considers the case.
As a reminder, if it upholds the Court of International Trade’s block on using this measure to impose tariffs, the Administration will appeal to the Supreme court.
The key question for the US is whether the tariff impact is now kicking in and how much that will affect the economy. There are three components that will determine this:
- The unwind of the “front loading” which boosted demand ahead of tariffs. The debate here is to what extend consumers held back on other spending to buy big-ticket items such as autos ahead of tariffs – there is evidence that this occurred, with incomes strong and savings rates rising. This would suggest consumers are managing their budgets carefully and there may not be as sharp an unwind as some expect. This unwind may be felt more in countries exporting to the US (notably the EU) where production and exports rose to get ahead of tariffs.
- The impact of the effective tax increase. Fear here has diminished but is still live. As mentioned above, incomes and jobs have held up and corporate anecdotes indicate demand remains okay. The flow-through of pricing from tariffs has not yet been that evident. It will come through – though how quickly will be important to watch. The other issue to watch is to what extent this is absorbed in corporate margins and affects business investment.
- The impact on sentiment. The effect of tariffs is estimated to be 1.0% to 1.5% off US GDP. How quickly this flows through is important – if this is a more extended period i.e. 9-12 months rather than 3-6, there is likely to be less risk of sentiment effects compounding the first order impact.
On inflation, the May Consumer Price Index (CPI) data was positive, with headline 0.08% month-on-month, versus 0.26% expected, and core 0.13% versus 0.27% expected.
It is estimated that tariffs added 4 basis points (bps) to the month’s CPI.
There is some debate over seasonal adjustments understating inflation, however, the key message for now is that the flow-through of tariffs is taking time and this may help with the sentiment effects.
Both goods and services inflation were below expectations and the “super core” measure was also benign, signalling around 2.5% annual inflation.
Tariffs should start flowing through into prices, with a survey indicating 31% of service firms and 45% of manufacturers intend to pass on tariffs in full. The bulk of the effects should be felt within six months, though existing inventories may delay some effects.
Inflation of 2.5% is not low enough for the Fed to feel comfortable about easing, particularly given the expectations that tariffs will lead inflation to the high 3% range by year end.
The Fed’s goal will be below-trend GDP growth, which will reduce the risks of inflation becoming embedded in the economy.
It appears as though that is happening, with the real data beginning to soften – such as initial and continuing jobless claims creeping higher. This is consistent with a deceleration rather than a more abrupt slowing.
The market continues to price in two more rate cuts in the US this year.
Issue 3: US deficit concerns and implications for bond yields
The third big issue for markets has been the rising fear of US debt sustainability, manifesting itself in higher long-bond yields.
The outlook here has improved, with some of the concerns flagged when the House version of the Big Beautiful Budget bill came out appearing overstated.
With slowing growth and benign inflation, bond yields have remained in their three-year range.
Yields declined last week, despite the increase in oil prices, and auctions for both 10-year and 30-year bonds were well supported.
Pendal Focus Australian Share Fund
Now rated at the highest level by Lonsec, Morningstar and Zenith
One trigger for concerns on bonds was the rise in Japanese 30-year bond yields. These too have come off, partly on expectations of supply being constrained but also as immediate selling pressures abated. This has flowed through into the US 30-year yields as well.
The final factor reducing fears of fiscal sustainability is that tariffs are generating good revenues for the government – an incremental US$55bn so far and an indicative run rate of $200bn per annum.
This, alongside the more resilient economy, has helped raise overall federal government revenues.
Section 899
Outside of these three key issues, we are also watching the issue of Section 899.
This relates to a provision in the budget Bill creating a new section 899 of the tax code, which would raise taxes on many forms of passive and active business income for foreign investors and corporates in the US.
This is a complex issue, but to summarise, the goal is not to create a blanket tax – rather, it aims to force other countries to rescind taxes on US companies.
The tax would scale over four years, to potentially 41% on US earnings of overseas companies.
Theoretically, this could impact several Australian companies including Macquarie Group, CSL, ResMed, Bramble and Aristocrat Leisure.
Australia does charge a Diverted Profit Tax (DPT) and has an Undertaxed Profits Rule (UTPR), as does the UK and much of the EU. Should the US deem these to be discriminatory, then the Section 899 tax may apply.
It also targets passive income which may include bond coupons.
The likelihood at this point is that these taxes will not have material impact.
Firstly, the Bill is likely to be changed by the Senate – notably, the passive income component may run the risk of deterring foreign investors into US bonds, which is untenable given the deficit.
The corporate taxes will probably remain, albeit with time for negotiations to gain an exemption.
However, this is an issue we need to keep a close eye on as while probability remains low, potential materiality (in its current form) is high.
Markets
Equity markets remain in good shape technically but are now consolidating, having returned to prior highs in a short period.
As highlighted in recent weeks, earnings revisions and Mag 7 strength has supported the recovery in US equities. Sentiment remains subdued, which is supportive, while credit spreads are also near their lows.
Technical support levels are around 3-5% below current levels
Gold is at an interesting level. It has been consolidating following the recent strong run and remains well supported – the question is whether it breaks through the $3,500/ounce high.
Gold miners are now performing better than physical gold, reflecting growing belief in the sustainability of higher prices.
Australia
The local market saw subdued moves last week as the S&P/ASX 300 consolidates after a 9.3% run quarter-to-date and is now at the top end of its historic PE range.
We did see rotation last week. Energy (+6.3%) led on the rising oil price, gold stocks were also up on geopolitical concerns and REITs (+2.5%) outperformed as Aussie bond yields continuing to fall and approach their lows for the year at 4.15% (Australian government 10-year yield).
Technology (-0.7%) pulled back, notably stocks which ran hard in May such as Life 360 (360, -5.4%) and technology One (TNE, -4.2%)
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 Pendal Focus Australian Share Fund has beaten the benchmark in 12 years of its 16-year history (after fees), across a range of market conditions.
Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.
Exclusionary screen changes
Pendal Sustainable Australian Fixed Interest Fund – Class R (APIR: BTA0507AU)
Pendal Sustainable Australian Fixed Interest Fund – Class W (APIR: PDL3438AU)
(the “Fund”)
The following information contains an important update to the Fund’s exclusionary screens disclosed in the Product Disclosure Statement and Additional Information to the Product Disclosure Statement dated 20 February 2025 for the Pendal Sustainable Australian Fixed Interest Fund (PDS) and should be read in conjunction with the PDS.
Effective from 30 June 2025, the exclusionary screens applied by the Fund will be changing, as outlined below:
- the definition of controversial weapons applied by the Fund will broaden to include white phosphorus weapons. As a result, the Fund will not invest in issuers involved in the manufacture of white phosphorus weapons;
- the Fund will introduce an additional exclusionary screen and not invest in issuers directly involved in the supply of goods or services specifically related to controversial weapons; and
- the Fund will remove its current screen for issuers that mine uranium for the purposes of weapons manufacturing as this will be captured under the new screen. Specifically, any issuer supplying uranium for the purposes for weapons manufacturing will now be captured under the supply of goods or services specifically related to controversial weapons exclusionary screen.
In our view, these changes ensure that the Fund remains true to label and is more closely aligned with investor expectations in relation to responsible investment funds.
Exclusionary Screens Effective 30 June 2025
Effective 30 June 2025, the section ‘Exclusionary Screens’ in section 5 of the Product Disclosure Statement is replaced with the following:
Exclusionary Screens
The Fund will not invest in issuers directly involved in any of the following business activities:
• tobacco production (including e-cigarettes and inhalers);
• controversial weapons manufacture (including cluster munitions, landmines, biological or chemical weapons, nuclear weapons, depleted uranium weapons, blinding laser weapons, incendiary weapons, non-detectable fragments and white phosphorus weapons); or
• supply of good or services specifically related to controversial weapons.
Additional exclusionary screens are applied differently across industries and business activities.
The Fund applies exclusionary screens to its investments in corporate debt securities. Exclusionary screens are not applied to government securities, semi-government securities, supranational securities, cash or derivatives. This is because it is not reasonably practicable to apply exclusionary screens to such securities or issuers. The use of derivatives may result in the Fund having indirect exposure to issuers that would otherwise be excluded.
For further information on the Fund’s exclusionary screens, go to the ‘Exclusionary Screens’ heading in the ‘Labour, environmental, social and ethical considerations’ section of the ‘Additional Information to the Product Disclosure Statement’.
Effective 30 June 2025, the section ‘Exclusionary Screens’ in section 3 of the Additional Information to the Product Disclosure Statement is replaced with the following:
The following text contains further information on the environmental, social (including labour standards) and ethical considerations that we take into account when selecting, retaining or realising investments in the Fund and should be read in conjunction with the PDS.
Exclusionary Screens
The Fund will not invest in issuers directly involved in any of the following business activities:
• tobacco production (including e-cigarettes and inhalers);
• controversial weapons manufacture (including cluster munitions, landmines, biological or chemical weapons, nuclear weapons, depleted uranium weapons, blinding laser weapons, incendiary weapons, non-detectable fragments and white phosphorus weapons); or
• supply of good or services specifically related to controversial weapons.
The Fund will also not invest in issuers directly involved in any of the following activities, where such activities account for 5% or more of an issuer’s gross revenue:
• exploration, extraction or refinement of fossil fuels (specifically coal, oil and gas);
• the production of alcohol;
• manufacture or provision of gaming facilities;
• manufacture of non-controversial weapons or armaments; or
• manufacture or distribution of pornography.
The Fund applies exclusionary screens to its investments in corporate debt securities. Exclusionary screens are not applied to securities issued by government, semi-government or supranational entities, derivatives or cash. This is because it is not reasonably practicable to apply exclusionary screens to such securities or issuers. The use of derivatives may result in the Fund having indirect exposure to issuers that would otherwise be excluded.
All reasonable care has been taken to implement the Fund’s exclusionary screens to meet the criteria described above. We draw on internal and supplementary external research, believed to be accurate, to determine whether an issuer is subject to the exclusionary screens. However, as the nature and conduct of businesses may change over time, and publicly available financial or other information is not always comprehensive or up to date, we cannot guarantee that the Fund will meet all these criteria at all times.
We review issuers subject to the exclusionary screens monthly, and monitor the Fund’s compliance with its investment guidelines (including with the exclusionary screens) daily. If we discover an investment no longer meets our criteria, we will divest the holding as soon as we consider appropriate (usually sold within three months), having regard to the interests of investors.
Exclusionary screen changes
Pendal Sustainable Balanced Trust – (APIR: PDL1098AU)
(the “Fund”)
The following information contains an important update to the Fund’s exclusionary screens disclosed in the Information Memorandum dated 8 May 2025 for the Pendal Sustainable Balanced Trust (IM) and should be read in conjunction with the IM.
The Fund applies exclusionary screens to its investments in the Australian and International shares, Australian and International fixed interest and part of its Alternative investments asset classes.
Effective from 30 June 2025, the exclusionary screens applied by the Fund to its International shares, Australian fixed interest and part of its Alternative investments asset classes will be changing, as outlined below:
- a new exclusionary screen will be added to the Fund’s International shares, Australian fixed interest and part of its Alternative investment’s asset classes. Within these asset classes the Fund will not invest in companies or issuers which directly supply goods or services specifically related to controversial weapons; and
- within the Fund’s Australian fixed interest asset class, the current screen for issuers that mine uranium for the purposes of weapons manufacturing will be removed as this will be captured under the new screen. Specifically, any issuer supplying uranium for the purposes for weapons manufacturing will now be captured under the supply of goods or services specifically related to controversial weapons exclusionary screen.
In our view, these changes ensure that the Fund remains true to label and is more closely aligned with investor expectations in relation to responsible investment funds.
Further, we have clarified the definition of controversial weapons includes white phosphorus weapons for the Fund’s International shares, Australian fixed interest and part of the Fund’s Alternative investments asset classes.
Exclusionary Screens Effective 30 June 2025
Effective 30 June 2025, the section ‘Exclusionary Screens’ in the IM is replaced with the following:
Exclusionary Screens
The Fund applies exclusionary screens to its investments in the Australian and International shares, Australian and International fixed interest and part of its Alternative investments asset classes.
The Fund’s exclusionary screens aim to avoid exposure to companies and issuers with core business activities that Pendal considers to negatively impact the environment and/or society.[1]
Exclusionary screens are not applied to investments in the Fund’s Australian and International property securities, unlisted property (including unlisted infrastructure and private equity), part of the Fund’s Alternative investments asset classes and certain financial instruments such as securities issued by government, semi-government or supranational entities, derivatives and cash. This is because such investments, financial instruments or issuers are not able to be reasonably screened for involvement in activities that Pendal considers to negatively impact the environment and/or society.1
The use of derivatives may result in the Fund having indirect exposure to companies or issuers that would otherwise be excluded.
The Fund’s Australian and International Shares, Australia and International fixed interest and part of the Alternative investments asset classes will not invest in companies and issuers which directly:
- Produce tobacco (including e-cigarettes and inhalers); or
- Manufacture controversial weapons (including landmines, biological weapons, blinding laser weapons, chemical weapons, cluster munitions, depleted uranium weapons, incendiary weapons, non-detectable fragments and nuclear weapons and except for International fixed interest, white phosphorus weapons).
Additional exclusionary screens are also applied across these asset classes as follows:
Exclusionary Screens – Australian Shares
The Fund’s Australian shares asset class will also not invest in companies which:
Fossil Fuels
• Directly extract or explore for fossil fuels (specifically, coal, oil and gas); or
• Derive 10% or more of their gross revenue from fossil fuel-based power generation (coal, oil and gas)*; or
• Derive 10% or more of their gross revenue from fossil fuel refinement (coal, oil and gas)*; or
• Derive 10% or more of their gross revenue from fossil fuel distribution (coal, oil and gas)*; or
• Derive 10% or more of their gross revenue from the provision of supplies or services which relate specifically to fossil fuel extraction or exploration (coal, oil and gas)*.
* Companies with a climate transition plan may be exempted from this exclusion, provided that they have in place a Paris Agreement aligned transition plan and produce climate-related financial disclosures annually, which in both cases we consider credible.
Uranium
• Derive 10% or more of their gross revenue from directly mining uranium for the purpose of nuclear power generation.
Logging
• Derive 10% or more of their gross revenue from unsustainable forestry or forest products, including non-Forest Stewardship Council certified forest products or non-Roundtable on Sustainable Palm Oil certified palm oil production.
Gambling
• Directly manufacture, own or operate gambling facilities, gaming services or other forms of wagering; or
• Derive 10% or more of their gross revenue from the indirect provision of gambling (for example, through telecommunications platforms).
Pornography
• Produce pornography; or
• Derive 10% or more of their gross revenue from the distribution or retailing of pornography.
Weapons
• Manufacture or distribute controversial weapons (including landmines, biological weapons, blinding laser weapons, chemical weapons, cluster munitions, depleted uranium weapons, incendiary weapons, non-detectable fragments, nuclear weapons and white phosphorus weapons); or
• Supply goods or services specifically related to controversial weapons; or
• Manufacture non-controversial weapons or armaments (including civilian firearms or military equipment); or
• Derive 10% or more of their gross revenue from the distribution or retailing of non-controversial weapons or armaments (including civilian firearms or military equipment); or
• Derive 10% or more of their gross revenue from the supply of goods or services specifically related to non-controversial weapons or armaments.
Alcohol
• Produce alcoholic beverages; or
• Derive 10% or more of their gross revenue from the distribution or retailing of alcoholic beverages.
Tobacco
• Produce tobacco (including e-cigarettes and inhalers); or
• Derive 10% or more of their gross revenue from the distribution of tobacco (including e-cigarettes and inhalers); or
• Derive 10% or more of their gross revenue from the supply of goods or services specifically related to the tobacco industry (for example, packaging or promotion).
Animal cruelty
• Directly undertake animal testing for cosmetic products; or
• Directly undertake live animal export.
Predatory lending
• Directly provide products or services with lending practices that are unfair or deceptive to ordinary borrowers, including small amount short term loans at higher than commercial rates of interest (for example, payday loans, pawn loans or the use of aggressive sales tactics).
Breaches and misconduct
• We consider to have been found to have significant breaches of social or environmental norms or regulations, or are subject to serious and substantiated allegations of unethical conduct, which we consider have not been remedied or adequately addressed.
Exclusionary Screens – International Shares
The Fund’s International shares asset class will also not invest in companies which directly:
• Supply goods or services specifically related to controversial weapons; or
• Extract or explore for fossil fuels (specifically, coal, oil and natural gas).
The Fund’s International shares asset class will also not invest in companies which derive 10% or more of their gross revenue directly from:
• Fossil fuel-based power generation, or fossil fuel distribution or refinement (coal, oil and natural gas)*; or
• The production of alcoholic beverages; or
• Manufacture, ownership or operation of gambling facilities, gaming services or other forms of wagering; or
• Manufacture of non-controversial weapons or armaments; or
• Manufacture or distribution of pornography; or
• Uranium mining for the purpose of nuclear power generation.
* Companies with a climate transition plan may be exempted from this exclusion, provided that they have in place a Paris Agreement aligned transition plan and produce climate-related financial disclosures annually, which in both cases we consider credible.
Exclusionary Screens – Australian Fixed Interest
The Fund’s Australian fixed interest asset class will also not invest in companies which directly:
• Supply goods or services specifically related to controversial weapons.
The Fund’s Australian fixed interest asset class will also not invest in issuers which derive 5% or more of their gross revenue directly from:
• Exploration, extraction or refinement of fossil fuels (specifically coal, oil and gas); or
• The production of alcohol; or
• Manufacture or provision of gaming facilities; or
• Manufacture of non-controversial weapons or armaments; or
• Manufacture or distribution of pornography.
Exclusionary Screens – International Fixed Interest
The Fund’s International fixed interest asset class will also not invest in issuers which derive 10% or more of their gross revenue directly from:
• The production of alcohol; or
• Manufacture or provision of gaming facilities; or
• Manufacture of non-controversial weapons or armaments; or
• Manufacture or distribution of pornography; or
• Direct mining of uranium for the purpose of weapons manufacturing; or
• Extraction of thermal coal and oil sands production.
Exclusionary Screens – Alternative Investments
Additional exclusionary screens are applied to only part of the Fund’s Alternative investments asset class. This is because some investments cannot be reasonably screened for involvement in activities that Pendal considers to negatively impact the environment and/or society.[2]
Where exclusionary screens can be applied to Alternative investments, the Fund’s Alternative investments asset class will also not invest in companies which directly:
• Supply goods or services specifically related to controversial weapons.
Where exclusionary screens can be applied to Alternative investments, the Fund’s Alternative investments asset class will also not invest in companies or issuers which derive 10% or more of their gross revenue directly from:
• The production of alcoholic beverages; or
• Manufacture, ownership or operation of gambling facilities, gaming services or other forms of wagering; or
• Manufacture of non-controversial weapons or armaments; or
• Manufacture or distribution of pornography; or
• Direct mining of uranium for the purpose of nuclear power generation; or
• Extraction of thermal coal and oil sands production.
All reasonable care has been taken to implement the Fund’s exclusionary screens to meet the criteria described above. To determine whether an investment is subject to the Fund’s exclusionary screens, Pendal relies on internal and supplementary external research, believed to be accurate. However, as the nature and conduct of businesses may change over time, and publicly available financial or other information is not always comprehensive or up to date, we do not guarantee that the Fund’s investments will meet all of the Fund’s exclusionary screen criteria at all times.
Where the Fund invests in non-Pendal funds or non-Pendal ETFs, LICs or LITs, we do not guarantee that these investments will meet all of the Fund’s exclusionary screen criteria at all times. This is because Pendal does not control the exclusionary screening methodology applied by such funds, ETFs, LICs or LITs and relies on publicly available information to monitor their compliance with the Fund’s exclusionary screens.
Pendal reviews investments subject to the Fund’s exclusionary screens monthly, however some investments within the Fund’s Alternative investments asset class are reviewed quarterly. We monitor the Fund’s compliance with its exclusionary screens daily.
If we determine that an investment no longer meets our exclusionary screen criteria, we will divest the holding (usually within six months) having regard to the interests of investors. The time it takes to sell an investment depends on factors including, but not limited to, the size and liquidity of the investment (which may have an impact on the Fund’s performance returns), and the time it takes for Pendal to seek and assess suitable replacement investments that meet the Fund’s exclusionary screens and sustainability criteria.
[1] As defined by the Fund’s exclusionary screens and gross revenue thresholds.
[2] As defined by the Fund’s exclusionary screens and gross revenue thresholds.
Pendal Sustainable International Share Fund (APIR: BTA0568AU)
(the “Fund”)
The following information contains an important update to the Fund’s exclusionary screens disclosed in the Information Memorandum dated 10 April 2025 for the Pendal Sustainable International Share Fund (IM) and should be read in conjunction with the IM.
Effective from 30 June 2025, the Fund will introduce an additional exclusionary screen and not invest in companies directly involved in the supply of goods or services specifically related to controversial weapons.
In our view, this change ensures that the Fund remains true to label and is more closely aligned with investor expectations in relation to responsible investment funds.
Exclusionary Screens Effective 30 June 2025
Effective 30 June 2025, the section ‘Exclusionary Screens’ in the Information Memorandum is replaced with the following:
Exclusionary Screens
The Fund applies exclusionary screens which aim to avoid exposure to companies with core business activities that Pendal considers to negatively impact the environment and/or society.4
The Fund will not invest in companies directly involved in the following activities:
• extract or explore for fossil fuels (specifically, coal, oil and natural gas); or
• produce tobacco (including e-cigarettes and inhalers); or
• manufacture controversial weapons (such as cluster munitions, landmines, biological or chemical weapons, nuclear weapons, depleted uranium weapons, blinding laser weapons, incendiary weapons, non-detectable fragments weapons and white phosphorous weapons); or
• supply of good or services specifically related to controversial weapons.
The Fund will also not invest in companies directly involved in any of the following activities, where such activities account for 10% or more of their gross revenue:
• fossil fuel-based power generation, or fossil fuel distribution or refinement (coal, oil and natural gas)*;
• the production of alcoholic beverages;
• manufacture, ownership or operation of gambling facilities, gaming services or other forms of wagering;
• manufacture of non-controversial weapons or armaments;
• manufacture or distribution of pornography; or
• uranium mining for the purpose of nuclear power generation.
*Companies with a climate transition plan may be exempted from this exclusion, provided that they have in place a Paris Agreement aligned transition plan and produce climate-related financial disclosures annually, which in both cases we consider credible.
Exclusionary screens are not applied to cash or derivatives. The use of derivatives may result in the Fund having indirect exposure to the excluded companies.
All reasonable care has been taken by Pendal to implement the Fund’s exclusionary screens to meet the criteria described above. To determine whether an investment is subject to the Fund’s exclusionary screens, Pendal relies on internal and supplementary external research, believed to be accurate. However, as the nature and conduct of businesses may change over time, and publicly available financial or other information is not always comprehensive or up to date, we do not guarantee that the Fund’s investments will meet all of the Fund’s exclusionary screen criteria at all times.
Pendal reviews companies subject to the exclusionary screens monthly and monitors the Fund’s compliance with its investment guidelines (including the exclusionary screens) daily.
If we determine that an investment no longer meets our exclusionary screen criteria, we will divest the holding (usually within six months) having regard to the interests of investors. The time it takes to sell an investment depends on factors including, but not limited to, the size and liquidity of the investment (which may have an impact on the Fund’s performance returns), and the time it takes for Pendal to seek and assess suitable replacement investments that meet the Fund’s exclusionary screens and sustainability or ESG criteria.
Regnan Global Equity Impact Solutions Fund – Class R (APIR: PDL4608AU)
(the “Fund”)
The following information contains an important update to the Fund’s exclusionary screens disclosed in the Product Disclosure Statement and Additional Information to the Product Disclosure Statement dated 2 September 2024 for the Regnan Global Equity Impact Solutions Fund (PDS) and should be read in conjunction with the PDS.
Effective from 30 June 2025, the Fund will introduce an additional exclusionary screen and not invest in companies directly involved in the supply of goods or services specifically related to controversial weapons.
In our view, this change ensures that the Fund remains true to label and is more closely aligned with investor expectations in relation to responsible investment funds.
Further, we have provided clarified that the Fund’s definition of controversial weapons includes white phosphorus weapons.
Exclusionary Screens Effective 30 June 2025
Effective 30 June 2025, the section ‘Exclusionary Screens’ in section 5 of the Product Disclosure Statement is replaced with the following:
Exclusionary Screens
The Fund will not invest in companies which directly:
• produce tobacco (including e-cigarettes and inhalers); or
• manufacture controversial weapons (including cluster munitions, landmines, biological or chemical weapons, nuclear weapons, depleted uranium weapons, blinding laser weapons, incendiary weapons, non-detectable fragments and white phosphorus weapons); or
• supply good or services specifically related to controversial weapons.
Additional exclusionary screens are applied differently across industries and business activities. For further information on the Fund’s exclusionary screens, go to the ‘Exclusionary Screens’ heading in the ‘Labour, environmental, social and ethical considerations’ section of the ‘Additional Information to the Product Disclosure Statement’at www.pendalgroup.com/RegnanGlobalEquityImpactSolutionsFundR-PDS.
The Fund may also hold cash and may use derivatives from time to time. Derivatives may be used to reduce risk and can act as a hedge against adverse movements in a particular market and/or in the underlying assets. Derivatives can also be used to gain exposure to assets and markets. Exclusionary screens are not applied to cash or derivatives. The use of derivatives may result in the Fund having indirect exposure to the excluded companies.
Effective 30 June 2025, the section ‘Exclusionary Screens’ in section 3 of the Additional Information to the Product Disclosure Statement is replaced with the following:
Exclusionary Screens
The Fund will not invest in companies which directly:
• produce tobacco (including e-cigarettes and inhalers);
• manufacture controversial weapons (including cluster munitions, landmines, biological or chemical weapons, nuclear weapons, depleted uranium weapons, blinding laser weapons, incendiary weapons, non-detectable fragments and white phosphorus weapons);
• supply good or services specifically related to controversial weapons; or
• extract or explore for fossil fuels (specifically, coal, oil and natural gas).
The Fund will also not invest in companies which derive 10% or more of their gross revenue directly from:
• fossil fuel-based power generation, or fossil fuel distribution or refinement (coal, oil and natural gas)*;
• the production of alcoholic beverages;
• manufacture, ownership or operation of gambling facilities, gaming services or other forms of wagering;
• manufacture of non-controversial weapons or armaments;
• manufacture or distribution of pornography; or
• uranium mining for the purpose of nuclear power generation.
*Companies with a climate transition plan may be exempted from this exclusion, provided that they have in place a Paris Agreement aligned transition plan and produce climate-related financial disclosures annually, which in both cases Regnan considers credible.
All reasonable care has been taken to implement the Fund’s exclusionary screens to meet the criteria described above. Regnan draws on internal and supplementary external research, believed to be accurate, to determine whether a company is subject to the exclusionary screens. Regnan reviews companies subject to the exclusionary screens monthly and monitors the Fund’s compliance with its investment guidelines (including exclusionary screens) daily. If Regnan discovers an investment no longer meets our criteria, Regnan will divest the holding as soon as Regnan considers appropriate, having regard to the interests of investors (and this will be on a case by case basis). However, as the nature and conduct of businesses may change over time, and publicly available financial or other Information is not always comprehensive or up to date, we do not guarantee that the Fund will meet all of these criteria at all times
Regnan Global Equity Impact Solutions Fund – Class W (APIR: PDL7011AU)
(the “Fund”)
The following information contains an important update to the Fund’s exclusionary screens disclosed in the Product Disclosure Statement and Additional Information to the Product Disclosure Statement dated 2 September 2024 for the Regnan Global Equity Impact Solutions Fund (PDS) and should be read in conjunction with the PDS.
Effective from 30 June 2025, the Fund will introduce an additional exclusionary screen and not invest in companies directly involved in the supply of goods or services specifically related to controversial weapons.
In our view, this change ensures that the Fund remains true to label and is more closely aligned with investor expectations in relation to responsible investment funds.
Further, we have provided clarified that the Fund’s definition of controversial weapons includes white phosphorus weapons.
Exclusionary Screens Effective 30 June 2025
Effective 30 June 2025, the section ‘Exclusionary Screens’ in section 5 of the Product Disclosure Statement is replaced with the following:
Exclusionary Screens
The Fund will not invest in companies which directly:
• produce tobacco (including e-cigarettes and inhalers); or
• manufacture controversial weapons (including cluster munitions, landmines, biological or chemical weapons, nuclear weapons, depleted uranium weapons, blinding laser weapons, incendiary weapons, non-detectable fragments and white phosphorus weapons); or
• supply good or services specifically related to controversial weapons.
Additional exclusionary screens are applied differently across industries and business activities. For further information on the Fund’s exclusionary screens, go to the ‘Exclusionary Screens’ heading in the ‘Labour, environmental, social and ethical considerations’ section of the ‘Additional Information to the Product Disclosure Statement’, a copy of which can be obtained by calling us.
The Fund may also hold cash and may use derivatives from time to time. Derivatives may be used to reduce risk and can act as a hedge against adverse movements in a particular market and/or in the underlying assets. Derivatives can also be used to gain exposure to assets and markets. Exclusionary screens are not applied to cash or derivatives. The use of derivatives may result in the Fund having indirect exposure to the excluded companies.
Effective 30 June 2025, the section ‘Exclusionary Screens’ in section 3 of the Additional Information to the Product Disclosure Statement is replaced with the following:
Exclusionary Screens
The Fund will not invest in companies which directly:
• produce tobacco (including e-cigarettes and inhalers);
• manufacture controversial weapons (including cluster munitions, landmines, biological or chemical weapons, nuclear weapons, depleted uranium weapons, blinding laser weapons, incendiary weapons, non-detectable fragments and white phosphorus weapons);
• supply good or services specifically related to controversial weapons; or
• extract or explore for fossil fuels (specifically, coal, oil and natural gas).
The Fund will also not invest in companies which derive 10% or more of their gross revenue directly from:
• fossil fuel-based power generation, or fossil fuel distribution or refinement (coal, oil and natural gas)*;
• the production of alcoholic beverages;
• manufacture, ownership or operation of gambling facilities, gaming services or other forms of wagering;
• manufacture of non-controversial weapons or armaments;
• manufacture or distribution of pornography; or
• uranium mining for the purpose of nuclear power generation.
*Companies with a climate transition plan may be exempted from this exclusion, provided that they have in place a Paris Agreement aligned transition plan and produce climate-related financial disclosures annually, which in both cases Regnan considers credible.
All reasonable care has been taken to implement the Fund’s exclusionary screens to meet the criteria described above. Regnan draws on internal and supplementary external research, believed to be accurate, to determine whether a company is subject to the exclusionary screens. Regnan reviews companies subject to the exclusionary screens monthly and monitors the Fund’s compliance with its investment guidelines (including exclusionary screens) daily. If Regnan discovers an investment no longer meets our criteria, Regnan will divest the holding as soon as Regnan considers appropriate, having regard to the interests of investors (and this will be on a case by case basis). However, as the nature and conduct of businesses may change over time, and publicly available financial or other Information is not always comprehensive or up to date, we do not guarantee that the Fund will meet all of these criteria at all times
Pendal Multi-Asset Target Return Fund (APIR: PDL3383AU)
(the “Fund”)
The following information contains an important update to the Fund’s exclusionary screens disclosed in the Product Disclosure Statement dated 19 December 2024 for the Pendal Multi-Asset Target Return Fund (PDS) and should be read in conjunction with the PDS.
Effective from 30 June 2025, the Fund will introduce an additional exclusionary screen and not invest in companies or issuers directly involved in the supply of goods or services specifically related to controversial weapons.
In our view, this change ensures that the Fund is more closely aligned with investor expectations around responsible investing.
Further, we have clarified the Fund’s definition of controversial weapons includes white phosphorus weapons.
Exclusionary Screens Effective 30 June 2025
Effective 30 June 2025, the section ‘Labour, Environmental, Social and Ethical Considerations’ in section 5 of the PDS is replaced with the following:
We do take environmental, social (including labour standards) and ethical considerations into account when making investment decisions. Sustainable investment practices are incorporated into the Fund by implementing exclusionary screens.
The Fund will not invest in companies or issuers directly involved in the following business activities:
- tobacco production (including e-cigarettes and inhalers);
- controversial weapons manufacture (including cluster munitions, landmines, biological or chemical weapons, nuclear weapons, depleted uranium weapons, blinding laser weapons, incendiary weapons, non-detectable fragments and white phosphorus weapons); or
- supply of goods or services specifically related to controversial weapons.
The Fund will also not invest in companies or issuers directly involved in the following activities, where such activities account for 10% or more of a company’s or issuer’s gross revenue:
- the production of alcohol;
- manufacture or provision of gaming facilities;
- manufacture of non-controversial weapons or armaments;
- manufacture or distribution of pornography;
- uranium mining for the purpose of nuclear power generation; or
- extraction of thermal coal and oil sands production.
Exclusionary screens are not applied to government securities, semi-government securities, supranational securities, cash or derivatives. The use of derivatives may result in the Fund having indirect exposure to the excluded companies or issuers.
All reasonable care has been taken to implement the Fund’s exclusionary screens to meet the criteria described above. We draw on internal and supplementary external research, believed to be accurate, to determine whether an investment is subject to the exclusionary screens. However, as the nature and conduct of businesses may change over time and publicly available financial or other information is not always comprehensive or up to date, we do not guarantee that the Fund will meet all of these criteria at all times.
We review investments subject to the exclusionary screens monthly and monitor the Fund’s compliance with its investment guidelines (including the exclusionary screens) daily. If we discover an investment no longer meets our criteria, we will divest the holding as soon as we consider appropriate, having regard to the interests of investors (and this will be on a case by case basis).
Emerging markets seem to be entering an extended period of rate-cutting, which should support their economies and equity markets. Pendal EM portfolio manager JAMES SYME explains
- Find out about Pendal Global Emerging Markets Opportunities fund
Uncertainty remains high in financial markets among participants and policy makers.
This uncertainty is driven by global trade policy and how it will affect growth, inflation and ultimately interest rate decisions (and market expectations of those decisions). The International Monetary Fund now believes today’s tariff-driven environment is more challenging than the COVID era.
“[Early in the pandemic] central banks everywhere were moving in the same direction in the sense of easing monetary policy very quickly,” IMF deputy Gita Gopinath said last week.
“But this time around the shock has differential effects.”
Looking at previous cycles in emerging markets – especially considering the impact of a weaker US dollar and incoming capital flows – Pendal’s EM team believes emerging markets are mostly in an extended period of cutting policy interest rates.
We believe this will be supportive of emerging economies and emerging equity markets.
Emerging markets cutting rates
Last year we saw rate cuts in many advanced economies as the 2022 inflation surge eased.
But this year global central banks have been more cautious, either in their statements or the speed or extent of rate cuts.
Why? Because volatility in trade policy creates significant uncertainty about growth and inflation.
Find out about
Pendal Global Emerging Markets Opportunities Fund
In the emerging world, however, most central banks have continued cutting rates.
The 19 independent central banks in the MSCI Emerging Market Index members (Greece uses the Euro and the four Arabian Gulf nations have USD pegs) have delivered 24 policy rate cuts and only four hikes in the first five months of 2025.
(Of those hikes, three were in Brazil where economic growth remains very strong, and the other was in Turkey after three big cuts.)
A clear pattern
There is a clear pattern here.
GDP growth forecasts for 2025 and 2026 have been revised lower in emerging Asia (and sharply lower in developed markets) but have held largely steady in EMEA and Latin America.
Many of the central banks on hold are in emerging Asia – China, Taiwan, Malaysia – despite this region’s more-challenging growth outlook.
We believe this is because those countries – with their export-based economic development models and big current account surpluses – have been less sensitive to the strong US dollar in recent years, and have been able to keep interest rates lower than the current account deficit countries.
For example, Taiwan had a 2024 current account surplus of 14.1% of GDP.
Its central bank has been on hold at 2% for more than a year despite CPI inflation in the first five months of 2025 averaging 2.2%.
By comparison, South Africa ran a 2024 current account deficit of 0.7% of GDP.
Its CPI inflation averaged 3.1% in the first four months of 2025 – but the central bank started the year with policy rates at 7.75% and has been able to cut rates twice so far this year.
What it means for investors
In terms of portfolio positioning, we expect global investor concerns about US trade and economic policy to continue driving capital flows into emerging markets.
We think this will be supportive of currencies, allowing stronger growth, lower inflation and faster/further rate cuts.
This, we believe, is the principal trigger of a positive feedback loop we’ve seen in emerging economies in previous up-cycles.
We prefer domestic-demand-driven emerging markets, with historically weaker current account balances and the ability to cut rates from higher real levels.
We remain constructive on the asset class, and overweight Mexico, Indonesia, South Africa and Brazil.
About Pendal Global Emerging Markets Opportunities Fund
James Syme, Paul Wimborne and Ada Chan 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.
Here are the main factors driving the ASX this week according to Pendal investment analyst ANTHONY MORAN. Reported by portfolio specialist Chris Adams
ROBUST employment and income growth in the US have been the lynchpin supporting markets at peak valuation levels – and the data didn’t disappoint last week.
Stronger-than-expected US payrolls on Friday saw US equities and bond yields both rising to close out the week.
The S&P 500 finished up 1.5%, the NASDAQ was up 2.2%, while the S&P/ASX 300 rose 1.0%.
Otherwise, there was little news on the macro and market front – with the media focused on President Trump and Elon Musk’s social media feud, which serves as an important reminder that a lot can change in six months.
The commodities picture was mixed, with cyclical exposures oil (Brent crude +4.0%) and copper (+3.8%) both rebounding, along with gold (+1.0%). Iron ore fell -3.5%.
US macro
May’s payroll data showed 139k new jobs, which was slightly ahead of the 126k expected by consensus and consistent with a slowing but still growing economy.
Average hourly earnings came in at +0.4% MoM, ahead of consensus at +0.3%.
This stronger hard data saw a spike in bond yields on Friday night, coming in as a bit of a surprise after softer economic survey data earlier in the week.
This softer data included the US Manufacturing Purchasing Manager’s Index (PMI) coming in at 48.5 versus 49.5 expected and the May ISM Services Index coming in at 49.9 versus 52.2 expected.
The Manufacturing PMI miss was primarily driven by de-stocking after the pre-tariff inventory build-up. This trend can also be seen in consumer data, with US auto sales down 9% month-on-month in May after a pull forward of purchases to beat tariffs earlier in the year.
The weakness in the ISM Services Index could provide a deflationary impulse to partly offset tariff impacts on goods inflation.
Elsewhere, the Fed’s “Beige Book” – a regular review of economic conditions – warned of a slight decline in economic activity.
Initial jobless claims also ticked up during the week, confirming a rising trend. However, seasonal adjustments made a big impact, so this is not yet a clear signal.
Commentary around inflation in many of the data releases was more hawkish – in the Services ISM, the price component spiked 3.6pts to 68.7 and the Beige Book noted: “There were widespread reports of contacts expecting costs and prices to rise at a faster rate going forward. A few Districts described these expected cost increases as strong, significant, or substantial.”
There was a partial offset to this from the Congressional Budget Office, which scored the current Budget Bill as a little less stimulatory than expected, which slightly eased longer term inflation fears.
The deficit-expanding impact of the Budget Bill is ostensibly the catalyst for Musk and Trump’s high-profile feud.
The takeaway is that data suggests the US economy is incrementally slowing – but this is not a big surprise and it suggests decelerating growth, not recession.
This incremental slowing is negative for stocks that are at the pointy end of economic weakness (e.g. US consumer-exposed stocks) but is unlikely to be enough to drag down the broader market materially.
The US economy is expected to reach trough growth in the December quarter.
Tariffs
There wasn’t a huge amount of news flow on tariffs last week, though anxiety is building as we get closer to the end of the tariff suspension period on 9 July.
Trump demanded the best offers from major economic partners by last Wednesday.
The biggest news was the phone call between Trump and China’s President Xi, but there were no real details apart from Trump being invited to Beijing.
The market still expects a Japan trade deal soon and the G7 Leader’s Summit from 15-17 June is seen as a possible confirmation point for deals.
Sentiment around tariffs looks set to remain volatile, with anxiety continuing to grow in the absence of news flow.
Australia macro
March quarter GDP was softer than expected at +0.2% quarter-on-quarter versus consensus at +0.4%. This is a marked slowdown versus the December quarter and a decline in per capita terms.
We have been expecting resilient economic growth in Australia on the back of rising real disposable incomes, an expansionary Federal Budget and interest rate cuts.
There were some unusual distortions in the March quarter from extreme weather events, which should reverse.
But we also saw a rare decline in public spending – driven by lower state government spending – and softer household consumption (+0.4% versus +0.7% in the December quarter).
Pendal Focus Australian Share Fund
Now rated at the highest level by Lonsec, Morningstar and Zenith
Notably, real household income growth was good at +1.7% quarter-on-quarter, but this was offset by a rise in the savings rate, which rose to 5.2% in the quarter and is normalising towards historical trends.
The Fair Work Commission announced a 3.5% increase in the minimum wage, which equates to growth in real wages with CPI running in the high-2% range. It comes on top of the 0.5% superannuation increase.
However, the growth in real wages won’t be a support to GDP growth if the savings rate keeps rising.
Of more concern for the longer-term economic outlook, productivity growth was flat during the quarter and unit labour costs were +0.9% (or +5.1% year-on-year).
This suggests there is little downside from here for the inflation rate – so while the RBA still intends to cut rates on the basis that monetary policy is tight, this may reduce the number of cuts.
We still expect a base case of resilient Australian GDP growth to play out, with some of the drivers in the March quarter softness to be temporary.
But the savings rate – potentially driven by global macro uncertainty and weather events (i.e. relief payments) – is worth watching as a risk.
We also need to wary of a labour cost-driven bounce back in the CPI that limits rate cuts.
Rest-of-the world macro
Eurozone preliminary CPI was softer at +1.9% year-on-year versus 2.0% expected, being helped by a stronger euro and lower energy costs.
This was below the ECB’s target and saw the central bank cut interest rates by a further 25bps on Thursday night.
Rates are now back to 2% and the ECB has signalled that it is nearing the end of the cutting cycle, albeit with downside risks and uncertainty ahead.
Tariffs are hitting the Chinese economy, with the Caixin Manufacturing PMI surprisingly down 2.1 points to 48.3 versus 50.7 expected. This is the lowest reading since October 2022.
China still needs to step up its stimulus, particularly in support of the consumer, to offset these impacts.
Markets
It was a good week for the Mag7 (ex-Tesla), with the AI narrative regaining some momentum, as:
- Taiwan’s TSMC spoke favourably about AI-linked demand.
- Meta struck a 20-year deal with Constellation Energy for nuclear power to support AI operations.
- The Wall Street Journal reported that Meta aims to have AI tools in place by the end of 2026 that would allow complete automation of the entire advertising process (including creating ads) – technology that could significantly disrupt traditional ad agencies.
- A report from private investment firm Bond Capital talked about the AI market growing to $244bn by 2025 and to $1.01 trillion by 2031.
In recent weeks, we’ve talked about how markets – despite trading at full valuations – seem well supported by technical drivers such as liquidity and slowing, but relatively resilient, economic growth.
This remains the case, but by some measures markets look like they have the potential to be more volatile.
Both long and short leverage is at a very elevated level historically. This leaves the net position balanced, but suggests the potential for outsized moves if there is a momentum shift as one side’s leverage is unwound.
There is a parallel of this in Merrill Lynch’s Bull & Bear Indicator, which is reading neutral, but under-the-hood components are sharply polarised with hedge fund and long-only positioning very bearish and credit market technical and equity market breadth very bullish.
So there is some potential for a pick-up in volatility, with tariff deadlines and deals a potential catalyst.
Another concern is that markets will underperform as hard data continues to slow in coming months. This risk is highlighted by the index of US Cyclicals versus Defensives pricing in economic growth well above current economic consensus.
This is clearly going to be a risk, but Goldman Sachs notes that in past recessions the market has rallied with the recovery in soft economic data, which leads the hard data.
We have already seen the weakness in the soft data and there are some signs of a rebound (e.g. consumer confidence recently rebounded 12.3pts to 98).
Also, the Cyclical versus Defensive reading may be exaggerated by the Healthcare sector – which is being challenged by government policy concerns – and tariffs hitting some normally defensive Consumer Staples.
More sector-neutral measures of economic sensitivity, like the High Operating Leverage versus Low Operating Leverage stocks index from Goldman Sachs, show High Operating Leverage stocks operating at a level more consistent with a recession.
The upshot is it seems more likely that trade policy, rather than the economic data, will be the main driver of potential volatility in coming weeks.
Australian market and stocks
The Australian market rose during the week, following the offshore lead – with banks and REITs leading the charge and defensives and resources underperforming, with iron ore declining and dragging down the latter.
About Anthony Moran
Anthony Moran is an analyst with over 15 years of experience covering a range of Australian and international sectors. His sector coverage has included Australian Industrials and Energy, 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.