Winners in a Trump world | Tune into Tencent for a hidden gem | Rates, China, Trump: the trends shaping 2025 | Learnings from the 2024 election year
In investing – just like in music – real success is found beyond the obvious. China’s Tencent Music is a great example, argues Pendal’s SAMIR MEHTA
- Value to be found in Asian equities if you know where to look
- Tencent Music generating cash and buying back stock
- Find out more about the Asian Share Fund
WHO is the Bob Dylan of music streaming?
That’s the question Pendal’s Samir Mehta posed at the Sohn Hearts & Minds Conference in Adelaide last month.
For most, the answer is obvious: Sweden’s Spotify has revolutionised the way we consume music, dominating developed markets and setting the benchmark for subscription-based streaming.
But in investing – just like in music – real success is found beyond the obvious.
For every Bob Dylan – whose sandpaper voice and sermon-like lyrics changed the face of music worldwide – there’s a Sixto Rodriguez: overlooked by mainstream audiences until an Oscar-winning documentary, Searching For Sugar Man, revealed he had been quietly building a cult following in small but devoted markets.
“Spotify has done a brilliant job in developed markets, but there’s lots of other markets that still have potential,” says Mehta, who manages the Pendal Asian Share Fund.
“What we need to do is search for the Sugar Man of streaming.”
“Music follows exactly the same trends across the world – and the Sixto Rodriguez of streaming is China’s Tencent Music Entertainment.”
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Pendal Asian Share Fund
With paying subscriber base of 117 million, a market capitalisation of around US$20 billion, over US$4 billion in cash, and revenues in the online subscription business growing at 20 per cent annually, Tencent Music generates almost US$1 billion of cash each year, says Mehta.
They have already bought back US$1 billion of shares and this year’s US$500 million buyback is ongoing.
“Generating cash and buying back stock is not something that you associate with Chinese companies,” says Mehta.
“But there’s been a sea change in attitudes among well-managed Chinese companies and Tencent Music represents one of those; doing exactly what we as minority shareholders want them to do.”
Streaming has transformed the global music industry, replacing one-time purchases of LPs, cassettes, and CDs with stable, long-term subscription revenue.
When Tencent Music was first launched by its parent Tencent Holdings, which retains a 52 per cent stake, some 70 per cent of sales came from so-called ‘social entertainment’ – essentially user-generated karaoke and live music performances.
But after Beijing imposed regulatory changes in 2021 that forced the business to take responsibility for the content on its platform, 78 per cent of revenue is now from traditional online music streaming.
“That is Spotify-like subscription revenues – growing at a clip of 20 per cent per annum,” says Mehta.
“Faced with a regulatory diktat, the company cleaned up and now they proudly proclaim ‘we are now progressing towards a healthy development of China’s online music industry’.
“They are signalling to the government that their business now is well within the requirements of the law that the Chinese government imposes.”
They currently have 117 millio active monthly paying subscribers. A key focus for management is to steadily raise average subscription from the current US$1.5 per month to US$2 over the next 5 years.
Tencent Music generates 42 per cent gross margins – and a nascent advertising revenue stream will only supplement growth, says Mehta.
“You can see the similarities.
Searching for Sugar Man made a cult figure of Sixto Rodriguez. This conference, Sohns Hearts and Minds, is going to do for Tencent Music what the documentary did for Rodriguez.”
About Samir Mehta and Pendal Asian Share Fund
Samir manages Penda’s Asian Share Fund, an actively managed portfolio of Asian shares excluding Japan and Australia. Samir is a senior fund manager at UK-based J O Hambro, which is part of Pendal Group.
Pendal Asian Share Fund aims to provide a return (before fees, costs and taxes) that exceeds the MSCI AC Asia ex Japan (Standard) Index (Net Dividends) in AUD over the medium-to-long term.
Find out about Pendal Asian Share Fund
About Pendal Group
Pendal is an independent, 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 portfolio manager RAJINDER SINGH. Reported by portfolio specialist Chris Adams
- Australian economy is “sluggish”
- Markets pricing up to three cuts by the end of 2025
- Find out about Crispin Murray’s Pendal Focus Australian Share Fund
GLOBAL equity markets had a solid start to December, supported by the increased likelihood of a rate cut at the Fed’s FOMC meeting this week.
Both the S&P 500 (up 1.0%) and Nasdaq (up 3.4%) hit all-time highs during the week, while US Treasuries rallied on relatively benign macroeconomic prints.
Overall, these indicators point to a solid US economy that is seeing an uptick in post-election confidence and activity, but without signs of any reacceleration in inflationary pressures.
There is plenty of interest for followers of international politics, though, with ongoing developments in France, South Korea and the Middle East. The implications for markets are not entirely clear, but it does affect confidence at the margin.
Australia released some mixed economic data points, with the September quarter GDP dominating discussions in both the economic and political spheres.
The Australian economy’s performance remains sluggish – with real GDP growth only slightly positive, due largely to public sector demand and strong immigration, and the per-capita recession continuing.
The market has brought forward the likelihood of the RBA’s first cash rate cut, though future CPI prints remain key.
Australian equities didn’t follow international markets higher, however, with the S&P/ASX down 0.2% for the week.
Technology (up 1.7%) and Consumer Discretionary (up 1.8%) continued their strong performance, while the weakest sectors were REITS (down 2.6%), Utilities (down 1.3%) and Energy (down 1.0%).
Fed commentary watch
On Monday we heard from Christopher Waller, a member of the Federal Reserve Board of Governors, whose remarks were regarded as dovish and risk friendly.
Waller discussed the case for a cut versus a skip in December, saying that “at present I lean toward supporting a cut”.
He also said he would be paying close attention to JOLTS (the employment report), as well as November CPI/PPI inflation and retail sales, and would shift to favour a skip if the data “surprises to the upside” and “alters my forecast for the path of inflation”.
Elsewhere:
- Mary Daly (San Fransisco Fed President) said an interest rate cut this month isn’t certain but remains on the table for policymakers.
- Adriana Kugler (Fed Board member) expressed optimism about the economy, saying inflation appears to be on a sustainable path to the central bank’s 2% goal.
- John Williams (New York Fed President) added that more rate cuts are likely needed “over time”
- Fed Chair Jerome Powell said that the FOMC can “afford to be a little more cautious” on moving policy toward a neutral setting given the current strength of the economy.
In summary, Federal Reserve officials indicated that they expect the central bank to continue cutting interest rates over the next year, but stopped short of saying they were committed to making the next reduction in December.
US economy
We saw an early read on Black Friday retail sales, with Mastercard’s SpendingPulse reporting that 2024 sales rose 3.4% compared with last year. Online retail sales increased 14.6% while in-store sales were up marginally (0.7%).
On Tuesday, we saw the release of the Institute for Supply Managements Manufacturing PMI, with the latest reading increasing to 48.4 from 46.5. While this indicator showed continued weakness in factory demand, it did exceed Wall Street’s 47.5 forecast.
Various components of the index indicated improvement on the previous month and, importantly, the forward-looking New Orders component showed increasing business confidence, with an expansionary 50.4 print.
There was a big focus on employment data last week, starting with the Job Openings and Labor Turnover Survey (JOLTS) – it confirmed recent labour market trends, where tightness in the jobs market is easing but remains in good shape overall.
The JOLTS data surprised to the upside, with overall job openings rising 372k to 7.74 million in October 2024. While this has come back from a peak of 12 million, it is still elevated when compared to pre-pandemic levels.
The JOLTS Quit tally rose 228k, taking the quit rate to 2.1% – the highest since May. The quit rate is important as it shows workers are confident leaving current employment and seeking a new job, making it a good predictor of future wage growth.
Initial jobless claims for the week ending 30 November rose by 9k to 224k (versus consensus at 215k) mostly on volatility around the Thanksgiving holiday, which came five days later than last year.
Cost-cutting measures announced at Boeing and Stellantis suggest jobless claims will rise through year-end and into mid-January.
The most anticipated data release of the week was the November non-farm payroll Employment Report on Friday.
Headline payroll growth bounced higher to 227k versus 36k in October, but the latter was affected by hurricanes and strikes. The unemployment rate ticked up to 4.2% from 4.1%.
This data was regarded as solid and as expected, but without too much upside surprise to stoke any fears of reaccelerating inflation.
Importantly, if the Fed wants some insurance against unemployment rising further, it is likely to cut rates by 25 basis points (bps) again in December as indicated in recent Fed board speeches.
We are still to see CPI data before the Fed meeting, but the market is already pricing most of a 25bp cut for December and up to three more cuts for calendar 2025.
Find out about Pendal Sustainable Australian Share Fund
Australian economy
There were a few mixed data points for Australia last week:
- Similar to the US, early indications on Black Friday sales showed solid performance. National Australia Bank’s transaction data showed overall spending was up 4% year on year.
- Official retail trade data from the ABS rose 0.6% in October, beating expectations of 0.4%. Annual growth increased to 3.4%, which is the highest rate since May 2023. Within components of this release, growth in discretionary spend categories was particularly strong.
- Credit growth in October 2024 rose 0.6% for the month and 6.1% year-on-year, which is the fastest pace since May 2023.
- Residential building approvals bounced up 4.2% month-on-month in October 2024 to 185k annualised, which is the highest level since December 2022.
- CoreLogic’s November house price series showed national house prices increased just 0.1% in the month – the weakest Australia-wide result since January 2023. There was large divergence across states, with Brisbane and Perth still growing well but down from previous high levels. Sydney was just below the national average, but Melbourne’s property (and economic confidence) woes continue.
The most watched economic release was the September quarter National Accounts, which showed GDP rising just 0.3% quarter-on-quarter, below the 0.5% consensus expectation.
Of most concern was the decomposition between the public and private components of the domestic economy, which showed that almost all of the economic growth was from the Government sector.
This continued a trend of weak Private sector demand over recent quarters.
Public sector demand has now risen to 29% of GDP, which matches Covid-19 emergency spending levels and represents some of the highest levels seen over the past 60 years – and this is before any new spending associated with the Federal election.
Aside from government spending, the only other support to the economy has been strong immigration levels.
Once this is accounted for, GDP per capita contracted for the seventh straight quarter, which is significantly worse than most of our international peers.
This softer GDP print saw the market move from pricing only one RBA cut to three by the end of 2025, with the first cut fully priced by April 2025.
Other global macroeconomic developments
Oil: OPEC+ delayed an output hike for a third time as the oil market faces a looming supply surplus that’s weighing on prices. The group will start increasing production in April instead of January and unwind cuts at a slower pace, in line with expectations
China: China’s top leaders plan to start the annual closed-door Central Economic Work Conference (CEWC) next Wednesday to map out economic targets and stimulus plans for 2025. Market watchers are looking/hoping for more concrete confidence building measures, particularly given Chinese property market concerns.
Europe: Traders are trimming their European Central Bank rate-cut wagers, though rates markets still have a cut still priced for 12 December – and a further five for 2025.
Geopolitics: Government instability in France and South Korea and the collapse of the Assad regime in Syria is not helping investor confidence outside of the US.
Markets
We are in a seasonally strong point for markets. Only once since 1928 has December been the worst month of the year performance-wise.
Historically, November and December are particularly strong return months in US Election years.
We see similar themes looking at the first month following Trump’s election victory in both 2016 and 2024.
There has been strong performance in risk-on cyclical sectors (Financials, Consumer Discretionary, Industrials, Small Caps), with weakness in defensives (Healthcare, Real Estate) and China-related (Materials) areas.
The Tech sector has performed a touch below the S&P 500 on both occasions.
We do note sentiment is getting very toppy, with Equity ETF flows more than two standard deviations above their average back to 2017.
About Rajinder Singh and Pendal’s responsible investing strategies
Rajinder is a portfolio manager with Pendal’s Australian equities team and has more than 18 years of experience in Australian equities. Rajinder manages Pendal sustainable and ethical funds, including Pendal Sustainable Australian Share Fund.
Pendal offers a range of other responsible investing strategies, including:
- Pendal Sustainable Australian Share Fund
- Crispin Murray’s Pendal Horizon Fund
- Pendal Sustainable Australian Fixed Interest Fund
- Pendal Sustainable Balanced Fund
- Regnan Credit Impact Trust
- Regnan Global Equity Impact Solutions Fund
Part of Perpetual Group, Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management. Responsible investing leader Regnan is now also part of Perpetual Group.
Unit prices delayed during the period 5 December 2024 to 11 December 2024 for:
- Pendal Dynamic Income Fund – Class R (APIR: BTA8657AU ARSN: 622 750 734)
- Pendal Dynamic Income Fund – Class W (APIR: PDL7550AU ARSN: 622 750 734)
The calculation of the unit prices for Class R and Class W of the Pendal Dynamic Income Fund (the Fund) will be delayed during the period 5 December 2024 to 11 December 2024 (the Period). This will, in turn, delay the processing of applications and withdrawals received during the Period.
We anticipate that unit prices for the Fund will be available by Thursday 12 December 2024.
Why are unit prices being delayed?
The Fund is invested in the Pendal Pure Alpha Fixed Income Fund which has terminated effective 5 December 2024. Unit prices for the Fund cannot be calculated until the termination of the Pendal Pure Alpha Fixed Income Fund is complete.
The termination proceeds from the Pendal Pure Alpha Fixed Income Fund are expected to be received by the Fund on or around 12 December 2024. Once the Fund receives the termination proceeds, we will then be able to calculate the unit prices for Class R and Class W, for each day during the Period.
What does this mean for you?
Unit prices for the Fund will not be published during the Period. However, investors will still be able to apply and withdraw from each class of the Fund during the Period.
This delay will not affect the unit price that investors receive for transactions they make during the Period. All valid application and withdrawal requests received before the daily cut-off time (i.e. 2.00pm (Sydney time)) will continue to be processed using the entry or exit price calculated for that business day, once the prices become available on or around 12 December 2024.
This delay will not affect the way that we currently manage the Fund.
Questions?
If you have any questions, please contact our Investor Relations Team during business hours Monday to Friday on 1300 346 821.
Changes to the Pendal Dynamic Income Fund effective from 5 December 2024:
- Pendal Dynamic Income Fund – Class R (APIR: BTA8657AU ARSN: 622 750 734)
- Pendal Dynamic Income Fund – Class W (APIR: PDL7550AU ARSN: 622 750 734)
We are implementing changes to the Pendal Dynamic Income Fund (the Fund) with effect from 5 December 2024.
The Fund is an actively managed portfolio of fixed interest securities that invests primarily in Australian issued investment grade corporate bonds, international credit and emerging markets sovereign debt.
Effective 5 December 2024, the Fund will be authorised to invest in high yield credit, as part of its international credit exposure. The Fund’s international credit (including high yield) exposure will be obtained through indices, primarily using derivatives.
With the addition of high yield credit, the Fund will be allowed to purchase non-investment grade international credit securities. International credit securities (including high yield) may be rated non-investment grade at the time of purchase. All Australian credit securities, including corporate bonds, will continue to be rated investment grade at the time of purchase and can continue to be held if the corporate bond is downgraded after purchase. The Fund’s maximum investment exposure to Australian and international non-investment grade credit securities (in aggregate) is limited to 15% of the value of the Fund.
Effective 5 December 2024, the Fund will also be able to implement direct active currency management as part of its investment strategy when we believe market conditions are supportive.
The leverage obtained from investing in derivatives to manage interest rate duration or active currency will not be limited. However, leverage obtained from investing in Australian and international credit derivatives and sovereign emerging markets derivatives is limited to a maximum of 20% above the value of the Fund.
The changes are expected to enhance the Fund’s investment returns and not impact the Fund’s overall risk profile. The Fund will continue to be managed to its investment objective of ‘aims to provide a return (before fees, costs and taxes) that exceeds the RBA Cash Rate by 2-3% p.a. over the medium term.’
We have reissued the Fund’s Product Disclosure Statement (PDS) to reflect these changes. A copy of the Class R’s PDS can be found on our website at Pendal Dynamic Income Fund – PDS – Class R.pdf.
Please call us on 1300 246 821 to obtain a copy of Class W’s PDS.
Questions?
If you have any questions, please contact our Investor Relations Team during business hours Monday to Friday on 1300 346 821.
Following a review of the Pendal Pure Alpha Fixed Income Fund (Fund) we have made the decision to terminate the Fund effective Thursday, 5 December 2024.
Why is the Pendal Pure Alpha Fixed Income Fund terminating?
We regularly review our product offerings and investment capabilities to ensure that our business continues to maintain a product suite that is relevant to client demands and commercially viable.
After careful consideration, we have determined that terminating the Fund is in the best interests of all investors.
The Fund has experienced underperformance and has not been able to meet its investment return objective. Also, the Fund has been in outflows for a number of years, with little prospect of any significant growth in funds under management in the foreseeable future. As a result, the Fund cannot remain economically viable without significantly increasing the management fee charged to investors.
How this affects you?
As the decision to terminate the Fund has been made, applications, transfers and withdrawal requests will not be accepted from 10:30am (Sydney time) on Thursday, 5 December 2024.
What happens next?
Following the Fund’s termination on Thursday, 5 December 2024, we will begin to wind up the Fund. The assets of the Fund will be sold and the net proceeds of winding up will be paid to all investors in proportion to their unit holding.
What does this mean for you?
Your pro-rata share of the net cash proceeds from this termination will be paid directly to your nominated bank account on file on or around Thursday, 12 December 2024.
There will be no final distribution of income by the Fund on termination. You will receive an AMIT Member Annual (AMMA) statement which will set out the details of taxable income that has been attributed to you following the end of the 2024/2025 financial year.
Questions?
If you have any questions, please contact our Investor Relations Team during business hours Monday to Friday on 1300 346 821.
Australia’s latest GDP figures suggest the door for rate cuts has opened further, writes Pendal’s head of government bond strategies TIM HEXT
- Why bonds, why now? Pendal’s income and fixed interest experts explain
- Browse Pendal’s fixed interest funds
THE Australian economy grew by only 0.3% in the September quarter, once again falling behind population growth.
We managed only 0.8% growth for the year, yet the RBA still thinks demand outstrips supply.
The September quarter GDP numbers were always going to be more interesting than most.
Tax cuts and government subsidies were hitting consumer pockets and the big question was whether they would be spent or saved. For now, it appears consumers have been happy to pocket the extra money.
Spending by business and consumers once again flatlined and per capita consumption fell by 2% over the year.
The only growth we could find was, once again, the government – which now comprises almost 28% of GDP, up from around 23% for most of the past 50 years.
The graph below, courtesy of Westpac, highlights this extraordinary return of big government.
Source: Wages grow 3.5 per cent for the year | Australian Bureau of Statistics
The national accounts also provided more information around wage pressures. As the high wage outcomes of 2022 and 2023 have faded from view, these are easing quickly.
Average earnings per hour moderated to 3.2%yr, from 6.5%yr in the June quarter. This is consistent with recent wage data at 3.5%.
We have weak growth, moderating inflation, wages under control and global easing cycles – so why the hesitation from the RBA?
The central bank remains focused on the idea that the labour market remains too tight, as it believes that 4.5% – not the current 4.1% – to be full employment.
The data is now suggesting otherwise.
Outlook
It will be an interesting few upcoming meetings for the RBA board.
February will likely be the last monetary policy board decision for three of the six independent directors. And March or April will see a split into governance and monetary policy boards.
Whether this influences thinking remains to be seen, but the current spirit of caution may yet stop a rate cut in February.
However, I think the RBA may do a short sharp pivot in the next few months, and view two cuts (in February and May) as still on the cards.
The Q4 inflation data at the end of February will be another low number, with even underlying inflation likely to print 0.6%, or annualised at the RBA midpoint.
While bond investors will be cheering for a cut, the Labour government will be desperate for one ahead of the “cost-of-living” election.
Time will tell if the RBA delivers for them.
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
- Find out about Pendal Focus Australian Share fund
- Tune in: register to watch Crispin’s Beyond the Numbers webinar
THE market finished November on a high, helped by falling bond yields and a lower US Dollar.
The S&P 500 returned 1.1% for the week and 5.9% for the month, while the S&P/ASX 300 was up 0.6% and 3.7%, respectively.
President-elect Trump’s threat of 25% tariffs on Canada and Mexico as well as 10% on China did not illicit a durable negative reaction in either bonds or equities – probably due to the attached conditionality and a timeframe that is still almost two months away.
The pre-conditions for a continued rally into year-end remain in place, with positive macro data, flows good, confidence high, and the supportive technicals.
There was strong divergence within Australian equities last week; tech and healthcare outperformed while energy and banks lagged.
The market’s favourite high-momentum growth names are melting up, with Life360 (360) up 20.5%, Pro Medicus (PME) up 13.6%, Sigma Healthcare (SIG) up 13.3%, Guzman y Gomez (GYG) up 12.7% and Telix Pharmaceuticals (TLX) up 9.6% week on week, with flows the main driver.
Our broad-cap portfolio positioning is generally skewed to growth, with Technology One (TNE) and Xero (XRO) underpinning performance in November. This was combined with quality industrials such as SGH (SGH) – formerly Seven Group – and James Hardie (JHX), as well as insurers which benefitted from higher bond yields over the month and the rotation to financials.
Pendal Focus Australian Share Fund
Now rated at the highest level by Lonsec, Morningstar and Zenith
US tariffs: hard to know where they land, so not factored in by the market for now
Trump posted that he intends to impose 25% tariffs on Mexico and Canada on day one of his administration.
While these are higher than the market expected, he conditioned them on action relating to immigration and drugs.
We have subsequently seen Mexican President Sheinbaum have a call with Trump, while Canadian Prime Minister Trudeau popped in for dinner at Mar-a-Lago.
Trump also spoke to imposing an additional 10% tariff on China.
The impact, if applied, is material.
The percentage of import value collected as tariffs would rise from low single-digits to roughly 10%, before factoring in anything additional for Europe.
So far, the market is sanguine on this on the belief that they will be watered down in both size and scope.
The other issues to consider with tariffs are:
- suppliers absorb part of the impact in their margins
- that the inflationary effect is diluted as trade flows adapt to avoid them
- currencies may adjust to dampen down effects (e.g. USD strength reduces the inflationary effect)
US economic outlook: looks fine, persistent inflation is one area to watch
This week’s monthly payroll data is an important signal for the US Federal Reserve.
The signals are constructive, with claims data coming off post the hurricane-induced spike. While continuing claims are picking up, it is gradual and still low in historical context.
Consumer confidence – reflected in the Conference Board Expectations Index – has seen a post-election increase tied to the election outcome.
History indicates that this may not result in higher spending, but it doesn’t hurt and reduces risks to the downside.
An encouraging component of the Conference Board measure is the confidence in jobs, which has improved and is a positive read on the outlook for employment.
Overall, the growth outlook remains encouraging according to the Atlanta Fed GDPNow indicator, which still has Q4 2024 GDP at above 2.5% growth.
There is a concern among some that inflation is not coming down sufficiently for the Fed to cut rates much below 4%.
In this vein, the latest Personal Consumption Expenditures (PCE) data – the Fed’s favoured inflation indicator – saw Core PCE up 0.27% month-on-month, in line with expectations.
However, the three-month annualised rate increased to 2.8% year-on-year.
Some of the services components are proving sticky; the concern is that the PCE won’t be able to break below 2.5% next year before we begin to get the effects of tariff increases and the potential impacts of lower immigration and tax cuts supporting the economy.
This could leave the Fed in a difficult position in terms of predicting the outlook, which may make them more cautious of further rate cuts.
The market is currently pricing 3.3 cuts by the end of CY25.
Australia: inflation data provides no help for case to cut rates
October’s Consumer Price Index (CPI) was lower than expected at 2.1% year-on-year, but this was all down to government subsidies.
Underlying inflation measures remain stubbornly high and the trimmed mean was 3.5% for the 12 months to October, up from 3.2% in September.
This provides no cover for the RBA to cut rates.
Inflation in areas such as rents and new dwelling purchase costs remain high, driven by structural issues in the economy.
We continue to see limited risk of a material slowdown in Australian GDP, but confidence is muted and growth seems likely to remain below trend for the next few quarters.
Markets: short-term signals remain positive
November was a good for equity markets, triggered by the decisive US election outcome.
The S&P 500 returned +5.9% for the month and the S&P/ASX 300 3.7%, with the bulk of the move from valuation re-rating.
Short-term market signals are positive:
- The US dollar has not broken above its range and retraced in the last week.
- Bonds yields have also rolled over and didn’t get back to the April highs.
- Market technicals like breadth and seasonality are positive. For example, 77% of the S&P 500 is trading above its 200-day moving average.
- Earnings revisions have been positive. This has been driven by mega-cap tech, where FY25 earnings have been revised up 11% over CY 2024. The rest of the tech sector has been revised down 1.6% and the rest of the S&P 500 down -3.8%. However, this is well within the normal range of zero to -5% earnings downgrades over the course of a year.
- Flows into US equities remain strong, with a large spike following the election result.
The challenge is US equity valuations are full. There appears little catalyst to change this currently, but if there was a shift in liquidity or in the economy, then valuations could reset.
The S&P 500 is on the top decile in terms historical market valuation going back to 1999.
There is an argument being made that the market structure is now dominated by mega-cap tech companies which have low capital intensity, high rates of return on investment and incremental return, as well as strong revenue growth rates which may suggest that valuations aren’t as extended as simple historical analysis suggests.
We do note that credit spreads are low by historical standards, which suggests that the liquidity environment remains supportive.
Australia
Information technology (+10.2%), banks (+7.1%), consumer discretionary (+6.6%) and industrials (+5.6%) led the S&P/ASX 300 higher in November. Energy (-0.7%) and resources (-3.4%) lost ground.
Growth momentum performed best; results from TNE, XRO and Block (SQ2) were good, while PME won a key contract.
With limited revisions, the banks’ earnings season was neutral, with CBA performing the best.
Insurers outpaced the banks, helped by bond yields.
Resources continue to fall and have given back more than 50% of their China stimulus rally.
Battery materials remain the worst of the sector, despite lithium prices stabilising. BHP continues to be burdened by the fear of it re-bidding for Anglo American now that the six-month lock period is up. Finally, copper and gold have retreated post the US election.
Portfolio positioning
Generally, across our broad-cap portfolios, we have kept our sector skews relatively limited:
- We have been underweight defensives/bond sensitives, though this has been reduced somewhat with the addition of Scentre Group (SCG) in recent months.
- We also have a small underweight to resources.
- The bank underweight has increased in recent weeks. We see reduced risk of valuations breaking higher for the bank sector given the strong run and current rating. This exposure is also partly offset by the overweight in insurers.
- We are underweight consumer defensive – notably supermarkets – which we see as expensive, low-growth stocks.
- Against this we are overweight growth, mainly through technology companies where we see earnings growth underpinning the higher valuations.
- We have also benefited from an overweight in cyclicals industrials, with stocks in good industries and/or strong market positions such as Aristocrat Leisure (ALL), SGH (SGH), James Hardie (JHX) and Qantas (QAN) all performing well in November.
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.
Managing portfolios in a Trump era | How the gender pay gap affects investors | China’s property sector improves | How to reduce the impact of inflation
At the end of a year in which almost half the world’s population were eligible to vote, investors can finally look forward to more certainty, says Pendal’s ADA CHAN
- End of a huge election year improves certainty for investors
- Potential opportunity emerges in China
- Find out more about Pendal Global Emerging Markets Opportunities Fund
- Watch a Pendal webinar covering the outlook for global equities and emerging markets
IF IT feels like a hectic year for emerging markets investors, you’d be right.
So far 66 national elections have taken place around the world in 2024, according to the International Institute for Democracy and Electoral Assistance, an intergovernmental organisation that supports democracy worldwide.
And another eight or so are still scheduled before the new year.
Just after the US election, Pendal Global Emerging Markets Opportunities fund manager Ada Chan joined Pendal Global Select fund manager Chris Lees in a live webinar to discuss major trends emerging from these polls, along with other issues.
You can watch the full webinar here.
Below are Ada Chan’s key points. Click here for insights from Chris Lees.
A big year for elections
Investors in emerging markets (EM) can expect more certainty after a huge year in national elections, says Pendal emerging markets fund manager Ada Chan.
“We will have to wait and see the details on many Trump Administration policies … and implementation is key from the US.”
But there are already actionable lessons to be drawn from elections in Indonesia, Mexico and India — which all had “very different elections this year”, Chan says.
“In Indonesia, there is continuity and stability and that is viewed positively. It is a market where reforms are [working] and driving the economy. That’s a differentiator among ASEAN markets.”
James Syme, Paul Wimborne and Ada Chan (right) are co-managers of Pendal Global Emerging Market Opportunities Fund
“In Mexico investors expected Claudia Sheinbaum to win, but the surprise was her super majority. There was also an overlap with her predecessor … and that created uncertainty and investors don’t like uncertainty.
“Mexico is a difficult market – which part of a valuation is driven by a carry trade unwinding, which part is driven by local politics and which part is driven by anticipation of what Donald Trump is going to do. We think a lot of the bad news is already in valuations,” she says.
“In India, people expected Narendra Modi to win, and he did. But markets in India are pricing in perfection. In India it isn’t so much about the election as high valuations.”
China
Investors in China should focus on domestic industries, rather than manufacturing exporters, Chan says, ahead of any Trump Administration decision on tariffs.
“The Chinese government wants to stimulate its economy. But I think there is a little bit of wait and see, to make sure they know what Trump is proposing,” Chan says.
“It is a timing issue for China. They want a bit more clarity [on the Trump Administration] before they come up with their stimulus. We do expect there will be more stimulus, but it is a step-by-step process.”
Chinese consumers are changing as well. Previously foreign brands sold better than local products but that is no longer the case.
“Chinese consumers are embracing domestic brands. They can buy better products, with higher average prices, that are a lot cheaper than foreign brands,” Chan says.
Country-first analysis
Chan’s investment process starts with identifying a promising country, based on an outlook and valuation perspective.
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Pendal Global Emerging Markets Opportunities Fund
“There are opportunities emerging in China. We think people had become too pessimistic and gone too extreme when looking at China.
“We saw Chinese companies report better numbers, raise forward earnings [guidance] and then get sold off.
“There is the opportunity to [invest] in companies that are becoming stronger because management are focusing on what makes the business more efficient, in an environment which is very difficult.”
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’s top-down allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.
James, Paul and Ada are senior fund managers at UK-based J O Hambro, which is part of Perpetual Group.
Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.