India has experienced a powerful demand recovery in recent months while Brazil, Mexico and South Africa have been more mixed.
Here James Syme and Paul Wimborne (pictured above) — managers of Pendal’s Global Emerging Markets Opportunities strategy — explain their latest EM thinking.
WE HAVE had a steadily evolving interest in the traditionally higher-beta emerging markets, as followers of our views will know.
We see domestic recoveries that have a good distance to run based on current trade balances and a reset to credit and demand cycles that 2020 created.
Some powerful upward moves in terms of trade (the ratio of export prices to import prices) in some of these economies are supporting those trade balances.
First among these has been India.
India has experienced a powerful demand recovery in recent months after a weak economic environment in 2019 and the effects of Covid-19 lockdowns.
PMIs have generally been printing above 55 and vehicle sales remain strong. The recovery began into the autumn festive season. Companies were unsure if it would last, but it has.
In particular companies are reporting strong demand and a reduced need to fund promotion and associated expenses to generate sales.
The recovery has been driven by:
- Urban demand — which slowed in 2019 and 2020, even for FMCG companies, but has
revived as Covid cases continue to fall - Premium segments as disposable incomes and consumer confidence improve
- Real estate — helped by lower mortgage rates and improved affordability.
Recoveries in Brazil, Mexico and South Africa have been more mixed. But some data points such as Brazilian bank-lending growth and South African retailer results show firm recoveries.
We particularly note the potential for these recoveries to continue for much longer than markets are pricing in. This suggests continued positive surprise in corporate results can drive equities and currencies higher for longer in these countries.
Where to take care
To be clear, we see these countries as the least understood and consequently most attractive part of Emerging Markets.
Yet with the exception of India we have been relatively cautious about adding exposure — even as these economies recover and portfolio capital that fled in the first half of 2020 returns.
Why?
There are two main reasons for short-term caution despite our longer-term optimism.
First, there are significant challenges from Covid second waves in some of our preferred markets.
Brazil has a major second wave underway. This is centred on the city of Manaus where a new variant is causing the majority of infections.
South Africa also had a second wave with a new variant at its heart, though case data there is now rapidly improving. Mexico’s second wave has been much more severe than its first — though again case data is now improving.
These second waves, and others, may lead to a short-term setback in economic recoveries and investor optimism.
Secondly, we are concerned about the potential for a short-term inflationary bulge as rising commodity prices meet the year-on-year effect of the March/April 2020 base.
The Brent oil price per barrel was US$17.30 at the end of March 2020, US$40 at the end of January 2021 and nearly US$60 at the time of writing. Soybeans (based on the Chicago bushel price) traded between US$6.50 and US$7 in the first few months of 2020, but are nearly US$14 at the time of writing.
The same pattern exists for diverse commodities — from wood pulp to copper, from wheat to ethylene.
In the higher beta emerging markets, stronger currencies have (and can continue to) offset the domestic inflationary effects. But we are concerned there is a risk of more challenging inflation prints in coming months.
We are particularly concerned about Brazil and Russia where inflationary pressures were starting to emerge before Covid hit. However differing reaction functions are more likely to see rate hikes and slower growth in Russia — and currency and bond market weakness in Brazil — should this occur.
Neither of these issues reduce our long-term enthusiasm for these markets.
India has been a powerful example of what a domestic demand recovery can mean for equity investors. Those same commodity prices are highly supportive of economic fundamentals and financial markets in more commodity-sensitive EMs such as Brazil, Mexico, South Africa and Russia.
We continue to look to increase our exposure to markets such as these. But we also look to be tactical in timing our portfolio shifts.
James Syme and Paul Wimborne are senior portfolio managers and co-managers of Pendal’s Global Emerging Markets Opportunities fund.
Find out more about the fund HERE.
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
Here’s what’s driving Australian equities this week according to Pendal’s head of equities Crispin Murray (pictured above). Reported by portfolio specialist Chris Adams.
Find out about Pendal’s Australian shares funds here.
MARKETS were relatively quiet on the macro front last week. US bond yields rose a touch, while the USD weakened and commodities were higher.
We think these trends can continue, supported by the immense scale of US fiscal stimulus and its size relative to the output gap.
Australian equities underperformed last week, falling 0.46% (S&P/ASX 300) versus a 1.28% gain in the S&P500. This was likely a knee-jerk response to the Victorian lockdown.
So far reporting season has been reasonably constructive, though the market has been in a mood to punish disappointing results.
Covid and vaccine outlook
Recent trends continue. New daily cases continue to plummet from early-January highs in the US and UK. German cases are also trending down.
Hospitalisations are also falling away. The US hospitalisation rate has almost halved from its peak.
Vaccine roll-outs continue to progress in line with plans. The US has stepped up to a daily rate of 1.6 million vaccinations, consistent with herd immunity by July.
We are starting to see the impact of vaccinations on case numbers. For example in Israel overall new cases are dropping — but this is happening much faster in the over-60 age cohort. This is a key positive marker.
Northern hemisphere mobility data is a second area to watch. We’ll be looking for signs that warmer weather, looser restrictions and vaccine-induced confidence are encouraging people to venture out again. This should feed into economic activity and further bolster confidence.
At this stage there are only tentative signs of improvement in mobility data.
Economics and policy outlook
There’s an increasing probability that the US fiscal package will be close to US$1.9 trillion as the Democrats pursue the “reconciliation” approach to passing the package, reducing the need for Republican support.
Key Democrats seem determined to avoid the “mistakes” of the Obama administration — ie not stimulating enough in the wake of the GFC.
This determination is leading to vocal debate as to whether the package will create an inflationary impulse.
Former Obama adviser Larry Summers makes the point that the Obama stimulus was equivalent to half the output gap at the time. The proposed package is three times the current output gap.
A total of US$3.3 trillion in stimulus was passed last year. It’s thought US$1 trillion of that amount is still unspent.
Adding another $1.9 trillion suggests cumulative stimulus is 14% of GDP at a time when pent-up demand is being released.
There is noise that a follow-up infrastructure package later this year will be around $2 trillion — although this spending would be spread out over a longer period.
Finally, Fed Chair Jerome Powell continues to highlight the goal of getting the labour market tight enough to help the most marginalised workers.
Markets outlook
There are signs that point to another sell-off in bonds. Yields have been inching up, commodities have strengthened and the US dollar is weaker. Higher bond yields would continue to support cyclicals and financials in the equity market.
The S&P/ASX 300 fell 0.46% last week.
Resources bounced back as commodity prices recovered. Industrials were hit hardest due to stock specifics and the Victorian lockdown.
Results and company-specific news
Well-received
IAG (IAG, +8.1%). After some recent disappointing updates and a capital raise linked to further provisions, the market was relieved by a lack of news. The new CEO articulated some cautious targets and laid the groundwork for expectations that coming halves will not disappoint.
Macquarie Group’s (MQG, +7.3%) quarterly trading updated indicated an uplift on full-year guidance. The commodities business is benefiting from hedging activity related to rising prices and volatilities.
Gold miner Newcrest’s (NCM, +4.4%) result indicated a plan to drive higher-than-expected production from its Lihir mine in PNG, helping offset headwinds in other parts of NCM’s portfolio.
James Hardie’s (JHX, +3.6%) strong result reflected a combination of surging US housing demand, alongside gains in market share and good margin leverage. JHX outlined an aggressive plan to grow its presence in the “repair and remodel” market, which should help alleviate constraints from supply bottlenecks in new housing.
Telstra’s (TLS, +3.2%) actual result was mixed. Covid had a negative impact on revenue with the enterprise business continuing to suffer from the shift to NBN. But there was strong growth in mobile subscribers relative to competitors. The outlook was more positive. Management indicated the company was at a turning point. Underlying EBITDA is expected to grow in 2H FY21 and into FY22. There are two key drivers: lower costs and increased average revenue per user (ARPU) in mobile as better pricing comes through. Cash flow should be strong as capex falls. Management committed to the current dividend — implying a 4.9% yield — while potential asset sales could support future capital management.
Downer (DOW, -1.5%) delivered a decent result, in-line with expectations. Cash conversion was good, with signs of improving performance and higher prospects of capital management as the company divests some segments. The result emphasised Downer’s shift from an unpredictable, capital-intensive business to a capex-light urban services strategy with a more predictable workflow.
Telecom provider Megaport (MP1, +4.1%) was among the market’s strongest. A good reaction (despite pre-announced results) was driven by optimism on new product launches.
Mixed
Commonwealth Bank (CBA, -2.0%) delivered a pretty good result. Credit growth picked up and the capital position is very strong. It is looking like it has over-provisioned for bad and doubtful debts. But the market was disappointed as expected capital management was deferred. The company announced a further $300 million of investment in technology. CBA has outperformed peers over the past year, given the perception of relative safety. But other banks have greater leverage to rising bond yields.
Suncorp (SUN, +0.1%) sounded positive with some ambitious longer-term targets. Near-term guidance pointed to weaker underlying margins. There are questions about provisions for potential business interruption claims.
Gold miner Northern Star (NST, +1.6%) has now merged with Saracen. Both segments are delivering well operationally. The merged entity offers a good combination of underground and open-pit assets, good long-term projects and decent near-term cash flow.
The Transurban (TCL, -4.7%) result was a touch disappointing. Traffic to airports was a bigger headwind than expected. This issue is small in the scheme of things but however the Victorian lockdown looms as a bigger near-term issue.
Crown (CWN, -0.9%). The Bergin review was in line with our expectations. There is a path to open and run the Sydney casino. Crown will outline its response in April. The market is looking for changes in management and the board as part of this. The current CEO has announced his departure.
Poorly received
AMP (AMP, -16.2%) is facing headwinds on several fronts. Ares pulling out of a potential takeover was a further blow. The company is focusing on cost-out opportunities but the market’s attention is on short-term revenue trends.
Challenger (CGF, -12.9%) disappointed. The market was looking for higher margins, driven by a shift to more risk assets. Issues with capital intensity have precluded this for now.
Boral’s (BLD, -7.9%) Australian business is in worse shape than expected major projects ending and delays to new ones. Weather and a slower apartment market have dampened concrete demand and pricing. The US business overall was better but not enough to satisfy the market, particularly given a dusty outlook for fly ash.
Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and a strong track record leading Australian and European equities funds.
Crispin manages a number of our flagship funds along with one of the largest equities teams in Australia.
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
Water sanitation innovator Ecolab is featured in new report by responsible investing leader Regnan which outlines four areas of investment in sustainable agriculture.
ECOLAB’S mission is clearly spelled out on its website – it simply wants to make the world a better place.
The NYSE-listed company is a world leader in water sanitation and the prevention of food borne pathogens.
Ecolab is a vital link in the global food chain by helping prevent food loss to spoilage.
The business is featured by responsible investing leader Regnan in new report that outlines four areas for investment in sustainable agriculture (find the report here).
Food waste occurs at every stage across the food supply chain – from growing to packing, processing, distributing and retailing.
A key cause of food waste is food pathogens – microorganisms like viruses, yeasts and moulds that can spoil food, taint water systems and contaminate equipment.
Food waste is one of the most pressing problems humans face. Close to one third of all food produced each year is lost to waste.
Source: FAO 2011, Regnan 2020
The global economic, environmental and social cost of food wastage is estimated at an annual US$2.6 trillion, which is nearly equal to the GDP of France and about double the total annual food spending in the US.
In the US alone, it is estimated that a 20 per cent reduction in food waste over the next 10 years would avoid almost 18 million tonnes of greenhouse gas emissions annually – equivalent to removing about 4 million cars from the road.
“The way that we feed the world’s population is a key part of the solution for climate change,” says Mohsin Ahmad, Regnan fund manager and co-author of the report Catalysing Sustainable Agriculture and Food Production.
Prevention of pathogens across food system value chains also benefits human health. The US Center for Disease Control and Prevention estimates that each year there are some 48 million cases of foodborne illness.
Ecolab has a goal of helping its clients provide high-quality and safe food to 1.8 billion people by 2030 and to prevent 11 million foodborne illnesses.
Today, Ecolab’s food safety products are used in more than 36 per cent of the world’s packaged food and 44 per cent of the global milk supply.
Ecolab is a holding in the Regnan Global Equity Impact Solutions Fund.
You can find a copy of the Regnan Catalysing Sustainable Agriculture and Food Production here.
Who is Regnan?
Regnan is a responsible investment leader with a long and proud history of providing insight and advice to investors with an interest in long-term, broad-based or values-aligned performance.
Building on that expertise, in 2019 Regnan expanded into responsible investment funds management, backed by the considerable resources of Pendal Group.
The Regnan Global Equity Impact Solutions Fund invests in mission-driven companies we believe are well placed to solve the world’s biggest problems.
The Regnan Credit Impact Trust (available in Australia only) invests in cash, fixed and floating rate securities where the proceeds create positive environmental and social change.
Both funds are distributed by Pendal in Australia.
Find out about Regnan Global Equity Impact Solutions Fund
Find out about Regnan Credit Impact Trust
For more information on these and other responsible investing strategies, contact Head of Regnan and Responsible Investment Distribution Jeremy Dean at jeremy.dean@regnan.com.
Recycling innovator Tomra is featured in new report by responsible investing leader Regnan which outlines four areas of investment in sustainable agriculture.
MOST people know Tomra from its reverse vending machines – those big metal kiosks that swallow your empty bottles and cans in exchange for a deposit refund.
The Oslo-listed company’s machines use sophisticated scanning technology to identify a bottle or can by its shape, material and barcode, sort it into the right recycling queue and provide an appropriate payout.
But that optical sorting technology has wider uses than recycling and it is now playing a key role in helping the agricultural industry manage food waste.
Tomra is featured by responsible investing leader Regnan in new report that outlines four areas for investment in sustainable agriculture.
Extraordinary challenge
Food waste is an extraordinary challenge for the planet.
Some 1.3 billion tons of food is lost annually, including 45 per cent of all fruit and vegetables, 30 per cent of cereals and 20 per cent of all meat.
This means every year we lose the equivalent of 3.7 trillion apples, 1 billion bags of potatoes – and 75 million cows.
The impact on the planet is immense. Not only does lost food not reach consumers, but the extra resources required to replace the food wasted puts pressure on everything from soil quality to the water system – even ultimately affecting climate change by lifting greenhouse gas emissions.
Waste occurs throughout the food production systems, from growers, through to processors, distributors and retailers.
Tomra’s sorting technology is being used by the food industry to inspect millions of pieces of produce with the aim of preventing food unnecessarily going to waste.
Tomra knows a bad apple
“The sensors are sophisticated enough to detect the sweetness of an apple,” says Mohsin Ahmad, Regnan fund manager and co-author of the report Catalysing Sustainable Agriculture and Food Production.
“They can detect the quality of the produce, if there’s any defect, the shape and size and so on.”
The key is that rather than disposing produce with visual defects that is otherwise sound, producers can divert the produce to an alternative purpose such as juice production.
“It’s really helping to reduce food waste,” says Ahmad, adding that Tomra sorting technologies are helping to divert 5-10 per cent of produce from going to waste.
Across its global customer applications, waste diverted is approximately equivalent to 25,000 trucks worth of potatoes per year.
Tomra is a holding in the Regnan Global Equity Impact Solutions Fund.
Find a copy of Regnan’s Catalysing Sustainable Agriculture and Food Production report here.
Who is Regnan?
Regnan is a responsible investment leader with a long and proud history of providing insight and advice to investors with an interest in long-term, broad-based or values-aligned performance.
Building on that expertise, in 2019 Regnan expanded into responsible investment funds management, backed by the considerable resources of Pendal Group.
The Regnan Global Equity Impact Solutions Fund invests in mission-driven companies we believe are well placed to solve the world’s biggest problems.
The Regnan Credit Impact Trust (available in Australia only) invests in cash, fixed and floating rate securities where the proceeds create positive environmental and social change.
Both funds are distributed by Pendal in Australia.
Find out about Regnan Global Equity Impact Solutions Fund
Find out about Regnan Credit Impact Trust
For more information on these and other responsible investing strategies, contact Head of Regnan and Responsible Investment Distribution Jeremy Dean at jeremy.dean@regnan.com.
Pendal Group Limited (ASX: PDL or Pendal) today announced the appointment of Mr Bertrand Lecourt and Mr Saurabh Sharma to establish a global equities sustainable water and waste investment strategy within the Regnan business.
Based in London, Mr Lecourt will join Regnan as Senior Fund Manager and Mr Sharma as Fund Manager.
It is expected the investment specialists will commence in April 2021, with the investment strategy to be launched in the UK and Europe in the second half of calendar 2021.
The team joins from Fidelity International where they manage the Luxembourg-domiciled US$2.4 billion Fidelity Funds Sustainable Water & Waste Fund.
The investment strategy will invest in companies involved in the design, manufacture or sale of products and services used in the water and waste management sectors.
Emilio Gonzalez, Group Chief Executive Officer of Pendal Group, said: “The appointment of Bertrand Lecourt and Saurabh Sharma demonstrates our ability to attract superior talent and progresses Regnan’s plans to become a global leader in providing environmental, social, and governance (ESG) investment strategies and solutions to clients.
“Regnan’s focus is on delivering innovative and specialist sustainable and impact investment solutions, drawing on over 20 years of experience at the frontier of responsible investment.
“The team’s appointment is the second investment team hire since Regnan expanded into investment management and follows the appointment of the Regnan Equity Impact Solutions team in December 2019, led by Tim Crockford, who joined from Federated Hermes.
“Clients are increasingly seeking out investment strategies that address environmental concerns in a sustainable way.
“The development of new technologies and proper water and waste management will be critical to manage the increasing demand for clean water and waste management as populations grow and become more urbanised.
“This will drive investment opportunities that Bertrand Lecourt and Saurabh Sharma will be able to capture through the unique combination of a diversified water and waste global equities portfolio with strong ESG credentials.”
Team biographies
Bertrand Lecourt, Senior Fund Manager
Bertrand Lecourt joined Fidelity International as a Portfolio Manager in 2018, where he launched and managed the Fidelity Funds Sustainable Water & Waste Fund.
Previously he was a Portfolio Manager at Polar Capital and the founder and CIO of Aquilys Investment Management. Prior to moving to the buy-side, Bertrand was Head of Equity Research, France at Deutsche Bank and a utilities analyst at Dresdner Kleinwort Benson and Goldman Sachs.
He holds an MSc in International Finance from HEC School of Management, France; an MSc in Money, Banking and Finance from Birmingham University, UK; and a DEA in Monetary Economics from Orleans University, France.
Saurabh Sharma, Fund Manager
Saurabh Sharma joined Fidelity in 2014 as a Product Specialist before becoming an Assistant Portfolio Manager in February 2020.
Previously, he held equity research analyst roles at Moody’s Analytics and GlobalData.
Saurabh has an MBA in Finance from IBS Hyderabad School in India and is a CAIA and ICFAI Charterholder.
Who is Regnan?
Regnan is a responsible investment business within Pendal Group with a vision to grow its funds under management and become a global leader in providing environmental, social, and governance (ESG) investment strategies and solutions to clients.
Regnan exists to drive positive impact and investment for a sustainable future and works towards this by developing and promoting more principled, rigorous and outcome-oriented approaches in responsible investment. It has a long and proud heritage in engagement and advice on ESG issues.
Regnan has produced pioneering research that has changed the way investors think about their wider responsibilities to society including advising influential organisations, such as the Principles for Responsible Investment (PRI).
Regnan can trace its roots back to a collaboration with Monash University, Melbourne in 1996, with an investigation into overlooked ESG-sources of risk and value for long-term shareholders in Australian publicly listed companies.
Regnan has since taken its ESG expertise globally. Its diverse experience in advocacy, regulation, academia and advising investment managers has enabled Regnan to offer ESG-related advisory, engagement and research services.
Visit Regnan.com
Find out about Regnan Global Equity Impact Solutions Fund
Find out about Regnan Credit Impact Trust
For more information on these and other responsible investing strategies, please contact Head of Regnan and Responsible Investment Distribution Jeremy Dean at jeremy.dean@regnan.com.
A global shift towards sustainable agriculture and food production is opening attractive opportunities for investors as new technologies and business models start to gain traction.
RESEARCHERS at Regnan, a global leader in sustainable investing, have named four areas of investment that will drive the transformation of food production while minimising waste and developing new sustainable and affordable food products.
The findings are featured in a new Regnan report, Catalysing Sustainable Agriculture and Food Production, by Regnan senior adviser Doug Holmes and Regnan fund manager Mohsin Ahmad.
Reforming agriculture is essential to meeting the challenge of climate change because agriculture and food production accounts for nearly a quarter of the world’s greenhouse gas emissions. Without change, emissions are forecast to grow more than 30 per cent by 2050.
“Industrial farming was the right solution for increasing global production of food back in the 50s and 60s,” says Holmes, who has worked in the sustainability sector for nearly three decades.
Source: WRI analysis based on FAO (2017a); UNDESA (2017); and Alexandratos and Bruinsma (2012).
“But there’s so much evidence out there around the negative impacts from industrial farming as practised now that it’s quite clear we need to change course.”
Climate change aside, large-scale food production is doing astonishing damage to the environment.
Run-off from fertilisers, pesticides and herbicides is polluting waterways and marine habitats, soil is being degraded by reliance on chemicals and irrigation is depleting aquifers.
A third of the planet’s soil has already been degraded. Without significant change, 90 per cent of soil on earth will be degraded by 2050.
But despite the toll, crop land and pasture land will increase by 600 million hectares over the next three decades, destroying forests and natural ecosystems.
The challenge is how to feed a global population that will hit 10 billion by 2050 — requiring 50 per cent more food than we produce today — without inflicting further damage on struggling ecosystems.
In the new report, Regnan’s team identifies four areas of investment that are crucial to the key stress points in global food production, ideal to catalyse change and – perhaps most importantly – largely unsung by the global investment industry.
1. Soil health
The first is regenerative and organic farming aimed at improving soil health.
Organic matter – essentially dead and decomposing plant and animal debris alongside billions of living creatures like bacteria, fungi, insects and worms – plays a vital role in soil health.
A 1 per cent increase in soil organic matter helps soil hold 20,000 more gallons of water per acre. Organic matter is also a powerful store for carbon dioxide that helps mitigate climate change.
The investment opportunity lies in the carbon credits that can be generated by better soil management.
“There are business models being developed monitoring and measuring and tracking soil carbon using various technologies and then creating markets for soil carbon that can be brought into the public space,” says Holmes.
2. Controlled farming
The second opportunity is controlled farming which can be conducted in cities as indoor or vertical farms, or larger-scale state-of-the-art greenhouse farming close to urban areas.
“Within developed economies, this is a real growth area,” says Holmes.
“There are some quite large controlled-farming start-ups and businesses in places like the United States and in Europe developing models that are very focused on feeding a rapidly growing urban population. They typically employ AI and advanced technologies.”
Controlled farming is essential to support the rapid growth of cities and the increasing urbanisation of the world.
The growing risk of extreme weather is another driver, as controlled farming can be better protected, lowering the risk of crop loss.
3. Waste management
Third on the ledger is the growing industry aimed at reducing the enormous waste in food supply chains.
Close to a third of all food produced is lost to waste.
This not only means that fewer meals are available for those in need, but it also lifts the land area and resources required to make up lost food, putting additional stress on the food system and lifting greenhouse emissions.
“By reducing food waste, there’s more food available that eventually reaches the dinner plate, so that means less load on systems upstream.
“Less land is cleared for agriculture and there is less load from the agricultural processes themselves and all the inputs that go into producing food.
“You’re reducing greenhouse impact and the also providing more food at the other end of the cycle.”
Food is lost across the food supply chain, from growing to storage, processing and distribution right through to the food thrown out by retailers and households.
Source: FAO 2011, Regnan 2020
ReFED, a non-profit aiming to end food waste, says a 20 per cent reduction in US food waste over the next decade would be equivalent to removing about 4 million cars from the road.
“It’s a key area for attention,” says Holmes, who says some of the more promising innovations are platforms connecting farmers with pre-determined buyers for food that might otherwise go to waste.
“For example, in developed countries, farmers who have produced crops that might be less presentable from a marketing perspective have pre-determined buyers to take that product and turn it into other value-added food products like juices or similar products.
“The systems are developed to pre-identify buyers for food that may be less visually appealing or perceived to be of lesser quality.”
The Regnan team singles out Tomra, which has its origins as a reverse vending machine company that collects bottles and cans for recycling. Tomra has now expanded into providing sorting technology for the food industry, inspecting produce and helping divert low-quality food to alternative uses.
You can read more about Tomra here.
Regnan funds also hold shares in NYSE-listed Ecolab, which makes antimicrobial water additive products that reduce foodborne pathogens and help control spoilage of processed fruit and vegetables.
4. Plant-based meat
Finally, Holmes points to the growth of a new plant-based meat industry as an example of a move to sustainable food products that replace resource intensive agriculture.
“Livestock production is enormously greenhouse intensive. The opportunities afforded by the plant-based products is a very big one from a sustainability perspective, and particularly as those products are get better and better.
“It seems to be to me there’s a there’s a very big business opportunity there.”
Download Regnan’s Catalysing Sustainable Agriculture and Food Production report here.
Who is Regnan?
Regnan is a responsible investment leader with a long and proud history of providing insight and advice to investors with an interest in long-term, broad-based or values-aligned performance.
Building on that expertise, in 2019 Regnan expanded into responsible investment funds management, backed by the considerable resources of Pendal Group.
The Regnan Global Equity Impact Solutions Fund invests in mission-driven companies we believe are well placed to solve the world’s biggest problems.
The Regnan Credit Impact Trust (available in Australia only) invests in cash, fixed and floating rate securities where the proceeds create positive environmental and social change.
Both funds are distributed by Pendal in Australia.
Visit Regnan.com
Find out about Regnan Global Equity Impact Solutions Fund
Find out about Regnan Credit Impact Trust
For more information on these and other responsible investing strategies, contact Head of Regnan and Responsible Investment Distribution Jeremy Dean at jeremy.dean@regnan.com.
Here’s what’s driving Australian equities this week according to Pendal’s head of equities Crispin Murray (pictured above). Reported by portfolio specialist Chris Adams.
Find out about Pendal’s Australian shares funds here.
CONFIDENCE in policy stimulus, some better US earnings and easing concerns over vaccines contributed to strong gains for equities last week.
There is evidence of hedge fund de-grossing as a result of recent short squeezes, but at the moment it is showing up in specific stocks rather than disorderly drawdowns. This also helping markets recover.
The S&P/ASX 300 gained 3.5% last week, led by banks and technology. Defensives underperformed. In the US, the S&P 500 rose 4.7%.
Covid and vaccines outlook
Hospitalisations and cases continue to trend down in the US and the UK, while vaccinations continue apace.
In the US, the number of Covid-19 patients in hospital per million people is down 30% from the peak, easing stress on the system. There have been big improvements in the past week in the hardest-hit states such as Texas and California.
The pace of vaccinations continued to accelerate in the UK and the US – although the latter saw some impact from poor weather.
Almost 15% of the UK population has received a first dose – and roughly 90% of those aged 80 and older. The UK and Israel are two bellwether countries to watch. This is where the impact of vaccines on the severity of cases will become evident earliest.
Projections suggest the UK will have vaccinated half its population by mid-March. The US is on track for the same target in the first half of May. Australia is expected to achieve 50% by early July. There is a tactical element to this for investors. Markets where the roll-out has been faster can expect to open up earlier and recover faster.
Economics and policy outlook
US payrolls rose 245,000 in November — well below the consensus estimation of 460,000. This reflects the impact of rising case numbers on retail and service sectors in that month.
The US unemployment rate dropped from 6.9% to 6.7% — but this resulted from a fall in the participation rate. The pandemic has forced roughly 6 million people out of the labour force. This is important in the context of the Fed’s employment milestone towards tighter policy. There are still a lot of people to come back into the workforce.
The data was not all bad. Hours worked (+0.9%) and income (+1.1%) were both better. The lead indicators on consumer spend are still tracking sideways. But with stimulus, lower cases and warmer weather coming through the picture could look very different in two months.
The Democrats look set to pass the Biden stimulus package through Congress via reconciliation – which would not require Republican votes. This means some measures are likely to tighten up — for example there could be greater restrictions on who gets the full stimulus cheques.
There also may be less allocated to States which are already seeing better-than-expected revenues. However it also means the aggregate package amount is likely to be at the high end of the expected range.
It is worth noting that despite a very weak near-term outlook for GDP, the Bank of England reduced the expectation of negative rates. The outlook is for a rapid recovery, helped by a roll-back of restrictions as the vaccine program takes effect. UK banks rallied on the news. We may see a repeat of this in other countries.
Finally, while there is plenty of worried commentary about the risk in equities given the recent strong run, it is worth reiterating the extraordinary moves in fundamentals we think continue to support markets:
- In the US, money supply (M2) is up 26% year-on-year
- The combined balance sheets of the Fed and ECB are up 70% year-on-year
- US fiscal stimulus, as measured by the budget deficit, is up US$2 trillion year-on-year
- Global short interest rate yields are down by 100bps to 0.65% year-on-year.
Macro risk and uncertainty remain elevated. Equity markets have had a strong run. Nevertheless, we think the combination of these effects is extraordinary and continues to provide a substantial foundation for both economic recovery and equity markets. We remain positive. We expect bond yields to rise, coinciding with a rotation to cyclicals.
Markets
Despite some evidence of continued hedge fund de-grossing, the markets had a sharp, broad-based recovery last week as the focus returned to liquidity and better earnings in US.
Normal correlations remained in place across asset classes. Equities were up, US 10-year bond yields rose 10bps, the USD weakened, gold was down 2% and Brent crude up 6.2%.
The Australian market more than caught up with the prior week’s losses. Defensives generally lagged. Staples were only up 0.57% and Utilities fell 1.0%.
Resources (+1.5%) lagged the rebound. We continue to see very supportive fundamentals, but the iron ore price was down 1.4%. There is a sense that resources have been a crowded trade and there may be some rotation to other sectors — potentially exacerbated by hedge fund de-grossing.
Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and a strong track record leading Australian and European equities funds.
Crispin manages a number of our flagship funds along with one of the largest equities teams in Australia.
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
We recently re-designed the Pendal Horizon Fund (formerly known as Pendal Ethical Share Fund) to better help investors benefit from the opportunities driven by Australia’s transition to a more sustainable economy.
This guide explains the fund’s approach to mining investments.
PENDAL recently made several material changes to the Pendal Horizon Fund — formerly known as Pendal Ethical Share Fund. The changes include an expanded set of exclusionary screens and a new framework to support in the identification of companies which are leading or enabling the drive to a future-ready economy. As part of this approach, we avoid companies whose industries, business models and products or services undermine a more sustainable economy or cause significant harm to society and the environment. We established a range of sector/activity-based exclusionary screens that effectively knock out harmful companies from the investable universe at the outset. These screens cover sectors such as fossil fuel extraction, weapons, gambling and logging. Some values-based investors might be surprised to see companies that mine non-fossil fuel-related minerals such as iron ore and gold not formally excluded from the fund. To better appreciate Pendal’s approach to mining within the fund, we produced this guide to explain it’s important to understand the fund’s sustainability-related priorities.
Download the guide here: Pendal Ethical Fund – Approach to Mining.
Pendal Dynamic Global Equity Fund (APIR: BTA0321AU, ARSN 140 921 311)
Pendal Dynamic Global Equity Fund (Fund) will be terminated effective 5 February 2021.
Given the declining size of the Fund and anticipation of further withdrawals, we are no longer able to effectively manage the Fund to achieve its investment strategy. We have concluded that it is in the best interests of all investors to terminate the Fund, liquidate the assets and return the net proceeds to investors.
How this affects you
The Fund is closed to all applications, transfers and withdrawals from Thursday, 4 February 2021. Any application, transfer or withdrawal requests received after this date will not be processed.
We will terminate the Fund on Friday, 5 February 2021 and as soon as practicable, begin winding up the Fund. The assets remaining in the Fund will be realised and the proceeds distributed to all investors in proportion to their unit holding.
Questions? (Please note our change of registry service provider effective 22 February 2021)
Please contact our Investor Relations Team during business hours:
On 1800 813 886 up until 19 February 2021.
On 1300 346 821 from 22 February 2021.
Here’s what’s driving Australian equities this week according to Pendal’s head of equities Crispin Murray (pictured above). Reported by portfolio specialist Chris Adams.
Find out about Pendal’s Australian shares funds here.
EQUITY indices fell last week in a remarkable few days of market activity. A frenzy on social media forum Reddit triggered a squeeze on some heavily-shorted US stocks. This forced the hedge funds who were short to de-leverage and sell down long positions, dragging on the US market.
This drawdown was reinforced by concerns over the impact of new Covid strains on vaccine efficacy and the shambles in the EU over vaccine supply. In Australia this led to a large unwind in cyclical stocks.
The S&P 500 was down 3.29%. The S&P/ASX 300 fell 2.88%.
We see three key issues facing markets and sentiment in the near term:
- The impact of retail investors, market speculation and views of valuation
- Concerns over the vaccine roll-out
- Risk of economic slowdown
In our view, we may see some further near-term volatility, but we ultimately expect more positive news on vaccines and the supportive effect of stimulus to win out.
Issue 1: Market sentiment / retail investor impact
Retail investor participation ramped up in 2020 and has recently hit new highs. Sitting at about 15% of US volumes before Covid, lockdowns and stimulus pushed it to 29% mid-year, before it fell back to 23% in September. In recent weeks it has returned to about 30% of daily volume. This has been accompanied by greater use of leverage, which can be seen in option activity.
This retail activity is another feature of current market environment which, alongside stimulus payments and liquidity, is driving speculative activity. Importantly, this activity is concentrated in specific pockets of the market, eg Tesla, Bitcoin, Renewable Energy ETFs and IPOs. Higher retail activity is another symptom.
In our view, this does not imply that the entire market is overvalued or in bubble territory.
Nevertheless, the specific focus on shorted positions was unusual. This coincided with hedge funds being levered up more than usual at gross and net level. This combination led to a huge short squeeze.
We can compare this to previous short squeeze events to get an idea of the scale. The impact on performance for an investor caught in the wrong part of the market in large caps last week was material. But less so than the post-GFC value rallies in 2009, the 2016 value rally or the surges in positive sentiment on economic recovery or vaccine news in 2020.
The situation was very different in small caps, however. Here the effect dwarfed anything since 1995, except for the Covid recovery surge in mid-2020. This highlights how increased retail activity is focused in the small cap part of the market.
The losses for hedge funds have been material. Fundamental hedge funds are about 9% below the market for January. This triggers the need to de-lever, which forces more selling. The short-term issue is that underperformance means the selling has not yet cut the level of leverage, so this could continue for a few weeks. A short squeeze event like this in early 2016 lasted 4-6 weeks.
The key questions raised:
1) Is this a flag for the overall market; the final demonstration of extreme speculative activity that marks a top?
We don’t believe so. At this point we see a buying opportunity. It could last a few weeks as hedge funds continue to de-leverage and many long-only funds have low allocations to cash. We still see strong market fundamentals – primarily stimulus, plus the release of pent-up demand as vaccines take effect – as a more important factor, which should underpin markets.
2) Does this signal a shift away from momentum stocks?
It’s possible. But right now we are sticking with the economic outlook and bond yields as the best indicator of this. Bond yields are holding at lower levels than most expected, supporting valuations.
3) How long does this retail effect last?
We now have the perfect storm of cyclical and structural factors supporting this activity:
- Markets have been rising so people are making money
- Stimulus cheques have just been received with more to come
- Lockdowns and cold weather give people more time
- Low-cost, easy investment platforms combined with social media raise interest and insights
We think this means retail participation is likely to remain a factor for next few months.
4) What does it mean for investors like Pendal?
Like the impact of quant, index, ETF and risk parity, this is another factor that can add to volatility which active fundamental investors need to be mindful of. Australia has been less affected by this episode, but there is evidence of impact in the behaviour of some stocks – eg the buy-now, pay-later companies.
Issue 2: Vaccination and re-opening timeline
The key question is whether new data on vaccines — showing lower efficacy to the South Africa variant — and the manufacturing issues in EU delay economic re-opening.
In our view it is likely to cause a small delay — maybe 1-2 months — and may limit the level of international travel for longer. But fundamentally it does not prevent us from reaching herd immunity or diminishing the more serious effects of Covid.
There was a lot of data to digest last week.
The Novavax vaccine trial data showed efficacy as good as Moderna’s — with better tolerance and a great ability to quickly ramp up production. A 65% jump in Novavax stock reflected how well the trial was received. Australia has signed up for 51 million doses of this vaccine.
Trials in the UK and South Africa showed efficacy fell from 96% for the original strain to 86% for the UK variant and 49% for the South African version (60% for patients without HIV). They plan to develop a booster to deal with this, likely to be available in Q3. But this partial immunity still protects against severe infections — even for the South African strain.
The Johnson & Johnson vaccine was more disappointing. Overall efficacy was around 66% — 72% for the original strain, down to 57% for the South African variant. While it may be less effective than other vaccines at stopping infection, it is still very effective in preventing severe infections. As such, it will play a role in alleviating pressure on health care systems and reducing mortality.
The company is also running two-dose trials which may lead to improved results. This is important because it’s a key part of the European supply and can be rolled out more easily.
There are now two paths countries can go down:
- Open up the economy earlier and accept the virus will be prevalent in the community — albeit at a lower incidence level but with severe infection becoming increasingly rare. This is much like the existing flu. We suspect the US and Europe may choose this path, with vaccines such as Johnson & Johnson’s playing a role.
- Seek immunity from mild incidence of the disease, wait for boosters and maintain some constraints. This may be where Australia goes.
Despite the concerns, vaccinations continue apace. Rates are accelerating in the US and the UK. Europe is lagging due to supply and logistics.
The rate of vaccinations in the US is up 35% week-on-week – passing Biden’s goal of 1 million per day. The goal is now 1.5 million per day, with the potential to achieve to 2 million per day – the UK’s current run rate.
Lockdown measures have led to a clear improvement in new case numbers. The US is back to early November levels, half that of the peak earlier in January. This is flowing through to hospitalisations. ICU capacity has materially improved in most US states. The pace of improvement could accelerate further as the effects of vaccinations flow on through February.
Issue 3: The risk of economic slowdown
The final concern is whether mutant strains will have a material effect on the path to normalisation and economic growth.
We suspect we are near the nadir on Covid sentiment. In coming weeks countries leading on vaccinations should start to see a material improvement in cases and hospitalisations. This should improve confidence in opportunities for economic re-opening.
The Fed last week made it clear that near-terms risks relating to vaccine distribution and efficacy reinforce their view that they will not be considering balance sheet tapering for a long time.
We also saw the EU show some indications that they may need to cut rates again — recognising specific problems with vaccine roll-out in the region, alongside the strong Euro.
We still see strong near-term drivers of economic demand. In 2020 the relaxation of US lockdowns was accompanied by reduced stimulus. This time around, the relaxation will be in concert with more stimulus. This should be a strong tailwind for demand, through both income growth and use of still high excess savings.
Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and a strong track record leading Australian and European equities funds.
Crispin manages a number of our flagship funds along with one of the largest equities teams in Australia.
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.