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.
THE paradox in current markets was perfectly illustrated last week.
Concerns over the impact of virus mutations on vaccine efficacy and soft economic data from the lockdown-impacted holiday period weighed on sentiment. A confusing statement from the European Central Bank raised concerns when it was interpreted by some as signalling balance sheet tapering sooner than expected.
Yet the market did not go down. The S&P/ASX 300 gained 1.33% and the S&P 500 was up 1.95%.
In current conditions, downturns in sentiment manifest in a rotation of market leaders – to growth stocks. This reflects the huge amount of liquidity that continues to support equity markets.
We expect this rotation to growth to be short lived and that cyclicals will resume leadership.
In our view:
- Sentiment towards Covid is at a nadir and should improve as vaccines ease pressure in key developed markets. New cases and hospitalisations are already rolling over in the US and UK — and that’s before the effects of vaccines flow through from late February.
- The stimulus impact is only just kicking in. Current softer data prints are lagging indicators.
- Money supply growth is re-accelerating as stimulus lands in bank accounts, helping fuel more speculative activity.
It is also important to flag that cyclicals can include growth names as well. For example, Xero (XRO) is leveraged to business creation, while Domain (DHG) is a beneficiary of a strong housing market.
Covid outlook
Key lead indicators are improving. Sharp falls in the number of new daily UK and US cases are reflecting the impact of lockdowns. This improvement may be sustained as the effects of immunising the most vulnerable kicks in.
US hospitalisations are also clearly falling now, with improvements in some of the hardest-hit states such as California. The view is: now the holiday season is over, the spread risk is reduced.
Vaccination rates continue to accelerate in the US, UK and Europe. The US is averaging 914,000 people per day — up 22% week on week. At this rate Biden’s goal of 100 million people vaccinated in 100 days is achievable — and could be as high as 150 million to 200 million. Some 4.5% of the US population has had a first dose and 0.7% have received two doses.
There is some noise around vaccine production difficulties but this is misleading.
There have been plenty of doses produced, however there have been issues with distribution in some places. In the EU it seems there has been some attempt to deflect distribution issues by pointing to the manufacturer.
New vaccines
We should see Phase 3 trial data from Johnson & Johnson this week — and from Novavax in the next three weeks.
There is speculation that the effectiveness of these vaccines may be lower than the Moderna vaccines if the new strains of the virus are harder to fight off. But at this point medical authorities believe they will still be effective and will largely stop severe cases.
Economic outlook
Recent data remains soft, reflecting the lagged effect of lockdowns. But there are some signs mobility data is incrementally improving.
There has been something of a seasonal lull in US housing, though conditions remain supportive. It is worth noting the strong recovery in existing sales has not been fully matched by single new housing starts. If supply is constrained, this will continue underpinning house prices.
With distribution of the “lame duck” stimulus package underway we are seeing a spike in money supply growth — a positive signal for markets.
Market outlook
In the US, a strong week for the big tech FANG stocks, IPOs and renewables — alongside a lag among financials — illustrated the rotation to growth.
In our view this was driven by weaker sentiment on vaccines and economic growth. But it also reflects broader market positioning. There has been a significant rotation into financials and materials in recent weeks.
While this does not preclude them from performing, it does highlight the risk to these sectors from any disappointment on the economy and an associated rally in bonds.
The Australian market continued to grind higher last week — but as with the rest of the world, saw a rotation back towards growth names.
Tech names that have lagged the market caught a bid on this rotation. Wisetech (WTC, +19.73%), for example, was the best performer in the ASX 100 last week.
Growth stocks Dominos Pizza (DMP, +11.76%), Afterpay (APT, +6.14%), Ramsay (RHC, +5.59%) and Seek (SEK, +5.06%) were also among the leaders.
Resources generally underperformed last week. Alumina (AWC, -6.27%) was the weakest in the ASX 100. Beach (BPT, -4.59%), Mineral Resources (MIN, -4.12%), Fortescue (FMG, -3.42) and Santos (STO, -2.83%) also fell.
There were several quarterly production updates from the sector. BHP (BHP, -1.47%) and Rio Tinto (RIO, -1.00%) were largely in line with expectations. Some emerging cost issues need to be watched, but current commodity price strength continues to support strong cash flow.
Elsewhere Cleanaway (CWY) fell 5.3% last week as its CEO announced his departure, leaving to join a private company.
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.
He 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.
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.
WE SAW markets consolidate last week as the S&P/ASX 300 shed 0.6% and the S&P 500 lost 0.8%.
Ironically, this came in combination with sign of exuberance in some pockets — notably the US IPO market.
Nevertheless, weaker economic data, chatter about the possible timing of a Fed taper and concerns over delays in vaccination programs weighed on sentiment.
This generally manifested in a rotation from cyclicals and value back to growth and defensives, rather than a material sell-off. This emphasises the strong degree of support markets continue to enjoy.
Economics and policy
President-elect Biden proposed a new stimulus bill of US$1.9 trillion with measures including a federally-mandated minimum wage. His current approach would require a degree of Republican support, so this initial package is likely to be watered down.
Expectations are the final bill will be between US$1.1 trillion and $1.6 trillion and the minimum wage legislation will be dropped. However the stimulus is still materially above the US$800 billion to US$1.4 trillion many had been expecting.
As it stands, nominal disposable income is expected to surge in Q1 2021 to levels above that of Q2 2020. Coupled with pent-up demand as lockdowns and restrictions are rolled back in the northern Spring, this is likely to provide stiff economic tailwinds.
Goldman Sachs last week upgraded its 2021 US GDP estimate from 4.1% to 6.6%, with 10% growth in Q2 and 9% in Q3.
At this point, however, economic data continues to reflect previous stimulus payments rolling off, as well as rising Covid cases and pre-election uncertainty.
US December retail sales provide the most recent example, falling 0.7% versus an expectation of 0%. Consumer sentiment surveys also remain soft.
We expect these indicators to improve as a combination of stimulus, vaccines, accommodating central banks and pent-up demand should win out.
The scale of stimulus is also reflected in higher inflation expectations, prompting some concern that the Fed might have to “taper” its bond purchases sooner than otherwise thought.
The fear here is of a 2013-style tantrum in markets. A number of Fed officials have downplayed this risk, including Chair Powell and Richard Clarida who is widely tipped to be Powell’s successor.
Covid and vaccines
Case numbers fell last week — while still remaining at high levels — as the impact of lockdowns took effect. US hospitalisations are also falling for the first time since September, although several areas remain under strain.
The impact of the vaccine roll-out on hospitalisations is the key issue to watch. Vulnerable parts of the population such as the elderly comprise a disproportionately high segment of hospitalisations and deaths.
Concentrating vaccinations on this cohort may mean that hospitalisations start to fall in February even if cases do not. Mortality rates may also start declining, with a lag.
The rate of vaccinations in the US doubled in the last week. Some 11.1 million Americans have now been vaccinated (about 3% of the population) up from 6 million people a week earlier.
Importantly, half of the phase 1A population — deemed the most vulnerable — and a third of long-term care residents have had their first doses.
We may reach a point in late February where a number of economies can consider re-opening, since Covid will no longer be straining the health care system.
In this vein, it’s been noticeable that government rhetoric has focused on a vaccine’s ability to prevent severe infections, rather than preventing infection entirely.
There have been reports the Oxford vaccine may produce better results in the more thorough AstraZeneca trial, than the 70% efficacy achieved in earlier iterations. However nothing has yet been published here.
Johnson & Johnson released data from its phase 1 trial — but we are still waiting to hear the results of the larger phase 3 trial. The latter is worth watching because it’s a one-dose regimen, which looks to deliver neutralising antibodies in line with the AstraZeneca/Oxford two-dose vaccine.
We think it’s fair to expect more positive developments on the vaccine front in coming weeks which may help calm concerns about vaccine availability and the timing of a roll-out.
Markets
Sentiment swung about last week, seeing some rotation between the cyclical reflation trade and the growth trade.
Valuation remains a key concern in some quarters.
The scale of expected earnings coming through for the next few quarters is helping alleviate some of this. The MSCI World P/E, for example, is still well below its 2000 peak. It is also important to remember that high valuations are concentrated in the growth part of the market, with value nowhere near as extended.
Bond yields remain the key driver of growth stock valuations — and therefore remain a key factor to watch.
The recent rise in bond yields has been driven by inflation expectations rather than a shift in nominal yields.
This is important because inflation expectations are highly correlated with performance of cyclicals — suggesting they can continue to do well while the market believes the Fed will accommodate stimulus. Nominal yields remaining low is an issue for financials.
Real yields (nominal minus inflation expectations) drive growth stock valuations. The massive increase in fiscal stimulus takes some pressure off monetary policy, which means real rates may not decline further from here.
This may mean growth stocks stop outperforming. But it does not necessarily mean they sell off materially. A shift to 2% yields may prompt this, but we remains some way from that point.
It is worth noting that a value rotation is likely to benefit the Australian equity market in comparison to the US, given our higher proportion of value stocks.
The ASX was off slightly last week. Banks and energy performed best; staples and health care the worst.
Energy stocks continued their recovery, helped by higher spot LNG prices. Recent strength in prices is likely to be temporary — reflecting a cold North Asian winter and a coincidence of maintenance-related supply disruptions.
Gold stocks fell on fears of rising bonds yields; bonds themselves were relatively flat on the week.
US dollar sensitives also fell, more as a funding source for banks, energy and resources.
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.
He 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.
Our Emerging Markets fund managers have reduced weight in China after spotting challenges to Chinese equities — and some highly attractive opportunities in other markets.
Here James Syme and Paul Wimborne (pictured above) — managers of Pendal’s Global Emerging Markets Opportunities strategy — explain the details.
Click here to download this article as a PDF.
CHINA was the first country into the Covid crisis, one of the (predominantly Asia-Pacific) countries that seemed to manage the pandemic well — and the first emerging market to show economic recovery in mid-2020.
This was partly due to the general normalisation of domestic conditions as lockdowns were removed. But it also came on the back of a marked shift to a more stimulative monetary and fiscal policy.
A long period of tighter policy that China put in place to slow the build-up of debt in the economy was eased in the first quarter of 2020. This helped drive the construction and real estate markets through the rest of the year.
The heavy weight in internet and technology service businesses in Chinese equity markets was a significant additional boost. Even at the start of 2020 this group of companies made up more than 37% of the index weight in the MSCI China index.
A significant, Covid-driven boost to gaming, online media consumption and e-commerce — coupled with strong investor preference for this sector — drove strong performance among these stocks and lifted the overall market higher.
Challenges to Chinese equities
Now, however, we see some challenges to Chinese equities, and have responded by reducing our weight in the country — especially in light of some highly attractive opportunities in other markets.
Signs of a slowdown in Chinese activity in the last quarter of 2020 are the first of these challenges.
This is by no means a crisis. But PMI data through the year-end came in below consensus expectations. November retail sales, while up 5% year-on-year, indicated there had not been a bounce-back in the Chinese consumer to make up for a Spring downturn.
This stands in contrast to several other big emerging markets, where data continue to surprise as recoveries come through.
Other indicators such as parcel delivery volumes and traffic congestion also suggest a softening of activity in November and December. Outside China, Korean exports were up 12% year-on-year in December, but Korean exports to China rose only 3%.
Earnings estimates trimmed
This softness has also come through in earnings estimates.
Consensus estimates of earnings for many Chinese companies were trimmed in the last three months — exactly at the time it seemed the global economy was accelerating and consensus earnings estimates were revised higher in many emerging countries.
Significantly, China lagged Korea and Taiwan in the last quarter on this measure after it tracked them through most of the rest of the year.
Politics and policies
The other set of challenges concern politics and policy — both within China and internationally.
Domestically, fallout continues from Alibaba founder Jack Ma’s October speech in which he criticised Chinese regulators.
Regulators promptly cancelled a planned US$37 billion listing of digital financial services company Ant Group (which counts Jack Ma as a founding shareholder).
In December the State began a full-blown anti-trust investigation into Alibaba. This caused a sharp decline in its share price — and related weakness in other Chinese internet and technology service businesses as investors adjust to what may be a more difficult operating environment.
US investor restrictions
This happened at broadly the same time the US government was ratcheting up restrictions on US investors investing in Chinese state-owned enterprises — principally by targeting the US secondary listings of such companies.
A November presidential executive order prohibits new investments in securities of Chinese businesses that the US government believes have links to the Chinese military.
This could potentially hit many listed companies. In the first instance it led to the delisting of three state-owned telecom companies from the New York Stock Exchange (and the removal of those securities from the MSCI China and MSCI EM indices).
It’s particularly concerning that the executive order may also affect US investors’ stakes in other US-listed Chinese companies — including most of the internet names — and also products such as ETFs and derivatives based on various Chinese equity indices, including the Hong Kong Hang Seng Index.
How we’re responding
We had already reduced exposure to US-listed Chinese State-owned enterprises (SOEs) in the portfolio in 2020, selling CNOOC, Sinopec and China Mobile.
We have further reduced our weighting in China, partly in response to the concerns highlighted above and partly in response to the much better macro environments we find in some other emerging markets.
More information: Download a PDF article with the further detail on Pendal’s Global Emerging Markets Opportunities strategy.
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.
BT Super Trust PST – Investment Fund (APIR: BTA0502AU) Termination
The BT Super Trust PST – Investment Fund (APIR: BTA0502AU) (PST) will be terminated on 16 April 2021.
The BT Super Trust PST was closed to new investors in 2012 due to low demand from investors. In a recent review, the Trustee[1] noted that the fund’s small number of investors, and low funds under management has meant it has become unviable. As a result, a decision has been made that it’s in the best interests of investors for the fund to be terminated.
What does this mean for investors?
From 15 January 2021 any request for an application or withdrawal from the PST will be assessed on a case by case basis by the Trustee to ensure a price can be determined that is fair and reasonable for all unit holders. If this cannot be satisfied, then the Trustee of the PST may not be able to process your request. If you have arranged regular scheduled contributions to be made into your investment, they may be returned to you.
Payment of the proceeds of your investment holding will be made by the end of April 2021 and credited to the nominated bank account we have on file for your superannuation account. A separate notice confirming this payment will be sent to the registered unit holder.
A small proportion of your holdings may be withheld to meet outstanding tax payments. If there are residual amounts owed to you after any outstanding taxes are paid, we expect to pay these to you by October 2021.
We understand that this is an important change and encourage you to seek independent financial advice from your financial adviser and specific tax advice from a registered tax agent.
What do investors need to do?
To ensure that the proceeds of your investment are credited to your preferred bank account, and that you don’t miss out on important communications about your investment(s), please contact us if your bank account or mailing details have changed. To do this, you can write to us at the following address:
BT for Pendal Fund Services Limited
Attn: Corporate Accounts Team
GPO Box 2675
Sydney NSW 2001
Your letter should include the following details:
- Your investor number: the C number found at the top of this letter
- Your investment name: BT Super Trust – Investment Fund
- What you would like to change e.g. your address or bank details
- Authorised signature(s): for your account this is the nominated signatures held on your account, which were recorded at the time of your investment application (i.e. authorised signatories must sign either individually or any two jointly)
- investment application (i.e. authorised signatories must sign either individually or any two jointly)
We’re here to help
We can also help if you need historical transaction information, to assist your financial adviser or tax agent to determine your taxation position (e.g. any likely capital gain impact) resulting from the termination.
If you have any questions about the PST termination, and your investment with us please call our Customer Relations team on 1800 813 886 between 8.00am and 6.00pm (Sydney time) Monday to Friday – We’d be happy to help.
[1] The Trustee of the Fund is BT Funds Management Limited (BTFM) ABN 63 002 916 458
As the COVID-19 pandemic continues to impact the global community, we remain focused on taking proactive measures and precautions to ensure the health and safety of our employees, while maintaining our ability to service our clients and manage our business.
Majority of our JOHCM staff have been working at home since mid-March and given the recent introduction of high-level restrictions in the UK and the ongoing situation in the US, our staff in these jurisdictions continue to work from home. They are well supported with technology and support programs and our comprehensive Business Continuity Plans in place for all of our offices ensure we continue to operate uninterrupted.
In Australia and jurisdictions where restrictions have been wound back and depending on government advice, employees where they can and are comfortable to do so are returning to the office, although this is a gradual and controlled process.
As always we continue to prioritise communication with our clients, keeping them informed through market updates, webinars with our fund managers and thoughtful insights on how to navigate through these uncertain times. Additionally we remain in regular dialogue with our core suppliers to ensure there is no disruption to services.
Our hearts and thoughts goes out to everyone who has been directly impacted and especially those families who have had to endure the loss of loved ones. We wish you and your family the best of health.
These are unprecedented times and the situation is changing daily. We closely monitor the local and World Health Organisation updates and practices in local jurisdictions and where required we will take further sensible and informed action.
If you have any questions or concerns, please do not hesitate to reach out to your Pendal Group contact.
Emilio Gonzalez
Group Chief Executive Officer
We believe the next opportunity in Emerging Markets lies with identifying the rebounds and the countries that have lagged.
Here James Syme and Paul Wimborne — managers of Pendal’s Global Emerging Markets Opportunities strategy (pictured above) — reveal two countries where they see new opportunities.
Click here to download this article as a PDF.
- We believe opportunities in Emerging Markets lie with identifying the rebounds and the countries that have lagged
- India and South Africa have suffered hard post-pandemic economic landings.
- Both have a huge build-up in domestic bank deposits, significantly increasing the potential for domestic demand recoveries as confidence returns.
- We are excited about the potential for the domestic demand cycle in both countries and have been adding to domestically-focused stocks in both markets.
MUCH OF the commentary on the impact of coronavirus on global economies has emphasised the unprecedented nature of the crisis.
However, the outcome is not new to emerging markets in some ways.
Sudden, brutal hard stops in domestic consumption and activity — accompanied by capital flight and spectacular correlated sell-offs in equities and currencies — have been a sporadic feature of the asset class since at least the Latin American debt crisis of the early 1980s.
That pattern allows us to look for signs indicating which economies — and potentially which markets — are in the best positions to recover.
There are particular indicators that, in our experience, show an economy has the foundations of a recovery in place — although history suggests it is usually worth looking for positive momentum in economic indicators and corporate results/expectations as well.
Looking at these indicators, India and South Africa stand out as two particularly interesting markets right now.
The signs of a hard landing in the economy are obvious: GDP, PMIs, industrial production, retail sales, imports, investment and corporate profits all fall sharply, whether the shock is country-specific, regional or global.
Clearly this has happened in India and South Africa.
India’s composite PMI bottomed out at 7.2 in April, while year-on-year GDP in the quarter to June was -23.9% and -7.5% in the quarter to September.
In South Africa the main PMI index had a lowest reading of 30.3 in April, while year-on-year GDP in the quarter to June was -17.1%.
These numbers represent huge output gaps of economies operating below capacity.
For recovery to happen, though, there has to be a source of demand.
One of these is the stimulative effect of weaker, real effective exchange rates. Weaker currencies stimulate exports (and import substitution) and can also attract capital inflows (when sufficient time has passed after a sell-off — memories are short in the carry trade).
As a result, one key metric for us is change in trade balances and current account balances. Several important historical recoveries in economies and markets have followed big upward moves in external balances.
Looking at the two markets in focus, we see India’s trade deficit averaging US$172 billion per month through 2018 and 2019, but sharply recovering through 2020. The the last two prints show a monthly deficit of less than US$95 billion.
Similarly, India’s current account balance was in surplus in the June quarter for the first time since 2004.
Both balances have also moved strongly towards the positive in South Africa as well. The trade balance in South Africa is the strongest it’s been since the end of apartheid and liberalisation. The current account balance is the strongest it has been in nine years.
While these moves are very positive, they are also seen in several other emerging markets.
Bank deposits are the key
It is another metric that makes India and South Africa stand out: bank deposits.
Both countries experienced a huge build-up in domestic bank deposits during the crisis, significantly increasing the potential for domestic demand recoveries when confidence returns.
In the year to September 2020, credit in India grew by only 5.8%, but aggregate deposits were 11% higher. The central bank noted “the increase was witnessed across all population groups”. Meanwhile the credit/deposit ratio declined to 72%.
This huge growth in incremental deposits was coincidental with an undershoot of consumer spending and private sector investment.
With the central bank’s reverse repo rate sitting well below the banking system’s average cost of funds, there is very real economic pressure on banks to grow credit as soon as demand returns.
South Africa has also seen a sharp move higher in bank deposits. In the year-to-date up to September, public sector deposits were up ZAR95.3bn (US$6.3bn), private sector corporate deposits lifted ZAR109.0bn (US$7.2bn) and household deposits grew ZAR97.1bn (US$6.4bn).
After sharp falls in interest rates there is huge potential for a drawdown of South African bank deposits to drive investment and consumption.
Excess saving has been a global problem since at least 2009.
There is only so much that conventional monetary policy can do in an absence of demand and Keynesian “animal spirits”.
It may partly fall to government spending to convert private sector savings into end demand.
But with improving coronavirus case data in both countries, a vaccine potentially to be deployed soon and other parts of the global economy picking up, we are excited about the potential for the domestic demand cycle in both countries.
We have been adding to domestically-focused stocks, notably banks, in both markets.
More information: Download a PDF article with the further detail on Pendal’s Global Emerging Markets Opportunities strategy.
James Syme and Paul Wimborne are senior portfolio managers and co-managers of Pendal’s Global Emerging Markets Opportunities fund.
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
The pandemic accelerated responsible investing as an investment theme, magnifying issues such as resilience and engagement. Pendal’s head of equities Crispin Murray outlined the big lessons at the Responsible Investment Association Australasia’s RI Australia 2020 conference.
View an edited video of the presentation above or read the transcript below.
Key points:
- How 2020 emphasised the importance of responsible investing
- How Crispin Murray thinks and acts on Environmental, Social and Governance (ESG) matters as an active fund manager and steward of capital
- Crispin’s observations on engaging with companies about ESG matters
TRANSCRIPT
Simon O’Connor, Chief Executive of the Responsible Investment Association Australasia:
Crispin you have a long history looking at ASX-based equities. I’m fascinated to hear your view on the year.
Crispin Murray, Head of Equities, Pendal:
Thanks for the opportunity. I’ll focus on three things. One is to give you my thoughts on what’s changed this year — and it’s been an enormous amount.
The second thing is to give you a snapshot of how an active fund manager thinks and acts on Environmental, Social and Governance (ESG) matters. And then some observations on what we’re seeing when we deal with the companies that we invest in.
What changed in 2020
First in terms of what’s changed, the pandemic has really brought attention to how existential risks are real. When they happen they have a dramatic effect. That’s across a number of areas, but from an equity market point of view you’ve seen huge divergence.
You’ve had clear losers and you had clear winners. I think that’s brought home how you need to not just understand where these risks are, but what are the consequences of these risks.
One of the lessons to come out of this is that when we think about investing and sustainability, we need to think about it from a risk management point of view.
We don’t actually have to prove that responsible investing is always going to beat more generalised investing. What you need to show is that in certain scenarios, that is the thing that could be protecting your portfolio.
That was a very interesting outcome from the pandemic.
Lack of resilience
Another feature of the year is that it’s really demonstrated a lack of resilience within economies, societies and within companies.
This tag that I think [former US treasury secretary] Larry Summers came up with is that we were moving from a just-in-time world to a just-in-case world.
I think that requirement to understand building in resilience to your business models is a really big imperative.
The final thing I’d say is it’s been an acceleration of some of the big themes that we’ve seen over the last few years.
Digitisation, the move online and ESG are are themes that have been supercharged by the lessons from the pandemic. So that’s one set of issues.
Geopolitical issues
I also think globally, geopolitically, we’ve seen some very important developments.
First of all we’ve seen China commit to a net zero target. While it may be a long way out, you can already see some of their policies that have been put into their latest five-year plan, which are very much linked to that long-term target. So I think that’s a strong signal.
On top of that clear, clearly we’re seeing in the US a shift towards the Biden administration, which I think will put in a renewed effort.
So I think there’s a very strong signal globally that a lot of companies are seeing and receiving.
Then the final thing I’d point to is this year’s local events.
There’s [the events of Rio and] Juukan Gorge, we’ve had the situation at AMP. There have been situations that have really demonstrated that if you’re not managing ESG risks well, it has significant impact on companies in terms of how they’re managed and the way investors perceive them.
How we think about ESG today
In terms of how we as investors think about ESG, Pendal’s very fortunate.
We’re a large fund manager. We have $17 billion invested in the Australia market.
That gives us a very important responsibility, which is to engage on behalf of our clients and to use that influence in a positive way.
We’re also fortunate we have a lot of resources. We have 19 people in our Australian equity team. We can also draw upon our colleagues at Regnan who have a team of eight dedicated to doing a lot of research in these matters. And then we have a responsible investing team.
So the resources dedicated to ESG matters has really multiplied in the last few years.
I think what’s shifted is, we’ve always been aware of ESG risks. Our job is about risk management contingency planning.
But the awareness is that these issues and these risks are far more material now and far more significant in terms of the consequence for our portfolios.
In addition, I do also believe that one of the big trends that we’ve seen over the last 25 years is the shift to passive [investing].
Part of that has led to a significant reallocation of resources towards more momentum, more growth-orientated stocks.
I think the next 20 years is going to be about people investing in sustainability-orientated portfolios. Even the managers who are not in those dedicated funds [will] have a greater and greater overlay of that in their investment decisions. In terms of a cost of capital outcome, there’s going to be a very material consequence.
So companies that do not deliver and are not seen to be managing these risks, are going to see their cost of capital rise. They’re going to see their ratings on their stocks fall. And they will not be allocated capital.
Markets are very efficient in terms of determining where they want capital to be allocated. We’ve seen that with growth stocks more recently. I think we’re going to see that increasingly with people’s allocation towards people who are not managing those risks properly.
So when we think about our investments, we think about it both from the perspective of the industry —what are the risks to that industry? what are the longer term trends? — and then how within the company, they are thinking about and managing those risks.
And we rate those companies. So we have a formal process of rating those companies on our own metrics, and we use the Sustainability Accounting Standards Board (SASB) framework to help guide us in what are the key things to focus on.
The importance of engaging with companies
The other element of what we do — and probably the most interesting and the most challenging — is we’re very much at the front line.
Our job — having done the analysis and having listened to perspectives from our investors — is to actually go in and meet these companies and raise these issues.
These are often quite uncomfortable discussions. That’s the nature of our job and that’s what we do.
I’m not expecting much sympathy on that front, but it’s worth highlighting.
You can often go into a meeting and the first part of the conversation with the chairman is ‘we don’t think the executives’ pay is aligned with shareholders, there’s a disconnect here, we need you to reassess that’.
Then we need to talk about how you’re managing your ESG risks and why you’re not thinking strongly enough about your targets on scope two and how you think about scope three and what what actions that you’re taking.
Then you may move on to a discussion about diversity within the organisation and what’s going on.
Keep in mind you’re dealing with people who, for most of their lives, are having people responding to them — they’re the ones directing everyone else.
In the last few years there has been a shift from ‘I’m not really used to people telling me what I need to change’ to an awareness that ‘okay, now I need to embrace this a little bit more’.
But there’s clearly still some resistance to that. That’s part of this process.
On one end of the spectrum there’s an understanding of where society needs to go [and] how economies need to transition to a more sustainable future. But then there’s still a traditional mindset that ‘well, we’re companies, we’ve got to focus on our returns and we’ve got to think about the real issues in front of us now’.
I’m not saying either end of that spectrum is wrong. What we need to do is meld those together so people can see they are actually intertwined.
So a lot of what we do is informing and discussing and trying to share perspectives with companies over these matters.
What we’re seeing when we meet with companies
That takes me to some of the observations we’ve made over the last couple of years within companies.
The first point is that everyone actually understands risks. I don’t think there’s a debate about whether there are issues that we need to be thinking about and taking care with.
The discussion is about the degree to which those risks are real and tangible in any reasonable timeframe.
That’s the push-back that we get. But I do think Rio with Juukan Gorge is a very seminal moment. Understanding community relations and working with the traditional landowners was something a company probably never thought would lead to the CEO and two senior executives being removed if they got it wrong.
That clearly was a risk that was underestimated by that company. That is a very stark lesson for all companies.
That’s one of the areas that’s being reassessed and needs to be continually discussed and highlighted with these companies.
The second thing is the interesting debate about the reporting versus the outcomes on ESG matters.
Both are very important but my observation is there’s an element now where companies feel that by delivering on the reporting side — giving the past — that’s showing that they’ve done their job.
Then I actually think about the point of the reporting and what we’re actually trying to achieve here and what are the outcomes.
We certainly want to emphasise — what is it that a company can do specifically? How can they make a dedicated change rather than just signing off on a series of targets that are not necessarily going to achieve a lot in a good timeframe.
If you take the mining sector, it’s going to be very difficult for the iron ore companies, for example, to push a lot of their customers such as the Chinese steel companies to embrace some of the measures that perhaps they should be embracing.
But what they can do is sit down with their suppliers of trucks and diggers and so forth and put a lot of pressure on them to transition away from diesel towards alternatives such as hydrogen or electric vehicles.
So we’ve been encouraging our companies to think about not just the reporting (you’ve still got to do that) but also the tangible things where we have a point of leverage to deliver a material outcome in a good timeframe.
Amcor as an engagement case study
Another company we’ve had a lot of discussions with is Amcor.
Amcor is an interesting company because it’s in a very controversial area — single-use plastics.
But it also has the potential to drive technology improvements and infrastructure that can lead to recyclable, reusable, combustible packaging becoming pervasive in our consumption habits.
We believe it’s really important to encourage them to realise that by doing something — and I believe they are doing something about it — that will help the rating of the company and their cost of capital.
And if they don’t do enough about it, it’ll actually go the other way.
So there’s a much more binary outcome in terms of their decision-making.
The carrot or the stick
That also leads me to this issue of the carrot and the stick.
I do believe that generally to motivate people and motivate companies, you need to not only tell them the consequences of not doing something and the penalties that will come. You also need to provide them with an incentive.
I think that’s where the market’s price action, the way that markets are rating companies is actually a very valuable tool in sending that signal and providing an incentive for companies.
In addition I think there’s enormous amount of opportunities. We’ve spent a lot more time recently thinking about the opportunities that are presenting themselves with this transition in the economy.
Going back to the pendemic, the companies that were able to help facilitate remote work and online shopping have had huge returns for investors.
So if you’re talking to a company you can say, ‘think about the opportunity, where can you tap into these trends and how can you actually take advantage of them and deliver a positive outcome?’
Intertwinment of E, S and G
The final observation I’ll make is to really reinforce this point about the intertwinement of the E, the S and the G [Environmental, Social and Governance issues].
When I speak to companies I see a parallel to what we’re seeing in broader society. There’s a group of people who are very much on board with the need to transition the economy. But there’s also still people who realise that they’re probably near-term losers from that transition.
That’s why the ‘S’ is so important.
We need an economy that is able to create industries that create new jobs, create wealth and enables us to transition quicker.
In terms of our portfolios the message we’re giving to companies is we’re really looking for those companies that help deliver on those other aspects of ESG, and are able to help facilitate the transitions that we’re seeking to achieve.
Simon O’Connor (RIAA): Crispin, you have quite unique access to very senior levels of Australian companies. We’ve seen something of a revolution on the investor side around ESG issues which you talked about. Are you saying the response at the leadership level in boards and among executives you speak to is responding and upskilling and building capability and knowledge quickly enough in your view — as a broad observation across the ASX?
Crispin Murray (Pendal): Yes the first thing I’ll say is, there’s an enormous emphasis across the board on these matters. Certainly we are through the stage of people dismissing this as an issue.
The challenge now is the output. I will sit down in some situations and we’ll literally have a 40-page deck, and it will just go through a whole bunch of things that companies are doing. But you get the sense sometimes that this is a case of ‘let’s just create lots of examples of all the things we’re thinking about’. But there’s no common theme or purpose as to what they’re trying to achieve.
The targets have created a mindset which is: ‘as long as we’re answering and delivering on these sorts of KPIs, we’re doing what we’re supposed to be doing’.
Getting people to actually think about the ‘whys’ is really important.
The other observation is it’s a lot easier for large companies to do this than small companies.
One of the things I worry about is that when you look at some of these third-party rating services, they’re penalising smaller companies because they haven’t got the reporting levels that larger companies have.
[Smaller companies] need to raise their game, and that’s a message that we give to them. But in many cases we think there’s a disconnect between the perception and the reality of these companies.
We want to try and find the right balance between, having companies feeling that they have to dedicate resources just to apply reporting standards that work for a global perspective versus if there’s one area of your business that you can really facilitate a change. We’d certainly encourage them to focus on that and work more on that front.
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.
He manages a number of our flagship funds along with one of the largest equities teams in Australia.
Click here for more information about Pendal’s newly enhanced Ethical Share fund.
For more information, please contact Pendal’s Head of Responsible Investment Distribution Jeremy Dean at Jeremy.Dean@pendalgroup.com.
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
Find out more about our investment capabilities: https://www.pendalgroup.com/about/investment-capabilities
Contact a Pendal key account manager: https://www.pendalgroup.com/about/our-people/sales-team/
Here’s what’s influencing Australian equities this week according to Pendal’s head of equities Crispin Murray (pictured above). Reported by portfolio specialist Chris Adams.
THERE was an unsurprising consolidation in equity markets last week following a strong run. The S&P/ASX 300 gained 0.15%, while the S&P 500 fell 0.82%.
This pause for breath has been orderly — we do not see signals of anything more meaningful at this stage.
As we move into the holiday period, we are monitoring seven key issues in coming days and weeks:
1. Will the global economy continue to surprise on the upside?
The global economy continues to run hot by aggregate measures of GDP and other indicators. However this is driven largely by industrial production.
Stimulus measures have held up consumer spending but there has been a shift from services to goods. As a result, production is running hard as depleted inventories are restocked. This is evident in commodity prices and activity data such as US railcar loadings and trucking stats.
There are signs of weaker consumer activity in the US under the current wave of Covid. This has been felt most in areas such as dining and entertainment. Retail spending remains strong although growth has slowed.
The jobs front in the US remains reasonable. Continuing jobless claims – probably the best real time measure – are slowly but surely continuing to trend down.
The impact of the latest northern hemisphere Covid wave needs to be watched — but at this point the economic situation remains solid. This is also reflected in credit markets, which are signalling a benign view.
2. Will the US see harder lockdowns?
Covid case data has re-accelerated in the US as post-Thanksgiving reporting flows through. The potential for harder lock-downs poses a risk to the current economic situation.
Localised restrictions have been enacted in some areas – particularly in California last week.
Hospitalisations and Intensive Care Unit (ICU) admissions remain the key factors to monitor. Hospitalisations are up 7% week-on-week.
The rolling seven-day average of net new daily hospitalisations is around 1000 patients. This is down from 2000 in mid-November, but the next week or two will tell if this re-accelerates due to the Thanksgiving lag.
Overall, ICU occupancy continues to sit at high levels but has not deteriorated. Average ICU occupancy in metro areas is running at about 75%, while 14% of metro areas are running at 90% or greater and a quarter are at 80% or greater.
This is the same as last week but bears watching.
We are moving into a period where traditional flu cases rise dramatically. So far this has not happened – but it could also be an important variable in pressure on the medical system.
3) Will new vaccine trial data identify any material issues?
Following initial positive news on high efficacy rates for the Moderna and Pfizer vaccines, subsequent news flow has raised some questions about health impact at the margin.
For example, data released on the Pfizer trial has shown incidence of Bell’s Palsy, lymphatic swelling and even appendicitis are all higher in trial groups taking the vaccine.
The Moderna trial will release more data this week while the UK vaccine roll-out could see other issues identified. Something to watch out for in coming weeks.
4) Ability to deliver an effective vaccine on the necessary scale
The market seems quite jumpy at any noise regarding the availability of vaccines. It’s important to remain aware of any issues regarding the supply chain. We also need to watch how effectively Moderna is able to handle its distribution.
At this point surveys suggest people’s propensity to take a vaccine continues to rise. However this is closely linked to views on its efficacy.
This may become an issue in Australia given our agreements with AstraZeneca and Novavax – and lack of agreement with Moderna.
5) Policy updates
Policy support remains the single greatest factor supporting the recovery in markets. Any signal from central banks that questions this support would be a negative. We are not seeing any sign of this at the moment.
The Fed meets this week and at the moment consensus is 50/50 on whether it will announce a lengthening of the maturity of the bonds they are willing to buy, with a view to containing the current sell-off in bonds.
Last week the European Central Bank extended the length of its current bond-buying program, without adding to its intensity.
The ECB struck a cautious tone, offering no comment on how much it planned to buy each month, saying only it would respond to conditions. This suggests there is greater push-back on the level of stimulus within Europe.
On the fiscal side, the odds of a near-term deal are also around 50% — and have probably deteriorated in recent days.
The tide of liquidity supporting the market is manifesting in several interesting ways. Equity market valuations look very high by historical standards in the US. Although the relative yield between equities and other asset classes is also at high levels, which is supportive.
6) Georgia Senate runoffs
Runoff elections due to take place in the US state of Georgia on January 5 have the potential to move markets. Recent polls suggest a close-fought race.
If the Democrats ended up with control of Congress, it would shift expectation on a fiscal package, prompting a further sell-off in bonds and rotation to value within equity markets.
7) Brexit
A potential wildcard. The situation remains fluid, and it seems negotiators have bought themselves more time overnight.
Markets outlook
Bond yields fell 8bps (US 10-year sovereigns) on concerns on the impact of lockdowns in the US. There will be a lot of focus on the Fed meeting this week, to see if it extends the duration of the bonds they are will willing to buy, to keep yields under control.
In commodities, iron ore continued higher on end-of-year restocking, as well as concerns that recommendations on the government inquest into the Juukan Gorge incident may have some impact on supply.
The Australian dollar broke higher, up 1.4% against the USD, on the back of good domestic economic indicators and higher commodity prices. It is sitting at 75c and may strengthen – an aspect to watch for some stocks.
The Australian market was led last week by Resources (+2.45%). There was some rotation back to growth and defensives following a couple of weeks of under-performance. Information Technology gained 2.76% and Consumer Staples was up 1.5%.
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.
He 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.
Find out more about our investment capabilities: https://www.pendalgroup.com/about/investment-capabilities
Contact a Pendal key account manager: https://www.pendalgroup.com/about/our-people/sales-team/
How many As are enough?
School reports are out this week and for highly driven students (and some parents) anything less than an A is disappointing. For others a single A can be a source of celebration.
Two Australian states this week lost an A.
S&P downgraded NSW from AAA to AA+. This came as no surprise given the massive increase in debt this year.
More surprising though was Victoria, which was double downgraded from AAA to AA, falling from the equal highest-rated state to the lowest.
Victoria has had a double downgrade before. In 1992, while struggling to emerge from a severe recession and the collapse of the State Bank of Victoria, the state was hit by a double downgrade from Moodys.
There were massive blowouts in the spreads of Victorian bonds and a sense of panic crept in. The downgrade was viewed as unacceptable by the new Liberal government of Jeff Kennett, which embarked on a program of asset sales and expense control to regain the AAA. It took six years.
Today we live in very different times. We no longer have mainstream economists and supposed experts like the IMF recommending a dose of large fiscal cuts as the remedy. Cutting government spending at a time of large private sector cuts is seen for the stupidity it always was.
More importantly at a federal level there has been a gradual realisation over the past 20 years that a government in control of the printing press has far more debt and fiscal capacity than previously thought.
We can thank Japan for first experimenting with what were then considered the “crazy” ideas of Modern Monetary Theory.It turns out the framework behind MMT is actually right — something that has embarrassed the many mainstream economists who predicted doom.
Since the facts disrupted the views of these economists they have been busy trying to exercise a triple reverse twist dive to pretend they could see this all along. Even worse, some are revealing their continued ignorance of MMT by still referring to it as “an impossible free lunch”.
This time governments and markets have correctly shrugged their shoulders at these downgrades as largely ho hum.
The cost of debt has barely budged. The RBA and banks chasing High Quality Liquid Assets are soaking up the extra supply. Debt has never been cheaper.
Governments have learned that the welfare of their citizens, particularly in a crisis, is more important than an extra A in the credit rating.
Over the next decade it will be inflation — not the rating agencies — that limits what a government can do. If inflation emerges it will hopefully be the “good kind” brought about by a strong economy, which would be fixing government finances.
The bad kind of inflation — supply-driven or stagflation — would be a different matter.
But that is a topic for another time.
Tim Hext is a portfolio manager with Pendal’s Bond, Income and Defensive Strategies team.
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
Find out more about our investment capabilities: https://www.pendalgroup.com/about/investment-capabilities
Contact a Pendal key account manager:
https://www.pendalgroup.com/about/our-people/sales-team/
PENDAL is proud today to introduce Regnan Global Equity Impact Solutions Fund in Australia.
The new fund is one of the first to provide Australian investors with access to global public market impact assets. The announcement follows the successful launch of Regnan Credit Impact Trust in January 2020.
Regnan, a specialist ESG research, engagement and advisory business that is fully owned by Pendal Group, expanded into global investment management in 2020 with the appointment of a four-person Global Equity Impact investment team.
The fund is offered as part of Regnan’s Global Equities Impact strategy which is available in the UK and now in Australia. The strategy is managed by Regnan’s London-based investment team and marketed by Pendal’s distribution team locally.
“The Regnan Global Equity Impact Solutions Fund is an important step in our vision to develop Regnan as one of the world’s foremost responsible investment managers,” said Pendal Australia Chief Executive Officer Richard Brandweiner.
“It’s an innovative investment strategy developed by a dynamic and passionate team with proven credentials as impact investors.”
Positive impact, active returns
Impact investment products are in high demand. The value of Australian impact investments is forecast to grow to $100 billion in five years — five times the current market size of $20 billion, the Responsible Investment Association Australasia reports.
Regnan Global Equity Impact Solutions invests in mission-driven companies that provide solutions for the growing, unmet sustainability needs of society and the environment while seeking to generate strong financial returns.
Using a proprietary taxonomy system, Regnan has identified more than 50 areas of potential investment based on the United Nations Sustainable Development Goals — and some 2200 innovative companies well-placed to become leaders in these new markets.
“We are excited to launch the fund in Australia,” said Tim Crockford, Head of the Regnan Equity Impact Solutions team.
“Impact investing is a nascent and fast evolving space. Our ethos is about investing in companies that are trying to solve environmental and social challenges like water and food security and embedding circular economy in their business principles. For us, the impact case is the investment case.”
Hear more from Tim Crockford in this video.
Click for detail about Regnan Global Equity Impact Solutions fund
Regnan’s new look
Reflecting its new, expanded mission, Regnan has introduced a new look and a new website.
The new Regnan logo evokes shifting tectonic plates, signifying the permanent change that sustainability brings to the investment landscape.
Australian investors: For more information, please contact Head of Regnan and Responsible Investment Distribution Jeremy Dean at jeremy.dean@regnan.com.
Information for UK, European and other international investors: www.regnan-johcm.com