Here are the main factors driving the ASX this week, according to Pendal portfolio manager JULIA FORREST. Reported by portfolio specialist Chris Adams

• Find out about Pendal Focus Australian Share fund
• Find out about Pendal Property Securities Fund

EQUITIES continue to grind higher, with the S&P 500 up 1.7% last week and the S&P/ASX 300 up 1.3%.

Safe havens like gold, oil and the Swiss franc caught a bid on the back of rising geopolitical tensions, with outgoing US president Joe Biden giving a final push to resolve the Russia-Ukraine conflict before Donald Trump takes office.

Treasury yields were relatively stable as markets attempt to discern the likely policy mix under a Trump administration, made even more difficult by some interesting cabinet nominees. 

US Fed-speak was mixed but on balance more dovish.

Nvidia, the world’s largest company, reported Q3 results with guidance for Q4 sales only beating by $400 million versus the normal $1 billion. Management highlighted some delays and cost pressures around the next-generation AI chip. 

In Australia, Reserve Bank minutes noted that easing in the labour market might have begun to stall or modestly reverse. The RBA wants to see two quarters of declining inflation before cutting the cash rate.

US macro and policy

Howard Lutnick, CEO of bond broker Cantor Fitzgerald, was appointed US commerce secretary and hedge fund manager Scott Bessent was announced as Treasury secretary.

Lutnick advocated for higher tariffs at a recent rally in New York, citing the prosperity of the early 1900s when there was no income tax and all the government had was tariffs. Though he did acknowledge they would raise prices, at least temporarily.

In an interview with the Financial Times, Richmond Fed president Tom Barkin noted the US was more vulnerable to inflationary shocks than in the past, with businesses more readily passing on costs to consumers.

The inflationary effects of potential tariffs and immigration plans under president-elect Donald Trump were a “concern” for businesses, but the Fed shouldn’t adjust monetary policy before possible changes in economic policy, he said.

Elsewhere, US home builder sentiment rose to a seven-month high. The results suggest optimism that high-income households will move forward with home-buying plans, given US personal tax cuts will persist.

While sentiment has been strong actual starts have been softer, with starts and permits declining 4% and 7.7% year-on-year. Mortgage rates have risen 80bp to 6.86% over the past two months.

Walmart reported sales +5.3% with the retailer benefiting from trading down.

Recent surveys suggest US consumers are set to spend 4% more on holiday shopping this year. While consumers may feel fearful of inflation, their balance sheets look good.

Initial jobless claims came in at 213k, better than consensus expectations (220k) with the data showing that the labour market is trending sideways at a healthy level.

The narrative that the US labour market is cooling appears inconsistent with the continued strength in data for above-trend GDP growth, strong retail sales, low jobless claims, and rising average hourly earnings.

In addition, credit spreads continue to be tight, corporate profits and forward profit margins are at all-time highs and US household balance sheets are in very good shape.

In short, the US economy remains very strong.

The market continues to pare back expectations of large Fed Fund rate cuts. Expectations for a December rate cut from the U.S. Federal Reserve have diminished, with the likelihood now at 53%, a sharp drop from 82.5% just a week earlier. 

Unsurprisingly the US dollar continues to be very strong.

US inflation and bond rates

The US 10-year bond yield has increased from 3.6% to 4.4% despite the Fed signalling significant rate cuts.

This has not been the case in previous rate cutting cycles where yields have either fallen or gone sideways.

The soft employment print in September prompted a 50 bp cut but was then met by a couple of sticky inflation prints.

Fed funds futures have shifted over the past two months, with the expectation for the end 2025 moving from 2.8% up to 3.8%.

While inflation has been trending down with the core measure at 3.3% year-on-year, it will remain a key concern for financial markets, as well as in the political sphere.

This was the 42nd consecutive month with Core CPI above 3%, the longest period of elevated inflation in the US since the early 1990s.

Voter perceptions of inflation were important in the recent US elections. The economy was the top concern for Republican voters, and three quarters of US voters felt inflation created hardship for them this year.

Tariffs generally apply to lower frequency consumer durables, with consumers less aware of price changes unlike the hyper awareness of changes in prices at supermarket or petrol stations.

As such tariffs may end up raising inflation with less impact on the politically important perception of inflation.

Europe macro and policy

The European Central Bank’s index for negotiated wages rose to 5.4% year-on-year in Q3, up from 3.5% in Q2, a record lift since the euro area was formed.

A jump had been anticipated after large, negotiated wage rises in Germany for auto and engineering workers.

The ECB expects wage inflation to fall next year to a rate more consistent with the 2% inflation target.

The market’s reaction was limited, with the data playing to the view that the ECB is likely to cut by only 25bps next month.

China macro and policy

China announced some tax reductions for home buyers. This might indirectly support consumer spending, with new home buyers having more spare cash to spend on furniture, for example.

However it is not the degree of consumer support markets really wish to see.

A wide gap has opened between mortgage interest rates and mortgage borrowing, implying that potential homebuyers are unwilling to buy apartments at any level of mortgage rate.

With an estimated 90 million empty apartments and a population expected to fall by roughly 100 million in the next 20-to-30 years, the cyclical and structural headwinds make stimulating this important part of the economy extremely difficult.

Australia macro and policy

Minutes from the RBA’s November meeting noted that easing in the labour market might have begun to stall or modestly reverse.

A breakdown of Australian unemployment by duration shows that short-term unemployment appears to have stabilised below pre-pandemic levels. 

The board also highlighted that due to govt subsidy ’noise’ from government subsidies in the December 24 quarter, it wants to see two quarters of declining inflation before cutting the cash rate’.

This means that the first rate cut (if any) is likely to occur from May 2025.

Australian housing prices have also hit a historical peak of unaffordability – with the average home now costing eight times the median household income.

The percentage of national median income needed to fund a mortgage on the national median dwelling value has hit 50.6%, according to CoreLogic, versus a 20 year average of 36.6%.

Rental costs are 33%, versus a 20 year average of 29%, by the same measurement.

The Australian Bureau of Statistics considers a household to be in housing stress if it pays more than 30% of income on housing costs.

While first home buyers have benefited from assistance from the Bank of Mum and Dad in recent years. There are warning signs of pressure here.

By one measure, the percentage of households in the 55-64 year age cohort owning a home with no mortgage has fallen from over 70% in 1995 to under 40% today.

Markets

There are some warning signals in US equities, such as historically high valuation levels, insider selling (although there are some seasonal effects here) and Berkshire Hathaway loading up on cash.

However, sentiment remains strong, and earnings growth continues to be supportive.

Market breadth is also improving and favouring small caps which are likely to benefit from US pro-growth policies.

The stock market is the second most expensive for any incoming President (after George W Bush in 2000). 

Given Trump’s pro-market tendencies, it is reasonable to expect that he is likely to double down on market friendly policies in the event of a big sell off.

Locally, the ASX unwound some of the recent weak performance in energy and resources with both sectors up strongly at the expense of IT, consumer discretionary stocks and AREITs.

 

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We have updated and reissued the Product Disclosure Statement (PDS) for the Pendal Australian Long/Short Fund (the Fund) effective on and from Monday, 25 November 2024. 

The following is a summary of the key changes reflected in the PDS for the Fund.

Updates to significant risks disclosure

The Fund’s investment strategy involves specific risks.

We have updated the significant risks disclosure applicable to the Fund to ensure that our disclosure continues to align with the nature and risk profile of the Fund and the current economic and operating environment.

Updates to ongoing annual fees and costs disclosure

The estimated ongoing annual fees and costs for the Fund have been updated to reflect financial year 2024 fees and costs. These include changes to estimated management costs and estimated transaction costs.

We now also disclose the maximum management fee we are entitled to charge under the Fund’s constitution.

Updates to restrictions on withdrawals

We have updated the disclosure on restrictions on withdrawals to align closer to what is in the Fund’s constitution.

Additional information on how to apply for direct investors

We have provided additional information for non-advised investors (i.e. investors without a financial adviser) investing directly in the Fund who may also be required to complete a series of questions as part of their online Application, to assist us in understanding whether they are likely to be within the target market for the Fund.

Updates to our complaints handling process

We have provided additional details about our complaints handling process and the Australian Financial Complaints Authority.

Shorting bonds may no longer be the best trade, argues Pendal’s head of income strategies AMY XIE PATRICK

• Bonds carry plenty of risk premium for the uncertainty that lies ahead
• Hedge funds piling on short US bond bets “like no other time in recorded history”
• Find out more about the Pendal Monthly Income Plus Fund

IN the final weeks leading up to the US election, political pollsters said it would be a close call.

Bond markets, on the other hand, traded like a Trump victory was in the bag.

While the market continues to show little love for bonds in the aftermath of the “Red Sweep”, this article looks at whether the bond short remains the correct “Trump trade”.

What’s priced in?

Bonds have had a busy time. For most of the year, US bond yields have danced between large and small rate cut expectations, fuelled by recession fears and resilient data, respectively.

Despite the US Federal Reserve (the Fed) kicking off this easing cycle with a 50 basis point (bp) cut to the Fed Funds Rate in September, bond yields have failed to fall any lower.

The fear of a Trump victory and the anticipation of his economic policies have played a large part in the most recent bond sell-off.

This move has been similar to the post-election bond market reaction in 2016.

After some immediate confusion as to whether a Trump presidency would herald the end of civilisation as the world had known it, bond yields started to take off. This made sense, as tax cuts and corporate repatriation tax breaks were lifting US growth expectations across the board.

The Fed was also engaged in a hiking cycle.

Between the 2016 US election and the middle of 2018, most tax cuts and repatriation flows had already happened. In that same window, US 10-year Treasury yields climbed by nearly 1.00%.

This time around, bond yields started to move ahead of the US election.

Since the September Fed rate cut (and there has been another cut since then), US 10-year bond yields have climbed by close to 0.9%.

Source: Bloomberg

This latest rise in US bond yields has effectively erased all the market’s anticipation of how the Fed easing cycle would play out on longer-dated bond yields.

It could even be argued that this similar rise in bond yields compares as more extreme than the 2016 experience, which took place against the backdrop of a Fed tightening cycle.

While it’s impossible to say whether the full impact of Trump’s presidency is already in the price, it is certain that bonds already carry plenty of risk premium for the uncertainty that lies ahead.

The real rise in yields

The rise in US bond yields since September is not just about a fear of Trump’s policies being inflationary. Figure 3 shows that both US 10-year breakeven and real yields have marched higher.

Breakeven yields indicate the market’s view on long-term inflation expectations. Since the September FOMC meeting, 10-year breakeven yields have risen by 0.24% to 2.35%.

In other words, the market is having doubts about the Fed being able to maintain inflation at its 2% target in the long run.

Real yields, however, have risen by twice as much in the same period – from below 1.6% in September to nearly 2.1% today.

The prevailing market explanation is that the incoming Trump administration is very likely to see a worsening of the US deficit situation, leading to an increase in US government bond supply.

However, real yields can move due to both the demand for and supply of capital.

An increase in US government bond issuance represents an increase in demand for capital. But existing academic studies have found that the most significant drivers of real yields in the US are demographics and growth.

Source: Bloomberg

Ageing populations lead to higher savings rates, which increase the supply of capital – pushing down real yields.

This long-term trend is unlikely to be suddenly reversed by Trump’s policies and may, in fact, be exacerbated if the working-age population can no longer grow so easily due to more hawkish immigration policies.

GDP growth is positively linked to real yields, because when an economy grows, its need for capital tends to increase. This is why productivity growth is also tied to real yields. Higher productivity is usually a result of investment in technology and innovation – both of which require capital.

The likely effect of tax cuts and tariffs

An expansion and extension of tax cuts under the Tax Cuts and Jobs Act may indeed lift the growth rate of the US economy. But with a real yield rise of over 0.5% since September, a lot of those higher growth expectations have already been baked in.

Furthermore, tax cuts are unlikely to have the same distributional impact as the post-pandemic fiscal handouts implemented under the Biden Administration.

As illustrated in Figure 4, the poorest half of Americans still have more cash in their pockets than prior to the pandemic. The poorest one-fifth of US households have still experienced significant growth in their ex-real estate wealth since the pandemic.

In addition, trade tariffs tend to have a contractionary effect on demand and global growth.

The US economic slowdown in 2018 was evidence of this during Trump’s tariff wars with China. The deflationary effects were so strong at the time that it forced the Fed into the famous “Powell Pivot”, whereby the hiking cycle was abruptly halted (Figure 5).

Source: Bloomberg

The extent to which Trump’s policies can lift the US economic growth trajectory is uncertain. That the poorest Americans stand to benefit the most is unlikely.

Place your bets

While the US economy has remained resilient, we remind ourselves that only weeks ago recession was the main concern on the supposed breach of the “Sahm rule”. Whether the US labour market will manage to avoid further deterioration remains the main concern.

As Figure 6 highlights, once the unemployment rate starts to turn higher, recession usually follows.

Source: Bloomberg

In the meantime, global hedge funds have piled on short US bond bets like no other time in recorded history (Figure 7).

 

Source: Bloomberg

Asset managers’ natural positioning on Treasury futures tends to be long, as often futures will be used to ensure their portfolios’ duration do not fall short of their benchmarks. This creates room to put cash to work on higher-yielding assets like credit.

The most recent rise in the net Treasury futures position among global asset managers may be linked to their chase for credit, rather than an outright desire to extend their US government bond exposures.

Hedge fund positioning, on the other hand, tends to be driven by a direct view of how US Treasuries will fare.

In the low-rates era, hedge funds built up short positions on views that lower rates could not possibly last forever. The pandemic brought in a brief period of even lower rates and forced those hedge fund short positions to be unwound.

Since 2022, however, hedge funds have re-engaged with the short-bond trade because of concerns over inflation, the US deficit situation, and likely a multitude of other factors such as momentum.

The most recent driver of short positioning among global hedge funds seems to be the “Trump trade”. With hedge funds’ short bets on US Treasuries at an all-time high and yields having already risen significantly, the risk is that even hawkish Trump policies fail to push this trade on further.

Market positioning is never the primary driver behind our portfolio positioning decisions. However, it does inform our assessment of the risk-reward dynamic affecting any active decision we make.

If the details of Trump’s economic policies surprise to be more benign or if hawkish policies lead to disappointing market reactions, one expects profit-taking or capitulation to occur among the hedge fund community.

In other words, market positioning points to risk-reward that favours bonds. At the very least, shorting bonds may no longer be the best Trump trade.

 

Here are the main factors driving the ASX this week, according to Pendal’s head of equities CRISPIN MURRAY. Reported by portfolio specialist Chris Adams

• Find out about Pendal Focus Australian Share fund
• Tune in: register to watch Crispin’s Beyond the Numbers webinar

THE post-election rally in equities hit the wall last week, driven by a combination of being overbought, a rise in bond yields, hawkish comments from the Fed, and concerns over some of Trump’s cabinet appointments.

The Fed’s Chairman, Jerome Powell, signalled that a December rate cut was not a certainty. We have now had four cuts taken out of forward expectations in the past two months.

The US economy continues to travel well and is increasingly divergent from the rest of the world.

This is leading to a strong US Dollar, which is also acting as a check on equities. The S&P 500 shed 2.05% for the week.

There were several results for ASX-listed companies which were, on balance, positive. The S&P/ASX 300 finished up 0.07%.

Commonwealth Bank’s quarterly update reinforced the benign credit environment, leading to small upgrades that fuelled further outperformance from the banks.

US interest rates and economy

The outlook for interest rates continued to shift higher on a slightly more cautious tone from the Fed as Chairman Powell signalled that a December rate cut was not locked in.

“The economy is not sending any signals that we need to be in a hurry to lower rates,” he said.

He further noted that current economic strength was giving the Fed “the ability to approach our decisions carefully”.

In a break with recent messaging, there was also no mention of rates being “a long way from neutral”.

The US government two-year bond yield has risen from roughly 3.6% in September to 4.3% now, as a signal of where the market thinks rates are likely to go.

The market is still pricing a 62% probability of a rate cut in December, before a pause in January.

While expectations for the end of 2025 are broad, the market is assigning the highest probability for rates to be 3.75-4.0% – that is, three more cuts from current levels.

All up, four cuts have been removed from expectations in the past two months. This reflects three factors:

1. The economy is holding up well. The latest Atlanta Fed GDPNow indicator for Q4 is 2.5% growth. The latest consensus data has US GDP growing 2% over the next twelve months, with Goldman Sachs – which has called GDP well this year – estimating 2.4%.  Jobless claims data remains benign, falling back down to 217k last week. October’s personal consumption data was solid and indicates consumer growth is around the trend rate of 2.5% to 3.0%.
2. Inflation is holding up above target levels. October’s CPI data was okay and certainly better than September. Headline CPI was up 0.2% month-on-month to 2.6% year-on-year, while core CPI rose 0.28% month-on-month (versus 0.31% in September) to 3.3% year-on-year. As always, CPI data can be cut to support multiple arguments. Core CPI looks to be trending the wrong way, but the super core measures – excluding idiosyncratic categories – are more consistent with the Fed getting towards its target. Ultimately, there is enough uncertainty here to indicate the Fed will be careful with rates.
3. Trump policies. Tariffs are seen as a one-off reset of prices rather than an ongoing issue. However, immigration policy may have more of an impact on rates. If immigration slows from the estimated annual run rate of three million people to 750,000, then labour supply is tighter which can affect wages. The employment growth needed to hold the unemployment rate steady is estimated at 170k per month, and this could be down to 60k-70k in H2 2025.

Elsewhere, the Senior Loan Officer Opinion Survey (SLOOS) still indicates relatively tight credit standards, but these continue to normalise and suggest that credit demand will pick up in the US over the next 12 months.

The Fed watches this carefully as a gauge for how tight monetary policy actually is.

Markets

US equities corrected last week, and a period of consolidation is understandable given the recent move.

Australia, like the US, has seen a significant sector rotation.

Resources have been weak on disappointment over China stimulus. Consumer Staples and Utilities are underperforming due to defensive attributes and rising capital intensity.

Technology and Banks lead the market. 

Currency markets

One issue to watch is currency markets.

The US rate outlook is moving higher at the same time as the market is becoming more pessimistic about European growth. Expectations of sub-1% growth in Europe in the next 12 months would require the European Central Bank to cut more aggressively.

The implied interest rate differential between Europe and the US has widened to 200 basis points (bps) by the end of 2025. There has been a similar issue with Japan and this has led to a significant move higher in the US Dollar.

The roughly 5% increase in the US Dollar trade-weighted index is not good for equity markets. A similar move in July to October 2023 coincided with a 9% correction in the S&P 500.

That said, the 2023 sell-off also coincided with a 130bp increase in US 10-year yields – we have only seen an 80bp move here so far.

Oil also rose $20 in that period to $95, whereas it is sitting at its lows currently.

So while there are some early warning signs, this is not as material a headwind as last year.

Liquidity/risk-on signals such as Bitcoin remain positive. Credit spreads are close to 20-year lows, which suggest this is more a consolidation than a market reversal.

US earnings are also supportive, with earnings per share (EPS) growth expected to pick up in the next 12 months.

Banks

Banks had another big week and have fully recovered from the China stimulus sell-off in late September.

The sector has now outperformed about 25% over the past 12 months, with the market almost uniformly negative and underweight the sector.

The move, relative to Resources, is even more extreme – now about 66% over 12 months.

Given the earnings outlook for banks is flat, the bulk of the move in Banks has been valuation re-rating.

To highlight the relative valuation shift, we need go no further than the example of Commonwealth Bank which, at 25.88x next-12-month price-to-earnings, has just overtaken CSL (25.14x) for the first time.

Bear in mind that CSL is expected to grow EPS by more than 10% per annuum for the next five years, whereas CBA is likely to be low single digit.

There is no doubt there are significant distortions affecting the market. A lot relates to passive investing, with flows – particularly from offshore – into a small number of mega-cap stocks.

It is hard to predict when these distortions reverse.

But we are reminded of the period where bond yields were around 0% and the market began to justify why this made sense – only to eventually see it unwind.

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About Crispin Murray and the Pendal Focus Australian Share Fund

Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and leads one of the largest equities teams in Australia. Crispin’s Pendal Focus Australian Share Fund has beaten the benchmark in 12 years of its 16-year history (after fees), across a range of market conditions.

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management. 

Find out more about Pendal Focus Australian Share Fund  

Contact a Pendal key account manager

We have updated and reissued the Product Disclosure Statements (PDSs) for the Pendal Global Property Securities Fund (the Fund) effective on and from Friday, 15 November 2024. 

The following is a summary of the key changes reflected in the PDS for the Fund.

Updates to significant risks disclosure

The Fund’s investment strategy involves specific risks.

We have updated the significant risks disclosure applicable to the Fund to ensure that our disclosure continues to align with the nature and risk profile of the Fund and the current economic and operating environment.

Updates to ongoing annual fees and costs disclosure

The estimated ongoing annual fees and costs for the Fund has been updated to reflect financial year 2024 fees and costs. These include changes to estimated management costs and estimated transaction costs.

We now also disclose the maximum management fee we are entitled to charge under the Fund’s constitution.

Updates to restrictions on withdrawals

We have updated the disclosure on restrictions on withdrawal to align closer to what is in the Fund’s constitution.

Additional information on how to apply for direct investors

We have provided additional information for non-advised investors (investors without a financial adviser) investing directly in each Fund who may also be required to complete a series of questions as part of their online Application, to assist us in understanding whether they are likely to be within the target market for the Fund.

Updates to our complaints handling process

We have provided additional details about our complaints handling process and the Australian Financial Complaints Authority.

The market only has eyes for Trump | How the gender pay gap affects investors | China’s property sector improves | How sustainable leaders are innovating with AI

Pendal’s Global Emerging Markets Opportunities team remains positive about China’s property sector. Here they explain why

• Signs of optimism in China’s property sector
• Caution should be applied when choosing where to invest
• Find out more about Pendal Global Emerging Markets Opportunities Fund

CHINA remains the most interesting emerging market from a top-down standpoint.

Here we focus on its property sector.

The scale of China’s property problem in recent years should need little introduction.

But to summarise it in a statistic: residential property sales were RMB 6 trillion in the first nine months of 2024, down from RMB 12.2 trillion in the first nine months of 2021.

A crackdown on new lending to most private-sector real-estate developers since 2020 has coincided with a broad slowdown in the rest of the economy.

This created a crisis of confidence in real estate, which quickly became a liquidity crisis for developers and a funding crisis for local governments.

Stimulus measures

In September, Chinese policy makers announced fiscal and monetary stimulus which brought about the prospect of change.

This included broad policies aimed at supporting the property sector.

They also specifically allowed the refinancing of a potential USD 5.3 trillion in residential mortgages from November, and a reduction in the banking system’s required reserve ratio.

Signalling from central government fed through to local governments.

Important commercial hub Guangzhou became the first tier-one city to remove all restrictions on buying residential property.

Other top-tier cities Beijing, Shanghai and Shenzhen eased rules on home-purchasing in suburban areas.

James Syme, Paul Wimborne and Ada Chan are co-managers of Pendal Global Emerging Market Opportunities Fund

Property sales rising

Chinese property sales data is normally released in the middle of the month, but there are some data sources that provide an early look.

Most significantly, listed property companies report monthly sales data early the following month.

Data released in early November covers the first full month since stimulus was announced.

For the 22 biggest listed real estate developers, October sales were up 68% month-on-month and 3% year-on-year.

A 3% rise is hardly a return to boom conditions. But as the first ten months for 2024 were down 34% on the equivalent period in 2023, it looks like a significant turning point has been reached.

More positive data

Other anecdotal evidence also supports this view.

New home visits over the October 1 National Day holiday were up 93% year-on-year in Beijing and 200% in Guangzhou.

Prime land in Shenzhen and Chengdu has been sold in recent weeks at high prices, reflecting optimism and financing availability for developers.

October national real estate data (due in mid-November) should give much more clarity on this suggestion of a turning point.

Caution advised

Despite this positive data – and despite strong share price performance among some real-estate developers – some caution must be exercised.

Inventory of unsold homes held by real estate developers is an estimated 28 months of current sales volumes.

Inventory in suburban areas and in tier-two and tier-three cities may be very difficult to sell.

And the Chinese economic slowdown is not driven solely by real estate: policy makers may fail to follow through on their announcements.

Keep an eye on country-level data

Operating a top-down investment process involves continually updating views as economic and company data is released.

A major policy announcement has been followed by a series of data points indicating a turning point in this critically important sector.

We will continue to assess the strength of the recovery and be alert to new investment opportunities.

Until then we remain overweight China in the Pendal Global Emerging Markets Opportunities Fund, with a selective –  and we believe higher quality – set of holdings.

We remain overweight Chinese real estate, with a holding in the more defensive state-owned segment of the industry.

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About Pendal Global Emerging Markets Opportunities Fund

James Syme, Paul Wimborne and Ada Chan are co-managers of Pendal’s Global Emerging Markets Opportunities Fund.

The fund’s top-down allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.

James, Paul and Ada are senior fund managers at UK-based J O Hambro, which is part of Perpetual Group.
 
Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

Contact a Pendal key account manager here

The latest wages data supports the rate cut case, but markets are too focused on Trump, says head of government bond strategies TIM HEXT

• Why bonds, why now? Pendal’s income and fixed interest experts explain
• Browse Pendal’s fixed interest funds

SEPTEMBER quarter wages data (the Wage Price Index) was released today and, for the third quarter in a row, sat at 0.8%.

This sees a 3.2% annualised pace, though the 1.1% outcome from the 2023 December quarter keeps the annual rate at 3.5% for now.

All sector WPI, quarterly and annual movement (%), seasonally adjusted (a)

Source: Wages grow 3.5 per cent for the year | Australian Bureau of Statistics

Both private and public wages rose 0.8%. A key factor was awards and minimum wage outcomes, which were set at 3.75% in June, down from 5.75% the previous year.

This would be very welcome news for the RBA.

Wage growth and underlying inflation are now heading back towards 3%. Given the two feed into one another, it reflects a more sustainable path for the medium term.

Recent RBA forecasts have underlying inflation at 3% and wages at 3.4% by June next year.

If the RBA has more confidence in reaching these levels sooner, it opens the door for rate cuts in the first half of next year.

Outlook

In another time or place, this data would have seen a decent market rally. But the market has eyes only for the future of Trump’s presidency.

This future is viewed as one of increasing government debt and higher tariff-led inflation in the US, feeding out into the globe.

As a result, markets now have only 30% chance of an RBA February rate cut and less than one cut by mid-year.

On domestic factors alone, this is very cheap, but reconciling it with Trump is proving the problem.

We think the Trump impact will be more mixed outside the US.

Australia’s trade deficit with the US should see us well down the list of targets, but key trading partners are at the top of the list.

Either way, Trump’s policies are unlikely to hit hard data until the back half of 2025 at the earliest, making central banks’ jobs more difficult for now.

We maintain the view that upcoming data leaves a February rate cut wide open.

At only 30% priced in, the risk/reward is becoming attractive, and we will use the sell-off as an opportunity to enter positions.

Further out the curve remains at the mercy of US bonds which, even at 4.5%, don’t seem to be finding widespread support.

Australia should outperform but yields may still move higher.

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About Tim Hext and Pendal’s Income & Fixed Interest boutique

Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.

Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

Find out more about Pendal’s fixed interest strategies here

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About Pendal

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.

Contact a Pendal key account manager

Closing gender pay gaps would bring significant benefits to the Australian economy – and to investors, argues Pendal’s ELISE McKAY

• Australian women still earn less than men
• Closing the gender pay gap would pay dividends for investors
• Find out about Pendal Horizon Sustainable Australian Share Fund

CLOSING gender pay gaps could significantly boost Australia’s economy, potentially increasing GDP by 6.2 per cent and creating 461,000 jobs annually — six times more than the current job creation rate.

And for investors, there is substantial evidence that companies with better gender equity tend to perform better financially.

“There’s a strong business case for all stakeholders to work together to close the gender pay gap,” says Pendal equities analyst and portfolio manager Elise McKay.

“The financial benefit to the Australian economy of closing the gender pay gap is substantial, and it would benefit all corporates with revenue ties to Australia.”

What is the gender pay gap?

Gender pay gap is not the same as pay inequality, where women and men are paid differently for the same role.

Equal pay for performing the same role has been a legal requirement in Australia since 1969.

Instead, a gender pay gap refers to the overall uneven distribution of salaries within an organisation.

Gender pay gaps can arise even when employers are committed to pay equality, says McKay.

Gender pay gaps can occur when women are under-represented in leadership roles, when women with caring responsibilities have fewer opportunities for career advancement, or when roles typically undertaken by women are undervalued in the workplace.

“The median gender pay gap in Australia is 19 per cent,” says McKay.

The Workplace Gender Equality Agency says that means that over the course of a year, the median of what a woman is paid is $18,461 less than the median of what a man is paid.

All organisations with more than 100 employees must report their gender pay data annually.

Investors should review a company’s gender pay data

McKay says the gender pay gap in many organisations is often a result of women and men being represented differently in high and low-paying jobs.

Carefully understanding these types of representation issues is the first step towards closing the gap.

“It’s a general story across the economy – there are leaders and laggards within each sector,” she says.

“The gender pay gap is a complex issue to resolve and it’s something that stakeholders need to work together to fix.

“We recognise that different companies have different workforces and different segments of their workforce may be traditionally male or female dominant.”

But there are things people can do within organisations to start understanding how to solve the problem.

“The first step is trying to understand the composition of your workforce and what’s driving your gender pay gap,” she says.

“Is it an actual remuneration issue, or is it a representation issue? And what is driving those differences in representation across hiring, promotions, and other factors?”

Proven solutions

McKay says representation issues take time to solve but there are proven paths for organisations to take.

“The company boards I speak to are at different stages in the journey. They range from some that haven’t really thought it through to some that are very evolved in terms of how they’re thinking about it.

“There’s still a bit of trial and error.

“But there’s many steps companies can take that have been trialled and are proven to work – for example, we know that sponsorship of females within organisations is more successful than mentorship.

“We also see companies that have re-thought their rostering to conduct work in ways that are more integrated with women’s lives.”

Case study: Viva Energy

Fuel retailer Viva Energy, which employs more than 1500 people, discovered that overtime payments were a significant driver of its pay gap.

This was partly because a threshold of five years’ experience to be eligible for the operational roles that attract overtime meant fewer women than men qualified.

Men also progressed faster, spending less time at each competency level than women because they were more likely to come to the business with a trade background.

Viva took action to improve the representation of women in operational roles and has reviewed its operator training programs to ensure women progress as quickly as possible – even without a trades background.

Devil in the detail

McKay says it’s important to look beyond the headline data when assessing progress on closing the gender pay gap.

That’s because actions taken to improve gender representation, such as hiring more women at entry-level positions, can sometimes temporarily distort pay gap statistics.

“More women coming in at lower levels can skew the data – so the devil is in the detail and just looking at the headline number does not necessarily show what’s actually going on in an organisation,” she explains.

That means companies need to be prepared to explain their gender pay gap numbers – and investors need to be careful when analysing the reports.

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About Elise McKay and Pendal Australian share funds

Elise is an investment analyst and portfolio manager with Pendal’s Australian equities team. Elise previously worked as an investment analyst for US fund manager Cartica where she covered a variety of emerging market companies.

She has also worked in investment banking and corporate finance at JP Morgan and Ernst & Young.

Pendal Horizon Sustainable Australian Share Fund is a concentrated portfolio aligned with the transition to a more sustainable, future economy.

Pendal Focus Australian Share Fund is a high-conviction equity fund with a 16-year track record of strong performance in a range of market conditions. The Fund is rated at the highest level by Lonsec, Morningstar and Zenith.

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management. 

Contact a Pendal key account manager here

Here are the main factors driving the ASX this week according to portfolio manager JIM TAYLOR. Reported by investment specialist Chris Adams

• Find out about Pendal Focus Australian Share Fund

THERE was not enough in Australian economic data last week to bring forward expectations of rate cuts.

US economic data remains on the soft-landing trajectory, with a slowing labour market and still-resilient consumption. The market is locked on for a 25bps cut at the Fed meeting this week.

We are seeing the highest dispersion in outcomes in a while from both US quarterly reporting season and the trading updates from Australian annual general meetings (AGMs). There are plenty of anecdotes about consumers “trading down” to cheaper products and services.

There are perhaps a couple of new trends emerging.

– First, weak EU data is prompting speculation about where rates go to – and do they settle below the “neutral” level.

– Second, some are starting to question the return-on-investment expectations around the swathes of corporate investment in AI.

Elsewhere, there is further chatter about a potential stimulus out of China’s NPC meeting this week. If forthcoming, it would see a confluence of China, the EU and the US all on a path of monetary easing and/or stimulus into 2025.

The US Presidential election remains a coin-toss – as does the time frame that it will take to determine a winner.

Increased volatility seems the only sure bet at the moment.

Macro and policy Australia

The headline consumer price index (CPI) for Q3 2024 rose 0.2% quarter-on-quarter, while the year-on-year rate eased 100bps to 2.8%. This is the first time inflation has been within the RBA’s 2-3% inflation target band since the first quarter of 2021.

That said, new subsidies drove electricity prices down 17.3% over the quarter, taking about 40bps off headline CPI.

The trimmed-mean CPI – a seasonally-adjusted measure closely watched by the RBA – rose 0.78% for the quarter and 3.54% for the year.

This has decelerated sequentially over the year; the quarterly growth was +1.01% in Q1 and +0.87% in Q2.

Year-on-year growth for the month of September was 3.2%, only just ahead of the RBAs 2-3% band.

Overall, inflation is tracking in the right direction, but not quickly enough to change expectations around rate cuts.

Breaking CPI into components:

– Goods prices fell 0.6% quarter-on-quarter, driven by the drop in electricity mentioned above as well as -6.7% in fuel prices. This offset a 0.6% gain in food prices.

– Services prices rose 1.1% quarter-on-quarter and the year-on-year figure rose 10bps to 4.6%. The volatile holiday travel and accommodation segment rose 1.4% for the quarter. There was moderating growth in rents (1.6%), other financial services (0.9%) and medical and hospital services (0.1%).

Retail sales

September retail sales rose 0.1%, versus 0.3% expected and 0.7% the previous month.

Weakness in clothing, footwear and accessories (-0.1%) and department stores (-0.5%) offset growth in household goods (+0.5%) and restaurant and takeaway food services (+0.4%).

Retail volumes rose 0.5% for the third quarter, having fallen 0.4% in the previous two quarters. This is only the second time in the past two years that quarterly volumes have increased.

The long-term average trend is 5% annual growth in retail sales. We are currently tracking a little below half this rate.

Macro and policy US

JOLTS

The September Job Openings and Labor Turnover Survey (JOLTS) saw job openings decrease by 418k to 7,443k.

This was lower than a (downwardly revised) 7,816k in August, well under consensus expectations of 8,000k and is the lowest level of job opening since January 2021.

Openings fell furthest in; 1) private education and health services (-175k), 2) trade, transportation and utilities (-132k), and 3) government (-132k). They increased in financial activities (+93k) and professional and business services (+77k).

The job openings rate fell 0.2%, to 4.5%, and the quits rate was down 0.1%, to 1.9%. The hiring rate rose 0.1% to 3.5% and the layoff rate was also up, by 0.2% to 1.2%.

Labour turnover now appears lower than pre-pandemic levels – for example, the quits rate averaged 2.3% in the two years before 2020.

Inflation

The 0.8% quarter-on-quarter rise in the employment cost index (ECI) was good news for the Fed, as the yearly rate dropped from 4.1% in Q2 to 3.9% in Q3. This is the first reading under 4% in three years.

Recent solid growth in productivity (averaging ~1.7% p.a. for the last 5 years) means that unit labour costs already are rising slowly enough (2.3%) for core personal consumption expenditures (PCE) inflation to fully return to the Fed’s 2% target during 2025.

The PCE price index rose +0.18% month-on-month for September, in line with the median forecast and up from 0.11% in August. It is up 2.09% year-on-year, again in line with the median forecast and down from 2.27% in August.

The Core PCE price index rose 0.25% month-on-month, which was the largest gain since April and is up from 0.16% in August. It is up 2.65% year-on-year, versus +2.72% in August.

The Q3 data appears to have been slightly worse than the Fed expected, as it would now require month-to-month increases to average 0.10% over the next three months for the median participant’s forecast of a 2.6% year-over-year increase in Q4 to be realised.
Nonetheless, the low level of food and energy prices, frictionless supply chains, cooling new rent inflation and the ongoing loosening of the labour market suggest that the outlook for core PCE inflation is fundamentally benign.

GDP

US GDP rose 2.8% in Q3 2024, driven mainly by strong consumption.

Consumer spending rose 3.7% – the largest gains since Q1 2023 – which accounted for 90% of the increase in activity.

This in turn is driven by the top 40% of US households by income, reflecting strong balance sheets and still-favourable wage and employment prospects.
In contrast, the bottom 40% of households are feeling the pinch from higher prices and higher mortgage costs.

Meanwhile, the middle 20% of households are still spending but trading down in the search for value.

Strong consumption offset weakness in other areas such as private investment, which rose just 1.3%, and in inventories, which went backwards.
The Atlanta Fed’s real-time GDP estimate GDPNow is forecasting 2.7% growth in Q4.

Other data

• October US consumer confidence rose 9.5pts to 108.7 which is the largest one month increase since March 2021. Are we drawing a line through the “vibecession” we have been experiencing for a couple of years?

• Pending home sales rose 7.4% in September, the strongest number since June 2020 and well ahead of expectations. Mortgage rates have however spiked since the end of September, so this could be short-lived joy.

• October non-farm payrolls rose 12K, versus 100k consensus expectations. Manufacturing strikes and hurricane impacts rendered the number somewhat meaningless. However there was a significant net revision of -112K across Aug/Sept. The 6-month average in September is ~150k, versus nearly 250k 6-month average in January 2024. The net revisions probably lock in a 25bp cut from the Fed in November.

• The unemployment rate was unchanged at 4.1% in October, matching the consensus.
Average hourly earnings rose by 0.37%, slightly stronger than the consensus, 0.33%. Net revisions were -0.09%.
- The ISM manufacturing index dipped to 46.5 in October, from 47.2, below the consensus, 47.6.

Macro and policy EU

There is some chatter that ECB policymakers have begun debating whether interest rates need to be taken below neutral to stimulate the economy.

While nascent, this is a significant shift in the policy debate.

Europe’s economic backdrop is deteriorating rapidly, while inflation is well below earlier predictions.

This raises the risk that price growth undershoots the ECB’s target, as it did in the decade before Covid.

Germany’s finance ministry flagged that the economy would probably contract in 2024, as it did in 2023, as the country continues to deindustrialise as a result of the EU’s energy policies.

German Chancellor Olaf Scholz noted the need for new a new approach – especially for industry – in the face of high renewable energy costs, weak global demand, and growing competition from China. One key question is how to ensure cheap energy.

Volkswagen asked its workers to take a 10% pay cut, arguing it was the only way it could save jobs and remain competitive.

Whilst only one company at the moment, we are starting to see the wave of deflation that Europe faces.

China

Vice finance minister Liao Min noted that Beijing’s stimulus is focused on lifting domestic demand and reaching the 2024 growth target, while coordinating with monetary policy to target economic restructuring.

There is an expectation that China will unveil fiscal stimulus following the National People’s Congress (NPC) Standing Committee meeting, schedule to conclude on 8th November.

Liao said fiscal policies will be of “quite large scale”, reiterating an earlier message from finance minister Lan Fo’an.

US earnings

The blended Q3 earnings growth rate for S&P 500 EPS currently stands at 5.1%, versus 4.3% expected at the end of the quarter.

The blended revenue growth rate is 5.2%.

70% of S&P 500 companies have reported, with 75% beating consensus EPS expectations. This is below the 78% one-year average and the five-year average of 77%.

60% have surpassed consensus sales expectations, below the 62% one-year average and the five-year average of 69%.

In aggregate, companies are reporting earnings that are 4.6% above expectations, below the 5.5% one-year average positive surprise rate and the five-year average of 8.5%.

In aggregate, companies are reporting sales that are 1.1% above expectations, better than the 0.8% one-year positive surprise rate but below the five-year average of 2.0%.

• Alphabet delivered a well-received set of numbers. Overall Group sales were up 15% versus 14% in Q2. Net income of $26.3bn was up 34% on the same period last year. The Cloud business was the highlight, with revenue up 35% versus 29% in Q2. Advertising growth slowed to 10.4%, versus 11.1% in Q2, with Search advertising of $49.4bn up 12.2% versus 13.8% in Q2. YouTube advertising sales of $8.9bn were up 12.2%, versus 13% in Q2. Investment in AI is “paying off,” according to management
• Microsoft beat consensus expectations for revenue and EPS. Azure, its cloud business, grew revenue 33% versus 29.5% expected, with generative AI contribution 12 percentage points of that. Capex as a percentage of revenue is running at 28%, versus a historical average of 12%.
• Meta grew revenue 19% in Q3, down from 22% in Q2. Q3 profits grew 35% to US$15.7bn. The capex budget for infrastructure is high and going higher. Capex to sales running at 24%, versus 19% historically. Zuckerberg said the company’s AI-driven feed and video recommendations have led to an 8% increase in time spent on Facebook and a 6% increase on Instagram. He added that more than one million advertisers used Meta’s generative AI tools to create more than 15 million ads in the past month, and the company estimates that businesses using image generation are seeing a 7% increase in conversions.
• Amazon expects to spend about US$75 billion capex in 2024 and more than that in 2025, with the majority driven by cloud-based Amazon Web Services (AWS). CEO Andy said “the increased bumps here are really driven by generative AI” which “is a really unusually large, maybe once in a lifetime type of opportunity,” but “customers, the business and our shareholders will feel good about this long term.” He noted that Amazon has “proven over time, that we can drive enough operating income and free cash flow to make this a very successful return on invested capital business…and we expect the same thing will happen here with generative AI.”

 

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About Jim Taylor and Pendal Focus Australian Share Fund

Drawing on more than 25 years of experience investing in top-performing Australian companies and a background in accounting, Jim manages our Long/Short Fund and co-manages our Imputation Fund. He is a Chartered Accountant with membership of the Australian Institute of Chartered Accountants.

Pendal Focus Australian Share Fund is managed by Crispin Murray. The fund has beaten its benchmark in 14 years of its 18-year history (after fees), across a range of market conditions. Find out more about Pendal Focus Australian Share Fund here.

Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management. 

Contact a Pendal key account manager here