Here are the key factors influencing Aussie stocks this week, according to Pendal’s head of equities Crispin Murray (pictured above). Reported by portfolio specialist Chris Adams.

RISING Covid numbers in the US and Europe and further uncertainty over a US fiscal package have not deterred the local market.

The S&P/ASX 300 made strong gains last week, rising 5.4% to bring the calendar year-to-date return to -6.2%. The S&P 500 was up 3.9%.

At this point investors seem content that the resurgence in cases is not denting activity and economic recovery remains in place.

A raft of stimulus in the federal budget served as a reminder that policy makers remain ready to step in to underpin the economy.

We are mindful that fund flows reflect a generally cautious mindset from investors. This also remains supportive for equity markets.

Covid data

New case trends continue to deteriorate in the US and in Europe. The seven-day average of daily new cases in the US has returned to about 50,000 compared to about 35,000 in early September.

The positivity rate and hospitalisations have also gradually picked up in recent weeks. This has not yet fed through to mortality rates, but the lagged effect and onset of cold weather is expected to drive an increase here too in coming weeks.

Most US states are seeing an increase in new cases. The biggest increase has been in New York despite moderate restrictions which remain in place there.

Europe also continues to deteriorate, but as with US this is not translating into excess strain on the health system so far.

Most importantly there is no evidence in either location that the increase in cases is affecting general economic activity levels. The recovery remains in place. This is the key aspect to watch, as any shift in expectations here could be material for markets.

Australia remains far better positioned than Europe and the US despite some setbacks last week.

Economic data and policy

The Australian federal budget was stimulatory, as expected. On balance, the scale of injection was probably a touch larger than consensus was looking for.

Key elements included:

– Bringing forward personal tax cuts, worth $7 billion in FY21 and $17 billion across FY21-22. Importantly, the cuts are retrospective which means the flow-through will commence straight away. This is positive for retail spending.

– Income support payments ($2.6 billion).

– New worker subsidies. This is worth $4 billion, but benefits should flow through in FY22-23, so this is not as immediate in impact.

– Additional infrastructure spending worth $9.7 billion. Again, this is spread over four years so it’s not as immediately beneficial in its full scale. However the “use it or lose it” directive to states should help accelerate projects.

– Accelerated investment allowances worth $26.7 billion through FY23-24. This investment would probably have occurred anyway, but brings it to the front end to help kick-start confidence.

The scale of measures, which will drive the budget deficit close to 12%, demonstrates the willingness of policy makers to underpin the economy.

The shift in mindset away from fiscal prudence and balance budgets is material and suggests there is more the government can do if required.

At this point the constraint on fiscal stimulus is either rampant inflation or loss of confidence in government credit. Neither factor is in play right now.

On the data side there were signs of a pick-up in Australian payrolls, which had been dragged down by Victoria since July. Overall unemployment is expected to peak at 8% compared to compared to the previous prediction of 10%.

Globally, data continues to indicate the recovery has not been affected by a rise in cases.

Leading indicators of GDP and corporate sentiment continue to rise. German retail sales have surged well above pre-Covid highs.

Global fund flow data continues to show net cumulative outflows out of equity funds and into bond funds. We see this as supportive for equity markets. Sentiment is a long way from euphoric despite the rapid rebound.

Markets

Equity markets were strong last week despite rising Covid cases. The prospect of a fiscal deal in the US prior to the election seems to be receding.

Senate Republicans seemingly do not want to complicate the process of installing a conservative Supreme Court justice prior to the election.

The bookies still have Biden at a 65% chance of a win, while the odds of a Democrat sweep – taking both the White House and a Senate majority – are now at 60%.

There is a view emerging that such a sweep could see the Democrats expand their current proposal to a figure north of US$2.5 trillion. This may explain the market’s seeming sanguinity on the issue of fiscal stimulus.

Commodity prices reflected a sunnier outlook for global growth. Brent oil rose 9.1%, iron ore 2.4% and copper 3.4%. Gold was up 1%. US bond yields are testing the upper range of their recent trading range.

All sectors in the S&P/ASX 300 made gains. The key laggards were defensives – particularly those bond-sensitive ones.

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/  

Here are the key factors influencing Aussie stocks this week, according to Pendal’s head of equities Crispin Murray (pictured above). Reported by portfolio specialist Chris Adams.

THE Covid situation in Australia continues to improve but deteriorating case numbers and softer macro data overseas weighed on the local market last week.

The S&P/ASX300 fell -2.8% for the week.

The US equity market reflected growing concerns on a number of fronts, but ended the week up 1.5% after a late rally.

We believe this reflects the notion that softer data increases the likelihood of further US policy stimulus.

Meanwhile Trump’s falling popularity is reducing fears among Democrats that a package could harm their election chances, giving them more confidence to support it.

The bookies continued to mark Trump down last week. An average betting indicator spiked from 55% to 61% in Biden’s favour after the first debate.

At this point the odds of a Republican versus Democrat controlled Senate are line-ball. This is a key issue. There seems to be underlying market concern that a Democrat White House with a big Senate majority would provide scope for material policy change.

Covid outlook Australian case trends continue to do well in stark contrast to September.

Community transmission has improved for 10 days in a row and remains the key number to watch. Optimism on this front is prompting outperformance among domestic re-opening plays such as travel stocks.

New daily cases in the US continue to trend sideways, though at a higher plateau than late August and early September. Hospitalisation rates are up slightly. The mortality rate continues to fall.

Concern about the impact of colder weather – particularly the risk of a higher death rate – continues to weigh on market sentiment.

European trends remain concerning but are no worse than last week.

The daily moving average of new cases in France has stabilised. However the plateau is at a much higher level than previous waves – similar to the US. Trends in Spain are slightly better, while there is a view the UK is stabilising. So far higher case numbers in France are not leading to the same crisis in healthcare – similar to the US.

Activity data has remained resilient, suggesting it is not leading to a material economic impact thus far.

Macro outlook

New US data was on the softer side last week. Headline employment continues to grow, but at a declining rate. For example, another 784,000 service sector jobs were added in September, versus an average of 2.2 million in each of the previous three months.

The unemployment rate fell to 7.9% but this number was helped by the participation rate falling to 61.4%. There are still 7.8 million fewer jobs in the non-government sector than pre-Covid.

The number of permanent job losses continues to grow as some “temporary” losses are reclassified.

All this is likely to increase pressure on policy makers to act. The growth in permanent job losses – and the implied degradation in skills and impact on mental health – are areas of key concern.

The case for further stimulus is reinforced by the fall in real personal income. This fell 2.7% in August as previous stimulus packages such as the Presidential program rolled off.

The net effect of falling personal income and decelerating employment trends are starting to prompt concern of disappointing growth in Q4 2020.

The savings rate will be a key swing factor here. The surge in stimulus payments saw it rise to 14% in recent months, up from the long-term trend of 8%.

The extent to which households will draw down on accrued savings in coming months to offset lower payments remains to be seen.

While the data is softer, it is important to bear in mind that the US economy continues to recover. However the pace of recovery is slowing.

Recent data highlights the need for further stimulus to maintain recovery rates – and there appears ample scope to do so.

The level of slack in the economy reduces the risk of stimulus-fuelled inflation, meaning little constraint on funding or funding costs.

Previous Democrat reticence to support the Republican campaign with improved economic data also seems to be waning, along with Trump’s popularity.

We remain of the view that policy makers will act if the situation starts to deteriorate. This notion should be supportive for markets.

Markets

Oil continued to weaken last week. Brent Crude was off 6.3% as markets tempered expectations of a rebound in demand. The impact of aircraft fuel is playing a role in this. However diesel demand has also been weaker than many would have expected at this point.

Other global demand proxies held up better. The copper price rose a little while the AUD appreciated 2.1% against the USD. Gold gained 2.3%.

Australian equities were led down by large caps. Energy (-6.8%) fared worst, but Banks (-4.6%) and Staples (-4.9%) were not far behind.

Domestic cyclicals tended to outperform, driven by an expectation of further stimulus from this week’s federal budget and optimism about the easing of border restrictions.

Thematic effects tended to drive most stock moves, with little stock-specific news.

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/  

BT Active Balanced PST (APIR: RFA0823AU)

We are writing to let you know that the BT Active Balanced PST (ABN 28 200 793 048) (PST) in which you are invested will be terminated on 30 October 2020.

In a recent review, of the PST the Trustee noted that the PST has a small number of investors and low funds under management. This means it is becoming less viable and, as a result, a decision has been made that it is in the best interests of investors for the PST to be terminated.

Further, from 30 September 2020 we’ve changed the trustee for the PST to BT Funds Management Limited ABN 63 002 916 458, AFSL No. 233724 (BTFM). This is to ensure compliance with draft legislation to implement one of the Royal Commission Recommendations, under which the trustee of a registerable superannuation entity will be prohibited from holding any other role or office.

What does this mean for me? 

From 29 September 2020 any request for an application or withdrawal from the Active Balanced PST will be assessed by the Trustee on a case by case basis and will depend on whether the price would be fair and reasonable for 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 November 2020 and credited to the nominated bank account we have on file for your PST account. A separate letter confirming this payment will be sent to you.

A small proportion of your holdings will 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 I 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 Active Balanced PST

− What you would like to change e.g. your address or bank details

− Authorised signature(s) for your account: this has to be what was nominated at the time of your investment application (i.e. authorised signatories must sign either individually or any two jointly)

We’re here to help

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.

We can also help if you need historical transaction, to assist your financial adviser or tax agent to determine your taxation position (e.g. any likely capital gain impact) resulting from the termination.

What’s impacting Aussie stocks this week, according to Pendal’s head of equities Crispin Murray (pictured above). Reported by portfolio specialist Chris Adams.

There was a disconnection between the Australian and US equity markets last week as the S&P/ASX 300 gained 1.6% while the S&P500 lost 0.6%.

This partly reflects a divergence in near-term trends.

Covid case numbers continue to rise in the US and in Europe, the fiscal package impasse remains and the Fed has delivered less monetary policy support than many hoped for.

In contrast, case numbers continue to improve in Australia, leading to a relaxation of restrictions and optimism about re-opening of borders. The federal government has also talked up budget stimulus.

We believe the market remains in a consolidation phase following its strong run.

Risks remain, but economic recovery, abundant liquidity and the scale of policy support (with the prospect of more if needed) provide powerful counters to the threat of a prolonged correction.

Covid trends

Australia continues to do better than many expected. New daily cases continue to trend down in Victoria and unidentified community transmission in NSW has been brought under control.

Various real-time statistics demonstrate that activity continues to improve. Dining-out data continues to trend upwards in NSW and Queensland, while regional Victoria is starting to see a resumption.

This bodes well for continuing confidence in an improving economy along with the approach of summer and talk of further budgetary measures.

Case numbers continue to trend upwards in the US, though there is some distortion for the accounting of lagged results from Texas.

Overall the positivity rate continues to decline, though there has been a small pick-up in hospitalisations which bears careful watching.

The bigger issue is a rise of cases in Europe, which has now overtaken the US. This needs careful monitoring for signs of any return to lockdown.

For now mortality rates and hospitalisations have stayed low.

US election outlook

Most pollsters and analysts continue to assign a 70-80% probability of a Biden win ahead of this week’s first debate. The bookies, burned by 2016, are more circumspect with a 50-60% probability in Biden’s favour.

Polling suggests only 20% of people expect a result on election night, with 45% predicting a result within a week.

Debate over the market implications of a Biden victory is convoluted, but we suspect the view that Trump is good for markets and Biden is bad is too simplistic.

Taxes may go up under Biden — any additional capital gains tax may prompt a bout of selling.

But we may see greater fiscal expansion and a more accommodative Fed under a Democrat administration. This would be pro-growth.

A lot depends on the margin of any victory and the Senate results. While there may be nuances, large-scale fiscal stimulus and monetary expansion is likely to remain in place regardless of the outcome.

Market outlook

Correlations remain high across markets, with a stronger USD dragging on returns for US equities, commodities and gold last week. Brent oil fell 2.9%, iron ore was down 2.6%, copper dropped 4.5% and gold was off 4.8%.

While case numbers and concerns over growth prompted a 1.8% gain in the US Dollar index, this did not translate to stress in credit markets or liquidity.

Concerns over the possible economic impact of rising case numbers prompted outperformance of US growth names as investors sought certainty on earnings.

Australian equity gains were led by large caps — particularly the banks (+4.4%) and health care (+4.0%).

The banks benefited from news that the government was planning to relax some rules around responsible lending.

The effect on credit flow is likely to be marginal. But it may help ease pressure on some borrowers as mortgage deferral periods roll off.

The bigger issue for banks remains the margin squeeze from lower interest rates and a limited ability to reduce costs.

Talk of further rate cuts only exacerbates this headwind. However on the positive side it may also signal an end to the extended period of tighter and tighter regulations which the banks have faced over the last few years.

Gold miners and resource stocks underperformed last week as commodity prices came off. Northern Star (NST, -8.4%), Evolution (EVN, -8.3%) and Saracen (SAR, -6.6%) were the worst performers in the ASX 100.

Expectation of an October rate cut drove bond yields lower, generally helping utilities and infrastructure names.

Conglomerate Soul Pattinson (SOL, +14.4%) was the strongest performer on the ASX 100, followed by Transurban (TCL, +8.4%) and TPG Telecom (TPG, +7.2%).

Atlas Arteria (ALX, -3.7%) bucked the broader trend of infrastructure outperformance as French case numbers grew. Though at this point there has been no traffic impact on its toll roads.

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/  

What’s impacting Aussie stocks this week, according to Pendal’s head of equities Crispin Murray (pictured above). Reported by portfolio specialist Chris Adams.

EQUITY markets continue to tread water — a trend likely to continue until the US election, barring unusually positive or negative economic or Covid news.

We continue to see a modest rotation from growth to value. Overall the S&P/ASX 300 gained 0.24% last week, while the US S&P 500 was down -0.6%.

Despite muted returns, there was a lot going on.

Economic data remains broadly positive but vaccine developments and the Fed update have disappointed markets somewhat. The US Presidential race has been complicated further by the passing of Supreme Court Justice Ruth Ginsburg.

New developments on key issues

·        Australian case trends: Continue to improve; combined with warmer weather we are seeing early signs on activity improvement.

·        US case trends: Slight deterioration, but reflects pick up in tests.

·        European case trends: Concern picking up, not yet impacting on the economy.

·        Vaccine: Recent data suggests some small delays in expected timeline.

·        US policy: Modest disappointment; no improvement in the odds of a fiscal deal, while some felt the Fed didn’t go far enough in approach to asset purchases.

·        Equity markets: Seeing rotation away from growth, but not yet seeing performance in deep value (banks and energy).

Australian outlook

Average daily cases continue to fall in NSW and Victoria, increasing the possibility of state borders re-opening prior to the summer holidays.

There is some evidence of an improvement in confidence which — coupled with warmer weather — is prompting a pick-up in activity. Dining-out data in NSW has started to trend upwards.

United States outlook

An uptick in the rolling trend of average new daily cases is causing some concern. But the Labour Day holiday may have caused some distortion as case report data catches up.

There has been no increase in positive test results or hospitalisation rates. The latter is down 8% week-on-week. The return-to-school effect has not been as bad as many feared.

European outlook

We are seeing significant second waves of Covid-19 in France and Spain. The UK has also seen a pick up. Overall new daily cases in Europe are above US levels.

The key risk is a return to severe lockdowns which would stymie economic recovery.

Continental Europe has so far resisted significant restrictions. Governments are conscious of the economic implications and mindful that hospitalisation rates are far lower than earlier in the year.

In France case numbers are double the previous peak, but hospitalisations are a fraction of the previous high.

There is a belief the ability to live with the disease is improving. Vulnerable people are minimising their interaction with others and the impact of younger people getting infected is not cascading into increased hospitalisations.

Protocols in hospitals and aged care seem to be working better again. There is also a theory that masks reduce the viral load in those getting Covid, which limits the impact.

The UK is more concerning. The government — already under heavy criticism for its handling of the first wave —appears to be considering a more significant lockdown than Europe.

This is creating a lot of negative sentiment on the UK with the triple hit of a second wave, the end of employment furloughs in late October and increasingly acrimonious negotiations over Brexit.

This seems to have triggered the Bank Of England to begin preparing for the possibility of a move to negative rates. 

Vaccine outlook

Updates on various vaccine trials — including further investigation into the AstraZeneca safety issue — have resulted in some tempered expectations around vaccine timelines.

Two weeks ago polls suggested the probability of an FDA-approved vaccine and availability of 25 million units before March 2021 was as high as 90%. This has shifted back to 50% with various trials expecting later dates for interim data.

Policy news

The Fed provided further guidance on its approach to rates. Pre-conditions for higher rates are now full employment plus inflation at 2% plus inflation on track to move higher.

This “triple lock” provides quite a high bar to raising rates. At the moment the market is pricing in rates to be effectively zero until the end of 2023.

It took six year before rates rose after the GFC. Given the lack of inflation the rate cycle lasted only three years and rose 2%. On this basis, we can expect an extended period with rate rises. The ability of policy makers to create inflation is the key factor to watch.

While the news on rates was dovish, the market was disappointed that the Fed did not give more concrete guidance with regard to QE, yield targets and asset purchases.

At this point the approach remains flexible, without a clear signal. This may reflect a view that the economy is doing better than many expected. They may be willing to wait and see ahead of the election, retaining scope to provide additional measures should trends start to deteriorate.

Economic news

Despite some negative headlines underlying economic data remains reasonable. We saw better employment data out of Australia, while lead indicators in China, Europe and the US remain good.

Industrial production in the US continues in a sharp “V-shaped” recovery, as do retail sales and food services which, like housing, has shot back above pre-Covid levels. The risk here is that the withdrawal of stimulus may see trends come off again. This remains an area to watch.

US election watch

Biden remains steadily in front. Bookmakers rate him a 54% probability to win. However we are mindful this could be an unusually prolonged process, given the high degree of mail-in votes. A much higher proportion of Democrats have indicated they may mail-in versus Republicans.  

A potential issue from the death of Ruth Ginsberg is that if the Supreme Court is required to rule on an impasse in a contested US election — and if no replacement justice has been confirmed — there is a potential for stalemate.

Confirmation hearings have the potential to be very contentious and trigger a partisan response. At this point it is hard to see which way that breaks.

Markets

Despite the negative news on vaccines, the Fed’s lack of commitment on extra QE and no fiscal deal, we are still seeing a rotation away from growth. This may be triggered by a sense that we have seen peak stimulus. Given the lofty valuations of growth names, this sense may be enough for a correction in growth names.

The bounce in value remains small in the context of the move in the last 18 months, but bears watching. 

In Australia this rotation has been into some industrial cyclical names. The key issue to watch is whether this extends into some of the deep value sectors such as banks (down -25% YTD) or energy (-40% YTD). At this point, investor appetite for these sectors remains muted.

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/  

Our responsible investing specialists have published a two-part guide explaining the impact of climate change on business and investing. Download your PDF copies below.

IT’S NOT easy for business managers and investors to understand the implications of climate change. The latest IPCC report which made headlines in August 2021 runs to a daunting 3900 pages.

Pendal Group’s responsible investing specialists have prepared a two-part climate change guide for financial advisers and investment professionals.

In late 2020 we published part one, Climate Change and Business: Key Concepts, which explains how major climate-related issues create risks for businesses.

Now we have published part two, Climate Change and Investing: Key concepts, which covers the implications for investing.

We invite you to download PDF copies below.

About Pendal Group

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

We believe sustainability considerations ultimately drive higher and more stable investment returns over the long term.

Pendal Group has a proud heritage in responsible investing, extending back decades. Our specialist responsible investing business Regnan includes highly experienced ESG research and engagement experts and offers a growing range of investment strategies.

Find out about some of our responsible investing strategies:

• Pendal Sustainable Australian Fixed Interest Fund
• Crispin Murray’s Pendal Horizon Fund
• Regnan Global Equity Impact Solutions Fund
• Regnan Credit Impact Trust

Contact a Pendal key account manager here

What’s impacting Aussie stocks this week, according to Pendal’s head of equities Crispin Murray (pictured above). Reported by portfolio specialist Chris Adams.

THE waning probability of an agreement on the next tranche of US fiscal support — coupled with suspension of AstraZeneca’s (AZ) vaccine trial — prompted a market wobble last week.

The S&P/ASX 300 fell -1.0% — however it held technical support levels. The S&P 500 was off -2.5%.

New developments on key issues:

• Australian Covid cases: Numbers continue to improve, but nothing to change the level of restrictions
  
• US cases: Trends distorted by Labor Day holiday. We continue to watch for the impact of school return and onset of colder weather.
• Vaccines & therapeutics: AZ vaccine issues highlighted risks in timing and success. But expert consensus remains confident in an approval by year’s end.
• Australian economy: Data suggests we are underperforming other developed markets in H2. The budget will be important. Significant stimulus is likely but there is a potential issue with timing.
• US economy: There was limited new data with real-time measures due to the holiday. Fiscal stimulus impasse continues.

Covid cases

New daily cases in NSW are trending down to mid-single digits after an uptick around the Sydney CBD cluster.

Victoria continues to trend down under the impact of lockdown. It is nearing a range of 30-to-50 cases a day, which would trigger step two of the restriction roll-back.

It remains unclear how the third step of a more material re-opening will be triggered any time soon under the current approach. This requires a moving average of fewer than five new cases a day — a level NSW has been unable to achieve despite a successful track-and-trace approach.

Given the material economic impact from the current situation, the framework may require review.

The US remains broadly in a holding pattern. The Labor Day holiday caused some volatility in testing and case numbers. Hospitalisations and mortality rates continue to grind lower.

Vaccine outlook

AZ suspended its vaccine trial after a patient developed transverse myelitis (spinal cord inflammation).

Safety watchdogs gave a greenlight for the trial to restart — but progress may be slower. This highlights risk in assuming that a vaccine will be ready by year’s end.

There are four potential scenarios around the AZ incident:

• The patient’s illness is unrelated to the vaccine
• Risk is linked to the vaccine, but it’s not common enough to halt the trial. If the vaccine works it would require a warning label, similar to other current flu vaccines.
• There is an issue with the vaccine delivery mechanism, which uses an adenovirus sourced from chimps to trigger a response that fights Covid. There is evidence that similar adenoviruses can trigger a rare condition in a small number of patients which in some instances can present as transverse myelitis. If this is the case it will be specific to the AZ vaccine.
• There may be an issue with the “spike” protein used to penetrate cells in the patient. If this is the case, it will be an issues for all vaccines.

Scenario three is considered most likely at present. This may be an issue for Australia because of our government’s commitment to the AZ vaccine.

Regardless, scrutiny of possible side effects may serve to slow down trials. This is a reminder not to assume a vaccine will come by year’s end.

US economic outlook

Real-time US activity data remains in a holding pattern and needs to be watched as the holiday period comes to an end.

The US fiscal agreement remains at impasse. The funding of state and municipal governments is proving to be a significant barrier.

Many Republicans are reluctant to fund what they see as recalcitrant state authorities. The political element becomes increasingly important as this drags on. As the election nears, Democrats may be less willing to agree to a package, fearing it will give Trump a pre-election boost.

The president’s “Lost Wages Assistance” unemployment insurance (UI) program is gaining some traction as it passes through state legislatures.

Some 40 states are going through the process. This is much smaller than previous UI packages but it has scope for “catch-up” payments.

This is leading to a bump in disbursements, helping close some of the gap on previous total payments.

Commercial real estate in the US should be watched as a potential negative factor. An oversupply of malls and reduced demand for office space could exacerbate rental delinquencies.

The big global banks have substantial provisions against this but some smaller regional banks may be at risk. This may impact broader credit provision and the multiplier effect of stimulus.

While not an issue at this point it’s another risk that bears watching.

Australian economic outlook:

Australia has the highest level of restrictions versus economies such as the UK, US, Canada, NZ, Germany and China due to our border closures and Victorian measures.

This has an important potential impact on economic recovery. Australian GDP fell -7% in 1H CY20 compared to about 10% for other countries.

The rest of the world is now experiencing a good rebound off a lower base — while there is risk Australia may disappoint with flat growth in 2H.

This is not a given outcome. A rethink of restrictions may alleviate this risk — particularly if combined with fiscal stimulus in the October federal budget.

However there is a challenge in the timing. Policy makers seem reluctant to replicate some of the blunter measures used earlier such as broad cash payments. But more refined measures may take longer to have an effect.

This is compounded by concerns over the impact of a “fiscal cliff” as JobSeeker, JobKeeper and superannuation access are rolled back.

This cliff is a complicated issue. The impact is difficult to quantify given the interplay of further stimulus, cash payments and the savings rate.

Key questions are:

• Savings have surged as payments have increased and consumption has fallen. How much does a fall in savings rate offset the reduction in household cash flow?
• How much additional stimulus occurs to boost household income?
• How much additional superannuation will be pulled out before the deadline?
• Will there be extensions to the interest deferrals on loans?

There is some near-term risk around domestic recovery and, by extension, the stocks leveraged to it.

But we are mindful several levers can be pulled which might see sentiment switch quickly and stock prices surge.

Retaining some exposure as part of a balanced portfolio is important.

Market outlook

Markets were generally quiet last week with thin volumes due to holidays in the US and Europe.

Tesla’s non-inclusion in the S&P index continued to weigh on growth stocks, although they ultimately found some degree of support.

There was a 6-7% drop in oil prices last week which bears watching. There has been some rumbling over OPEC supply as well as disappointment at the AZ vaccine trial.

Anything more prolonged may indicate deeper concerns about underlying demand.

There was minimal dispersion at a sector level in the Australian market outside of the oil-related fall in Energy (-5.3%) stocks. Origin (ORG, -10.3%) was the worst performer in the ASX100, followed by Beach (BPT, -8.4%) and Oil Search (OSH, -8.4%).

Rio Tinto

Rio Tinto (RIO, +4.5%) was — somewhat ironically — the best performer in the ASX 100 last week.

It is clearly disappointing that governance issues deteriorated to a point which culminated with three senior executive departures.

It is preferable that mistakes of this severity don’t happen in the first place. But when they do, it is critical companies are quick to acknowledge the error and act decisively to address it.

In this instance RIO’s initial response was not robust and lacked accountability.

Without accountability, issues can fester and snowball as the recent Royal Commission demonstrated.

The executive departures raise uncertainty over medium-term strategy.

One factor in RIO’s favour is that, operationally, their existing operations are well established and supported by cyclical tailwinds. This buys time to restructure management and repair cultural issues that led to this juncture.

This is in contrast to the banking sector, which has had to deal with the fallout of the Royal Commission in a much tougher operating environment.

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/  

Opportunity in China is not always where you might think. Global Emerging Markets Opportunities portfolio managers James Syme and Paul Wimborne (pictured above) explain their approach

THIS month we highlight one of the main expected drivers of our portfolio and explain the case for those investments.

We focus on these holdings because a high-level look at the portfolio’s relative weightings might not bring out the degree of our conviction.

At a country-level, our portfolio is broadly neutral China — a country that represented 42.6% of the MSCI Emerging Markets Index at the end of August.

There are different groups of stocks within that Chinese index weight — including Hong Kong-listed securities (23.4%), mainland China-listed securities (5.1%) and US-listed securities (14.1%).

The US group is mainly technology and new consumer companies that have generally participated in the broad rally in US equity markets.

Although it is Hong Kong-listed, Chinese alcohol producer Meituan Dianping (1.8% of the MSCI EM Index) can also be thought of as one of the Chinese consumer stocks that have re-rated this year.

In total, this group constitutes 15.9% of the MSCI Emerging Markets Index.

Where we focus

The Global Emerging Markets Opportunities portfolio has a zero weight in these names.

Instead, it has a substantial allocation to companies that are beneficiaries of a policy-led recovery in domestic economic activity in China.

Recent economic data points to a fairly strong Chinese economy (certainly compared with other major economies).

The data also shows the recovery is driven (as in previous recoveries in 2009-10, 2013 and 2015-16 — by centrally-mandated liquidity and credit provision; and the feed-through of that into construction, real estate and financial sectors.

Although there is some positive effect on Chinese consumers, we do not see signs of a strong recovery.

We do not share the consensus enthusiasm for expensive Chinese consumer stocks.

The heartbeats of Chinese policy are credit growth and money supply growth.

Having been restrained back to single-digit growth rates for the last few years, the period since March has seen a marked pick-up in both.

In the year to July we’ve seen M2 growth of 10.7% (year-on-year) and growth in claims on the financial sector of 12.4%.

While still below the 2016 peaks of 14% and 22.2% for example, there has clearly been a step-change in policy in China.

This has driven a pick-up in the Chinese economy.

Composite PMI measures for August are around the 55 level, industrial profits in the year to July are up 19.6% year-on-year and property and infrastructure investments are showing clear recoveries.

GDP growth in 2Q20 was 3.2% year-on-year. This was a substantial positive surprise relative to expectations.

Signs of strength

Other signs of strength can be seen at a micro level — for example a sharp move higher in Chinese copper imports since June.

Then there are the positive year-to-date returns from mainland Chinese equities and strong growth in southbound mainland-to-Hong Kong equity investment flows.

By comparison, retail sales in the year to July were down 1.1% year-on-year.

Notably, the last three retail sales data points have all come in below expectations, reflecting ongoing caution among Chinese consumers.

This slower recovery can also be seen in China’s external balances.

China’s trade balance averaged CNY 254bn per month in 2019. The surplus has averaged more than CNY 400bn per month in the last three months.

This is supportive of China’s currency and financial system, but also reflects relative weakness in domestic consumption.

What we hold and why

So, with our lack of enthusiasm for the domestic consumer, what do we hold in our Chinese sub-portfolio instead?

We have substantial exposure to the real estate sector including developers and also service providers and companies with investment portfolios.

In the second quarter we added a cement company and the operator of the Hong Kong Stock Exchange.

One of our few pure consumer names is a retailer of gold and gold products, which are in effect savings vehicles.

We continue to look for opportunities in this part of the economy: construction, cement, real estate, infrastructure, and financials and asset reflation plays.

This is where we find policy support, positive macro-economic momentum, positive fundamental momentum and attractive valuations.

Although the relative country weight does not show it, this is one of our strongest conviction ideas.

James Syme and Paul Wimborne are senior fund 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. 

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/

Changes to the Pendal Ethical Share Fund (APIR: RFA0025AU, ARSN 096 328 219)

The Fund’s investment strategy, including how we take labour standards and environmental, social and ethical considerations into account when selecting, retaining or realising investments of the Fund, will be changing from 12 October 2020. 

Investment strategy

From 12 October 2020, the Fund will be a high conviction, values-oriented, concentrated portfolio of typically 15-35 stocks that invests in businesses that in our view, in aggregate, provide a net benefit to Australia’s future economy and society.

Pendal will adopt a principles-based approach in identifying the Fund’s investments which aims to:

• Avoid companies whose industries, business models and products or services are not sustainable or cause significant harm, having regard to what we believe most investors would want to avoid in a values-based investment portfolio.

• Invest in companies that demonstrate, or offer or enable more sustainable practices, business models or products and services.

• Invest in companies that advance or participate in the transition of the Australian economy to one that is more sustainable.

• Engage with management of companies in which we invest to manage risk, effect change and realise potential value over the long term.

From 12 October 2020, the following exclusionary criteria will apply to the Fund.

Why are we making the changes?

We believe it is in the best interests of investors for the new and tighter exclusionary criteria to be implemented for the Fund. These screens are expected to better meet investors’ expectations regarding the holdings of an ethical fund, which have evolved considerably since the Fund was launched in 2001.

Most notably, investors in ethical funds have increasingly sought to avoid allocating capital to companies whose activities significantly contribute to climate change. For this reason, we will be introducing fossil fuel-related screens in the Fund.

The investment team will be applying a framework that places a greater focus on stocks and industries that meet our investment criteria, responsible investment priorities and philosophy, resulting in a high conviction, values-oriented, concentrated portfolio that is expected to deliver better risk-adjusted returns for investors in the Fund.

Transition into the new investment strategy

The changes will require a number of stocks in the Fund to be sold from 12 October 2020, as these stocks do not meet the new exclusionary criteria. These stocks are relatively liquid and we expect to be able to complete the sell down within one day under normal market conditions.

Management fee

There is no change to the management fee of the Fund which will remain at an issuer fee of 0.95% p.a.

About the Fund’s Portfolio Manager

The Fund will continue to be managed by Crispin Murray, Head of Equities.

Crispin was appointed as Head of Equities in 2003 and is responsible for overseeing Pendal’s Australian Equities business and currently manages A$15 billion of funds under management.

In managing the Fund, he will be supported by the Pendal Australian Equities Team, a team of 19, one of the largest fundamental Australian Equities Team in the market.

Here’s what’s impacting Aussie stocks at the moment, according to Pendal’s head of equities Crispin Murray (pictured above). Reported by portfolio specialist Chris Adams.

Strong US jobs data last week suggests the reduction in fiscal stimulus is not yet biting.

The Victorian lockdown continues to drag on Australia’s national economic pulse. As a result Australia is a negative outlier in global industrial surveys.

There was a sharp sell-off in growth stocks late last week, which dragged on markets as a whole.

Key near-term factors

• US cases: New case numbers are plateauing; it’s important to watch for a pick up as students return to school
• Australian cases: Trends continue — numbers falling in Victoria, steady in NSW.
• Vaccine/therapeutics: No new material news.
• US economy/policy: Stronger data – no signs of lower unemployment insurance payments stalling rebound. Policy impasse remains.
• Australia economy/policy: Rising expectations for tax cuts in upcoming budget

Australian outlook

Victoria’s seven-day moving average of new cases continues to trend lower, dipping back below 100. Having crept back up a few weeks ago, NSW remains steady at around 10 new cases a day.

Victoria’s decision to pursue an effective elimination strategy is material. It means stricter restrictions for longer, with a greater impact on activity, the economy and budget deficits.

The number of people dining out demonstrates the impact of Victoria’s lock-down on the national economy. In NSW restaurant-going has returned to pre-Covid levels, while Queenslanders are eating out more than they were in January.

However at a national level dining out remains 20-30% below pre-Covid levels, due to the drag from Victoria. This remains a headwind for the domestic equity market and specific companies.

US outlook

The rapid spread of Covid-19 among students returning to university has seen new daily cases in the US plateau at around 40,000 – after falling from a mid-July high of about 60,000. Hospitalisations continue to fall. But this may change given the lagging effect with new cases. Mortality rates continue to fall.

The main news out of the US was last week’s strong jobs data. The payroll data was reasonable – probably a little better than expected. But the household survey of employment was very strong, suggesting unemployment fell 2% over the month to about 8% – half its pandemic high-point. The hours-worked survey confirmed the same trend.

Margins of error are likely to be larger than normal. But the change is beyond anything that could be explained by such margins – and paints a picture of a strong V-shaped economic recovery.

The easier gains are likely to have been made and it may get harder to maintain momentum from here. But this helps explain why markets have been as strong as they have. The rebound has simply been much better than many feared. It also confirms falling government payments are not crimping the rebound.

Global GDP growth forecasts have progressively improved as analysts become less pessimistic. There’s been a sharp pick-up in expected growth rates for Q3 2020 since mid August.

This is supported by underlying activity in key sectors such as autos, where US production is now running above pre-Covid levels. The rebound in China and Japan is also strong. This has been driven by income support and pent-up demand helped by an aversion to public transport. Other sectors are languishing, however this demonstrates the speed with which key parts of the global economy are rebounding.

Most industrial surveys in key economies around the world are in expanding territory and improving. Australia is an outlier in this regard. The drag from Victoria has prompted deteriorating industrial surveys and a more neutral outlook for the economy. The effective elimination strategy is likely to see this drag continue for a while longer.

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/