To cut or not to cut? Pendal’s head of government bond strategies, TIM HEXT, explains what information the RBA needs to make a decision

WE are just over a month away from the next RBA meeting, the first of the year.

The information the RBA will need in order to decide on a rate cut is now falling into place. Let’s look at what we know and what pieces of the puzzle are left.

Employment and wages

Today’s employment numbers were the last before the meeting, with January’s numbers not coming out till 20 February.

An unemployment rate of 4% for the end of 2024 is definitely lower than the RBA (and nearly everyone else) expected. The RBA had forecast 4.3% by now. This, of course, counts against a rate cut but is not the end of the story.

What matters more is where full employment is, and this is not something scientific.

The US Federal Reserve believes its full employment to be around 4%, so were happy to start a rate cut cycle despite overall strong job markets.

The RBA has previously suggested that full employment here was closer to 4.5% but – as always – it is an educated guess. What is the main observable indicator? That would be wages.

On this front, the news has been far better. Wages look to be settling down nearer 3.5% than 4%, suggesting that full employment may also be closer to 4% than 4.5%.

The only large pocket of elevated wage claims seems to be public sector unions playing catch up, as their wage agreements always lag inflation.

So, on the employment and wages front, the RBA will need to work out just how much excess demand is in the job market – one still largely fuelled by the public sector.

In summary, the job and wages market is not a reason to cut, but may also prove not strong enough to stop one.

Inflation

The Q4 2024 inflation data does not come out till 29 January, but we already have around 70% of the data and a good idea on most of the rest.

We anticipate market expectations to be at 0.3% headline and 0.6% underlying for the quarter.

Clearly, government subsidies are artificially depressing headline numbers, but that is not the only news.

In the housing sector (23% of CPI), two stars of the inflation surge in 2022 and 2023 – new dwelling costs (9% of CPI) and rents (6% of CPI) – are also moderating. We expect rental cost growth to be down from 9% in 2024 to nearer 6% and for new dwelling costs to settle nearer 4%, having peaked around 10%.

This should help keep services inflation nearer 4% than 5% which, in turn, allows inflation to settle around 3% – the RBA forecast for June 2025. The fact is that inflation is somewhat circular, so as goods prices have fallen and subsidies have lowered other costs, then overall pressure comes off.

Most importantly, as consumers feel less of a cost-of-living squeeze, they are less likely to push for higher wage outcomes.

In summary, high inflation is now past us, inflation is moderating near 3%, and the need for rates up at 4.35% has now passed.

Growth

We won’t have Q4 growth numbers till early March, but we all know the story of sluggish growth, only held up and partly squeezed out by high public spending.

The RBA is forecasting a decent rebound in GDP, expecting 2.3% in 2025 after around 1% in 2024.

Growth has not been the factor keeping rates high, but rather a lack of supply in the key government areas of healthcare and social services and construction.

Unfortunately for the RBA, both state and federal governments have shown little drive to restrain their spending further. This could mean 2025 is likely to be another year where the private sector needs to make way for the government sector.

Either way, growth numbers are unlikely to be a major deciding factor for the RBA in February.

Putting the pieces together

I have avoided discussing international factors, such as Trump’s early weeks. In what might be a close decision for the RBA, these factors may yet play a part but will not be the main game.

The main game is that inflation is now back towards the top end of the RBA’s inflation range, meaning there is now space for moderate cuts.

We expect 0.25% in February (70% priced in) and 0.25% in May.

Cost-of-living relief for mortgage holders will be very welcome (especially by Albanese) and is unlikely to unleash any inflationary spending surge. In fact, the big spenders last year were retirees, pumped up with their 5% term deposit rates and strong equity markets.

I am sure they will survive on 4.5% term deposits.

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

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

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

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

Find out more about Pendal’s fixed interest strategies here

About Pendal

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

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

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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

MARKETS have started off the year on a weaker note, with the “US exceptionalism” theme seeing an increase in bond yields.

US two-year yields are up 14 basis points (bps) and 10-year yields up 19bps year to date. The move in bonds has been driven by some combination of:

  • Signs of inflation basing out and turning higher
  • Perceptions that US economic growth is stronger than expected, exemplified in US payroll data
  • Building concerns that Trump’s policies will reinforce growth and inflation issues
  • Some circumspect comments from the Fed on the rate cycle
  • Structural fiscal deficit concerns affecting term premiums

We have also seen an impact on currencies, with the US trade-weighted dollar index up 0.6% year to date.

Equity markets have struggled when US 10-year bond yields move over 4.7%. They are currently 4.8%, which explains the small recent sell-off.

The S&P 500 was down -1.9% last week and -0.9% for the year to date.

Australian equities have held up better, with the S&P/ASX 300 up 0.5% last week and 1.6% year to date.

There is a perception that the US Federal Reserve (the Fed) declared victory over inflation too early, with bond yields up 115bps since the 50bp interest rate cut in September.

There are, however, some self-correcting mechanisms as the rise in yields potentially slows the economy, with some data points indicating this may already be beginning to play out.

Equities have also been affected by strength in the US dollar, which is back to three-year highs on a trade-weighted basis.

This partly reflects the divergence in the economic and rate outlook for the US versus the rest of the world and is reinforced by US funding needs tightening the market for dollars.

The final macro factor to watch is oil, which has risen 3.1% year to date, breaking through technical resistance levels. 

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Potential macro outlook scenarios

We see four broad potential scenarios developing from here, with an aggregate 70% bullish/30% chance bearish conclusion for equity markets:

  1. Recession. There is still a cohort of economists that believe the economy is softer than current perceptions and the risk of recession cannot be dismissed (~10% chance).

  2. The economy slows, disinflation reasserts, leading to falling bond yields and equity markets continuing to rally (~35% chance).

  3. US economic growth continues to hold up better than expected, prompting the Fed to pause rate cuts, meaning bond yields stay higher but equity markets are supported by better earnings (~35% chance).

  4. Inflation goes higher, prompting the Fed to shift monetary policy stance to slow the economy. This is negative for equities, as we get higher yields without the higher earnings (~20% chance).
US economic data holding up OK

Recent US employment has been better than expected – see data below:

  1. December payrolls added 256k jobs versus 156k expected – the strongest gains since March 2023. The unemployment rate fell from 4.2% to 4.1%. The three-month average is 170k jobs, which is running slightly above the threshold needed to hold unemployment constant. Unlike previous months, private payrolls were stronger than expected at 223k versus 140k expected. Economic bears believe this is overstating labour market strength as it is a catch-up post the hurricane and strike-affected September/October period. Still, the underlying unemployment rate has reversed its recent upward trend and therefore gives the Fed cause to pause.
  2. JOLTS (the Job Openings and Labor Turnover Survey) saw an upside surprise in job openings, which still sit above the pre-Covid levels. This was mitigated to an extent by the quits rate falling to new low levels for the cycle, which is a positive signal for wage inflation.
  3. Weekly jobless claims have fallen back and most recently came in at 201k versus consensus at 215k.

A stronger ISM Services Index gave the market a jolt.

The December Services Purchasing Managers’ Index (PMI) rose to 54.1 from 52.1, driven by the current business activity component and the price diffusion index. The latter increased to 64.4 from 58.2 – the highest since February 2023 – highlighting that services inflation will potentially prove more resilient.

More positively, December average hourly earnings rose 0.28%, which was in line with consensus and indicates that the likely trend is 3.5% annual wage growth.

US economic outlook

The upshot is that the market is now pricing in 25bps of rate cuts in 2025, with no rate cut in January and a roughly 35% chance in March.

Not until July will we see an implied chance above 50%.

The interesting issue is that by deferring a March cut, it would mean that the Fed would be cutting in May or June at a time when prospective tariff increases would be potentially impacting inflation.

There are several reasons why the Fed retains scope to cut rates in 2025:

  • While there is more risk on inflation than three months ago, underlying drivers such as wages are relatively benign as demonstrated by average hourly earnings and the quits rate.
  • Trump’s policies may represent a one-off price shock rather than a money supply or demand-driven impulse and are, therefore, not necessarily as negative for inflation – or as large an impediment to Fed easing – as perceived.
  • Real rates do remain high and the move in bonds and currencies are tightening financial conditions.

The monetary policy environment is not negative but has shifted to a more neutral factor than was the case last year. This emphasises the need for vigilance on markets given current valuations.

Australian inflation – slightly better data raising hopes for rate cuts

November’s monthly Consumer Price Index (CPI) data was seen as aiding the case for the RBA cutting rates in February, rather than waiting for April or later.

While headline CPI rose to 2.3% from 2.1%, this was as expected, and the composition proved a bit better.

Electricity prices rose more than expected for the month, however, these are being distorted by the government subsidies.

Travel prices fell both for international and domestic travel.

Construction costs (new dwelling purchases – the largest component of the CPI) are falling quicker than expected. This segment was down 0.6% in November, taking annual inflation to 2.8% versus 4.2% in October.

The underlying trimmed mean measure of monthly inflation has improved to 3.2% from 3.5%.

Does this mean rates will be cut sooner? We do not think so.

Given a lower likelihood of US rate cuts, a weaker Australian dollar, uncertainty on services inflation and a healthy labour market, it would be a bold move that could very quickly look a mistake.

This would represent a significant gamble for a newly formed monetary policy board.

Markets

We continue to believe markets are consolidating, rather than starting a more material sell-off – but that is conditional on the above view that growth and inflation remain as expected.

The market consolidation has taken us back from an extreme in sentiment, looking at a variety of criteria such as S&P futures positioning, various bull/bear ratios, and sentiment surveys.

Equity ETF flows remain the biggest support for this market.

These are at an extreme for US equities, with a four-week average of US$9.6bn/week versus a $5.7bn/week average for the year. However, flows into other equity markets are subdued.

S&P 500 market breadth has deteriorated to the lowest level in a year in terms of percentage of stocks above their 200-day moving average. That is a warning sign we need to watch.

Bonds remain a key issue.

There appears to be some disconnection in yields from fundamentals, in that 10-year yields have risen from early December even as the overall economic surprise index has fallen.

This probably highlights the anticipation – or fear – of what Trump will do post-inauguration.

But this may prove overstated. Fiscal policy measures are likely to run into issues in the House and may be diluted. At the same time, tariffs may be designed to avoid giving the Fed a reason not to cut rates, nor to drive the US dollar any higher.

Australian equities

The S&P/ASX 300 has performed better than other equity markets, which reflects optimism that rates may fall sooner than expected, in addition to being helped by thin volumes.

Sentiment on Resources is very low. While iron ore prices have been subdued, copper and oil prices are bouncing off their recent lows and, given positioning is skewed against the sector, there has been better price action. The Resource sector is up 1.6% year to date.

Real Estate Investment Trusts have so far defied the negative lead from offshore, up 2.8% year to date.

Banks were the sector that caught much of the market out last year and have continued to perform well, up 1.8% year to date. Valuation multiples remain at historical highs for the Big Four except ANZ, where the market has been cautious on changes in strategy and management.

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 Statement (PDS) for the Pendal Multi-Asset Target Returns Fund (the Fund) effective on and from Thursday, 19 December 2024. 

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

Labour, Environmental, Social and Ethical considerations

We have clarified, the Fund’s exclusionary screens are not applied to government securities, semi-government securities, supranational securities, cash or derivatives. And that the use of derivatives may result in the Fund having indirect exposure to the excluded companies or issuers.

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.

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

IT was a fascinating and action-packed week in the market, though perhaps too action-packed for this time of year.

The news headlines of the week included US Consumer price Index (CPI) and Producer Price Index (PPI) data, local RBA and employment figures, and announcements from China’s Politburo.

While the data itself wasn’t groundbreaking, much of the discussion centred on the finer details and minor variations.

The 10-year yield has surged 80 points since the Fed’s rate cuts began in September. Inflation concerns persist, with core inflation stubbornly high.

The economy shows limited spare capacity in employment, and fiscal stimulus is expected under Trump.

Markets anticipate a rate cut this week, but will Powell signal the end of the rate cut cycle?

In Australia, the RBA opened the door to more dovish monetary policy on Tuesday. However, the door was slightly closed again due to a strong employment report on Thursday showing tightening conditions.

The NAB Business Survey and business turnover were weak, with the public sector providing support.

Liquidity remains positive, supported by seasonal trends, though January could be tricky.

It’s a good time to be cautious with positions and valuations. Market breadth is narrow, and relative valuations are extreme.

Implied volatility is almost non-existent, with Tesla’s surge to $420 and profitless tech stocks keeping pace with the Magnificent 7, indicating frothiness in the market. Google’s new quantum computer chip kept the bulls excited.

Monday’s momentum unwind marked Pure Momentum’s worst day since November 2022, highlighting market vulnerability.

This week, all eyes are on the FOMC and Personal Consumption Expenditures (PCE) data in the US, along with Australia’s Mid-Year Economic and Fiscal Outlook (MYEFO).

US macro and economy

Headline CPI rose by 0.3% (up 2.7% YoY), slightly above consensus. Core CPI also edged up, with a 31-basis point (bp) increase versus the expected 28bp, maintaining a sticky 3.3% over 12 months.

Other highlights include:

  • Housing Inflation had its smallest monthly gain since January 2021.
  • Core MoM has been stable since mid-year.
  • Services Inflation appears on the decline.
  • Rent numbers finally aligned with the Zillow Index.
  • Super Core remains stubbornly high at over 4%, which should limit the Fed’s ability to keep cutting.
  • Goods inflation ticked up after a benign period.

The market is comfortable with the current US CPI story, but persistent core inflation could challenge the Fed in Q1. Goods inflation rising above core services MoM for the first time since May 2023 adds to the discomfort.

With the PCE reading looming next Friday, headline PPI rose a bit higher at 0.4% MoM – surpassing the 0.2% consensus.

This marks the largest monthly gain since February 2023, driven – interestingly – by a spike in egg prices, encouraging a turn to quality and defensives.

Combined with this week’s CPI, the report positions next week’s PCE to only post a modest PCE acceleration, reassuring the Fed that its favourite inflation gauge is on track.

Beyond the Numbers, Pendal

PPI final demand rose 0.4% in November (above the 0.2% forecast), with the prior month revised up to 0.3%. The year-on-year rate increased to 3.0% from 2.6%.

Core PPI was in line at 0.2%, but the annual rate rose to 3.4% from 3.2% after a revision.

Bloomberg noted the surging egg price helped drive some of the beat but indicated other categories suggested a muted increase in the Fed’s preferred PCE measure.

PPI for final demand rose 0.4%, the highest since June, beating the 0.2% estimate. Overall, services costs edged up 0.2% and goods prices (excluding food and energy) rose by a similar amount.

Economists see little change or declines in key service categories, allaying some concerns over recent firming in broader inflation metrics.

Elsewhere, the NFIB US Small Business Survey saw its largest monthly jump ever in November, surging eight points to a three-and-a-half-year high, surpassing the post-2016 election spike.

US initial jobless claims for early December rose by 17k to 242k (versus 220k expected), mainly due to seasonal distortions from the Thanksgiving holiday and wildfires in California affecting around 20k residents.

Insured unemployment claims also trended higher, indicating a cooling labour market.

China

Copper, zinc, and iron ore prices surged after China’s Politburo (the highest political bureau of China’s central governing committee) announced a shift to a “moderately loose” monetary policy for 2025, the first stance change in 14 years.

This announcement on Monday signalled greater easing and a more proactive fiscal policy.

This shift from a “prudent” stance comes as Beijing braces for a potential trade war with the US under President-elect Donald Trump.

With China dominating metal demand, the prospect of rate cuts and increased stimulus spending is a welcome sign for investors seeking stronger economic growth measures.

The Central Economic Work Conference (CEWC) echoed the Politburo’s announcements, focusing on consumption demand as the key priority without providing any novel statements.

The government did announce a widening budget deficit for 2025, and the absence of “fiscal discipline” in post-conference commentary suggests a commitment to achieving economic targets.

More specifics on macro policy and stimulus measures will be revealed at the CEWC and the NPC meeting in March.

A new phrase was used – “enhancing extraordinary counter-cyclical adjustment” – which hints at stronger, unconventional stimulus measures, though details are lacking.

Other macro

Both the Bank of Canada (BoC) and the European Central Bank cut rates by 50bps and 25bps, respectively, which was as expected this week.

The BoC’s consecutive 50bp rate cut, its fifth straight, highlights the urgency to remove policy restrictiveness. Recent policy measures and new tariffs have increased uncertainty and clouded Canada’s economic outlook.

Elsewhere, the Swiss National Bank (SNB) delivered a larger-than-expected cut, Brazil saw a bigger hike, and reports suggest the BOJ may downplay the potential for a hike next week.

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Australian economy

At its latest meeting, the RBA Board kept the cash rate target unchanged at 4.35% and the interest rate on Exchange Settlement balances at 4.25%.

While softer-than-expected data was anticipated, the Board made notable changes to its communication.

It now believes “some of the upside risks to inflation have eased” and is “gaining confidence that inflation is moving sustainably towards target.”

Some key phrases that had given a hawkish tone to previous RBA statements were removed:

  • “Vigilant to upside risks to inflation” – language used since May.
  • “Not ruling anything in or out” with respect to policy – language used since March.
  • “Policy will need to be sufficiently restrictive until the Board is confident that inflation is moving sustainably towards the target range” – language used since August.

The Board still isn’t ready to declare victory on inflation, reiterating that it will take time for inflation to reach the target range.

New language highlights that while aggregate demand still exceeds supply capacity, the gap is closing, and the Board is gaining confidence that “inflation is moving sustainably towards target”.

Moving onto employment data, Australia’s unemployment rate dropped to 3.9% in November, the lowest since March.

Employment rose a solid 35.6k, though total hours worked tracked sideways – indicating there is not much spare labour capacity to go around.

The data supports the RBA’s view of a tight labour market, with unemployment expected to average 4.3% in Q4.

The NAB Business Survey noted current conditions are at their weakest since August 2020.

This weakness is broad-based, especially in trading conditions and profitability. Manufacturing saw the sharpest decline with retail also soft. Government spending is driving growth, while private sector conditions are soft.

The ABS Nominal Business Turnover remains flat and CBA Household Spending is growing at low single digits, while household goods are relatively strong.

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Crispin Murray,
Head of Equities

Markets

It was a softer week for equity markets, which intensified further down the market cap spectrum.

Resources outperformed Industrials and Banks, while Tech stocks were hit hardest by rate concerns and sector rotation.

Financials and Real Estate also struggled due to rate expectations, while Staples remained defensive, and Energy held steady.

Two-year Treasuries rose 15bp, and 10-year Treasuries climbed 25bp.

Oil had a positive week, recovering some year-to-date losses. Most commodities saw slight gains, with gold and Bitcoin leading year-to-date performance.

Interestingly, the ASX 300 underperformed other global indices despite Australia’s resource exposure. The current darling, the Russell 2000, also had a notable decline.

The AUD/USD saw little change, while the DXY strengthened.

There was not a lot of action on the upside this week in Australian markets, with most stocks trading lower. Resource stocks led on the upside and high-priced growth stocks led on the downside

There are a few other market observations that investors should keep in mind:

  • NASDAQ breaking 20,000 for the first time on record, with global flows leaving other markets and rushing into US equities.
  • December is typically a strong month, especially in the days leading up to Christmas.
  • Increasing chatter about the market’s narrow breadth with Tech’s leadership. Is it late cycle or time for new leadership?
  • Momentum appears stretched and typically struggles in January.
  • We are seeing a period of concurrent earnings and multiples expansion, which is not very common.
  • There is currently almost no implied volatility in the S&P 500.
  • Corporate executive stock sales have reached an all-time high.

About Crispin Murray and 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 an independent, 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 here.  

Contact a Pendal key account manager here.

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

Winners in a Trump world | Tune into Tencent for a hidden gem | Rates, China, Trump: the trends shaping 2025 | Learnings from the 2024 election year

In investing – just like in music – real success is found beyond the obvious. China’s Tencent Music is a great example, argues Pendal’s SAMIR MEHTA

  • Value to be found in Asian equities if you know where to look
  • Tencent Music generating cash and buying back stock
  • Find out more about the Asian Share Fund

WHO is the Bob Dylan of music streaming?

That’s the question Pendal’s Samir Mehta posed at the Sohn Hearts & Minds Conference in Adelaide last month.

For most, the answer is obvious: Sweden’s Spotify has revolutionised the way we consume music, dominating developed markets and setting the benchmark for subscription-based streaming.

But in investing – just like in music – real success is found beyond the obvious.

For every Bob Dylan – whose sandpaper voice and sermon-like lyrics changed the face of music worldwide – there’s a Sixto Rodriguez: overlooked by mainstream audiences until an Oscar-winning documentary, Searching For Sugar Man, revealed he had been quietly building a cult following in small but devoted markets.

“Spotify has done a brilliant job in developed markets, but there’s lots of other markets that still have potential,” says Mehta, who manages the Pendal Asian Share Fund.

“What we need to do is search for the Sugar Man of streaming.”

“Music follows exactly the same trends across the world – and the Sixto Rodriguez of streaming is China’s Tencent Music Entertainment.”

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With paying subscriber base of 117 million, a market capitalisation of around US$20 billion, over US$4 billion in cash, and revenues in the online subscription business growing at 20 per cent annually, Tencent Music generates almost US$1 billion of cash each year, says Mehta.

They have already bought back US$1 billion of shares and this year’s US$500 million buyback is ongoing.

“Generating cash and buying back stock is not something that you associate with Chinese companies,” says Mehta.

“But there’s been a sea change in attitudes among well-managed Chinese companies and Tencent Music represents one of those; doing exactly what we as minority shareholders want them to do.”

Streaming has transformed the global music industry, replacing one-time purchases of LPs, cassettes, and CDs with stable, long-term subscription revenue.

When Tencent Music was first launched by its parent Tencent Holdings, which retains a 52 per cent stake, some 70 per cent of sales came from so-called ‘social entertainment’ – essentially user-generated karaoke and live music performances.

But after Beijing imposed regulatory changes in 2021 that forced the business to take responsibility for the content on its platform, 78 per cent of revenue is now from traditional online music streaming.

“That is Spotify-like subscription revenues – growing at a clip of 20 per cent per annum,” says Mehta.

“Faced with a regulatory diktat, the company cleaned up and now they proudly proclaim ‘we are now progressing towards a healthy development of China’s online music industry’.

“They are signalling to the government that their business now is well within the requirements of the law that the Chinese government imposes.”

They currently have 117 millio active monthly paying subscribers. A key focus for management is to steadily raise average subscription from the current US$1.5 per month to US$2 over the next 5 years.

Tencent Music generates 42 per cent gross margins – and a nascent advertising revenue stream will only supplement growth, says Mehta.

“You can see the similarities.

Searching for Sugar Man made a cult figure of Sixto Rodriguez. This conference, Sohns Hearts and Minds, is going to do for Tencent Music what the documentary did for Rodriguez.”

About Samir Mehta and Pendal Asian Share Fund

Samir manages Penda’s Asian Share Fund, an actively managed portfolio of Asian shares excluding Japan and Australia. Samir is a senior fund manager at UK-based J O Hambro, which is part of Pendal Group.

Pendal Asian Share Fund aims to provide a return (before fees, costs and taxes) that exceeds the MSCI AC Asia ex Japan (Standard) Index (Net Dividends) in AUD over the medium-to-long term.

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About Pendal Group

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 are the main factors driving the ASX this week, according to portfolio manager RAJINDER SINGH. Reported by portfolio specialist Chris Adams

GLOBAL equity markets had a solid start to December, supported by the increased likelihood of a rate cut at the Fed’s FOMC meeting this week.

Both the S&P 500 (up 1.0%) and Nasdaq (up 3.4%) hit all-time highs during the week, while US Treasuries rallied on relatively benign macroeconomic prints.

Overall, these indicators point to a solid US economy that is seeing an uptick in post-election confidence and activity, but without signs of any reacceleration in inflationary pressures.

There is plenty of interest for followers of international politics, though, with ongoing developments in France, South Korea and the Middle East. The implications for markets are not entirely clear, but it does affect confidence at the margin.

Australia released some mixed economic data points, with the September quarter GDP dominating discussions in both the economic and political spheres.

The Australian economy’s performance remains sluggish – with real GDP growth only slightly positive, due largely to public sector demand and strong immigration, and the per-capita recession continuing.

The market has brought forward the likelihood of the RBA’s first cash rate cut, though future CPI prints remain key.

Australian equities didn’t follow international markets higher, however, with the S&P/ASX down 0.2% for the week.

Technology (up 1.7%) and Consumer Discretionary (up 1.8%) continued their strong performance, while the weakest sectors were REITS (down 2.6%), Utilities (down 1.3%) and Energy (down 1.0%).

Fed commentary watch

On Monday we heard from Christopher Waller, a member of the Federal Reserve Board of Governors, whose remarks were regarded as dovish and risk friendly.

Waller discussed the case for a cut versus a skip in December, saying that “at present I lean toward supporting a cut”.

He also said he would be paying close attention to JOLTS (the employment report), as well as November CPI/PPI inflation and retail sales, and would shift to favour a skip if the data “surprises to the upside” and “alters my forecast for the path of inflation”.

Elsewhere:

  • Mary Daly (San Fransisco Fed President) said an interest rate cut this month isn’t certain but remains on the table for policymakers.
  • Adriana Kugler (Fed Board member) expressed optimism about the economy, saying inflation appears to be on a sustainable path to the central bank’s 2% goal.
  • John Williams (New York Fed President) added that more rate cuts are likely needed “over time”
  • Fed Chair Jerome Powell said that the FOMC can “afford to be a little more cautious” on moving policy toward a neutral setting given the current strength of the economy.

In summary, Federal Reserve officials indicated that they expect the central bank to continue cutting interest rates over the next year, but stopped short of saying they were committed to making the next reduction in December.

Beyond the Numbers, Pendal

US economy

We saw an early read on Black Friday retail sales, with Mastercard’s SpendingPulse reporting that 2024 sales rose 3.4% compared with last year. Online retail sales increased 14.6% while in-store sales were up marginally (0.7%).

On Tuesday, we saw the release of the Institute for Supply Managements Manufacturing PMI, with the latest reading increasing to 48.4 from 46.5. While this indicator showed continued weakness in factory demand, it did exceed Wall Street’s 47.5 forecast.

Various components of the index indicated improvement on the previous month and, importantly, the forward-looking New Orders component showed increasing business confidence, with an expansionary 50.4 print.

There was a big focus on employment data last week, starting with the Job Openings and Labor Turnover Survey (JOLTS) – it confirmed recent labour market trends, where tightness in the jobs market is easing but remains in good shape overall.

The JOLTS data surprised to the upside, with overall job openings rising 372k to 7.74 million in October 2024. While this has come back from a peak of 12 million, it is still elevated when compared to pre-pandemic levels.

The JOLTS Quit tally rose 228k, taking the quit rate to 2.1% – the highest since May. The quit rate is important as it shows workers are confident leaving current employment and seeking a new job, making it a good predictor of future wage growth.

Initial jobless claims for the week ending 30 November rose by 9k to 224k (versus consensus at 215k) mostly on volatility around the Thanksgiving holiday, which came five days later than last year.

Cost-cutting measures announced at Boeing and Stellantis suggest jobless claims will rise through year-end and into mid-January.

The most anticipated data release of the week was the November non-farm payroll Employment Report on Friday.

Headline payroll growth bounced higher to 227k versus 36k in October, but the latter was affected by hurricanes and strikes. The unemployment rate ticked up to 4.2% from 4.1%.

This data was regarded as solid and as expected, but without too much upside surprise to stoke any fears of reaccelerating inflation.

Importantly, if the Fed wants some insurance against unemployment rising further, it is likely to cut rates by 25 basis points (bps) again in December as indicated in recent Fed board speeches.

We are still to see CPI data before the Fed meeting, but the market is already pricing most of a 25bp cut for December and up to three more cuts for calendar 2025.

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Australian economy

There were a few mixed data points for Australia last week:

  • Similar to the US, early indications on Black Friday sales showed solid performance. National Australia Bank’s transaction data showed overall spending was up 4% year on year.
  • Official retail trade data from the ABS rose 0.6% in October, beating expectations of 0.4%. Annual growth increased to 3.4%, which is the highest rate since May 2023. Within components of this release, growth in discretionary spend categories was particularly strong.
  • Credit growth in October 2024 rose 0.6% for the month and 6.1% year-on-year, which is the fastest pace since May 2023.
  • Residential building approvals bounced up 4.2% month-on-month in October 2024 to 185k annualised, which is the highest level since December 2022.
  • CoreLogic’s November house price series showed national house prices increased just 0.1% in the month – the weakest Australia-wide result since January 2023. There was large divergence across states, with Brisbane and Perth still growing well but down from previous high levels. Sydney was just below the national average, but Melbourne’s property (and economic confidence) woes continue.

The most watched economic release was the September quarter National Accounts, which showed GDP rising just 0.3% quarter-on-quarter, below the 0.5% consensus expectation.

Of most concern was the decomposition between the public and private components of the domestic economy, which showed that almost all of the economic growth was from the Government sector.

This continued a trend of weak Private sector demand over recent quarters.

Public sector demand has now risen to 29% of GDP, which matches Covid-19 emergency spending levels and represents some of the highest levels seen over the past 60 years – and this is before any new spending associated with the Federal election.

Aside from government spending, the only other support to the economy has been strong immigration levels.

Once this is accounted for, GDP per capita contracted for the seventh straight quarter, which is significantly worse than most of our international peers.

This softer GDP print saw the market move from pricing only one RBA cut to three by the end of 2025, with the first cut fully priced by April 2025.

Other global macroeconomic developments

Oil: OPEC+ delayed an output hike for a third time as the oil market faces a looming supply surplus that’s weighing on prices. The group will start increasing production in April instead of January and unwind cuts at a slower pace, in line with expectations

China: China’s top leaders plan to start the annual closed-door Central Economic Work Conference (CEWC) next Wednesday to map out economic targets and stimulus plans for 2025. Market watchers are looking/hoping for more concrete confidence building measures, particularly given Chinese property market concerns.

Europe: Traders are trimming their European Central Bank rate-cut wagers, though rates markets still have a cut still priced for 12 December – and a further five for 2025.

Geopolitics: Government instability in France and South Korea and the collapse of the Assad regime in Syria is not helping investor confidence outside of the US.

Markets

We are in a seasonally strong point for markets. Only once since 1928 has December been the worst month of the year performance-wise.

Historically, November and December are particularly strong return months in US Election years.

We see similar themes looking at the first month following Trump’s election victory in both 2016 and 2024.

There has been strong performance in risk-on cyclical sectors (Financials, Consumer Discretionary, Industrials, Small Caps), with weakness in defensives (Healthcare, Real Estate) and China-related (Materials) areas.

The Tech sector has performed a touch below the S&P 500 on both occasions.

We do note sentiment is getting very toppy, with Equity ETF flows more than two standard deviations above their average back to 2017.

About Rajinder Singh and Pendal’s responsible investing strategies

Rajinder is a portfolio manager with Pendal’s Australian equities team and has more than 18 years of experience in Australian equities. Rajinder manages Pendal sustainable and ethical funds, including Pendal Sustainable Australian Share Fund.

Pendal offers a range of other responsible investing strategies, including:

Part of Perpetual Group, Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management. Responsible investing leader Regnan is now also part of Perpetual Group.

Contact a Pendal key account manager here

Unit prices delayed during the period 5 December 2024 to 11 December 2024 for:

  • Pendal Dynamic Income Fund – Class R (APIR: BTA8657AU ARSN: 622 750 734)
  • Pendal Dynamic Income Fund – Class W (APIR: PDL7550AU ARSN: 622 750 734)

The calculation of the unit prices for Class R and Class W of the Pendal Dynamic Income Fund (the Fund) will be delayed during the period 5 December 2024 to 11 December 2024 (the Period). This will, in turn, delay the processing of applications and withdrawals received during the Period.

We anticipate that unit prices for the Fund will be available by Thursday 12 December 2024.

Why are unit prices being delayed?

The Fund is invested in the Pendal Pure Alpha Fixed Income Fund which has terminated effective 5 December 2024. Unit prices for the Fund cannot be calculated until the termination of the Pendal Pure Alpha Fixed Income Fund is complete.

The termination proceeds from the Pendal Pure Alpha Fixed Income Fund are expected to be received by the Fund on or around 12 December 2024.  Once the Fund receives the termination proceeds, we will then be able to calculate the unit prices for Class R and Class W, for each day during the Period.

What does this mean for you?

Unit prices for the Fund will not be published during the Period.  However, investors will still be able to apply and withdraw from each class of the Fund during the Period.   

This delay will not affect the unit price that investors receive for transactions they make during the Period.  All valid application and withdrawal requests received before the daily cut-off time (i.e. 2.00pm (Sydney time)) will continue to be processed using the entry or exit price calculated for that business day, once the prices become available on or around 12 December 2024.

This delay will not affect the way that we currently manage the Fund.

Questions? 

If you have any questions, please contact our Investor Relations Team during business hours Monday to Friday on 1300 346 821.

Changes to the Pendal Dynamic Income Fund effective from 5 December 2024:

  • Pendal Dynamic Income Fund – Class R (APIR: BTA8657AU ARSN: 622 750 734)
  • Pendal Dynamic Income Fund – Class W (APIR: PDL7550AU ARSN: 622 750 734)

We are implementing changes to the Pendal Dynamic Income Fund (the Fund) with effect from 5 December 2024.

The Fund is an actively managed portfolio of fixed interest securities that invests primarily in Australian issued investment grade corporate bonds, international credit and emerging markets sovereign debt.

Effective 5 December 2024, the Fund will be authorised to invest in high yield credit, as part of its international credit exposure. The Fund’s international credit (including high yield) exposure will be obtained through indices, primarily using derivatives.

With the addition of high yield credit, the Fund will be allowed to purchase non-investment grade international credit securities. International credit securities (including high yield) may be rated non-investment grade at the time of purchase.  All Australian credit securities, including corporate bonds, will continue to be rated investment grade at the time of purchase and can continue to be held if the corporate bond is downgraded after purchase. The Fund’s maximum investment exposure to Australian and international non-investment grade credit securities (in aggregate) is limited to 15% of the value of the Fund.

Effective 5 December 2024, the Fund will also be able to implement direct active currency management as part of its investment strategy when we believe market conditions are supportive.

The leverage obtained from investing in derivatives to manage interest rate duration or active currency will not be limited. However, leverage obtained from investing in Australian and international credit derivatives and sovereign emerging markets derivatives is limited to a maximum of 20% above the value of the Fund.

The changes are expected to enhance the Fund’s investment returns and not impact the Fund’s overall risk profile. The Fund will continue to be managed to its investment objective of ‘aims to provide a return (before fees, costs and taxes) that exceeds the RBA Cash Rate by 2-3% p.a. over the medium term.’

We have reissued the Fund’s Product Disclosure Statement (PDS) to reflect these changes. A copy of the Class R’s PDS can be found on our website at Pendal Dynamic Income Fund – PDS – Class R.pdf.

Please call us on 1300 246 821 to obtain a copy of Class W’s PDS.

Questions? 

If you have any questions, please contact our Investor Relations Team during business hours Monday to Friday on 1300 346 821.

Following a review of the Pendal Pure Alpha Fixed Income Fund (Fund) we have made the decision to terminate the Fund effective Thursday, 5 December 2024.

Why is the Pendal Pure Alpha Fixed Income Fund terminating?

We regularly review our product offerings and investment capabilities to ensure that our business continues to maintain a product suite that is relevant to client demands and commercially viable.

After careful consideration, we have determined that terminating the Fund is in the best interests of all investors.

The Fund has experienced underperformance and has not been able to meet its investment return objective.  Also, the Fund has been in outflows for a number of years, with little prospect of any significant growth in funds under management in the foreseeable future.  As a result, the Fund cannot remain economically viable without significantly increasing the management fee charged to investors.

How this affects you?

As the decision to terminate the Fund has been made, applications, transfers and withdrawal requests will not be accepted from 10:30am (Sydney time) on Thursday, 5 December 2024.

What happens next?

Following the Fund’s termination on Thursday, 5 December 2024, we will begin to wind up the Fund. The assets of the Fund will be sold and the net proceeds of winding up will be paid to all investors in proportion to their unit holding.

What does this mean for you?

Your pro-rata share of the net cash proceeds from this termination will be paid directly to your nominated bank account on file on or around Thursday, 12 December 2024.

There will be no final distribution of income by the Fund on termination. You will receive an AMIT Member Annual (AMMA) statement which will set out the details of taxable income that has been attributed to you following the end of the 2024/2025 financial year.

Questions?  

If you have any questions, please contact our Investor Relations Team during business hours Monday to Friday on 1300 346 821.