The Pendal Geared Imputation Fund (Fund) will terminate on Tuesday, 26 March 2024.
Why is the Fund terminating?
The Fund’s small size means that it has high running costs and cannot be managed in a cost-efficient way.
The Fund has also been in outflow for a number of years, and we consider that there is little prospect of significant growth in funds under management in the foreseeable future.
As the Fund continues to get smaller, continuing to run the Fund would result in higher management costs for investors, which would reduce investment returns.
How this affects you?
We will terminate the Fund on Tuesday, 26 March 2024.
Any applications or transfers received after 11.00am (Sydney time) on Tuesday. 5 March 2024 will not be accepted.
We will continue to accept withdrawal requests up to 2:00pm (Sydney time), on Monday, 25 March 2024.
What happens next?
As soon as practicable after the Fund is terminated on Tuesday, 26 March 2024, we will begin winding up the Fund. The assets remaining in the Fund will be realised and the proceeds paid to all investors in proportion to their unit holding.
What does this mean for you?
The cash proceeds from this termination will be paid directly to your nominated bank account on file on or around Wednesday, 3 April 2024.
We also expect that the termination of the Fund will result in a final distribution of the income of the Fund which will be paid directly to your nominated bank account before the payment of the cash proceeds from the termination.
Details of any distribution paid to you will be included in your final Distribution Statement. You will also 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 2023/2024 financial year.
Questions?
If you have any questions, please contact our Investor Relations Team during business hours Monday to Friday on 1300 346 821.
What is changing?
Effective 5 March 2024, the weighted average maturity (WAM) of the Fund will not exceed 90 days and all securities held by the Fund will mature within 190 days. The Fund’s WAM has been reduced from 100 days and the maximum maturity of all securities held by the Fund has been shortened from 12 months.
The Fund will also no longer have the ability to use derivatives.
Why are we making the changes?
The changes are being made to better reflect the way in which the Fund is managed.
What will stay the same?
There are no other changes to the Fund.
The Fund will continue to target a return (before fees and expenses) that exceeds the RBA Cash Rate by at least 0.45% p.a..
Additionally, there is no change to the Fund’s management fee.
What do you need to do?
No action is required. You will be able to continue to invest and withdraw from the Fund.
Updated Information Memorandum (IM)
An updated IM issued on 5 March 2024 is available by calling us on 1300 346 821.
Here are the main factors driving the ASX this week according to portfolio manager JIM TAYLOR. Reported by portfolio specialist Chris Adams
- Find out about Pendal Focus Australian Share Fund
- Register for Crispin Murray’s bi-annual Beyond the Numbers webinar
LAST week saw the release of highly anticipated January US Personal Consumption Expenditures (PCE) data.
While it showed an increase on previous months, it was in-line with consensus, and there has already been a significant change in expectations around rate cuts in 2024.
So, the market’s reaction was fairly muted – with the S&P 500 ending the week up 0.99%.
The question remains whether the uptick is a blip in the road to further disinflation – as the Fed suggests – or if it is the start of a more significant uptrend.
Locally, the market took Australia’s Consumer Price Inflation (CPI) data for January in its stride, with the S&P/ASX 300 returning 1.68% for the week.
Bonds rallied across the curve, with US 10-year Treasury yields falling 7 basis points (bps).
Commodities were mixed, with Brent crude oil up 2.5% and iron ore down 1.6%.
Bitcoin fired up and is back to its highest level since 21 March.
The Nasdaq and S&P 500 both hit records and were up for the seventh week in the past eight – with the S&P 500 now up in sixteen of the past eighteen weeks, its best run since 1971.
Fedspeak
Last week saw several members of the US Federal Reserve (the Fed) making the case for rate cuts in 2024, while also exercising some caution. In summary:
- Atlanta Fed President and FOMC voting member Raphael Bostic noted that he expects the first cut in the summer.
- Boston Fed President and non-voting member Susan Collins suggested that the path of easing may not be as rapid as in previous cycles.
- New York Fed President (and FOMC Vice-Chair) John Williams observed that there is still “a ways to go” until inflation is back to target.
- Cleveland Fed President and voting member Loretta Mester said that she thinks three cuts for 2024 currently sounds about right.
This week will see Chair Jerome Powell testify before Congress.
The recent convergence between market expectations around rate cuts and the Fed’s own dot-plots should be helpful.
US inflation
January’s PCE index rose 0.34% month-on-month, up from 0.12% in December.
This was the fastest monthly rise for a year but was largely in-line with consensus expectations.
It was up 2.40% year-on-year, down from 2.62% in December.
The Core measure rose 0.42% month-on-month and 2.85% year-on-year.
The Goods component (about 23% of the PCE basket) continues to do much of the heavy lifting, falling 0.05% month-on-month in January.
Core Services (about 65% of the basket) was up 0.58% month-on-month in January after increasing 0.29% in December.
This was despite Housing – which is 15% of the basket – rising at 0.50%, which was lower than the aggregate Core Services inflation.
These results have driven the three and six-month annualised figures back above the Fed’s 2% inflation target.
Personal income rose 1.0% which was well ahead of expectations.
However, once the annual increase in social security payments and the effect of dividends were stripped out, core wages and salary growth rose 0.4% which was in-line with expectations.
US growth
Both initial and continuing jobless claims came in a little above consensus expectations, while January new home sales grew 1.5% which was slightly weaker than expected.
February’s ISM Manufacturing Survey came in at 47.8 – down from 49.1 and well below the 49.5 expected.
The Consumer Confidence Index for February was also weak at 106.7 versus the 114.8 expected and down from 110.9 in January – the first drop in three months.
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Pendal Horizon Sustainable Australian Share Fund
Australian economy
The CPI fell 0.33% month-on-month in January, following the 0.66% rise in December.
The annual rate rose 2bps to 3.40%, which was a touch under consensus expectations of 3.6%.
The Core measure – which excludes volatile items and travel – was flat month-on-month and the annual rate fell 9bps to 4.13%, which was also lower than expectations.
Food (ex-meat), furnishings, clothing and travel prices are all declining, while rent, home maintenance and utilities are all going up.
The latest round of fortnightly Enterprise Bargaining Agreement (EBA) data showed that wages growth had eased from 4.1% in December to 3.7% in January – though January’s data covered just 9,000 workers versus 199,000 in December.
While the more modest pace suggests we may have seen the peak in wages growth, it also suggests that wages growth is likely to remain relatively elevated.
Interestingly, union wage agreements are continuing to run about 100-150bps higher than non-union agreements.
Retail sales grew 1.1% in January versus the 1.5% expected, suggesting that retail sales are near stalling at current levels.
It is worth noting that the Reserve Bank of New Zealand (RBNZ) kept rates unchanged at 5.5% despite some speculation it would hike.
Rates in New Zealand are unchanged since May last year and the RBNZ remains of the view that sustained high rates are constraining economic activity and prices.
US earnings scorecard
About 97% of the S&P 500 has reported Q4 2023 earnings.
Of this, 73% of companies reported a positive EPS surprise (which is below the five and ten-year averages of 77% and 74%, respectively) and 64% of companies reported a positive revenue surprise.
In aggregate, companies are reporting earnings 4.1% above estimates – again lower than the five-year average of 8.5% and the ten-year average of 6.7%.
The year-over-year earnings growth rate for the S&P 500 is 4.0%, the second-straight quarter of earnings growth.
Looking forward, consensus is expecting 3.6% earnings growth for Q1 2024 and 9.2% for Q2 for overall calendar-year 2024 earnings growth of 11.0%.
The 12-month forward price-to-earnings ratio is 20.4x, which is above the five and ten-year averages of 19.0x and 17.7x.
Australian reporting season wrap
Reporting season began well, with FY24 earnings projections largely unchanged in the first couple of weeks.
Then it faded into the close, with financial year earnings revised down 1.5% over the month – the weakest outcome since February 2009.
Consumer Discretionary, Financials and REITS saw positive revisions, while the sharpest downgrades came in Communication Services, Energy, Consumer Staples and Materials.
Dividend projections were also scaled back.
There are three factors at play:
- Softening margins: seven out of ten GICS sectors (excluding Financials) saw margin compression, with Consumer Discretionary providing one pocket of resilience.
- Interest cost projections are still rising, with consensus estimates higher for every sector bar one.
- High capex projections.
Despite this, the majority of stocks in the index made gains in the wake of their results – with the market price-to-earnings ratio expanding around 0.7x as a result.
Valuation change was the dominant element of price moves during reporting season.
Single-day stock price volatility in reporting season has been elevated since Covid and remains so, though this reporting season was a touch less volatile than previous episodes.
Meanwhile, 35% of companies beat expectations, which was in-line with the historical average, while 46% missed, which was higher than the 34% historical average.
About Jim Taylor and Pendal Focus Australian Share Fund
Drawing on more than 25 years of experience investing in top-performing Australian companies and a background in accounting, Jim manages our Long/Short Fund and co-manages our Imputation Fund. He is a Chartered Accountant with membership of the Australian Institute of Chartered Accountants.
Pendal Focus Australian Share Fund is managed by Crispin Murray. The fund has beaten its benchmark in 14 years of its 18-year history (after fees), across a range of market conditions. Find out more about Pendal Focus Australian Share Fund here.
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
January data suggests inflation continues to moderate. But we shouldn’t read too much into this better-than-expected outcome, writes Pendal’s head of government bond strategies TIM HEXT
- Monthly data supports the theme of moderating inflation
- The months ahead will see a more balanced CPI outcome.
- Why bonds, why now? Pendal’s income and fixed interest experts explain
- Browse Pendal’s fixed interest funds
THE January inflation numbers showed a continuation of the theme of moderating inflation.
Prices were 3.4% higher than January 2023.
More impressively, prices were down 0.3% in January from December – though this number is not seasonally adjusted and January is usually a weaker month.
This continues the downward path to inflation, in place since the 8.4% high in December 2022.
Source: ABS, 2024
Monthly CPI price data sets are not comprehensive, but quarterly are.
Only around 60% of the basket is tracked every month, while 30% is collected once a quarter (with different items in different months) and 10% is annual (with education in February, health insurance in April, and council rates in September).
So effectively, most monthly CPI prints cover 70% of the basket. The others are kept flat.
The list of prices going down in January is quite long; fuel, clothing, furnishings, and recreation all helped reduce inflation.
However, utilities went up (but less than expected), while food prices rose a bit more than expected.
Overall, we shouldn’t read too much into this better-than-expected outcome and the market reaction has also been quite muted.
It does make us more confident on our 0.8% forecast for the March quarter CPI due late April – and if anything, we might lower it to 0.7%.
This would see annual inflation (as measured quarterly, not monthly) also fall to 3.4% – near the RBA forecast of 3.3% of CPI by June.
However, we will have to wait for the September quarter 2023 number of 1.2% to drop out in October for CPI to have a chance of hitting 3%.
The months ahead will see a more balanced CPI outcome.
For items only measured once a quarter, January is goods-heavy, while February and March are more services-heavy – and services are where the higher pressures are. This will be especially so when education hits the February numbers.
If anyone is interested in a breakdown of the path back to low inflation this year, please read my article in our recent Australian Quarterly Update.
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Pendal’s Income and Fixed Interest funds
Oil remains the main x-factor to these forecasts and prices have edged steadily higher in recent weeks, though still in range for now.
The RBA will remain confident that its inflation forecasts are being met.
This does not mean rate cuts in the months ahead, but if the Fed were to start cutting in May, it still opens the door for lower rates here in the second half of 2024.
We remain biased to being overweight duration but will continue to adjust positioning based on market levels in a range-trading market.
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.
Here are the main factors driving the ASX this week, according to Pendal’s head of equities CRISPIN MURRAY. Reported by investment specialist Chris Adams
- Find out about Pendal Focus Australian Share fund
- Register for Crispin Murray’s bi-annual Beyond the Numbers webinar on March 8
LAST week was quiet on the macro front, with little data to add to the debate on disinflation and growth.
Fed speakers remain patient, as an economy holding up well allows them to wait and see if improving inflation trends are confirmed.
The US equity market was singularly focused on the Nvidia result, which once again beat consensus expectations, taking the stock – and the market – to new highs.
The S&P 500 ended up 1.68% for the week.
US earnings have been good, index momentum is strong, breadth is reasonable, the macro backdrop is supportive, and seasonality is positive – with March/April historically the best two months in 1H.
So, while consolidation is possible, the market remains in an uptrend.
The Australian market was largely flat, in a week dominated by results (S&P/ASX 300 +0.12%).
Earnings season is telling us the economy is okay; there is the odd pocket of softness, but generally, trends are continuing as before.
Industrial and tech companies are doing better, while large consumer-facing companies are wary of delivering a message which is too positive for fear of a media backlash.
Economy and inflation
United States
There was little relevant data last week.
We are seeing some survey data – such as the Evercore ISI Company Survey Diffusion index – indicate that the industrial sector is beginning to improve in the US.
This had been dragged lower by substantial destocking in 2023.
Even a gentle recovery here would help underpin economic growth.
A number of Fed members made comments during the week, generally emphasising the importance of not overreacting to January’s CPI data.
Governor Chris Waller was the most cautious, saying that the chance of January’s CPI being noise versus a signal was a fifty-fifty chance. He does tend to be at the more hawkish end of the debate.
Vice-chair Philip Jefferson and New York Fed chief John Williams took a more benign view.
Williams noted that disinflation tends to be bumpy but is moving in the right direction, and that while core inflation is still above the 2% target, it is below 3%. He also noted there was no need to shift the view on neutral rate levels.
These comments continue to suggest a likely first cut in May or June.
Economic resilience gives the Fed capacity to be patient; it would be a tougher call if there was a weaker economy, but inflation hasn’t fallen sufficiently.
Europe
Europe also saw some marginally positive industrial survey data, as the Euro Area S&P Global and Global Composite PMIs – a measure of confidence – ticked up.
We also first signs of wage growth data easing in Europe.
China
Sentiment remains poor and authorities continue to try to support the stock market.
The National People’s Congress annual meeting in March looms large.
The market will be looking to this event to provide signals on growth targets, fiscal deficit, local government bond quota and potential central government bond issuance.
Markets
Nvidia is the bellwether for the AI theme which, in turn, is the leading theme in the market.
Its Q4 result was strong and better than expected, leading to a US$250 billion rise in market cap on the day and a current market cap of more than US$2 trillion.
The market liked several messages from management, including:
- Revenue was diversifying, implying a more sustainable earnings stream.
- The company absorbed a large hit from China, where regulation shrank its market from about 25% to mid-single digit of revenue in the quarter.
- New production innovation from late 2024, which has five to ten times the computational power and should underpin the outlook for 2025.
- Enterprise and sovereign demand are gaining share.
The spread into enterprise is particularly interesting as that goes to the use case and the potential for generative AI to accelerate productivity and earnings in other sectors.
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Pendal Horizon Sustainable Australian Share Fund
Overall, the US market appears to remain well underpinned as it breaks to new highs.
The percentage of stocks above their 200-day moving average has remained in the 70-80% range in 2024, which compares to a trough of near 20% in October last year.
Sentiment is very bullish, but this is not a reason in and of itself for the market to drop.
For example, the market stayed near current levels of bullishness – as measured by the Consensus Inc % Bullish measure – for extended periods across 2014-15 and late 2016-18.
Earnings season
Earnings season in Australia remains mixed, with no clear macro themes emerging.
REIT and retailer results suggest that the consumer continues to hold up relatively well.
But there are pockets of softness – for instance, the supermarket sector as price inflation falls, but no pick-up in volumes in response.
Advertising remains very soft, but industrial companies are generally seeing activity remain at the same cadence.
Cost control has been a point of differentiation at the company level, but it tends to be disciplined control rather than large restructuring announcements.
One recurring theme is that large companies, particularly with a consumer focus, are mindful about the media and government reaction to their results.
There is a less positive spin and more focus on evidence of reinvesting to help customers.
In some cases, it appears as though companies are prepared to sacrifice valuation ratings to avoid facing backlash.
Industrial and tech companies are more immune to this issue and are, therefore, faring better.
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.
Why a hard landing looks unlikely | Latest outlook for inflation | Three mid-cap themes to consider | Opportunities in industrials
Despite some negative surprises among ASX industrials this earnings season, there are still opportunities for stock pickers. Pendal analyst ANTHONY MORAN explains his approach
- Industrials hit by changes in customer behaviour.
- Opportunities in sold off stocks, but watch margin pressures
- Find out about Pendal Focus Australian Share fund
THERE have been plenty of negative surprises among industrial stocks this ASX earnings season, showing how companies across the economy are changing their behaviour, says Pendal equities analyst Anthony Moran.
It’s an environment that provides opportunity for stock pickers – if you know what to look for.
“Several industrials companies have demonstrated weakness for the December six months and it’s been a surprise,” Moran says.
“There is more weakness than expected and that’s manifesting in corporate results.”
Moran nominates packaging group Amcor where volumes were down 10 per cent for the December quarter, year-on-year.
“That’s quite astounding for a company that sells packaging for centre-of-the-aisle groceries.
“It highlights that there is weak demand in certain sectors, and the de-stocking impact has exceeded expectations,” Anthony says. Pendal holds Amcor.
More broadly, it shows that companies across the economy are trying to manage higher interest costs by reducing working capital and maximising their cash balances, he says.
“Amcor saw it. Fletcher Building experienced it through the New Zealand construction cycle.
“Treasury Wine Estates saw it in their US wine business and in their Asian premium business. At Treasury there is more destocking then expected along with a weaker consumer.” Pendal holds Treasury Wines.
Where to look for opportunities
The macro shifts hitting individual companies throw up opportunities for investors, Moran argues.
“There are companies that have cyclical weakness, and their valuations can be attractive.
“You want to look for a company that has the ability to grow above its end market and has the potential to accelerate its share, even in a declining market.
James Hardie (held by Pendal) is an example, he says.
“It’s shown strong growth in the last 12 months even as the repair-and-remodel cycle has been down double digits in the US.
“You want companies that are able to do that,” he says.
Another example is Orora (also held by Pendal) which is a major packaging distributor which has spent time implementing a new operating model, that is now showing sustained market gains, Anthony says.
Pendal Focus Australian Share Fund
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Delivering good performance from a core business, even if the market is not growing, is attractive to investors, Anthony says.
“Aristocrat Leisure is doing that at the moment. The US casino market is stable, but Aristocrat is delivering good performance.” Pendal holds Aristocrat.
Look for companies emerging from down cycles
He says investors should consider looking for industries that are emerging from down cycles, particularly if they are worried about the economic outlook.
Another theme coming through earnings season, particularly across industrials, is margin disappointment, Anthony says.
“In Fletcher Building’s case, the sensitivity of the margins surprised but that’s what you get in big volume downturns.
“But for someone like Hardie, it did disappoint on its margin outlook, and that’s because some of the cost relief they got during Covid is starting to normalise up.
Transurban is another example where they recorded another year of cost growth above inflation and that’s crimping their margins.
“The headline is that costs are still an issue for a number of companies and for most industries pricing power is coming off. It means investors need to watch margins,” Anthony says.
“The next 12 to 24 months is going to be the great normalisation of the post-Covid super-cycle in margins, at least for the industrials sector.”
About Anthony Moran
Anthony Moran is an analyst with more than 15 years of experience covering a range of Australian and international sectors. His sector coverage has included Australian Industrials and Energy, Building Materials, Capital Goods, Engineering & Construction, Transport, Telcos, REITs, Utilities and Infrastructure.
He has previously worked as an equity analyst for AllianceBernstein and Macquarie Group, spending a further two years as a management consultant at Port Jackson Partners and two years as an institutional research sales executive with Deutsche Bank.
Anthony is a CFA Charterholder and holds bachelor’s degrees in Commerce and Law from the University of Sydney.
Here are the main factors driving the ASX this week, according to portfolio manager RAJINDER SINGH. Reported by portfolio specialist Chris Adams
- Find out about Rajinder’s Pendal Sustainable Australian Share Fund
- Find out about Crispin Murray’s Pendal Focus Australian Share Fund
- Register for Crispin Murray’s bi-annual Beyond The Numbers webinar on March 8
GLOBAL equity markets took a breather last week, while bonds continued to sell off as they have so far throughout February.
Stronger-than-expected US inflation numbers weighed on both asset classes. Core CPI — and the services components in particular — stayed stubbornly high.
Other key US data releases were mixed.
Overall, these indicators increase the likelihood that the US Federal Reserve will want to accumulate more evidence of sustained disinflation before making its next change in rates.
Markets already had moved to a view of a first cut in May or maybe even June, rather than March as hoped earlier in the year.
In other international economic news, two G7 countries – Japan and the UK – dipped into technical recessions.
Commodities have been relatively resilient, with oil holding onto its previous gains, and copper and lithium enjoying some relief after a difficult 2024 so far.
In Australia, the unemployment rate edged up and Australian bonds followed US bond yields higher.
We saw reporting season moving up a gear with numerous important results coming out.
Early indicators suggest that in aggregate, companies are delivering revenue in line with expectations, but with upside on earnings due to better margin management.
The S&P/ASX 300 gained 0.23% while the S&P 500 fell 0.35%.
US macroeconomics
Last week, we saw two important US inflation indicators: the producer price index (PPI) and consumer price index (CPI).
The headline PPI advanced 0.3% in January, which was a stronger than the 0.1% expected.
The acceleration in core PPI was an even bigger surprise, increasing by 0.5% versus consensus of 0.1%.
Another concern is that some components of PPI, especially health care, were strong in January and these are aligned with those used in the Fed’s preferred measure of inflation – the personal consumption expenditures (PCE) core services ex-housing (CSEH) index.
Some economic forecasters increased their predicted PCE inflation as a result.
The CPI report was the most influential of the week’s economic indicators.
Headline CPI for January came in higher than expectations, up 0.3% month-on-month and 3.1% year-on-year versus consensus increases of 0.2% and 2.9%, respectively.
Core CPI advanced 0.4% and 3.9% year-on-year, which also was higher than consensus.
Strength in housing-related Owners Equivalent Rent (OER) and Core Services ex-Housing drove this result.
This was the highest Core CPI reading in eight months, prompting a sell-off in the S&P 500 and an increase in bond yields.
While CPI is still decelerating, the concern is that the pace of this decline has stalled – requiring the Fed to keep rates up higher for longer.
The case for this is supported by the gap that has opened up between Core CPI and PCE Core Services ex-Housing measure.
There were some noteworthy trends in the CPI components:
- Services inflation remains consistently higher and stronger, though some forward-looking indicators suggest rent should have a moderating effect.
- Commodities and food effects have continued to reduce slowly over the last 12-18 months.
- Energy is having a deflationary effect, though this could easily reverse with base effects and changing prices.
Find out about Pendal Sustainable Australian Share Fund
Following the release of the CPI numbers, the Fed’s Chair, Jerome Powell, held a closed-door meeting with US House members.
Here, he reportedly said words to the effect that the CPI numbers were consistent with the Fed’s expectations and that they would look at the upcoming PCE report to give them some more information.
Elsewhere, January retail sales were also disappointing, down 0.8% month-on-month.
Housing starts were soft, down 14.8% month-on-month in January, but poor weather has been blamed for depressing both indicators.
Initial Jobless Claims remained low at 212,000, indicating that US labour markets still appear resilient.
On Tuesday, we saw the release of the NFIB small business survey, which showed that US business sentiment remains at recessionary levels.
However, the survey also showed small businesses continue to moderate price rises.
In terms of consumer sentiment, the University of Michigan update showed consumers feeling significantly more optimistic than the low levels in 2023.
Historically, this has correlated with S&P 500 market performance.
Global macroeconomics
US goods imports data demonstrates the sharp decline in China’s share of the US market.
As a percentage of total US imports, China has fallen from a peak of more than 20% prior to Covid back to 13.7% in December 2023 – roughly the same level as 2004.
Mexico has overtaken China with 15.3% of US imports, which at least partly reflects the outcome of “near-shoring”.
Elsewhere, the EVRISI survey of company sales in China shows that sales have fallen back to near-record lows and are only just above the Covid trough.
Japan and the UK dipped into technical recessions with a second quarter of economic contraction in Q4 2023. Germany also contracted but had been flat in the previous quarter.
Japan’s three-decade economic slide continues, with the country slipping from the third to fourth-largest economy in the world after the US, China and Germany.
Australian macroeconomics
The unemployment rate rose to 4.1% (consensus 4.0%), which is the first time above 4% since Jan 2022.
Employment was flat, the number of unemployed rose 22,000, and the number of hours worked dropped 2.5%, though there may be seasonal effects at play.
It’s only one month of data, but it is in line with other indications that the Australian economy is starting to show signs of slowing.
The trend in employment growth slowed considerably towards the end of 2023.
Also, the shift from full-time to part-time employment as the composition of hours worked indicates a degree of under-utilisation within the Australian labour force, which is important in helping slow inflation.
ASX earnings season
It’s still relatively early days, but it’s been a decent start to ASX half-year reporting season.
Australian companies seem to have navigated relatively subdued revenue growth by increasing margins and delivering decent EPS outcomes.
An analysis of management commentary indicates that companies are, if anything, a bit more optimistic (or at least less pessimistic) about current positioning and the outlook for the year ahead.
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:
- Pendal Sustainable Australian Share Fund
- Crispin Murray’s Pendal Horizon Fund
- Pendal Sustainable Australian Fixed Interest Fund
- Pendal Sustainable Balanced Fund
- Regnan Credit Impact Trust
- Regnan Global Equity Impact Solutions Fund
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.
How to conquer the interest rate peak | Goldilocks beware on inflation data | What to watch in a turning-point year | What’s driving the market this week
What’s next for rates and how should fixed-interest investors be positioned? CommBank chief economist STEPHEN HALMARICK and Pendal’s head of government bonds TIM HEXT discuss their views in a new on-demand webinar
Below are the highlights. Watch the webinar here
- Soft landing likely with rate cuts around September
- Bond rally to be sustained
- Watch now: How to conquer the rates peak webinar with CommBank’s Stephen Halmarick and Pendal’s Tim Hext
AS chief economist at Australia’s biggest bank, Stephen Halmarick has better access to real-time consumer data than almost anyone.
The day after the RBA’s February rates decision, Halmarick sat down to share his insights in a webinar with Pendal’s head of government bond strategies Tim Hext.
“The Reserve Bank kept a mildly hawkish tone … at its board meeting,” Halmarick said after the no-change decision.
“Governor Michelle Bullock isn’t yet ready to declare victory against inflation.”
Official figures, and internal data from the Commonwealth Bank, show the economy is slowing and growth this year is likely to be below trend, he said.
“Household sectors will be under ongoing stress. But business investment intentions are holding up nicely. And state government infrastructure spending is still pretty solid.”
Soft landing
Halmarick believes the Australian economy is heading for a “soft landing”, based on weak consumer spending.
“It’s not till we get the rate cuts through the door that we see consumers start to pick up,” he says.
“We think the unemployment rate by the end of this year will be closer to 4.5 per cent.
“There will be more people employed but there will also be more people joining the labour market.
“It’s important to remember that nobody needs to lose their job for the unemployment rate to go up.”
Halmarick expects inflation to keep falling this year, giving the central bank confidence to cut the official cash rate in September.
US inflation almost under control
Pendal’s head of government bond strategies Tim Hext says the US economy is close to getting inflation under control.
He believes the first rate cut in the US will happen in May, followed by several more this year.
“The RBA always follows what happens globally,” Hext says in the webinar.
“This cycle has been all about inflation and that’s what will allow the Reserve Bank to start cutting rates.”
Hext believes there will be three or four cuts within six months of the first reduction in the local cash rate, which he tips will be in September.
Geopolitical factors and other risks
What are the key risks to this scenario?
Halmarick points to geopolitical factors and risks around supply chains, as well as the performance of China.
“Domestically the key risk is the fall in household real income,” he says “The other big issue is the housing market.
“I’m particularly interested in rental markets. Rents are chewing up so much more of people’s money.”
Hext says the list of worries about the economy is getting smaller, not bigger.
One potential concern is the Reserve Bank’s aggressive reduction in its inflation forecast – it expects headline inflation to be 3.2 per cent by the end of 2024.
There’s a risk that won’t be met, says Hext.
And he says oil – via primary and secondary effects – can also have an impact on inflation.
Significantly, the Reserve Bank seems more relaxed about wages.
Both Stephen and Tim agree that the upcoming tax cuts in the middle of the year will not make a significant difference to inflation or growth, relative to the already legislated Stage 3 tax cuts.
What does it mean for fixed income investors?
With a soft landing the most likely outcome, the current bond rally should be sustained, argues Hext.
Last year investors could buy “real yields” on 10-year bonds above 2 per cent – meaning the investor gets 2 per cent above the inflation rate on a government bond.
“That’s very generous for taking very little risk,” Hext says. “It’s not sustainable unless you have a massive productivity boom.
“If inflation heads towards 3 per cent and real yields start to head back towards where productivity is at the moment – somewhere between zero and 1 per cent – then 10-year bonds should land around 3.5 per cent and the cash rate around 3 per cent.
“Right now we are a bit above 4 per cent so there’s a fair bit of juice left in 10-year bonds,” he says.
“The rally should be sustained. Bonds still represent some value though they’re not as cheap as a year ago.
“Under a soft-landing scenario, it is quite risk friendly. “
Which asset classes should investors consider?
“You should have more duration than normal in bonds, you should be comfortable about owning credit, and it’s not a bad environment for equities,” argues Hext.
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.