The Pendal American Share Fund (Fund) will terminate on Tuesday, 28 November 2023.
Update on the estimated date for payment of cash proceeds
The cash proceeds from this termination, including any distribution of net income, is expected to be paid to your nominated bank account on file on or around 7 December 2023 rather than the previously advised estimated date of the week commencing Monday, 11 December 2023.
Please refer to the Notice of Termination: Pendal American Share Fund (APIR: BTA0100AU, ARSN 087 594 509) dated 25 August 2023 for more details on this termination.
Questions?
If you have any questions, please contact our Investor Relations Team during business hours Monday to Friday on 1300 346 821.
The Pendal European Share Fund (Fund) will terminate on Tuesday, 28 November 2023.
Update on the estimated date for payment of cash proceeds
The cash proceeds from this termination, including any distribution of net income, is expected to be paid to your nominated bank account on file on or around 7 December 2023 rather than the previously advised estimated date of the week commencing Monday, 11 December 2023.
Please refer to the Notice of Termination: Pendal European Share Fund (APIR: BTA012AU, ARSN 087 594 429) dated 25 August 2023 for more details on this termination.
Questions?
If you have any questions, please contact our Investor Relations Team during business hours Monday to Friday on 1300 346 821.
Here are the latest insights on the fixed interest landscape from Pendal’s head of government bond strategies TIM HEXT
- Why bonds, why now? Pendal’s income and fixed interest experts explain
- Browse Pendal’s fixed interest funds
EACH quarter the Reserve Bank releases its economic forecasts as part of a monetary policy statement.
Most investors are happy to see a few headlines and take the rest as given.
For bond investors, though, these forecasts are very important.
They tell us what the RBA expects – and sets parameters for what might trigger a rate move over the next quarter.
In May, inflation was forecast to finish the year at 4.5%.
In August this was revised to 3.9%. Now it is back at 4.5%.
Why the revision in August? Well, the Q2 CPI had just come out at 0.8%, helped by falling oil prices.
Prices then turned around in Q3, pushing inflation up to 1.2%.
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We could smooth it out and call it 1% on average – but the RBA is currently in the business of fine tuning, and keen to regain its damaged inflation credentials.
So up goes the forecast and up go cash rates.
Rates outlook
For what it’s worth, we see Q4 inflation at around 0.7% to 0.8%, meaning inflation will end the year at 4.2%, rather than 4.5%.
If we are right, then the rate hike was not needed.
More importantly, this makes the chance of a February hike very low.
Beyond February, inflation should remain sticky around 0.8% to 0.9% a quarter, meaning rate cuts are off the table for most of 2024.
By the middle of next year, US rate cuts may well be on the table, helping bonds find more support.
The RBA expects inflation to hit 3.6% by mid-2024, a forecast we roughly agree with.
That’s still above their preferred 2-3% band, but would reclassify inflation as “high to uncomfortably high” – though manageable. (We don’t expect the RBA to be quite so explicit, however).
The next few months will reveal what kind of damage this pre-Christmas hike has had on the economy.
As always, we will be watching leading indicators and leaning heavily on our equities team to get an insight into retailers this Christmas.
For now though, our models and our macro outlook are bond friendly.
Yields, despite their comeback this month, remain attractive on a medium-term basis.
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 Aussie equities analyst ELISE MCKAY. Reported by portfolio specialist Chris Adams
DATA on the macro front continues to support the soft-landing (or “goldilocks”) scenario.
Inflation data came in lower than expected in the US and UK last week.
The US print was accompanied by stronger-than-expected retail sales, emphasising there are no signs of a slowdown in US growth just yet.
The Atlanta Fed GDPNow model is estimating fourth quarter (Q4) GDP growth of 2%, which is above the consensus expectations of less than 1%.
This suggests the Fed hiking cycle is now well and truly done. Risk is now to the downside (ie rate cuts) should we see any real signs of a growth slowdown.
This is consistent with the bull case for markets we outlined last Monday (and drove a “risk-on” rally in equities last week). The S&P 500 rose 2.31%, the NASDAQ lifted 2.42%, while the S&P/ASX 300 was up 1.35%.
Bonds were also quick to adjust, with US 10-year yields dropping 22 basis points (bps). The market moved to price in more rate hikes, with a 78% chance of a cut by May and four cuts priced in for 2024.
In Australia we had some meaningful economic data, with wages accelerating to above 4% year-on-year (in line with expectations), a 55,000 rise in employment, and a 0.2% increase in the unemployment rate to 3.7%.
While this suggests a resilient labour force, some leading signs suggest pockets of weakness are emerging – for instance, an increasing share of part-time work, number of hours worked stalling and youth unemployment increasing to 9.2%.
US economics and policy
CPI inflation
Headline CPI came in higher at 0.045% month-on-month for October, which was below consensus expectations of 0.1% growth. Core CPI rose 0.227% on the month.
On an annual basis, headline inflation declined to 3.2% while core CPI declined to 4%.
This positive outcome was due partly to a 2.5% decline in energy prices, with softer demand and increased supply contributing to a 4.9% decline in energy goods (largely gasoline).
This decline is likely to continue into November, with retail petrol prices continuing to fall through the first few weeks of the month.
However, there was some offset from an acceleration in food prices to 0.3% in October – up from a three-month average of 0.2% monthly – which was driven by an uptick in the “food at home” category.
For core CPI, there was a 0.3% increase in core services inflation and a 0.1% decrease in core goods inflation.
Pleasingly, core services inflation decelerated to the second lowest print in CY23. This was the result of shelter inflation cooling from 0.6% in September to 0.3% in October, with owners’ equivalent rent declining from 0.6% to 0.4%.
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While core CPI is running at 4% year-on-year, core inflation (excluding rents) is now back to 2% – down from 8% at the peak in February 2022.
This is supportive for the core personal consumption expenditure (PCE) numbers (the Fed’s preferred inflation measure), which have less weighting to rent inflation.
Rents should also continue to come down in line with the forward-looking Zillow rent numbers.
Much of the downward pressure on core CPI inflation (excluding rents) has been driven by the ongoing decline in used vehicle prices, which fell a further 7.1% year-on-year in October. These lag auction prices, which are generally supporting further downside pressure.
PPI inflation
PPI data was also lower than expected. Core PPI (excluding food, energy and trade services) was 0.14% month-on-month in October, versus the 0.2% consensus and is running at 2.9% year-on-year.
Headline PPI was also depressed by energy prices (down 7.4%, driven by gasoline and lower electricity prices), coming in significantly lower than expected at -0.5% month-on-month versus consensus growth of 0.1% and down from 0.4% in September.
Combined with the CPI data, this suggests that core PCE continues to soften for October. This report is due on 30 November.
Retail sales
October retail sales were stronger than expected, but confirmed a slowdown in consumption into Q4.
Headline sales were down 0.1% month-on-month versus the consensus expectation of a 0.3% decline, and down from 0.9% in September. Most categories (8/13) were negative.
It’s likely there will be a more sustained step-down in consumer spending in Q4, driven by softer consumption (the student loan moratorium ended in October), labour markets softening, and tighter credit conditions weighing on consumer spending.
Australian economics and policy
Australian wage growth accelerated to 4% year-on-year, which was in line with expectations.
There was a 55,000-person rise in employment and a small 0.2% increase in the unemployment rate to 3.7%.
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Crispin Murray’s Pendal Focus Australian Share Fund
This suggests labour-force resilience, though there are softer pockets emerging, such as an increased share of part-time work, hours worked stalling and the youth unemployment rate increasing to 9.2%.
Wages
Wages accelerated by a record 1.3% in September, lifting annual growth to 4% (from 3.6% in Q2).
But this was as expected given the 5.8% increase in award wages (accounting for some 20-25% of employees) and a lift in EBA wages growth.
However, wages growth under individual agreements was up only 0.01%, which is encouraging given this is the sector most sensitive to underlying labour market conditions.
Looking forward, third-party data is providing a mixed read on non-award/EBA wages growth.
The slower individual agreements data is supported by Xero’s Small Business Insights, which show wages rose only 1.9% year-on-year in September and are growing below the pre-COVID average of 3%.
However, Seek data supports current strength while EBA data suggests stabilisation around 4%.
Employment data
Of the 55,000 new jobs, 38,000 were part-time – contributing to a mix shift, with 31% of employment now part-time. As a result, hours worked grew only 1.7% year-on-year versus employment figures up 3%.
A slow-down in hours worked can be a leading indicator, as companies may find it easier to reduce hours rather than lay-off their employees.
The youth unemployment rate also lifted materially to 9.2%, which is the highest rate since December 2021 and a good indicator of the strength of the overall market given the low-skilled and young tend to fare the worst when conditions get tough.
Labour market outcomes should ease in the near term with surging migration contributing to strong population growth (roughly 3% year-on-year in the working age population) and softer labour demand.
UK economics and policy
Both UK retail sales and inflation came in below consensus.
Retail sales fell 2.7% year-on-year, with October sales down 0.3% month-on-month versus consensus expectations of a 0.3% increase.
October’s headline CPI came in lower than expected, down from 6.7% year-on-year to 4.6%, and core CPI decelerated to 5.7%.
While most of the decline in core inflation has stemmed from goods (driven by lower energy prices and easing supply chain bottlenecks), services inflation has also started to decelerate, albeit from a much higher level.
Services inflation is closely tied to wages growth, which has remained strong at about 7% year-on-year, but there are signs that this is cooling.
Private sector regular pay decelerated from 8.1% year-on-year in August to 7.8% in September (below the Bank of England’s forecast), while a number of other metrics show data consistent with the moderation story.
The UK rates market has moved quickly to price earlier cuts, reflecting this data. Bond yields have declined as well, with the two-year down 46bps and the five-year down 58bps from the recent October peak.
Markets
We note that demand for US government debt from foreign buyers is decreasing, with foreigners now owning an estimated 30% of all outstanding US Treasury securities, down from 43% a decade ago.
The US Treasury has shifted to issuing more shorter-dated debt in response. This has helped restore market stability but is resulting in material changes in supply and demand dynamics.
As flagged last week, positioning by systematic strategies going into November was very underweight equities, particularly CTAs, which had the lowest exposure since 2018.
Over the last ten days, CTAs have bought nearly $70 billion in US equities – the largest ten-day buying volume that Goldman Sachs has on record.
About Elise McKay and Pendal Australian share funds
Elise is an investment analyst and portfolio manager with Pendal’s Australian equities team. Elise previously worked as an investment analyst for US fund manager Cartica where she covered a variety of emerging market companies.
She has also worked in investment banking and corporate finance at JP Morgan and Ernst & Young.
Pendal Horizon Sustainable Australian Share Fund is a concentrated portfolio aligned with the transition to a more sustainable, future economy.
Pendal Focus Australian Share Fund is a high-conviction equity fund with a 16-year track record of strong performance in a range of market conditions. The Fund is rated at the highest level by Lonsec, Morningstar and Zenith.
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
The trend of the year | Bull and bear cases | Asset allocation for the ‘old normal’ | Value in value investing | What’s unique about Aussie bonds
With moderating inflation as the trend of the year, investors can be more assured in their bond allocation, argues Pendal assistant PM ANNA HONG
- Why bonds, why now? Find out more from Pendal’s income and fixed interest team
MODERATING inflation is the trend of the year.
Across the globe, economies are seeing inflation come down as the resumption of supply chains eased price pressure on goods.
Central banks have taken the fight to services inflation — which has held on even as goods inflation eased.
In 2023, markets whipsawed on inflation and unemployment data releases, as investors try to pick the end of the rate-hiking cycle.
The latest US Consumer Price Index data came in much weaker than expected on Wednesday, sparking a Wall Street rally.
The US CPI increased 3.2% in the year to October — down from 3.7% annualised in September.
We can now see the light at the end of the tunnel.
US inflation cools
US inflation for October came in at a cool 3.2% year-on-year.
On a monthly basis, October was flat — the slowest since July 2022 — with core services handing out the biggest downside surprise.
Markets welcomed the news that this time around the inflation slowdown is much more broad-based, rather than just a goods-fuelled moderation.
With the US Federal Reserve’s July rate hike still working its way through the economy in the months ahead, markets swiftly took out most of the pricing for any future US rate hikes.
Investors now seem convinced that the last rate hike by US Fed is behind us.
The story back home
Back here in Australia, the picture does not look quite the same.
The most recent CPI (Q3, 2023) surprised to the upside instead, printing at 5.4% year-on-year.
Australia economic strength was confirmed with business conditions continuing to improve in the latest NAB business survey.
Headline capacity utilisation moderated to 84% but remains well above long-run average. Price pressure eased on business inputs but remains elevated at 1%.
We are probably six months behind the US.
US CPI last had a five-handle on it back in March.
Australian capacity utilisation remains stubborn at 84% while the US has dropped below 80%.
The US Fed has been on pause since its July rate hike while the RBA just raised ours.
Even though we may be lagging the US in the disinflation journey, inflation is on the same trajectory here.
Elsewhere, the UK CPI dropped from 6.7% to 4.6% this week.
What it means for bonds
Bond investors can be more assured that we are seeing the light at the end of the tunnel.
The gap between Australian and US front-end rates should narrow as US Fed starts a rate-cutting cycle ahead of the RBA.
That should buoy short-end US treasuries and weaken the USD against AUD.
For Australian investors, any gain in short-end treasuries should be largely offset by foreign exchange losses.
For long-end bonds, we believe the risk-reward of Aussie government bonds outweighs the US treasuries.
Why?
Firstly, Australian 10-year yields at 4.56% are more attractive than US 10-year treasuries at 4.45%.
Secondly, the steepness of the Australian yield curve gives investors good carry-and-roll versus the inverted US yield curve.
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Finally, the supply-demand dynamics work in Australia’s favour.
Australia is running a budget surplus while the US is running a budget deficit.
This means that on the supply side, the Australian government does not need to issue more bonds.
On the other hand, the US has raised its planned 10-year issuance size by US$2 billion to US$40 billion.
On the demand side, the number of captive audiences for US treasuries has dwindled.
US Fed — the biggest buyer — is now a seller, not a buyer.
The reliable Japanese have shied away due to the weakness of the Yen.
And US commercial bank — having learnt from the mistakes of Silicon Valley Bank — are rebalancing away from long-end US treasuries.
With moderating inflation as the trend of the year, investors can be more assured in their bond allocation.
On balance, we believe Australian bonds should provide better risk-reward ahead.
About Anna Hong and Pendal’s Income and Fixed Interest team
Anna Hong is an assistant portfolio manager with Pendal’s Income and Fixed Interest team.
Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.
With the goal of building the most defensive line of funds in Australia, the team oversees some $20 billion invested across income, composite, pure alpha, global and Australian government strategies.
Find out more about Pendal’s fixed interest strategies here
About Pendal Group
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
Increase to the Pendal Asian Share Fund’s management fees and costs
The Fund’s financial year 2023 (FY23) estimated management fees and costs are 1.30% p.a. of the assets of the Fund. The estimated management fees and costs have increased from 1.20% p.a. of the assets of the Fund in financial year 2022.
The increase is due to the fund experiencing higher estimated transaction costs. The Fund’s FY23 estimated transaction costs net of any amount recovered by the Fund’s buy-sell spread increased by 0.10% p.a. to 0.30% p.a.
Transaction costs are incurred when buying and selling the Fund’s underlying securities and are paid out of the Fund’s assets. These costs are reflected in the daily unit price and are not charged to you as an additional fee. Transaction costs and buy-sell spread may vary from year to year depending upon market conditions and volumes traded.
There has been no change to the Fund’s management fee of 1.00% p.a..
Here are the main factors driving the ASX this week according to our head of equities CRISPIN MURRAY. Reported by portfolio specialist Chris Adams
MOST equity markets held their recent gains or advanced incrementally last week, despite bond yields rising after a big move lower the previous week.
The S&P/ASX 300 gained 0.1% and the S&P 500 lifted 1.35%.
Recent equity market resilience has been driven by a combination of:
- A slower-than-expected bond issuance calendar for the December quarter
- A dovish Federal Open Market Committee (with chair Jerome Powell highlighting the work done by bond yields on tightening financial conditions)
- Softer data from the US Institute for Supply Management manufacturing index
- Jobs data sitting in the “goldilocks zone”
However, these factors were offset last week by:
- Powell adopting a sterner tone in an IMF speech, perhaps with an eye on an easing financial conditions index
- A disappointing US Treasury auction, reminding the market that supply is a risk to bond yields
- Worse-than-expected inflation expectations, which highlights Powell’s mantra that there is “a long way to go” to get inflation sustainably back to 2%
Despite this more negative tone, there was resilience in equities. This can be attributed to short-covering by systematic funds which were bearishly positioned and caught out by the prior positive reversal.
Investors were also possibly mindful of the market moving into what has historically been a positive part of the year for equities.
Due to the technical nature of the bounce, it was concentrated in the mega cap “magnificent seven” of the S&P 500, with breadth not as supportive.
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This could suggest price action from here will be more subdued. Though we expect to see a continued grind higher given prior bearish positioning, unless fundamentals change.
Oil continued lower with Brent crude down 5.7% last week, which also supported equities.
The rate hike in Australia was well anticipated and therefore had limited market impact.
Dovish RBA commentary helped support equities and led to a sell-off in the Australian dollar.
Markets
We have often referenced the importance of positioning both at a stock and market level. This has been recently demonstrated again.
Systematic strategies such as commodity trading advisor (CTA), risk parity and volatility-controlled funds are often the marginal dollar in the market.
Going into November they were very underweight US equities with CTAs at their lowest exposure since 2018.
This coincided with historically the most positive seasonal period of the year, encouraged by reduced tax loss selling and the resumption of buy-backs.
A reversal in bond yields provided the catalyst for systematic strategies to cover their position in equities. The rush to cover led to an initial sharp move which has subsided.
But the current equity exposure is still low and vulnerable to any squeeze into market, which is why it could be supportive.
From here, there are two disparate views on the medium-term outlook:
- The bear case
The bears expect material weakening or recession in the US in 2024.
This view points to the effects of monetary tightening lagging more than usual due to longer debt duration, though still flowing through.
Recent weakening in economic data and continued tightening in credit conditions are taken as early signs of this.
In this scenario unemployment might rise materially, affecting consumption.
This could result in rate cuts sooner than expected in response to economic weakness. Though lingering inflation concerns could still cause delays.
In this scenario we could see a fall in corporate earnings and a de-rating in equity markets.
- The bull case
The bulls believe the peak in tighter financial conditions has passed and presents a lighter headwind going forward.
In this scenario, core inflation has fallen more quickly than feared. Unemployment has stayed low and GDP growth resilient, reflecting a different kind of cycle tied to the distortions of the pandemic rather than a classic ‘overheating’ cycle which requires a recession.
This view sees the recovery in labour force participation enabling wages to ease off, consumption to remain supported and real disposable income growth improving.
Should inflation continue to fall, this could facilitate potential rate cuts, providing protection against a slowdown.
The global picture
The global picture on current market valuations is mixed.
The US looks expensive at 18.5x 12-month forward price/earnings versus a 20-year median of just under 16x.
However this is distorted by mega-cap tech. Without these stocks, the market is at 16x, versus a median of around 15x.
Asia and Australia are around the 20-year median point while the UK and Europe are looking cheap by historical standards.
With almost 90 per cent of the US index having reported quarterly earnings, EPS growth is coming in at 4% year-on-year, versus 0% in Q2 2023. That reflects a stronger economy. (Ex-energy EPS is +10%.)
Despite this, expected earnings have fallen 4% for Q4 and 1% for the calendar year so far.
Q4 expectations indicate margins are set to fall, suggesting the market is reasonably cautious in terms of outlook.
US policy and economics
There were four factors to take note of in the US last week:
- Powell comments – a shift in tone from the previous week
Powell’s IMF speech struck a more hawkish tone than a week earlier. This was likely due to the risk of prompting too much optimism and becoming counter-productive. He said there was still a long way to go to get inflation sustainably down to 2%, while also noting previous “head fakes” on inflation.
Powell also toned down comments on the impact of improved supply chains versus. The benefits from supply might now wane, requiring tighter financial conditions to reduce inflation.
He also didn’t cite the impact of higher bond yields as a counter to recent strong growth, effectively recognising the rapid fall in bond yields has diminished this economic brake.
- Conditions remain tight in Senior Loan Officer Opinion Survey
A lot of the bears focus on this Federal Reserve quarterly series. The latest survey reinforced the idea that conditions remain as restrictive as they were in the prior release — which usually signals slowing credit growth.
This is understandable given the cost of debt has risen close to 10 per cent for small-to-medium enterprises.
The US relies less on bank lending than any other economy given alternatives such credit and private credit. So it may not be as negative a signal as in previous years.
- Inflation expectations deteriorating
US consumer sentiment deteriorated for second consecutive month, according to the latest University of Michigan survey on inflation expectations.
Expectations one-year forward shifted from 4.2% to 4.4%, having risen from 3.2% in September’s survey.
Five-year forward expectations rose from 3% to 3.2% — a 12-month high.
While an important signal for the Fed, this series has some caveats given a smallish sample and the historic influence of energy prices.
That said, it reinforces the Fed’s need to strike a balanced line on policy messaging and ensure expectations remain anchored.
- Atlanta Fed’s wage growth tracker slightly lower
There was no major shift in this signal on US wages. The three-month moving average of median wage growth was at 5.2%, but it did validate a recent move lower.
This measure is typically about 1% ahead of other measures of wage growth, which suggests they may be in the low-4% to mid-3% range.
This is closer to being consistent with 2% inflation.
China
There was little newsworthy from China last week. But it’s worth noting some of the real-time trackers of the economy deteriorated again in October, reinforcing the need for ongoing stimulus.
Property is still not bouncing off depressed levels and confidence remains weak.
Australia
The Reserve Bank raised rates 25bp to 4.35% but softened its language regarding the need for further hikes — perhaps to dampen down reaction to the hike.
The RBA is effectively indicating it will not raise rates again unless the data demands it.
The RBA’s updated forecasts for inflation suggest why it remains more benign on the outlook for rates.
The actual rise in CPI forced it to raise forecasts. But it’s now expecting CPI to return to a previous forecast by mid-2024 — so it’s seen as six-to-12-month phenomenon.
A lower CPI forecast comes despite higher GDP growth, driven by stronger net exports and private and public investment.
Higher employment growth and lower unemployment is expected. But wage growth is anticipated to fall as higher award wages partly offset moderating wage growth in IT, professional services and construction.
The RBA therefore seems optimistic on inflation fixing itself, as has been the case in US.
The logic is that we may be just beginning to see the first signs of consumer slowing, while falling global inflation should also help.
The RBA’s six-month stability report and quarterly monetary statement highlighted the resilience of households and businesses.
Households have taken on extra work, reduced discretionary spend and drawn on savings. Businesses have been helped by large cash buffers.
Employment income growth has been strong, particularly at the lower-income levels, even as real base wages have declined. This reflects household ability to add extra sources of income.
For the lowest quintile of households by wage real (ie inflation-adjusted) employment income has grown more than 10 per cent.
Spending remains supported by savings buffers, which are only being run down slowly and still represent more than 15 per cent of household disposable income.
The RBA stability report noted some early signs of emerging financial stress. For example:
- The National Debt Helpline has seen demand for services rising 25%, albeit off a very low base.
- Another metric uses baseline household expenditure measure (HEM) for essential expenses. The proportion of households with variable-rate mortgages where baseline HEM plus-mortgage repayments is greater than income has risen from 1% to 5% since April. If rates went to 4.6% this 5% would rise to 7%, of which 30% are at risk of depleting buffers within six months (2% of all mortgages).
- Using a broader HEM (including some discretionary expenses), the proportion of mortgage holders where HEM plus mortgages is higher than income has risen from 3% to13% since April.
- Around 25% of households have less than a three-month buffer on their mortgage.
We are approaching the end of the fixed rate re-pricing peak, with two of the eight peak months left to go.
Mortgage principal plus interest payments is now reaching the threshold of percentage of disposable income that households have historically paid, when they were making voluntary payments over and above principal and interest.
This means mortgages are now starting to eat into disposable income.
Negative equity is not near to being an issue given the loan-to-value ratio distribution.
This shows that in the event of a 10% fall in house prices there would be almost no losses for the lender — even if a portion of borrowers could no longer service mortgages.
This all highlights that the economy, households and the financial system are under strain, but have so far absorbed the rise in interest rates and the headwind of tighter financial conditions.
These headwinds may begin to fade and we may see some support from higher real disposable incomes as inflation falls relative to wages.
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 a global investment management business focused on delivering superior investment returns for our clients through active management.
Opportunities emerge in China | How rates are impacting private credit | Promising mid-cap themes | Rate pause expected
Pendal equities analyst ELISE MCKAY is bullish on data centre stocks. But some are better positioned than others. Here’s why.
- Generative AI putting pressure on data centres
- Power and water major constraints on sector
- Find out about Pendal Focus Australian Share fund
“I’M very bullish on the outlook for data centres,” says Pendal Aussie equities analyst Elise McKay, who’s just returned from a US trip where she met with participants across the “DC” supply chain.
Data centres are facilities which house heavy-duty computer systems and components used to support resource-intensive applications such cloud computing, artificial intelligence training and data storage.
In Australia an example would be NEXTDC (ASX: NXT), which is held in a number of Pendal Aussie equity portfolios.
The accelerating shift to cloud computing (on-demand access to computing resources over the internet) is driving demand, along with “generative AI” applications such as ChatGPT.
But some data centre stocks are better positioned than others, cautions McKay.
She prefers established DC owners with existing capacity — due to the time it takes to acquire land, undertake construction and manage power requirement and other complexities.
“There’s strengthening demand for DCs and supply is tightening,” McKay says.
“In some major DC locations, such as Northern Virgina in the US, vacancy rates are at one per cent. In Australia it’s closer to 17 per cent.”
Demand for energy and water
Strong demand and tight supply are conditions ripe for data centre owners to outperform — though there is a potential emerging constraint.
“There is not enough power available, especially for artificial intelligence (AI) applications,” Elise says.
Data centres use huge amounts of energy, estimated to be more than one per cent of global energy markets — and power requirements will grow demand is expcted to grow iline with DC footprints.
Access to power will a significant constraint for some players, particularly as the world focuses on the energy transition.
“It means that providers of data centres with available capacity will benefit while new entrants will be constrained by access to power,” she says.
“Power constraints are very material and data centre players need to be planning five to ten years out.
“They are now looking for solutions that go behind the meter. They are thinking about self-generation – in the future can they do small scale nuclear reactors to power data centres?
“US data centre giant Equinix is powering two Dublin two facilities with gas. This is a complex issue that needs to be solved.”
Data centres also need large amounts of water. The energy used in data centres produce heat, and the servers need to be cooled.
Technology is addressing some of the water challenges in data centres.
“New cooling technologies are being deployed with limited need to retrofit. While this is slightly more expensive, I don’t expect it to change return targets.”
“Because data centres are both power and water hungry, sustainability is now an increasing focus,” Elise says.
Elise believes it will ultimately result in stronger pricing and better returns for data centres with capacity.
About Elise McKay and Pendal Australian share funds
Elise is an investment analyst and portfolio manager with Pendal’s Australian equities team. Elise previously worked as an investment analyst for US fund manager Cartica where she covered a variety of emerging market companies.
She has also worked in investment banking and corporate finance at JP Morgan and Ernst & Young.
Pendal Horizon Sustainable Australian Share Fund is a concentrated portfolio aligned with the transition to a more sustainable, future economy.
Pendal Focus Australian Share Fund is a high-conviction equity fund with a 16-year track record of strong performance in a range of market conditions. The Fund is rated at the highest level by Lonsec, Morningstar and Zenith.
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.