Unemployment may drift higher | Meet Pendal’s small caps team | Be cautious with Korean equities

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

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

DESPITE higher bond yields and a constant stream of tariff proclamations, the US and Australian equity markets have reached all-time highs.

Reporting season has started in the US, with most companies beating consensus – though both company guidance and analyst expectations had been massaged down since Liberation Day.

A 7% fall in the trade-weighted US dollar index in 2025 should help US earnings, as 28% of S&P 500 revenues are from offshore – lifting earnings-per-share (EPS) by 2-3% in aggregate.

Global equity fund manager positioning is “all in”, with cash levels sitting at a close to a record low of 3.9%, investor sentiment at five-month high and recession expectations at a five-month low.

Macro data was mostly supportive in the US, with stronger retail sales, a drop in weekly initial jobless claims, a slightly higher Consumer Price Index (CPI) – with some signs of tariff price pressures – and a flat Producer Price Index (PPI).

In Australia, we saw softer employment data and a 25bp interest rate cut is now fully priced in for the RBA’s August meeting.

It was a big week for alternative assets.

Bitcoin overtook the Hong Kong dollar to become the seventh-largest traded currency globally. The Trump administration is preparing to open the US 401k retirement market to crypto currency investments, gold and private equity. This lifted private equity firms Blackstone and Brookfield.

The S&P 500 gained 0.6% and the S&P/ASX 300 was up 2.1% for the week.

The rebound in equities since early April reflects, to some extent, a bet that President Trump won’t follow through on his tariff threats.

Paradoxically, the market’s resilience may encourage Trump to push forward (or harder) on tariffs, which could be bad news for equities in both the US and Europe.

US macro and policy

CPI

US Headline CPI rose 2.7% year-on-year (YoY) in June, up from 2.4% in May and ahead of the 2.6% consensus expectation. The Core measure rose 2.9% YoY, up from 2.8% in May, but a touch behind the 3.0% expected in consensus.

The uptick in inflation was largely driven by heavily imported goods like toys, clothes, audio equipment, shoes and sporting goods. This suggests an impact from tariffs.

There are concerns that the CPI will pick up from here, as prices have possibly been depressed by the running-down of inventories built up prior to tariffs taking effect. The weaker US dollar may also feed through to higher inflation.

On a positive note, the University of Michigan Sentiment Survey showed long term inflationary expectations fell 40bp to 3.6%.

Other data

• The PPI for final demand was unchanged in June. Prices for final demand goods advanced 0.3%, and the index for final demand services decreased 0.1%.
• Retail sales rose more than expected in June (up 0.6% versus 0.1% consensus), buoyed by strong demand for cars and clothing as tariffs begin to take hold. Though, it should be noted that this follows two consecutive months of spending declines – a 0.1% pullback in April and a 0.9% slowdown in May.
• Initial weekly unemployment claims were down 7,000 last week to 221,000 – their lowest reading since the end of March. Year on year claims were down 7.9%, however, continuing claims rose by 4.8%.

Housing data – softness reflects a global trend

New housing starts are running at 1.32 million in June, with home builders cutting prices at the highest rate in three years.

Builder confidence in the market for single-family homes continues to bounce along the bottom at 33 on the National Association of Home Builders (NAHB)/Wells Fargo Housing market index, which has been in negative territory for fifteen straight months.

Housing units under construction were down another 6,000 to 1.361 million annualised – this is the lowest level in four years and down 20.6% from their peak.

First home buyers now account for 25% of purchases, down from 50% in 2010. This slows the down the chain of activity associated with people “trading up” properties. High house prices and mortgage rates (currently 6.75%) are the main impediment.

We also note that student loan repayments resume from May 2025. Roughly 45 million Americans have student loans, with an average balance of US$41,600. Repayments can impact spending in other areas.

Interest rates

Better-than-expected macro data and resilient GDP growth means the market is pricing no chance of rate cut when the FOMC meet on 29 July.

The next fully priced cut has been pushed out to October, with less than 50bps of cuts priced in for the remainder of 2025.

The market is also mindful of the Fed wanting to see how tariffs and a weaker US dollar feed into inflation.

However, last week, sitting Fed Governor Christopher Waller gave a speech entitled “The Case for Cutting Now”. Like Trump, Waller argues that we should be cutting rates now as tariffs only cause temporary inflation, growth is soft relative to long run potential, and labour market risks are rising.

The Trump Administration’s desire to see lower rates stems in part from the need to refinance the roughly $9.2 trillion of US government debt expected to mature in 2025 at the lowest rates they can. That’s about 25% of the total $36.2 trillion federal debt outstanding.

About $6.5 trillion matured in the first half of the year, and an additional $2.7 trillion is scheduled to mature in the second half. Looking ahead to 2026, another $7.6 trillion is set to mature.

Tariff update

President Trump said he reached a deal with Indonesia that will see goods from the latter face a 19% tariff, while US exports will not be taxed.

Nvidia received assurances that the US government would allow it to export some chips to China, a move that could generate billions of dollars in revenue. This was seen as a necessity for a China/US tariff deal.

Treasury Secretary Scott Bessent said talks between the US and China are in a “very good place” ahead of an expected meeting in coming weeks. He suggested the deadline for a US-China tariff truce is flexible, telling market participants not to worry about 12 August.

Alcoa, the largest US aluminium producer, said tariffs on imports from Canada cost it US$115 million in the second quarter. The company redirected Canadian-produced aluminium to customers outside the US to mitigate additional tariff costs.

Australia macro and policy

A softer employment print dominated last week. June saw 2k jobs growth, versus 20k expected, lifting the unemployment rate by 20bp to 4.3% YoY – a three-and-a-half-year high.  

Employment growth has slowed to 1.3% in six-month annualised terms, down from growth of 2.8% in 2024. 

Hours worked declined by 0.9% and youth unemployment was up 90bp to 10.4%.

This saw expectations of an August interest rate cut shift from 90% to 100%.

The ANZ-Roy Morgan Weekly Consumer Confidence Index has languished below the neutral 100 mark for more than three years, the longest and deepest stretch this century. It last reached positive territory in March 2022, just before the Albanese government was elected.

China macro and policy

China’s GDP growth came in at 5.2% in 2Q25, slowing from 5.4% in 1Q25. However, nominal GDP – which accounts for price changes – grew only 3.9%, which is the lowest rate (outside the pandemic) since the quarterly data began in 1993.

The GDP deflator, a measure of economy-wide prices, extended the longest streak of declines on record.

The problems in China are overcapacity and a weak consumer as real estate continues to implode.

Property prices are in freefall and private surveys are much worse.

China home prices fell at the fastest pace in eight months in June, with prices for new homes down 0.27% and secondary down 0.61%, which was reflected in profit warnings from property developers China Vanke and Poly Global. Vanke is seeking to extend its bank loans by as much as ten years.

Chinese steel production in Q2 2025 is likely to hit the lowest level since 2018. But despite the dramatic drop in production, iron ore imports have remained extremely strong, surging above the five-year average.

China Mineral Resources are using prices below US$100/tonne to build a vast official iron ore stockpile – in line with the same policy for nickel, lithium, cobalt and copper.

Japan macro and policy

Japanese 10-year government bond (JGB) yields finished the week at 1.59% – the highest level since 2008 – with concerns about fiscal spending ahead of an upper house election as Japanese parties discuss consumption tax cuts given real wages have fallen 2.9% year-on-year. 

Yields on the 30-year JGB also rose to a record high of 3.21%, while Japan’s 20-year government bond yields spiked to their highest level since 1999.

Rising bond yields in Japan, the US, Germany and France reflect the uncomfortable truth that no politician wants to cut spending or raise taxes – and bond markets are getting nervous.

Markets

US reporting season has started, with most companies beating consensus.

However, both company guidance and analyst expectations had been massaged down since Liberation Day.

Banks and brokers always kick off each earnings season and we had strong results from Goldmans and Morgan Stanley, helped by higher trading/advisory fees driven by tariff-related volatility.

Netflix 2Q25 EPS and revenue and FY25 outlook were higher than expectations, driven by solid advertising, membership growth, and pricing benefiting from a lower US dollar given more than 50% of its revenue coming from overseas.

In terms of positioning and risk appetite, the latest Bank of America Fund Manager Survey reveals investor sentiment is the most bullish since February 2025, risk appetite has risen, and cash levels are low.

The markets are feeling a little extended, but “all-time highs” are quite bullish, so we could very well see rotation rather than retreat.

Australian equities got a lift from a softer employment print raising expectations of rate cuts.

We saw continued rotation into Tech (+5.4%), Health Care (+4.7%) and AREITs (+2.7%) at the expense of Resources (+1.8%).

In the banking sector, the RBA released a consultation paper and draft standard on removing card surcharges for consumers and limiting interchange fees paid by businesses.

The latter will impact the banks, with the RBA estimating an $880m reduction in interchange fees across the system. If 75% of this impact is felt by the major banks, it would reduce earnings by 1-2%. However, banks will likely respond by increasing card fees and/or reducing card reward programs.

 

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June’s unemployment rise should all but seal a June rate cut. Only a massive quarterly inflation surprise at the end of July would stop it, writes Pendal’s head of government bonds TIM HEXT

• Unemployment may drift higher
• But no suggestion of a sharp or rapid rise
• Find out about Pendal Government Bond Fund
• Browse all Pendal’s fixed-income funds

THE unemployment rate jumped to 4.3 % for June – the highest rate since late 2021.

Job growth was a very tepid 2000. Hours worked fell by 0.9%.

In trend terms – which we prefer over the more volatile, seasonally adjusted data – job growth was 22,800 while unemployment rose from 4.1% to 4.2%.

Unemployment, June 2025 (seasonally adjusted vs trend):

Source: Australian Bureau of Statistics

June was a relatively clean month – no elections or weather events – and the Bureau of Statistics offered no one-off excuses for the poor outcome.

The Reserve Bank expected unemployment to end 2025 at 4.3%, having revised it up from 4.2% in May.

Interestingly their forecast at the start of the year was 4.5%,  but they lost patience as results earlier in the year were strong.

Noise or new trend?

The obvious question is whether this is just noise or the start of a new, upwards trend.

Every month one eighth of the survey is rotated as respondents are surveyed over eight months – so there is some impact or noise to consider.

However, as students of statistics will know, since each sample size is 3000 households (24,000 in the survey), the impact should be small.

We won’t get a breakdown by profession until the quarterly numbers, but rapid growth in non-market jobs (mainly education and healthcare) has masked softer market job growth for some time.

There are signs this non-market job growth may be slowing, so unemployment may drift a bit higher into the end of year.

However, forward indicators such as job vacancies and employment indicators in NAB’s monthly business survey, do not suggest a sharp or rapid rise.

August rate cut looks likely

The Reserve Bank next meets on Tuesday, August 12.

Today’s data should all but seal a rate cut – only a massive quarterly inflation surprise at the end of July would stop it.

The Q2 wage data and the next Labour force survey do not come out till after the meeting.

The market has two-and-a-half cuts by year end and a terminal cash rate just above 3%.

We still think bonds are range-bound by this data.

Together with bonds sitting at the cheaper end of the range, we have added some duration to our portfolios. 

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

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

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

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

Find out more about Pendal’s fixed interest strategies here

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About Pendal

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

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

Contact a Pendal key account manager

In this video, Australian equities portfolio manager BRENTON SAUNDERS explains the strategic role of ASX mid-cap stocks in a diversified portfolio

An excerpt from Brenton’s interview

ASX-listed mid caps represent the “ideal sweet spot” of the market, offering compelling opportunities for investors seeking growth, income and diversification in their portfolios.

That’s according to Brenton Saunders, portfolio manager of Pendal Midcap Fund, who explains the opportunity set in the video above.

The ASX mid-cap universe — which Pendal defines as companies ranked 51st to 150th by market capitalisation — is rich with innovation and diversity. It includes high-growth names in fintech, healthcare and technology, as well as early-stage resource companies ramping up production.

“Most of the best growth stocks sit in the mid-cap universe,” argues Brenton.

These often founder-led opportunities are not only a more evenly weighted representation of the economy, but can also be the subject of corporate activity, making it an exciting part of the Australian market.

“These companies augment growth and capital appreciation at a reasonable level of yield,” Brenton says. “In aggregate, they tend to outperform large caps while offering more stability than small caps.”

However, performance is often tied to domestic economic conditions — which means it’s critical to invest with an experienced team with the resources to carry out deep macro-economic insight.

“Most mid-caps have high domestic exposure, so understanding the shape and health of the Australian economy is key,” says Brenton.

Pendal Midcap Fund is well placed to benefit from the scale, infrastructure and experience of Pendal’s Australian equities team, which is one of the biggest and best-resourced in the country.

“We have deep sector coverage and high continuity, which can translate into better research, stronger conviction and more robust portfolios,” Brenton says. “That allows us to find and cover opportunities in different parts of the economy at different times of the economic cycle.”

Supported by a disciplined, research-driven process, the fund offers a powerful tool for enhancing exposure to an exciting part of the market.

Watch the video above to hear more from Brenton and Pendal’s mid-cap strategy.

About Pendal

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

Pendal’s Australian equities team is one of the most experienced and well-resourced equities teams in Australia. 

Contact a Pendal key account manager

Find out more about Pendal’s Australian equities capabilities

Regnan Credit Impact Trust (APIR: PDL5969AU)

(the “Fund”)

The following information contains an important update to the exclusionary screens disclosed in the Product Disclosure Statement and Additional Information to the Product Disclosure Statement for the Regnan Credit Impact Trust dated 11 January 2023 (together, “the PDS”) and should be read in conjunction with the PDS.

The changes to the Fund’s exclusionary screens are outlined below. In our view, these changes ensure that the Fund remains true to label and more closely aligned with investor expectations in relation to responsible investment funds.

1. Broader screening for fossil fuels

The Fund will limit its exposure to issuers directly involved in the exploration, extraction or refinement of fossil fuels (specifically coal, oil and gas).

2. Broader screening definition for controversial weapons

The screening definition for controversial weapons will broaden to also include white phosphorus weapons. As a result, the Fund will not invest in issuers directly involved in the manufacture of white phosphorus weapons.

3. Additional screen for controversial weapons

The Fund will apply an additional exclusionary screen for controversial weapons as follows:

The Fund will not invest in issuers directly involved in the supply of goods or services specifically related to controversial weapons.

4. Removal of current screen for issuers that directly mine uranium for the purposes of weapons manufacturing

The current screen for issuers directly involved in the direct mining of uranium for the purposes of weapons manufacturing will be removed.

Issuers supplying uranium for the purposes of weapons manufacturing will be captured under the new screen for controversial weapons relating to the supply of goods or services specifically related to controversial weapons. 

5. Stricter gross revenue thresholds

The Fund will not invest in issuers directly involved in any of the following activities, where such activities account for 5% or more of an issuer’s gross revenue:

• Alcohol
• Gaming facilities
• Non-controversial weapons or armamentsPornography
• Fossil Fuels.

Exclusionary Screens

Effective 15 July 2025, the disclosure relating to the Fund’s exclusionary screens set out in section 5. How we invest your money of the Fund’s Product Disclosure Statement is replaced with the following:

The Fund will not invest in issuers directly involved in any of the following activities:

• tobacco production (including e-cigarettes and inhalers); or

• controversial weapons manufacture (including cluster munitions, landmines, biological or chemical weapons, nuclear weapons, depleted uranium weapons,  blinding laser weapons, incendiary weapons, non-detectable fragments and white phosphorus weapons); or

• supply of good or services specifically related to controversial weapons.

The Fund will also not invest in issuers directly involved in any of the following activities, where such activities account for 5% or more of an issuer’s gross revenue:

• the production of alcoholic beverages; or

• manufacture or provision of gaming facilities; or

• manufacture of non-controversial weapons or armaments; or

• manufacture or distribution of pornography; or

• exploration, extraction or refinement of fossil fuels (specifically coal, oil and gas).

Effective 15 July 2025, the disclosure relating to the Fund’s exclusionary screens under the heading ‘Ethical considerations’ in section 3. Labour, environmental, social and ethical considerations of the Fund’s Additional Information to the Product Disclosure Statement is replaced with the following:

The Fund will not invest in issuers directly involved in any of the following activities:

• tobacco production (including e-cigarettes and inhalers); or

• controversial weapons manufacture (including cluster munitions, landmines, biological or chemical weapons, nuclear weapons, depleted uranium weapons, blinding laser weapons, incendiary weapons, non-detectable fragments and white phosphorus weapons); or

• supply of good or services specifically related to controversial weapons.

The Fund will also not invest in issuers directly involved in any of the following activities, where such activities account for 5% or more of an issuer’s gross revenue:

• the production of alcoholic beverages; or

• manufacture or provision of gaming facilities; or

• manufacture of non-controversial weapons or armaments; or

• manufacture or distribution of pornography; or

• exploration, extraction or refinement of fossil fuels (specifically coal, oil and gas).

Here are the main factors driving the ASX this week, according to Pendal portfolio manager PETE DAVIDSON. Reported by head investment specialist Chris Adams

• Find out about Pendal Focus Australian Share fund

GLOBAL equity markets are climbing the wall of worry, with most indices now 25% above their post-Liberation Day lows and close to all-time highs.

This suggests investors are backing a Goldilocks version of the US economy with not too much inflation from tariffs (as exporters “pay to play” by absorbing tariffs through lower production margins) and just enough spending growth from consumers to keep growth intact.

The US technology sector has reached record highs, fuelled by optimism that strong earnings will persist following the passage of Trump’s One Big Beautiful Bill Act (OBBBA) on 4 July, which includes tax cut extensions for individuals and new permanent capital expenditure deductions for companies.

NVIDIA’s market capitalisation reached a historic US$4 trillion last week, equivalent to 2.3x the total value of the ASX200 and approximately 30 times the size of Commonwealth Bank (CBA).

Additionally, NVIDIA is reportedly planning to launch a new AI chip specifically designed for the Chinese market in September.

Last week’s key headlines included US copper tariffs, a US Department of Defence rare earth offtake agreement and, domestically, an unexpected pause in rate cuts by the RBA.

On tariffs, the Trump administration noted a pending letter to the European Union – delivered over the weekend and imposing 30% tariffs on both it and Mexico – alongside threats of a 35% tariff on Canada and plans for a blanket 15% or 20% tariffs on most other trading partners.

The market was largely inured to these developments last week, perhaps seeing them as a negotiating tactic and preferring to wait for final resolution.

The S&P/ASX 300 fell 0.3% last week. Resources (+0.5%) fared better on a firmer iron ore price – underpinned again by tariff news with the US threat to hit major iron ore producer Brazil with a 50% tariff.

The S&P 500 was also off 0.3% and is +7.2% for the year.

There has been a change in leadership so far in 2025 with European (Euro STOXX 50 +12.8%) and UK (FTSE 100 +11.8%) markets performing well on expectations of far greater fiscal stimulus and a reindustrialisation of Europe. German defence names have been particularly strong.

At the margin these markets are also benefitting from a shift away from dollar assets, with the US Dollar trade-weighted index (DXY) down 10% for the year.

Indian and Chinese equities are also lagging.

US treasuries were relatively quiet, with 10-year bond yields edging up 7bps and remaining contained at the long end.

Commodities were generally stronger, led by copper which jumped 9% after the announcement it will face a 50% US tariff – the same rate as steel and aluminium.

The US uses about 6% of global copper and is expecting a surge in demand, mostly in tech and data centres applications. The Trump administration wants to secure its sovereign supply and bring smelting and refining back onshore.

Copper is now up just under 40% for the year. Lithium remains soft, down 18.5% for the year, in part reflecting reduced EV subsidies in many countries.

US macro and policy

It was a slow news week for macro data in the US.

The June FOMC minutes showed most members are waiting for more clarity on the effects of tariffs before altering rates.

A July rate cut is unlikely, but weaker labour data could prompt action in September.

The committee expects possible 25bp cuts in September, October, and December, though opinions remain divided.

The NFIB Small Business Optimism index inched down to 98.6 in June from 98.8 in June. This is better than this year’s lacklustre average of 93.0, though still far from its peak at 105.1 post Trump’s election, before tariffs dampened the mood.

While business owners’ optimism bounces around, hard data like hiring and investment plans remain soft. With fewer respondents than usual even bothering to answer the survey, things might be rougher than they appear.

Mortgage Applications leapt by 9.4% in the week ending 4 July to reach their highest level since February 2023.

The gradual decline in the 30-year average conventional mortgage rate to 6.77%, from 6.93% four weeks ago, is likely to have helped to bolster demand.

Some consumer surveys, however, also point to a pick-up in optimism and improved perceptions of job security over the last couple months.

The further decline in Initial Jobless Claims (to 227K last week, from 232K the week before) was largely driven by states with relatively large auto sectors where figures can be noisy due to annual summer shutdowns.

Meanwhile, continuing claims increased to 1,965K in the week ending 28 June, continuing to suggest a future rebound in the unemployment rate, which fell from 4.2% in May to 4.1% in June.

There were several developments on the tariff front, with the Trump Administration announcing:

• A 50% tariff on copper, in line with aluminium and steel.
• A 35% tariff on Canadian imports starting next month
• A 50% tariff against Brazil – which is a major supplier of beef, coffee and orange juice to the US. As a major supplier of iron ore, a large tariff is potentially positive for Australia.
• Intended tariffs of 15% or 20% on most other trade partners.
• A 200% tariff on pharmaceuticals is being considered – but the US will give companies extended time to build the manufacturing facilities in the US before applying tariffs if they don’t. Like copper, the aim is to bring manufacturing back to the US.

Tariff revenues have quickly risen from the range of US$6-8bn per month, to over $20bn in May.

A projected US$30 bn per month would equate to US$360bn per annum – the problem is that the US Budget Deficit is US$1800bn and is increasing, thanks to the Trump OBBA, which is projected to add US$240 bn in deficits per annum for next decade.

China macro and policy

Beijing has announced further population growth stimulus measures – with cash payments for children born after January 2025.

There was also further rhetoric related to recent comments around the need to remove excess capacity in core industries – such as steel. The risk here for Australia is that reduced steel capacity results in lower demand and pricing for iron ore, despite higher steel margins.

There was also some social media speculation that the leadership will be holding a meeting to help revive the property sector.

Australia macro and policy

The RBA surprised the market with its decision to leave the cash rate unchanged at 3.85% against expectations of a 25 bp cut.

The decision to pause the easing cycle was “about timing rather than direction” with the RBA just “looking for further confirmation we are on the forecast path”.

Governor Bullock reasoned a “cautious approach” was warranted, because year-over-year growth in the quarterly trimmed mean inflation had only just returned to the 2-3% target band (2.9%yoy), labour conditions were tight with negligible productivity growth, and because global uncertainty remains elevated.

The high number of dissents – the vote passed 6-3 in favour – also caught attention, highlighting clear debate over the appropriate policy stance.

Multiple economists previously calling for a July rate cut pushed back those expectations, but retained terminal rate forecasts of 3.10%, implying three more 25 bp cuts. Bond yields shifted ~14 bp higher across the curve.

Australian equities

July has seen a continued rotation from growth into resources/cyclicals, despite a slight bounce in US bond yields and further tariff agitation from Trump.

Stocks like James Hardie (JHX), BlueScope Steel (BSL) and Sims (SGM) have all benefitted from sector rotation, as have some of the weaker stocks in FY25 such as Amcor (AMC), Orora (ORA) and Light & Wonder (LNW).

The re-rate looks to be outpacing fundamentals in some instances – for example, BSL’s North American steel spreads have stabilised and there is an emerging risk around cost inflation and increased discounts.

Since the RBA surprise “hold” decision, the ASX 200 is flat, while the AUD/USD cross is +0.3% and Australian Government 10-year yields are +10bps.

Banks notably outperformed after the decision while, interest sensitive and defensive sectors have been weaker.

AREIT update

The AREIT sector returned 12.9% in FY25, against 13.8% for the S&P/ASX 300.

Performance was led by Charter Hall Group (CHC, +76.6%), driven by lower bond rates and signs that commercial real estate values have bottomed and, as a result, we have seen a pickup in fund flows and transaction activity.

Goodman Group (GMG, -0.6%) was a drag on the sector, unwinding previous outperformance with the market concerned about the capital required to build its data centres.

We expect stronger EPS growth for the sector, particularly from the retail REITs, affordable housing and fund managers.

We see a stronger-for-longer cycle for quality asset owners, as rising demand (helped by population growth) is met with limited supply – with higher construction costs meaning a majority of proposed developments are uneconomic.

Residential apartments, like many other forms of commercial real estate, are trading below replacement costs.

The sector has a twelve-month-forward dividend yield of 3.4% (5.5% excluding GMG), a price/earnings of 19x (14.7x excluding GMG) and three-year EPS growth rates of 5-6% or more, which is a historical high (4.2% excluding GMG).

Meanwhile we are seeing signs of equity managers buying AREIT cover and reducing active underweights.

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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. 

Find out more about Pendal Focus Australian Share Fund  

Contact a Pendal key account manager

In this video, ELISE McKAY explains the Pendal process for identifying income, growth and diversification opportunities in Australian shares

An excerpt from this interview

AUSTRALIAN equities have the potential to offer investors a compelling trio of benefits, argues analyst and portfolio manager Elise McKay.

In this video, Elise explains how the Pendal investment process helps her team identify and take advantage of opportunities in Australian shares.  

“Firstly you get income, secondly you get growth, and then thirdly you get the diversification benefit,” she says.

High dividend pay-out ratios and a strong franking credits regime make Australian stocks attractive for income-seeking investors, she says. 

On the growth front, Australia has been a fertile ground for scalable business models.

“If you can succeed and grow from nothing in Australia, you’re really well placed to scale that model offshore,” she says, noting examples such as CSL, Xero and Wisetech, which are held in various Pendal portfolios.

Diversification is another key advantage. Unlike tech-heavy US markets, Australia’s ASX is weighted towards financials, resources and healthcare companies which can offer additional sector and geographical balance — particularly for businesses with exposure to Asia.

Pendal clients benefit from the experience and tenure of the Australian equities team, which is one of the biggest and best-resourced in the country.

Pendal thrives on respectful debate and diverse perspectives, where “everyone feels free to challenge each other, which translates to better outcomes,” Elise says. 

“We’re core managers, so style consistency is critical. We actively monitor performance and risk to avoid surprises.”

Elise manages Pendal Horizon Sustainable Australian Share Fund, which aims to align performance with purpose by supporting companies driving the transition to a more sustainable future.

“We exclude harmful sectors, we support sustainable practices, and we engage with companies to improve,” she says. “It’s about de-risking and building better businesses.”

Watch the video above to learn more about Elise and Pendal’s Australian equities strategies.

About Pendal

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

Pendal’s Australian equities team is one of the most experienced and well-resourced equities teams in Australia. 

Contact a Pendal key account manager

Find out more about Pendal’s Australian equities capabilities

In this video, explore the opportunity set in Australian equities through the eyes of one of the country’s biggest and best-resourced equities teams

An excerpt from the team’s interview

AT the heart of investing in Australian equities is a belief in Australia itself.

In this video, hear more about the opportunity set in Australia through the eyes of the Pendal Australian equities team – one of the biggest and best-resourced teams in the country.

According to Crispin Murray, head of equities at Pendal, Australia is not only one of the fastest-growing economies in the developed world – it’s also home to strong institutions, well-run companies and a government with a strong balance sheet.

“Put all that together and you have a market full of opportunities and the potential for strong returns,” Crispin says. “That means it’s a really good part of any diversified portfolio.”

Investing in the Australian market can offer a trifecta of benefits, adds analyst and portfolio manager Elise McKay.

“In Australia, you get income, growth, and diversification,” she explains. “Plus, we have some world-class growth companies – if you can succeed in Australia, you’re well-placed to scale globally.”

However, staying abreast of the opportunity set, navigating market cycles and selecting the best stock ideas calls for the knowledge, skills and research power of a well-resourced team.

Pendal’s 19-strong equities team hail from all walks of life – supporting a diversity of thought that underscores their understanding of industry, sector and business performance through various market cycles. 

“We have one of the biggest active Australian equities teams in the market, and we do that very consciously,” explains portfolio manager Brenton Saunders. “We want to understand all the opportunities and have very dedicated coverage across each sector of the market.”

By “acting like business owners”, the team can also harness their knowledge of business fundamentals to get the inside track on the challenges companies face in each environment and the solutions they can offer shareholders.

“We task ourselves with making money in any and every environment,” says co-portfolio manager Lewis Edgley. “The way we do that is having a very good fundamental understanding of the businesses that we’re investing in. And when we get that right, we can identify mispriced opportunities and exploit them.”

Get to know our portfolio managers better in these individual profile videos:

Crispin Murray, head of equities
Elise McKay, analyst and portfolio manager
Brenton Saunders, portfolio manager
Lewis Edgley and Patrick Teodorowski, co-portfolio managers

About Pendal

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

Pendal’s Australian equities team is one of the most experienced and well-resourced equities teams in Australia. 

Contact a Pendal key account manager

Find out more about Pendal’s Australian equities capabilities

In this video, our head of equities CRISPIN MURRAY explains Pendal’s advantages in finding opportunities and managing risks in Australian equities

An excerpt from Crispin’s interview

INVESTING in Australian shares is more than a financial decision.

According to Crispin Murray, it’s also a vote of confidence in the country’s economic resilience and institutional strength.

In this video, hear from Pendal’s head of equity strategies about the opportunity set in Australia and why he believes Australian equities deserve a place in your diversified portfolio.

“Investing in Australian equities is really a view on Australia as a country,” he says. “We’re one of the fastest-growing economies in the developed world, with well-run companies and a government that has a good balance sheet.”

This optimism is backed by the depth of experience within Pendal’s Australian equities team.

With 19 members averaging 20 years in financial markets — with 15 of those years at Pendal — the team brings a wealth of insight and historical perspective.

“If you’ve lived through COVID, the financial crisis, and the crises of the 90s, you understand how markets operate and when to step in or step back,” Crispin continues. “You can take a really long-term view and generate returns for your investors.”

At the core of Pendal’s approach, however, are three guiding principles: open-mindedness, critical dialogue, and awareness of bias.

“You need to be prepared to change your investment view,” Crispin notes, emphasising the importance of dynamic thinking and robust critical dialogue.

The Pendal Focus Australian Share Fund exemplifies this philosophy.

An actively managed portfolio of up to 30 stocks, the fund blends large and small caps, growth and value, to deliver consistent performance.

“You’re not relying on the cycle or market themes — just finding really good companies that aim to outperform.”

Tune into Crispin’s interview above to hear more about why, with a 20-year track record of disciplined investing and strong returns, Pendal offers a compelling case for inclusion in any diversified portfolio.

Get to know our portfolio managers better in these individual profile videos:

About Pendal

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

Pendal’s Australian equities team is one of the most experienced and well-resourced equities teams in Australia. 

Contact a Pendal key account manager

Find out more about Pendal’s Australian equities capabilities

In this video, our experienced ASX smaller companies team explain how they find mispriced opportunities

An excerpt from the team’s interview

BEYOND the familiar territory of the ASX 100 lies a universe of opportunity in smaller companies.

In this video, Pendal Smaller Companies Fund co-portfolio managers Lewis Edgley and Patrick Teodorowski explore how investors can benefit from the breadth and diversity of Australia’s small-cap market.

For investors seeking more than just the familiar names on the ASX 100, Lewis believes small caps offer a world of untapped potential.

“When we look at the ASX 100, it’s very dominated by financials and resources,” he explains. “Whereas the Small Ordinaries Index really is a very broad and diverse set of investment opportunities.”

This diversity is key — according to Lewis, there are “literally hundreds, if not thousands, of companies that we can look at”.

“Our job is to search through them and find where mispriced opportunities exist,” he says. “At different points in the economic cycle, different sectors will be doing better and doing worse. That gives us opportunities to find money-making opportunities regardless of what the economy is doing.”

According to Patrick, small caps can also offer a broad set of industry exposures that investors might not get from large-cap Australian companies.

“We invest in companies that have very long runways for growth,” he adds. “You can also invest in businesses before they can become household names and enter into the major indices.”

With central banks beginning to cut rates globally, Lewis sees a turning point for ASX-listed small caps.

“We think there’s a scenario over the next 12 months where the handbrake comes off. As a category, things get a little easier,” he explains.

Ultimately, the team’s edge lies in its relentless research — drawing from the resources of a 19-strong Australian equities team.

“We are bottom-up stock pickers,” says Lewis. “In small caps, our team has decades of experience. We’re always looking for that information edge and when we find it, we’re willing to exploit it.”

About Pendal

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

Pendal’s Australian equities team is one of the most experienced and well-resourced equities teams in Australia. 

Contact a Pendal key account manager

Find out more about Pendal’s Australian equities capabilities