Three things to watch when re-entering markets | Why bonds look promising for Q2 next year | How China has ‘completely changed’ for investors
Here are the main factors driving the ASX this week according to portfolio manager OLIVER RENTON. Reported by portfolio specialist Chris Adams
MARKET sentiment continued to pick up last week despite a big sell-off in US mega-cap tech names last week.
About 71% of S&P companies have beaten EPS estimates in US Q3 earnings season and 63% have beaten on sales.
S&P 500 earnings have beaten expectations by 5.8% in aggregate so far — slightly ahead of the historical average of about 5%. Though FY23 earnings estimates have been revised lower in recent weeks.
The S&P 500 gained 4% last week and the S&P/ASX 300 lifted 1.7%, capping a strong month of gains.
The S&P 500 returned 8.9% for the month (with a day to go), and the S&P/ASX 300 was ahead 4.8%. That leaves the US index down 17.1% for 2022 to date and the S&P/ASX 300 off 5.7%.
US GDP rose 2.6% (annualised). The core Personal Consumption Expenditure price index — a key measure of underlying US inflation, excluding food and energy — held firm at 0.5% month-on-month. But the data showed reduced breadth.
The market is pricing in a 75bp hike in the Fed Funds rate later this week.
China
Equity risk premiums for offshore-listed Chinese equities rose following President Xi Jinping’s consolidation of power at the National Party Congress last week.
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Crispin Murray’s Pendal Focus Australian Share Fund
Hopes that the meeting might signal an inflection in policies such as Covid-zero appear to have been dashed.
Entrenched support for Xi may signal further development of the current policy direction.
This suggests no near-term policy relief for property markets. Growth stimulus may be used more sparingly and surgically going forward.
Geopolitical risk has also increased. As a result, the market-implied equity risk premium for Chinese equities is at levels not seen since 2008, according to research firm CLSA.
Cyber security
Cyber security is in focus after news that Medibank Private’s (ASX: MPL) data breach was more serious than first thought — following the Optus breach several weeks ago — and coupled with news that Australian Clinical Labs (ASX: ACL) had also suffered an attack.
MPL experienced a sharp decline in share price, which seems driven more about the risk of customer losses than the cost of addressing the breach. Whether this eventuates remains to be seen.
Historical analysis by Sustainalytics suggests companies that experience data breaches typically see most of the stock downside in the first couple of weeks after an announcement. Most of the impact is recovered within three months on average.
Federal Budget
The Budget did not contain much of relevance to markets.
But the focus on energy pricing and policy was important. The Budget highlighted the potential impact of high electricity prices on cost-of-living pressures — and by implication, inflation.
There was little detail on how it may be addressed, but the risk of intervention is material.
The future of more than a dozen carbon capture and storage projects is also up in the air after the government cut $250 million in funding in this area.
Europe
The energy situation in Europe is better than many fared, with storage near full and a mild start to the winter. Natural gas futures have plummeted in response.
The situation could change. But it implies some of the steam may come out of coal and LNG prices.
This in turn is beneficial for inflation, bond yields and potentially equities.
Markets
There’s been an interesting divergence in US quarterly earning season.
Some $250 billion in market cap disappeared after softer results from Microsoft, Alphabet, Meta and Amazon. Meta was down 24% last week.
But Visa and Mastercard noted no discernible impact on spending patterns. Traditional industrials such as Caterpillar, McDonalds and General Motors all delivered strong results.
There was a big move in bond yields last week as US 10-year Treasury yields fell 20bps to 4.02%. The Australian equivalent fell 46bps to 3.74%.
The market’s best performers were generally driven by macro considerations. Gold miners such as Evolution (EVN, +15.5%) and Northern Star (NST, +12.2%) did best.
Asset-based bond-sensitives such as REITs and infrastructure did well as bond yields came off.
Miners were generally weaker, which may be in reaction to the outcome from China’s National Party Congress.
About Crispin Murray and Pendal Focus Australian Share Fund
Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and leads one of the largest equities teams in Australia. Crispin’s Pendal Focus Australian Share Fund has beaten the benchmark in 12 years of its 16-year history (after fees), across a range of market conditions.
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
Find out more about Pendal Focus Australian Share Fund here.
Contact a Pendal key account manager here.
Drawing on more than 25 years of experience investing in top-performing Australian companies and a background in accounting, Jim manages our Long/Short Fund and co-manages our Imputation Fund. He is a Chartered Accountant with membership of the Australian Institute of Chartered Accountants.
Pendal Focus Australian Share Fund is managed by Crispin Murray. The fund has beaten its benchmark in 14 years of its 18-year history (after fees), across a range of market conditions. Find out more about Pendal Focus Australian Share Fund here.
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
Budget, inflation and rates outlook | Xi and the ASX | How to avoid greenwashers | Indonesia looks promising | Euro outlook
Here are the main factors driving the ASX this week according to portfolio manager Brenton Saunders. Reported by portfolio specialist Chris Adams
EQUITY market remain volatile and driven by macro factors.
Last week we saw a +4.8% rebound in the S&P 500 and +5.2% in the NASDAQ. The S&P/ASX 300 fell 1.2%, but may catch up this week after strong moves in the US on Friday.
Markets remain intent on buying any suggestion that the rate of rate increases will slow, despite limited evidence.
Nevertheless, comments from Minneapolis fed president Neel Kashkari were taken as dovish. The UK’s U-turn on economic policy and intervention to support the Japanese yen also helped buoy sentiment.
Global equity market strength came despite bond yields and the US dollar moving higher.
Major support levels in the S&P 500 continue to hold. Along with heavily bearish market positioning this may provide a base for further short-term recovery in equities.
US economic and policy
US building permits came in at 1.4% higher month-on-month, versus consensus expectations of -0.8%. But overall trends in the housing market remain weak, with mortgage rates topping 7%.
Kashkari – a voting member of the Federal Open Market Committee which determines the direction of US monetary policy – highlighted signs of a slowing global economy and a possible peaking in headline inflation.
But he also noted there was no evidence that core and services inflation had peaked. This is as dovish a statement as the Fed dares venture at this point. The inflation landscape (as revealed in Evercore surveys) remains confusing.
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Crispin Murray’s Pendal Focus Australian Share Fund
Sectoral surveys of rents, wage expectations, freight, retail pricing power and commodities suggest inflation may be rolling over.
But this is not reflected in core inflation, which remains supported by tight labour markets.
Bank deposits continue to decline as consumers dip into savings to underpin spending and pay mortgages.
Business health is declining, but still strong, according to company surveys. Although demand remains stubbornly strong, company CFOs expectations around labour costs are declining.
China economics and policy
Confirmation of Xi Jinping’s third term as China’s leader was not surprising, but the degree of his apparent control is greater than most expected.
The new standing committee of the Communist party’s politburo – the key decision-making body – will be only seven members, all of whom are seen as Xi loyalists. There was some hope of broader factional representation.
Most commentators suggest this is a worst-case outcome in terms of concentration of power. It’s likely to embolden Xi to continue pursuing his regional and global geopolitical ambitions.
A change to the constitution officially ruled out Taiwanese independence.
Details of a five-year plan will be forthcoming. But it appears the main aim will be to replace the “successfully achieved” Moderately Prosperous Society with a Modern Socialist Society.
This is seen as part of China’s ambitions as a technology powerhouse and ability to project power and influence.
This may suggest the economy remains on a relatively austere pathway by historical standards. Stimulus could be used in a more surgical manner to achieve economic goals where needed.
The potential outcome is the property market remains muted. This is a headwind to economic growth and demand for steel-making materials beyond the short-term.
UK economic and policy
Political turmoil continued in the UK as Prime Minister Liz Truss resigned. Chancellor Jeremy Hunt reversed course on the Truss government’s policy of unfunded tax cuts, which helped stabilise the UK bond market and the pound sterling.
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Pendal Midcap Fund
The Bank of England retains a hawkish mindset given high inflation, despite intervening in the bond market to help liquidity for UK pension funds. The latter issue continues to lurk.
Australia economic and policy
The monthly unemployment and participation rates remained essentially unchanged at 3.5% and 66.6% respectively. This week’s CPI data will help inform the size of the RBA’s next hike.
The implied peak rate for Australia is now back to 4.3%, having fallen to 3.2% in early October on the RBA’s surprise 50bp hike.
US Q3 earnings
About 20% of the S&P 500 market cap reported last week. Earnings have largely been in line with expectation, though EPS beats are running at 39% versus a 48% historical average.
Some weakness in consumer appliances and in companies with European exposure is evident. This suggests a downturn may be on the way.
Netflix bucked the trend with better-than-forecast new subscription growth.
Another 46% of the market will report this week.
Markets
European and North American gas prices continued to decline given a mild start to the winter and high levels of storage.
The market remains watchful of the weather. This will determine the degree of re-stocking needed next year, which may see market tighten again.
US equity investors are at extreme levels of shorting – back to similar numbers prior to the June/July rally.
Macro positioning is also fairly aligned with ongoing trends of higher rates, stronger USD, weaker markets and rising inflation.
Any surprise to these “negative” trends will likely result in a short-covering rally in risk assets.
The S&P/ASX 300 fell 1.2% last week and is down 7.2% for 2022. It underperformed US markets last week due to weakness in large-cap miners and some industrial cyclicals.
Lithium stocks continue to run hard.
About Brenton Saunders and Pendal MidCap Fund
Brenton is a portfolio manager with Pendal’s Australian equities team. He manages Pendal MidCap Fund, drawing on more than 25 years of expertise. He is a member of the CFA Institute.
Pendal MidCap Fund features 40-60 Australian midcap shares. The fund leverages insights and experience gained from Pendal’s access to senior executives and directors at ASX-listed companies. Pendal operates one of Australia’s biggest Aussie equities teams under the experienced leadership of Crispin Murray.
Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.
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.
The case for currency hedging | A ‘solution’ for stranded assets | A new kind of ESG engagement | EM countries weathering the storm
Next year is when rate hikes fully kick in and the resilience of the real economy will be tested, writes Pendal’s head of government bonds TIM HEXT
IT’S been an extraordinary year. It’s tiring to think it still has more than two months to go.
The fiscal and monetary policy induced wild asset price party of 2021 has become the mighty hangover of 2022.
Industry super fund advertisements are now boasting about their 10-year returns, not three-year returns.
Clear air is needed in 2023, but will it arrive?
Policy makers have gone from patience in 2021 to playing catch-up in 2022. For now they’re on message that they are happy for the pain to continue until actual – not anticipated – inflation turns.
Of course the problem is that inflation is a lagging indicator – often by six to 12 months.
However, central banks view an inflation policy mistake as worse than a recession.
Demand destruction is required, even though it means people losing jobs and in some cases forced out of homes.
Waiting for supply to solve the problem is proving too much.
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Pendal’s Income and Fixed Interest funds
The NZ CPI this week again highlighted the stubbornness of high inflation, stuck above 7%.
The main driver this time was transport, with airfares up 25%. Not surprisingly after lockdowns everyone is trying to visit family not seen for years.
Out of interest I looked at trans-Tasman airfares. Wow! The Kiwi diaspora in Australia (and indeed the world) is huge, with a quarter of Kiwis living overseas at any one time.
They all seem to want to visit home at once. But it’s almost cheaper flying to Europe now.
Fixing will take time
These pockets show supply/demand dynamics in many industries will take time to fix.
Australia is less exposed given our larger size. But the themes are similar.
Clear air is unlikely until 2024 when a “normal” economy returns.
By then permanent and student migration numbers should be near 2019 levels, providing relief in the important area of employment and wages.
For now markets are in a holding pattern.
Next year is when rate hikes will fully start to kick in and the resilience of the real economy will be tested.
Maybe finally we can buy bonds as a defensive asset class again. We remain vigilant.
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.
IT’S almost a year to the day since NSW and Victoria exited lockdowns.
NSW premier Dominic Perrottet declared “freedom day” on October 11 last year as millions of Australians celebrated at pubs and restaurants in Sydney and Melbourne.
Today’s headlines couldn’t be further from that optimism. Recession. Inflation. Strikes. Oil prices. War.
A stream of bad news has led to near-historic lows in consumer confidence.
With central banks unusually coordinated in rapid-fire rate hikes, it’s reasonable to be concerned.
RBA deputy governor Michelle Bullock’s speech yesterday was a timely reminder of the central bank’s objectives: currency stability, full employment and the welfare of the people of Australia.
That differs from the US Federal Reserve’s dual mandate of price stability and maximum sustainable employment.
Welfare of the people. A small but important difference.
This objective influenced the RBA’s discussions, leading to an earlier slowdown in rate hikes this month.
Recessions bring a real human toll that can lead to a prolonged economic slowdown.
Research has shown that people out of work for extended periods become so disconnected from labour markets, that they struggle to find jobs even after the economy has recovered.
The effects of recession on labour force shrinkage is evident in Europe and the US. Participation rates in the US have barely budged despite some of the tightest labour market conditions on record.
In Australia the belt-tightening has started with consumer goods spending growth flat-lining in 2022.
In the RBA’s latest Financial Stability Review, the Reserve Bank stress-tested the impact of a 3.6% cash rate target. About 40% of people would experience a -20% to 0% reduction in cash flows, with almost 15% going into negative cash flows.
The psychological impact of watching savings buffers evaporate would likely increase the pace of decline in consumer spending as rates increased.
The peak rate could very well be lower than the market pricing of 3.6%.
Markets will remain choppy with upcoming CPI releases.
As consumers head into the first fully open Christmas in three years, many will travel to visit families they have not seen in years.
Anyone booking travel will be aware of the high prices of airfares, particularly across the Tasman.
These will feed into CPI – as possibly a last hurrah before belt-tightening in 2023.
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Pendal’s Income and Fixed Interest funds
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. In 2020 the team won the Australian Fixed Interest category in the Zenith awards.
With the goal of building the most defensive line of funds in Australia, the team oversees A$22 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.
Here are the main factors driving the ASX this week according to portfolio manager Jim Taylor. Reported by portfolio specialist Chris Adams
THE US CPI print, which dominated headlines last week, reminded markets to expect the unexpected.
The highly anticipated data point came in hotter than expected and even the most dovish will now expect 75bps moves in November and December.
The federal funds rate predictions also shifted to just a tick under 5% in Q1 2023, resuming the debate on the likelihood of a recession.
Inexplicably, on the day of the print the market went bottom-left to top-right – which no one foresaw but plenty rationalised.
These theories were swiftly discarded as markets reversed back into the red on Friday.
The situation in the UK highlighted that material policy errors need to be near of mind when forming expectations in this highly unpredictable environment.
Australian markets fared quite well despite a down week for commodities.
The flat performance was mainly attributed to the positive earnings outcomes in the financials sector.
Economics and policy
The Fed’s stance was split in two last week.
At the start, the commentary was somewhat conciliatory and balanced, indicating that past short-and-sharp rate rises will need time to work through the economy.
Current moderation in demand was due to economic tightening being “only partly realised so far”, added Fed vice-chairwoman Lael Brainard.
Chicago’s Fed president Evans warned of the cost of “overshooting” rate rises.
But after the CPI print, the Fed took a more hawkish tone. Key members flagged the prospect of a 5% fed fund rate at the end of 2023.
These latest Fed minute show a greater degree of differing opinions than usual. This is evident in opinions on goods and services, noting relief in key pressure points such as shipping costs, delivery, and rising inventories. This suggests supply bottlenecks have passed their peak.
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Crispin Murray’s Pendal Focus Australian Share Fund
The hawks, however, claim this small improvement does not offset continued elevated rates in core goods prices.
Labour markets appear to be moving towards a better balance, with a lower rate of job turnover, moderation in employment growth and increase in labour force participation rate.
Concerns of a wage-price spiral weighed on sentiment since some expect this may occur sooner rather than later.
Meanwhile it was a tumultuous week in the UK.
The Truss administration backflipped on several key economic policies it defended weeks prior – most notably scrapping plans to freeze UK tax next year.
This was an attempt to settle the markets and allow pension funds to extricate themselves from the recent liquidity crisis.
Attempting to salvage the situation, the PM sacked the treasury chief and back-peddled on her vision for a low-tax environment.
This fanned the political flames, stressing an already nervous market.
US CPI Print
The US CPI rose +0.4% MoM and 8.2% YoY, which was above the consensus of 0.2% and 8.1%.
Core CPI (ex food & energy) surged another 0.6% to 6.6% versus 0.4% and 6.5% consensus.
Shelter and medical care prices also saw big increases.
US inflation is still elevated, though longer-term expectations are fortunately still anchored.
For the first time in two years we saw core services inflation (6.7% YoY) exceed the core goods inflation (6.6%).
This indicates that goods inflation is passing the baton to services. This is alarming for markets, since inflation in services tends to be far more persistent than goods.
Services make up about 75% of the core index, meaning it triples the influence of core goods.
Overall, core goods inflation was relatively flat, with a 1.1% drop in used car prices offsetting a 0.7% increase in new cars. There were smaller gains in tools, tobacco and other recreational goods.
In contrast, core services inflation was up 0.8% MoM – the highest reading of the cycle and the biggest increase in 40 years.
This was largely due to prices (ex-energy) increasing by 0.8%, acceleration in rents and hefty increases in health and vehicle insurance components.
Shelter continued to anchor core inflation, rising 0.75%/6.6% MoM/YoY – accelerating from the July and August run rates.
Owners Equivalent Rent rose 0.8% which was the highest rise since 1990. When looking at current climate however, data suggests rents are beginning to roll over.
Excluding shelter, services still were up 0.9% Additionally, transportation services inflation was up 1.9%, medical care up 1% and airline fares rose 0.84% MoM.
The PPI also rose above consensus (+0.4%), with a 1.2% jump in food prices and 0.7% increase in energy prices.
Similarly with the CPI, the core increase was primarily in services, up 0.6%, while goods remained flat. One positive note is we are not seeing a continued escalation of margins.
Additional non-CPI data was also released last week. Notably, the Michigan consumer sentiment index rose to 59.8 from 58.6 which was slightly above consensus. This suggests the covid-induced savings bubble has continued to support spending, despite it being depressed overall.
Five-to-ten-year inflation expectations rose to 2.9% from 2.7%, reversing the August drop. The one-year expectations rose more materially by 0.4% MoM to 5.1% YoY, the first rise since March.
These increased expectations could pose troublesome for those wanting the Fed to start putting their foot on the breaks, given how closely the policy makers watch this number.
Australia
Similar to the rest of the world, consumer sentiment in Australia remains firmly in a recessionary environment.
Despite this, consumer behaviour continues to contradict with business conditions remaining very robust throughout Q3.
Importantly, low consumer confidence is not driven by labour as Australians remain highly active in the jobs market. Unemployment expectations are reaching all-time lows with no real slowdown in sight for the hiring movement.
Selling price inflation and wage costs dipped slightly but remain strong overall. Measures of price pressures eased somewhat in September but remained elevated in levels terms.
Labour costs eased 30bps to 3.1% QoQ after peaking in July. Purchase costs eased 60bp to 3.8% QoQ while final product prices eased 40bps to +2.1% QoQ.
These data points all point towards robust economic conditions despite inflation remaining elevated.
Markets
Volatility was the name of the game last week. The day of the CPI print was only the fifth time in history the S&P500 has opened down 2% and finished up 2%. It was also the first time the Dow has fallen 5% and risen 8% in a single session.
The gains were short lived as a sharp reversal occurred on Friday.
Bond yields were choppy, ending up for the week. Brent oil was up 2.4% alongside copper which bounced down and up 1%. The AUD traded down to 61.7c, was swept in the CPI euphoria and ended back at 63c.
It is predicted that inflation concerns will not be conclusively taken off the Fed agenda until corporate margins/earnings start coming down. As of now, there is not much evidence of broad-based margin/earnings issues yet.
The Australian market was supported last week by the performance of the major banks (Financials +3%) and Consumer Staples (0.4%). Large-cap miners were flat for the week with the brunt of the pain in resources felt in the mid and small-cap space.
The REITs (-2.2%) sector struggled due to big discounts to book value and too much gearing. It is becoming increasingly hard to identify the circuit breaker to this valuation down spiral.
Information Technology (-3%), Health Care (-2.9%) and metals had another tough week.
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.
A monthly insight from James Syme, Paul Wimborne and Ada Chan, co-managers of Pendal’s Global Emerging Markets Opportunities Fund
ONE of the main drivers of global financial markets in 2022 has been the strength of the US dollar (and the weakness of other global currencies), driven by tightening US financial conditions.
The dollar is the preferred currency for international trade invoices and cross-border financial claims.
The global financial cycle is essentially a dollar cycle – and an aggressively tightening Federal Reserve has a chilling effect on non-US economies and non-US financial markets.
Emerging markets can generally be divided into two broad groups:
- Net exporters that tend to run current account surpluses (such as China, Korea and Taiwan, but also UAE and Saudi Arabia)
- Net importers that tend to run current account deficits (such as Brazil, Mexico, South Africa and India).
Historically, the first group have broadly tended towards high sensitivity to global growth and the second to global financial liquidity.
So it’s normally been the second group that has the worst currency and equity market performance in strong dollar/tight liquidity environments.
In 2013 the Fed announced an intention to reduce the buying of US treasuries.
The hardest-hit emerging markets were Brazil, India, Indonesia, South Africa and Turkey. They were dubbed the “fragile five” by one market participant.
This time it’s different
This year has decidedly not followed that pattern.
In the first nine months of 2022, the only major EM currencies to strengthen against the dollar were the Brazilian real and the Mexican peso.
The Indian rupee and Indonesian rupiah were also relatively strong, declining 6.8% and 9.4% respectively.
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Pendal Global Emerging Markets Opportunities Fund
By comparison, the Korean won fell 20.4%, the Taiwanese dollar 14.7% and the Chinese renminbi 12%, despite those economies running big current account surpluses.
This pattern is very interesting and points to a real change in leadership in the asset class.
We have previously commented on the positive effect high commodity prices have on commodity economies such as Brazil – and to a lesser extent Mexico and Indonesia.
This continues to play out in economic data. Recent PMI surveys are 51.1 in Brazil and 47.3 in Korea, for example.
Other drivers at play
The explanation is that there are other drivers at play.
One is the Japanese yen.
With ongoing monetisation of debt and low inflation, Japanese monetary policy remains very loose, leading to about a 25% depreciation of the yen against the dollar year-to-date.
Given the tight trade relationships between the four big East Asian economies (both as partners and as competitors), this has put significant downward pressure on the currencies of China, Korea and Taiwan.
Another driver is energy balances.
The huge moves in oil, gas and coal prices in the last two years have been a boost for energy exporters (or large consumers who also have large domestic production).
The value of Indonesia’s exports of oil and gas in the last three months were $US4.6 billion, compared with $US3 billion for the same period in 2019.
By comparison, the cost of Korea’s crude oil imports in the third quarter of 2022 was $US31 billion, compared to $US17 billion in the third quarter of 2019.
At a broad regional level, North America and the Arab Gulf are in extremely strong positions, while Europe and East Asia face a powerful drag on their external balances and their growth.
Although all four East Asian economies have very substantial ability to use their large foreign exchange reserves to support their currencies, their desire to support exports has meant this has been limited.
Japan did intervene last month, but the ongoing economic weakness in China and Japan mean major intervention was unlikely.
By comparison, both India and Indonesia have intervened, supporting their currencies, reducing imported inflation and facilitating economic growth.
Sign of change
We think 2022 is a sign of a change in market leadership in emerging markets.
The markets that might be expected to underperform instead may be the best performers.
We believe that can continue with either a stronger or weaker US dollar.
About Pendal Global Emerging Markets Opportunities Fund
James Syme, Paul Wimborne and Ada Chan are co-managers of Pendal’s Global Emerging Markets Opportunities Fund.
The fund aims to add value through a combination of country allocation and individual stock selection.
The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.
The stock selection process focuses on buying quality growth stocks at attractive valuations.
Find out more about Pendal Global Emerging Markets Opportunities Fund here
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
An asset class snapshot | bond-buying in a hiking cycle | Signs to watch for a turning point | US earnings outlook