Pendal Sustainable International Share Fund (APIR: BTA0568AU)
(the “Fund”)
The following information contains an important update to the Fund’s exclusionary screens disclosed in the Information Memorandum dated 10 April 2025 for the Pendal Sustainable International Share Fund (IM) and should be read in conjunction with the IM.
Effective from 30 June 2025, the Fund will introduce an additional exclusionary screen and not invest in companies directly involved in the supply of goods or services specifically related to controversial weapons.
In our view, this change ensures that the Fund remains true to label and is more closely aligned with investor expectations in relation to responsible investment funds.
Exclusionary Screens Effective 30 June 2025
Effective 30 June 2025, the section ‘Exclusionary Screens’ in the Information Memorandum is replaced with the following:
Exclusionary Screens
The Fund applies exclusionary screens which aim to avoid exposure to companies with core business activities that Pendal considers to negatively impact the environment and/or society.4
The Fund will not invest in companies directly involved in the following activities:
• extract or explore for fossil fuels (specifically, coal, oil and natural gas); or
• produce tobacco (including e-cigarettes and inhalers); or
• manufacture controversial weapons (such as cluster munitions, landmines, biological or chemical weapons, nuclear weapons, depleted uranium weapons, blinding laser weapons, incendiary weapons, non-detectable fragments weapons and white phosphorous weapons); or
• supply of good or services specifically related to controversial weapons.
The Fund will also not invest in companies directly involved in any of the following activities, where such activities account for 10% or more of their gross revenue:
• fossil fuel-based power generation, or fossil fuel distribution or refinement (coal, oil and natural gas)*;
• the production of alcoholic beverages;
• manufacture, ownership or operation of gambling facilities, gaming services or other forms of wagering;
• manufacture of non-controversial weapons or armaments;
• manufacture or distribution of pornography; or
• uranium mining for the purpose of nuclear power generation.
*Companies with a climate transition plan may be exempted from this exclusion, provided that they have in place a Paris Agreement aligned transition plan and produce climate-related financial disclosures annually, which in both cases we consider credible.
Exclusionary screens are not applied to cash or derivatives. The use of derivatives may result in the Fund having indirect exposure to the excluded companies.
All reasonable care has been taken by Pendal to implement the Fund’s exclusionary screens to meet the criteria described above. To determine whether an investment is subject to the Fund’s exclusionary screens, Pendal relies on internal and supplementary external research, believed to be accurate. However, as the nature and conduct of businesses may change over time, and publicly available financial or other information is not always comprehensive or up to date, we do not guarantee that the Fund’s investments will meet all of the Fund’s exclusionary screen criteria at all times.
Pendal reviews companies subject to the exclusionary screens monthly and monitors the Fund’s compliance with its investment guidelines (including the exclusionary screens) daily.
If we determine that an investment no longer meets our exclusionary screen criteria, we will divest the holding (usually within six months) having regard to the interests of investors. The time it takes to sell an investment depends on factors including, but not limited to, the size and liquidity of the investment (which may have an impact on the Fund’s performance returns), and the time it takes for Pendal to seek and assess suitable replacement investments that meet the Fund’s exclusionary screens and sustainability or ESG criteria.
Regnan Global Equity Impact Solutions Fund – Class R (APIR: PDL4608AU)
(the “Fund”)
The following information contains an important update to the Fund’s exclusionary screens disclosed in the Product Disclosure Statement and Additional Information to the Product Disclosure Statement dated 2 September 2024 for the Regnan Global Equity Impact Solutions Fund (PDS) and should be read in conjunction with the PDS.
Effective from 30 June 2025, the Fund will introduce an additional exclusionary screen and not invest in companies directly involved in the supply of goods or services specifically related to controversial weapons.
In our view, this change ensures that the Fund remains true to label and is more closely aligned with investor expectations in relation to responsible investment funds.
Further, we have provided clarified that the Fund’s definition of controversial weapons includes white phosphorus weapons.
Exclusionary Screens Effective 30 June 2025
Effective 30 June 2025, the section ‘Exclusionary Screens’ in section 5 of the Product Disclosure Statement is replaced with the following:
Exclusionary Screens
The Fund will not invest in companies which directly:
• produce tobacco (including e-cigarettes and inhalers); or
• manufacture controversial weapons (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 good or services specifically related to controversial weapons.
Additional exclusionary screens are applied differently across industries and business activities. For further information on the Fund’s exclusionary screens, go to the ‘Exclusionary Screens’ heading in the ‘Labour, environmental, social and ethical considerations’ section of the ‘Additional Information to the Product Disclosure Statement’at www.pendalgroup.com/RegnanGlobalEquityImpactSolutionsFundR-PDS.
The Fund may also hold cash and may use derivatives from time to time. Derivatives may be used to reduce risk and can act as a hedge against adverse movements in a particular market and/or in the underlying assets. Derivatives can also be used to gain exposure to assets and markets. Exclusionary screens are not applied to cash or derivatives. The use of derivatives may result in the Fund having indirect exposure to the excluded companies.
Effective 30 June 2025, the section ‘Exclusionary Screens’ in section 3 of the Additional Information to the Product Disclosure Statement is replaced with the following:
Exclusionary Screens
The Fund will not invest in companies which directly:
• produce tobacco (including e-cigarettes and inhalers);
• manufacture controversial weapons (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);
• supply good or services specifically related to controversial weapons; or
• extract or explore for fossil fuels (specifically, coal, oil and natural gas).
The Fund will also not invest in companies which derive 10% or more of their gross revenue directly from:
• fossil fuel-based power generation, or fossil fuel distribution or refinement (coal, oil and natural gas)*;
• the production of alcoholic beverages;
• manufacture, ownership or operation of gambling facilities, gaming services or other forms of wagering;
• manufacture of non-controversial weapons or armaments;
• manufacture or distribution of pornography; or
• uranium mining for the purpose of nuclear power generation.
*Companies with a climate transition plan may be exempted from this exclusion, provided that they have in place a Paris Agreement aligned transition plan and produce climate-related financial disclosures annually, which in both cases Regnan considers credible.
All reasonable care has been taken to implement the Fund’s exclusionary screens to meet the criteria described above. Regnan draws on internal and supplementary external research, believed to be accurate, to determine whether a company is subject to the exclusionary screens. Regnan reviews companies subject to the exclusionary screens monthly and monitors the Fund’s compliance with its investment guidelines (including exclusionary screens) daily. If Regnan discovers an investment no longer meets our criteria, Regnan will divest the holding as soon as Regnan considers appropriate, having regard to the interests of investors (and this will be on a case by case basis). However, as the nature and conduct of businesses may change over time, and publicly available financial or other Information is not always comprehensive or up to date, we do not guarantee that the Fund will meet all of these criteria at all times
Regnan Global Equity Impact Solutions Fund – Class W (APIR: PDL7011AU)
(the “Fund”)
The following information contains an important update to the Fund’s exclusionary screens disclosed in the Product Disclosure Statement and Additional Information to the Product Disclosure Statement dated 2 September 2024 for the Regnan Global Equity Impact Solutions Fund (PDS) and should be read in conjunction with the PDS.
Effective from 30 June 2025, the Fund will introduce an additional exclusionary screen and not invest in companies directly involved in the supply of goods or services specifically related to controversial weapons.
In our view, this change ensures that the Fund remains true to label and is more closely aligned with investor expectations in relation to responsible investment funds.
Further, we have provided clarified that the Fund’s definition of controversial weapons includes white phosphorus weapons.
Exclusionary Screens Effective 30 June 2025
Effective 30 June 2025, the section ‘Exclusionary Screens’ in section 5 of the Product Disclosure Statement is replaced with the following:
Exclusionary Screens
The Fund will not invest in companies which directly:
• produce tobacco (including e-cigarettes and inhalers); or
• manufacture controversial weapons (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 good or services specifically related to controversial weapons.
Additional exclusionary screens are applied differently across industries and business activities. For further information on the Fund’s exclusionary screens, go to the ‘Exclusionary Screens’ heading in the ‘Labour, environmental, social and ethical considerations’ section of the ‘Additional Information to the Product Disclosure Statement’, a copy of which can be obtained by calling us.
The Fund may also hold cash and may use derivatives from time to time. Derivatives may be used to reduce risk and can act as a hedge against adverse movements in a particular market and/or in the underlying assets. Derivatives can also be used to gain exposure to assets and markets. Exclusionary screens are not applied to cash or derivatives. The use of derivatives may result in the Fund having indirect exposure to the excluded companies.
Effective 30 June 2025, the section ‘Exclusionary Screens’ in section 3 of the Additional Information to the Product Disclosure Statement is replaced with the following:
Exclusionary Screens
The Fund will not invest in companies which directly:
• produce tobacco (including e-cigarettes and inhalers);
• manufacture controversial weapons (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);
• supply good or services specifically related to controversial weapons; or
• extract or explore for fossil fuels (specifically, coal, oil and natural gas).
The Fund will also not invest in companies which derive 10% or more of their gross revenue directly from:
• fossil fuel-based power generation, or fossil fuel distribution or refinement (coal, oil and natural gas)*;
• the production of alcoholic beverages;
• manufacture, ownership or operation of gambling facilities, gaming services or other forms of wagering;
• manufacture of non-controversial weapons or armaments;
• manufacture or distribution of pornography; or
• uranium mining for the purpose of nuclear power generation.
*Companies with a climate transition plan may be exempted from this exclusion, provided that they have in place a Paris Agreement aligned transition plan and produce climate-related financial disclosures annually, which in both cases Regnan considers credible.
All reasonable care has been taken to implement the Fund’s exclusionary screens to meet the criteria described above. Regnan draws on internal and supplementary external research, believed to be accurate, to determine whether a company is subject to the exclusionary screens. Regnan reviews companies subject to the exclusionary screens monthly and monitors the Fund’s compliance with its investment guidelines (including exclusionary screens) daily. If Regnan discovers an investment no longer meets our criteria, Regnan will divest the holding as soon as Regnan considers appropriate, having regard to the interests of investors (and this will be on a case by case basis). However, as the nature and conduct of businesses may change over time, and publicly available financial or other Information is not always comprehensive or up to date, we do not guarantee that the Fund will meet all of these criteria at all times
Pendal Multi-Asset Target Return Fund (APIR: PDL3383AU)
(the “Fund”)
The following information contains an important update to the Fund’s exclusionary screens disclosed in the Product Disclosure Statement dated 19 December 2024 for the Pendal Multi-Asset Target Return Fund (PDS) and should be read in conjunction with the PDS.
Effective from 30 June 2025, the Fund will introduce an additional exclusionary screen and not invest in companies or issuers directly involved in the supply of goods or services specifically related to controversial weapons.
In our view, this change ensures that the Fund is more closely aligned with investor expectations around responsible investing.
Further, we have clarified the Fund’s definition of controversial weapons includes white phosphorus weapons.
Exclusionary Screens Effective 30 June 2025
Effective 30 June 2025, the section ‘Labour, Environmental, Social and Ethical Considerations’ in section 5 of the PDS is replaced with the following:
We do take environmental, social (including labour standards) and ethical considerations into account when making investment decisions. Sustainable investment practices are incorporated into the Fund by implementing exclusionary screens.
The Fund will not invest in companies or issuers directly involved in the following business activities:
- tobacco production (including e-cigarettes and inhalers);
- 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 goods or services specifically related to controversial weapons.
The Fund will also not invest in companies or issuers directly involved in the following activities, where such activities account for 10% or more of a company’s or issuer’s gross revenue:
- the production of alcohol;
- manufacture or provision of gaming facilities;
- manufacture of non-controversial weapons or armaments;
- manufacture or distribution of pornography;
- uranium mining for the purpose of nuclear power generation; or
- extraction of thermal coal and oil sands production.
Exclusionary screens are not applied to government securities, semi-government securities, supranational securities, cash or derivatives. The use of derivatives may result in the Fund having indirect exposure to the excluded companies or issuers.
All reasonable care has been taken to implement the Fund’s exclusionary screens to meet the criteria described above. We draw on internal and supplementary external research, believed to be accurate, to determine whether an investment is subject to the exclusionary screens. However, as the nature and conduct of businesses may change over time and publicly available financial or other information is not always comprehensive or up to date, we do not guarantee that the Fund will meet all of these criteria at all times.
We review investments subject to the exclusionary screens monthly and monitor the Fund’s compliance with its investment guidelines (including the exclusionary screens) daily. If we discover an investment no longer meets our criteria, we will divest the holding as soon as we consider appropriate, having regard to the interests of investors (and this will be on a case by case basis).
Emerging markets seem to be entering an extended period of rate-cutting, which should support their economies and equity markets. Pendal EM portfolio manager JAMES SYME explains
- Find out about Pendal Global Emerging Markets Opportunities fund
Uncertainty remains high in financial markets among participants and policy makers.
This uncertainty is driven by global trade policy and how it will affect growth, inflation and ultimately interest rate decisions (and market expectations of those decisions). The International Monetary Fund now believes today’s tariff-driven environment is more challenging than the COVID era.
“[Early in the pandemic] central banks everywhere were moving in the same direction in the sense of easing monetary policy very quickly,” IMF deputy Gita Gopinath said last week.
“But this time around the shock has differential effects.”
Looking at previous cycles in emerging markets – especially considering the impact of a weaker US dollar and incoming capital flows – Pendal’s EM team believes emerging markets are mostly in an extended period of cutting policy interest rates.
We believe this will be supportive of emerging economies and emerging equity markets.
Emerging markets cutting rates
Last year we saw rate cuts in many advanced economies as the 2022 inflation surge eased.
But this year global central banks have been more cautious, either in their statements or the speed or extent of rate cuts.
Why? Because volatility in trade policy creates significant uncertainty about growth and inflation.
Find out about
Pendal Global Emerging Markets Opportunities Fund
In the emerging world, however, most central banks have continued cutting rates.
The 19 independent central banks in the MSCI Emerging Market Index members (Greece uses the Euro and the four Arabian Gulf nations have USD pegs) have delivered 24 policy rate cuts and only four hikes in the first five months of 2025.
(Of those hikes, three were in Brazil where economic growth remains very strong, and the other was in Turkey after three big cuts.)
A clear pattern
There is a clear pattern here.
GDP growth forecasts for 2025 and 2026 have been revised lower in emerging Asia (and sharply lower in developed markets) but have held largely steady in EMEA and Latin America.
Many of the central banks on hold are in emerging Asia – China, Taiwan, Malaysia – despite this region’s more-challenging growth outlook.
We believe this is because those countries – with their export-based economic development models and big current account surpluses – have been less sensitive to the strong US dollar in recent years, and have been able to keep interest rates lower than the current account deficit countries.
For example, Taiwan had a 2024 current account surplus of 14.1% of GDP.
Its central bank has been on hold at 2% for more than a year despite CPI inflation in the first five months of 2025 averaging 2.2%.
By comparison, South Africa ran a 2024 current account deficit of 0.7% of GDP.
Its CPI inflation averaged 3.1% in the first four months of 2025 – but the central bank started the year with policy rates at 7.75% and has been able to cut rates twice so far this year.
What it means for investors
In terms of portfolio positioning, we expect global investor concerns about US trade and economic policy to continue driving capital flows into emerging markets.
We think this will be supportive of currencies, allowing stronger growth, lower inflation and faster/further rate cuts.
This, we believe, is the principal trigger of a positive feedback loop we’ve seen in emerging economies in previous up-cycles.
We prefer domestic-demand-driven emerging markets, with historically weaker current account balances and the ability to cut rates from higher real levels.
We remain constructive on the asset class, and overweight Mexico, Indonesia, South Africa and Brazil.
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 a 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 Pendal investment analyst ANTHONY MORAN. Reported by portfolio specialist Chris Adams
ROBUST employment and income growth in the US have been the lynchpin supporting markets at peak valuation levels – and the data didn’t disappoint last week.
Stronger-than-expected US payrolls on Friday saw US equities and bond yields both rising to close out the week.
The S&P 500 finished up 1.5%, the NASDAQ was up 2.2%, while the S&P/ASX 300 rose 1.0%.
Otherwise, there was little news on the macro and market front – with the media focused on President Trump and Elon Musk’s social media feud, which serves as an important reminder that a lot can change in six months.
The commodities picture was mixed, with cyclical exposures oil (Brent crude +4.0%) and copper (+3.8%) both rebounding, along with gold (+1.0%). Iron ore fell -3.5%.
US macro
May’s payroll data showed 139k new jobs, which was slightly ahead of the 126k expected by consensus and consistent with a slowing but still growing economy.
Average hourly earnings came in at +0.4% MoM, ahead of consensus at +0.3%.
This stronger hard data saw a spike in bond yields on Friday night, coming in as a bit of a surprise after softer economic survey data earlier in the week.
This softer data included the US Manufacturing Purchasing Manager’s Index (PMI) coming in at 48.5 versus 49.5 expected and the May ISM Services Index coming in at 49.9 versus 52.2 expected.
The Manufacturing PMI miss was primarily driven by de-stocking after the pre-tariff inventory build-up. This trend can also be seen in consumer data, with US auto sales down 9% month-on-month in May after a pull forward of purchases to beat tariffs earlier in the year.
The weakness in the ISM Services Index could provide a deflationary impulse to partly offset tariff impacts on goods inflation.
Elsewhere, the Fed’s “Beige Book” – a regular review of economic conditions – warned of a slight decline in economic activity.
Initial jobless claims also ticked up during the week, confirming a rising trend. However, seasonal adjustments made a big impact, so this is not yet a clear signal.
Commentary around inflation in many of the data releases was more hawkish – in the Services ISM, the price component spiked 3.6pts to 68.7 and the Beige Book noted: “There were widespread reports of contacts expecting costs and prices to rise at a faster rate going forward. A few Districts described these expected cost increases as strong, significant, or substantial.”
There was a partial offset to this from the Congressional Budget Office, which scored the current Budget Bill as a little less stimulatory than expected, which slightly eased longer term inflation fears.
The deficit-expanding impact of the Budget Bill is ostensibly the catalyst for Musk and Trump’s high-profile feud.
The takeaway is that data suggests the US economy is incrementally slowing – but this is not a big surprise and it suggests decelerating growth, not recession.
This incremental slowing is negative for stocks that are at the pointy end of economic weakness (e.g. US consumer-exposed stocks) but is unlikely to be enough to drag down the broader market materially.
The US economy is expected to reach trough growth in the December quarter.
Tariffs
There wasn’t a huge amount of news flow on tariffs last week, though anxiety is building as we get closer to the end of the tariff suspension period on 9 July.
Trump demanded the best offers from major economic partners by last Wednesday.
The biggest news was the phone call between Trump and China’s President Xi, but there were no real details apart from Trump being invited to Beijing.
The market still expects a Japan trade deal soon and the G7 Leader’s Summit from 15-17 June is seen as a possible confirmation point for deals.
Sentiment around tariffs looks set to remain volatile, with anxiety continuing to grow in the absence of news flow.
Australia macro
March quarter GDP was softer than expected at +0.2% quarter-on-quarter versus consensus at +0.4%. This is a marked slowdown versus the December quarter and a decline in per capita terms.
We have been expecting resilient economic growth in Australia on the back of rising real disposable incomes, an expansionary Federal Budget and interest rate cuts.
There were some unusual distortions in the March quarter from extreme weather events, which should reverse.
But we also saw a rare decline in public spending – driven by lower state government spending – and softer household consumption (+0.4% versus +0.7% in the December quarter).
Pendal Focus Australian Share Fund
Now rated at the highest level by Lonsec, Morningstar and Zenith
Notably, real household income growth was good at +1.7% quarter-on-quarter, but this was offset by a rise in the savings rate, which rose to 5.2% in the quarter and is normalising towards historical trends.
The Fair Work Commission announced a 3.5% increase in the minimum wage, which equates to growth in real wages with CPI running in the high-2% range. It comes on top of the 0.5% superannuation increase.
However, the growth in real wages won’t be a support to GDP growth if the savings rate keeps rising.
Of more concern for the longer-term economic outlook, productivity growth was flat during the quarter and unit labour costs were +0.9% (or +5.1% year-on-year).
This suggests there is little downside from here for the inflation rate – so while the RBA still intends to cut rates on the basis that monetary policy is tight, this may reduce the number of cuts.
We still expect a base case of resilient Australian GDP growth to play out, with some of the drivers in the March quarter softness to be temporary.
But the savings rate – potentially driven by global macro uncertainty and weather events (i.e. relief payments) – is worth watching as a risk.
We also need to wary of a labour cost-driven bounce back in the CPI that limits rate cuts.
Rest-of-the world macro
Eurozone preliminary CPI was softer at +1.9% year-on-year versus 2.0% expected, being helped by a stronger euro and lower energy costs.
This was below the ECB’s target and saw the central bank cut interest rates by a further 25bps on Thursday night.
Rates are now back to 2% and the ECB has signalled that it is nearing the end of the cutting cycle, albeit with downside risks and uncertainty ahead.
Tariffs are hitting the Chinese economy, with the Caixin Manufacturing PMI surprisingly down 2.1 points to 48.3 versus 50.7 expected. This is the lowest reading since October 2022.
China still needs to step up its stimulus, particularly in support of the consumer, to offset these impacts.
Markets
It was a good week for the Mag7 (ex-Tesla), with the AI narrative regaining some momentum, as:
- Taiwan’s TSMC spoke favourably about AI-linked demand.
- Meta struck a 20-year deal with Constellation Energy for nuclear power to support AI operations.
- The Wall Street Journal reported that Meta aims to have AI tools in place by the end of 2026 that would allow complete automation of the entire advertising process (including creating ads) – technology that could significantly disrupt traditional ad agencies.
- A report from private investment firm Bond Capital talked about the AI market growing to $244bn by 2025 and to $1.01 trillion by 2031.
In recent weeks, we’ve talked about how markets – despite trading at full valuations – seem well supported by technical drivers such as liquidity and slowing, but relatively resilient, economic growth.
This remains the case, but by some measures markets look like they have the potential to be more volatile.
Both long and short leverage is at a very elevated level historically. This leaves the net position balanced, but suggests the potential for outsized moves if there is a momentum shift as one side’s leverage is unwound.
There is a parallel of this in Merrill Lynch’s Bull & Bear Indicator, which is reading neutral, but under-the-hood components are sharply polarised with hedge fund and long-only positioning very bearish and credit market technical and equity market breadth very bullish.
So there is some potential for a pick-up in volatility, with tariff deadlines and deals a potential catalyst.
Another concern is that markets will underperform as hard data continues to slow in coming months. This risk is highlighted by the index of US Cyclicals versus Defensives pricing in economic growth well above current economic consensus.
This is clearly going to be a risk, but Goldman Sachs notes that in past recessions the market has rallied with the recovery in soft economic data, which leads the hard data.
We have already seen the weakness in the soft data and there are some signs of a rebound (e.g. consumer confidence recently rebounded 12.3pts to 98).
Also, the Cyclical versus Defensive reading may be exaggerated by the Healthcare sector – which is being challenged by government policy concerns – and tariffs hitting some normally defensive Consumer Staples.
More sector-neutral measures of economic sensitivity, like the High Operating Leverage versus Low Operating Leverage stocks index from Goldman Sachs, show High Operating Leverage stocks operating at a level more consistent with a recession.
The upshot is it seems more likely that trade policy, rather than the economic data, will be the main driver of potential volatility in coming weeks.
Australian market and stocks
The Australian market rose during the week, following the offshore lead – with banks and REITs leading the charge and defensives and resources underperforming, with iron ore declining and dragging down the latter.
About Anthony Moran
Anthony Moran is an analyst with over 15 years of experience covering a range of Australian and international sectors. His sector coverage has included Australian Industrials and Energy, Building Materials, Capital Goods, Engineering & Construction, Transport, Telcos, REITs, Utilities and Infrastructure.
He has previously worked as an equity analyst for AllianceBernstein and Macquarie Group, spending a further two years as a management consultant at Port Jackson Partners and two years as an institutional research sales executive with Deutsche Bank.
Anthony is a CFA Charterholder and holds bachelor’s degrees in Commerce and Law from the University of Sydney.
Cash rates finishing the year at 3.1% seems like a good bet, writes Pendal’s head of government bonds TIM HEXT. Here’s why
THE GDP numbers for Q1 2025 were released today.
In volume terms, the economy grew by 0.2%. This leaves the annual rate at 1.3%.
Against population growth of 0.4%, we are once again back to the negative GDP per capita growth story seen over most of the past two years.
There was some dampening in mining and tourism from poor weather in Queensland and Western Australia, but the result will be a disappointment to the government and – more importantly – the RBA.
This is supposed to be the year that the primarily government-led growth of the past few years gives way for a resurgent private sector.
After all, tax cuts, rate cuts and positive real wages leave households with more cash to spend.
Public demand fell 0.4% in the quarter, led by a 2% fall in public investment. While we doubt it is the start of bigger falls, it will continue to taper off.
Private investment rose 0.7%, led by buildings and construction.
So far so good, in terms of following the script.
However, we the consumer are yet to come to the party. Household spending rose 0.4% but only really on essential items, partly offsetting reduced government subsidies.
It seems we are saving our income boost more than spending it – with the household savings rate rising to 5.2%, the highest since the pandemic.
It seems unlikely that this will change anytime soon as the trade wars won’t exactly fill consumers with confidence.
A couple of other points to note.
There were still no productivity gains, with productivity being flat for the quarter and actually 1% lower over the year.
Also disappointing was the lack of consumer growth in NSW and Victoria, where consumers should have responded more positively to income gains.
Cash rate implications
GDP always lags data, but the weaker trend is unlikely to change a lot in the current quarter.
Overall, the RBA was expecting growth to be at 1.8% by the end of June. This forecast only came out two weeks ago. Q2 last year was 0.2%, so the central bank would need to see a 0.7% result for Q2 this year.
While we expect growth to continue to pick up, it is likely GDP will be closer to 1.5% by the end of June and below the RBA’s 2025 forecast of 2.1% by year-end.
We were expecting the RBA to hold off till August to cut rates, in line with its quarterly CPI cycle.
However, recent consumer data (retail sales, household spending, and GDP) now suggests the RBA will cut in July to give the consumer a further boost to pick up their spending.
Cash rates finishing the year at 3.1%, or around their estimate of neutral, seems like a good bet.
About Tim Hext and Pendal’s Income & Fixed Interest boutique
Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.
Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.
Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.
Find out more about Pendal’s fixed interest strategies here
About Pendal
Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.
In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.
Here are the main factors driving the ASX this week, according to Pendal’s head of equities CRISPIN MURRAY. Reported by portfolio specialist Chris Adams
FALLING bond yields, decent earnings from Nvidia and a US court ruling against some of the Trump Administration’s tariffs combined to support equity markets last week.
The latter ruling is under appeal and tariffs will remain in place through that process. However, there is a perception that this may reduce the Trump Administration’s bargaining power and possibly lead to a lower tariff outcome.
There are other mechanisms for applying tariffs (detailed later in this note), so this process is unlikely to make a major difference to the ultimate tariff rate, in our view. The key issue remains whether we see negotiated outcomes that help reduce the end tariff rate.
The rally in bonds diffused some of the concerns that the rise in long-dated bond yields would derail equity markets.
At the same time, Nvidia’s outlook was constructive, and underpinned the recovery in AI and technology stocks last week.
The S&P 500 rose 1.9% and finished up 6.3% for May. The ASX 300 was up 0.9% and 4.2%, respectively. Both markets are now up over the year: 1.1% for the S&P 500 and 4.9% for the ASX 300.
Growth stocks, some domestic cyclicals and a recovery in the energy sector helped Australian equities last week.
Impact of the tariff ruling
Our first observation is that the timing of the US Court of International Trade (CIT) ruling caught the market by surprise – it was not expected this soon.
The second observation is that the CIT, while not well known, is held in high regard by legal experts, with a specific remit and technical framework and specialised jurisdiction over civil disputes related to US customs and international trade laws.
It found no legal defence for the Trump Administration’s implementation of the 10% reciprocal tariffs – and those levied on Mexico, Canada and China with regard to fentanyl and border security – under the International Emergency Economic Powers Act (IEEPA). The Court issued a permanent injunction blocking enforcement of the tariffs.
The government immediately appealed the decision and the US Court of Appeals ruled that the tariffs could remain in place while that process plays out.
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The legal consensus is leaning to the view that the Appeal court will uphold the CIT ruling, which would then see the matter go to the Supreme Court, which may not rule until after their summer recess.
In reviewing this matter, the Supreme Court will be mindful that over-ruling the CIT could call previous rulings and cases relating to intellectual property and other matters into question, prompting further consequences.
Also, when the Supreme Court ruled on upholding the TikTok ban in January, it cited two previous IEEPA cases which emphasised that the President can’t assert authority on the basis of national emergencies that aren’t genuine and extraordinary – and that the impact of the remedy must be proportional to the threat.
So, there is a reasonable chance this may prevent the Trump Administration from using the IEEPA path. However, there are other paths that the Administration can take:
- While the Appeal is pending, these tariffs can remain in place.
- If suspended, then the President has authority to impose tariffs up to 15% for 150 days to address trade deficits, under section 122 of the Trade Act of 1974. This could be applied within days/weeks.
- The Administration could launch investigations to lay groundwork for new permanent tariffs under Sections 232 and 301 of the same Act. While more time consuming, they can be expedited and probably undertaken during the 150-day period while Section 122 tariffs are in place.
- There is an existing Section 301 tariff already in place on China, which can be used to increase tariffs.
So, while the CIT ruling notionally takes average tariff rates down from 14% to 6%, at this point we would still work on the premise that tariffs end up in the 14 to 18% range.
The other issue to watch is the bilateral negotiations between the US and other countries. Treasury Secretary Bessent noted that two are close to agreement and that two more are proceeding but are more complicated.
So, we could find that the bulk of trade is covered off by bilateral deals by the time the legal process is over.
There was further negative news over the weekend, as President Trump announced that steel and aluminium tariffs would be raised from 25% to 50%.
It is unclear if this will be followed through; this may be Trump trying to re-assert his credentials in response to the surge in TACO (“Trump Always Chickens Out”) memes.
We also note a deterioration in the tone of discussions between China and the US, with both sides accusing the other of breaking the spirit of the recent Geneva agreement.
The upshot, in our view, is that tariffs are an important part of the Trump Administration’s five-pronged strategy to re-industrialise the US economy – the other four being tax cuts, deregulation, cheap energy and a lower US dollar.
As a result, we should assume they find a way to apply them.
However, there is a risk that the legal wrangling weakens their bargaining position and delays the signing of bilateral trade deals.
“Big beautiful” budget bill process
There was nothing much new last week. As the bill marinates, there is an increasing sense that Congress will look to roll back some of the measures given the concerns over the fiscal deficit.
This could make it harder to reach final approval, which may mean it is not in place by mid-August when the debt ceiling needs to be lifted.
As it stands, the Bill does front-end stimulus measures – such as a US$4k tax breaks for retirees, no tax on tips, and increased tax credits and a baby bonus for people having children.
These would kick in around April next year and Goldman Sachs estimates this could add 1% to GDP in H1 2026.
This would coincide with the German fiscal stimulus, and potentially affects the duration and scale of the current monetary easing cycle.
Growth and inflation outlook
The Core Personal Consumption Expenditures (PCE) deflator – a measure of inflation – was helpful, coming in at 0.12% for April which was in line with consensus. It was 2.5% year-on-year, with services inflation decelerating.
This is likely to be the low point in inflation, however, with the spike from tariffs set to hit from late May through to October. Annualised inflation over those months may reach 6%.
In this case, the PCE could rise to 3.5% year-on-year by the end of 2025, versus a Fed target of 2%.
That said, this is a wildcard given no one knows how large the tariffs will ultimately be – and how much of the impact companies will pass through.
It is important to remember that this is a one-off impact – and the Fed has historically said it does not see tax-driven inflationary impulses as a reason to react as it is transitory.
Given greater slack in the labour market, there is less reason to expect this to trigger an inflation spiral.
There are also offsetting factors with the hit to GDP later this year – estimated to be from 1.0% to 1.5% – leading to slower services inflation, offsetting the traded goods inflation.
Elsewhere, real disposable income rose 0.7% in April after rising 0.5% in March, highlighting that there is still good support for consumers. The savings rate has risen from 4.3% to 4.9%, reflecting a more muted rise in consumption in April (up 0.1% month-on-month).
The conclusion is that the US consumer remains in decent shape to absorb the impact of tariffs.
The Atlanta Fed GDPNow is signalling Q2 2025 growth of 3.8% and we are now seeing Wall Street beginning to follow; JP Morgan lifted its forecast to 4% – a lot of this is the unwind of the negative trade impact of Q1.
The average growth for H1 2025 will therefore come in at around 2%, which is probably the right signal for the run-rate going into the tariff shock and which should pull growth down to around 1% by Q4.
The most important read on the US economy is jobs as this drives income. Interestingly, it is also important for the equities market, with the strength of 401K inflows providing important liquidity.
There is a small sign of deterioration here as continuing claims are ticking up and have hit a cycle high. Payroll data is out this Friday.
Markets
The US market reacted well to the Nvidia result, which saw revenues up 12% quarter-on-quarter, beating consensus by 2%.
The important message was that shipments are picking up as supply chain constraints ease and demand remains good, which will help drive gross margin expansion.
It suggests there are no signs of weakness in the market for its graphic processing unit (CPU) chips, reinforcing the message from data centre hyperscalers (the largest users of data centre capacity such as Amazon, Microsoft and Google, among others) that capex is holding up.
There is also more focus now on the application layer for AI – for example, AI assistants on mobile phones – which will provide more confidence that the investment being undertaken can begin to be monetised.
This completes the earnings season for the Mag 7, which has proven to be one of the best in terms of revisions.
This, combined with a large underweight in tech among US hedge and long-only funds, helps explain why the market has been supported by the tech sector.
Australia
The S&P/ASX 300 returned 4.2% in May, driven by Technology (+18.8%).
Energy (+8.7%) and Small Resources (+10.1%) also outperformed on reduced concern over the risk of recession. Financials (+5.1%) did well, driven more by the insurers and market sensitives rather than the banks.
Defensive sectors such as Utilities (+0.3%) and Consumer Staples (+1.2%) lagged, having done well in April, while Health Care (+1.4%) was also weak on lingering concern over tariffs.
Large-cap Resources (+3.1%) also underperformed, with the outlook for iron ore seen as more subdued.
May also saw a mini-reporting season, which went reasonably well.
Results from Life360 (360, +51.9%) and Technology One (TNE, +36.8%) led the market higher, while the rest of the tech sector followed the US lead – with WiseTech (WTC) +21.1% and Xero (XRO) +12.2% on a good result.
Domestic cyclicals such as Qantas (QAN, +19.9%), Nine Entertainment (NEC, +12.9%) and Seek (SEK, +14.1%) also outperformed, helped by the RBA’s 25bps interest rate cut and its positive signalling on future cuts, as well as Labor’s election win which underpins government spending.
Industrials generally did better – notably Dyno Nobel (DNL, +18.1%) and Orica (ORI, +15.7%) on decent results supported by capital management.
Banks (+4.4%) were in line with benchmark, but this hid a more material divergence – with Commonwealth Bank (CBA) +5.6% and National Australia Bank (NAB) +5.2%, while ANZ (ANZ) was -2.8% and Westpac (WBC) was -0.9%.
Aggregate bank valuations remain at extreme levels, with the sector trading at almost four standard deviations above long-term price-to-earnings (P/E) and price-to-pre-provision-profit levels.
However, the bulk of this is now the CBA premium over the rest of the big four banks – this has reached record levels at 13 P/E points (23x versus 15x for the other “Big Three”) and is the best representation of the distorting effects of index weights.
Overall, the S&P/ASX 200 has returned to the top end of its historical valuation band at around 18x, which limits the valuation-driven upside from here and means the market will be earnings driven.
The positive here is that FY26 earnings-per-share growth is currently expected to be 6.9%, with resources finally no longer being a headwind.
The current valuation rating does make the market vulnerable to a deterioration in earnings. This looks unlikely in the next few months, however, given the solid economic outlook and supportive fiscal and monetary policy.
Inflation this month was broadly in line with expectations, while retail sales was a bit soft (-0.1% month-on-month, possibly tied to the election) which helps underpin expectations for RBA cuts.
The July meeting remains live for a cut, with the market at 60% probability, with two more cuts expected by year end.
About Crispin Murray and the Pendal Focus Australian Share Fund
Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and leads one of the largest equities teams in Australia. Crispin’s Pendal Focus Australian Share Fund has beaten the benchmark in 12 years of its 16-year history (after fees), across a range of market conditions.
Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.
The headlines driving Aussie equities | Falling USD should lift EMs | Where to find opportunities in theme-driven markets
Here’s what the latest inflation data means for markets, according to Pendal’s head of government bonds TIM HEXT
HAS a two-year disinflation trend in Australia finally come to a halt?
Today we received the Monthly CPI series for April. The headline numbers show prices 2.4% higher in April compared to the same period last year – the same as February and March.
The monthly trimmed mean (which removes the most extreme price movements to show the broader trend) was 2.8% – a small uptick from March.
Source: Monthly CPI indicator rises 2.4% to April 2025 | Australian Bureau of Statistics
As reminder, the monthly series tracks around 60 per cent of prices every month, 30 per cent every three months (varying by months), and 10 per cent once a year.
Therefore, the series can be volatile and is still not fully trusted by the RBA.
In her last press conference, Governor Michele Bullock reminded us once again that the RBA relies heavily on quarterly numbers.
The second quarter is young, but our early forecast for the quarterly inflation numbers released on July 30 is 0.8% for both headline and underlying.
What’s driving disinflation
There have been three main drivers of disinflation over the past two years.
Firstly, the most clear and obvious is the passage of time as we exit from pandemic supply shocks in many areas. It took a bit longer than we would have liked, but it did happen.
Secondly, monetary and fiscal policy have been contractionary. Added to this were government subsidies across several key areas at federal and state level.
Thirdly, as inflation fell, so did wages, creating a positive downside loop between the two and reversing the opposite from 2021 to early 2023.
However, all these have now either run their course or may even be heading in the opposite direction. Rates are coming down, fiscal policy is expansionary again, and there are few – if any – additional supply levers to pull.
From here, we expect services inflation to become very sticky around 3.5%. In fact, the risk is that services move a bit higher, with 4% more likely than 3%.
New dwelling costs (as measured by project homes) have been flatlining despite higher building prices. Margin pressure will see inflation resume there shortly.
Health inflation looks too low given actual costs, with health providers being squeezed as the government leans on health insurance costs.
And will private schools move back from 6% fee hikes to 3%? Unlikely.
Against this is an expectation that tariff wars may mean China and others move supply to Australia, seeking more demand through discounting. Goods prices have been growing around 1% in recent years and, with weaker commodity prices, may begin to flatline or even fall.
It is the only hope for inflation falling significantly further from here. We are, therefore, neutral on inflation at these levels.
Current levels do allow for more rate cuts – however, we do not share the narrative that the RBA has declared victory on inflation and is keen to get cash rates back to neutral (read 3%) sooner rather than later.
This narrative was fuelled by the governor’s recent comments, seeing markets currently price a 60 per cent chance of a July cut.
We think the RBA will still wait for quarterly inflation numbers to greenlight cuts and see August and November cuts as more likely.
Either way, we are still surprised to see Australian bonds above 4% and continue to favour long-duration positions.
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.