The Russian economy has been performing strongly, but the outlook is now uncertain as global sanctions bite. Here is the EM view from Pendal’s JAMES SYME
THE investing environment for Russian assets is clearly extremely uncertain right now.
Geo-political risk is intense — possibly the highest of any Emerging Market in the modern history of the asset class.
However, recently the Russian economy has been benefiting significantly from current demand levels and prices for major commodities. The equity market is incredibly cheap on all measures.
The Russian economy has been performing strongly on the back of commodity exports and a domestic recovery from Covid.
Economic growth in 2021 accelerated to a 14-year high of 4.7%, beating consensus forecasts.
Exports, investment by oil and gas companies and government spending have been all major contributors. Growth was stronger into the end of the year, and the outlook for growth in 2022 is promising.
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Our positioning in Russia was to move from heavily underweight to slightly overweight in January, following the declines in the equity market and the currency despite robust fundamental conditions.
From the October 2021 peak to the end of January, MSCI Russia index fell 24.6% in USD terms, even as the oil price rose through the USD 90/barrel level.
We recognise the intense political risk at the current time and the chance that sanctions mean we will not be given the time to see valuations move to reflect economic fundamentals.
However, we believe that, as index-relative investors, it is risky to not have (careful, scaled, diversified) exposure to Russia, given valuations and fundamentals.
An improvement in the political environment could lead to a very significant move in Russian assets, as we have seen in previous recoveries.
In calendar year 2009, the USD total return for MSCI Russia was more than 100%. From late 2014 to late 2016 it was 63.7%. From October 2020 to October 2021 it was 83.2%.
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We would highlight another facet of emerging market equity investing – there are no ‘safe’ investments.
In the past 12 months previous investor favourites Alibaba, Meituan and Sea Group (all Emerging Asian internet companies) are down more than 50 per cent in USD terms.
In the same period, the highly unpopular Brazilian energy company Petrobras (which has been one of the largest holdings in the portfolio) has returned 114% in USD terms.
We continue to adhere to our successful process, which is to combine economic, political and market risks and opportunities into a top-down view to identify preferred countries, and to apply a rigorous risk-focused portfolio construction process to allocate to those markets.
About James Syme and Pendal Global Emerging Markets Opportunities Fund
James Syme is a senior portfolio manager of Pendal’s Global Emerging Markets Opportunities Fund with Paul Wimborne.
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.
Deep, country-level analysis is critical in emerging markets investing, says Pendal’s James Syme. India and Mexico are two examples of countries with hidden strengths
- Conventional wisdom says India, Mexico should slow
- Hidden depths to their economies leave them well placed to grow
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LOOKING beyond the headlines is critical in investing, especially when assessing emerging markets, says Pendal’s James Syme.
India and Mexico are two current examples of countries with unexpected, hidden strengths.
Rising inflation and higher commodity and energy prices are traditionally a negative for commodity importing countries like India and Mexico, says Syme, who co-manages Pendal Global Emerging Markets Opportunities Fund.
Yet he likes both countries due to domestic factors that leave them well placed to weather global economic changes.
“Mexico is a major oil producer, but a significant commodity importer that trades on the strength of its manufactured exports to the US.
“India has a long-standing vulnerability to commodity prices both through inflation and the current account balance.
“So why are we positive on these two markets?”
The reason is hidden in the domestic data.
For India, it’s the unsung strength of its computer service exports. For Mexico, it’s the record remittance income from citizens working abroad.
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“It’s easy to overlook the strength of India’s computer services exports. There’s no single trade number that captures things like IT services, software product development, business process outsourcing, data services, engineering services and the like,” says Syme.
“But there’s a central bank survey. In 2013, Indian exports of these types of services were $62.6 billion but in 2021 they were $133.7 billion.
“Because the listed companies make up so much of that market you can almost get a feel for how they are doing by extrapolating from the 20 largest listed business.
“And this year, ending March 2022, should be a really good year.”
This matters because in 2013, India’s oil imports — the key economic vulnerability traditionally feared by investors — exceed its IT services exports by $100 billion.
But in 2021, the deficit was erased.
“A significant part of India’s oil import bill is now being paid by its IT services exports — and they continue to grow significantly.
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“The India of today and the India of ten years ago are not the same country.”
A similar story in Mexico
Syme tells a similar story about Mexico.
As a commodity importer and manufactured goods exporter, Mexico should struggle in times of rising input prices.
But the overlooked factor is the huge and growing remittances being sent home by Mexicans abroad.
“Lots of countries have income from citizens who work abroad, but for Mexico, remittance income is really big. Family remittances were $52 billion in calendar 2021.”
These remittances almost entirely come from the US, where tight labour markets, especially for low paid workers, are proving “exceptionally positive for the Mexican economy”, says Syme.
“One of the main things Mexico exports is Mexicans. Being adjacent to the US is Mexico’s secret strength.
“Like IT services in India, it’s been a story of steady growth. In 2021, remittances in Mexico were up 25% on the calendar year before.
“It doesn’t show up in the trade balance — but we think you have to take it into account.”
About James Syme and Pendal Global Emerging Markets Opportunities Fund
James Syme is a senior portfolio manager of Pendal’s Global Emerging Markets Opportunities Fund with Paul Wimborne.
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.
Rising oil and gas prices mean boom times for emerging market energy exporters such as Brazil, Mexico and Russia, says Pendal EM manager JAMES SYME
- Rising oil prices are lifting energy exporters
- Boom times for countries that sell energy
- Brazil, Mexico and Russia the picks
GLOBAL equity investors should look to Brazil, South Africa and Russia in 2022 as rising oil and gas prices deliver widespread economic growth to emerging market energy exporters, says Pendal’s James Syme.
Shifting attention to commodity exporters would be a change for many global investors who have been enamoured with China’s internet sector and the big semi-conductor stocks in recent years.
Syme — who co-manages Pendal Global Emerging Markets Opportunities Fund — agrees that has been the right approach for the past decade.
“But the Chinese economy is not particularly strong at the moment, and while it’s been a long time coming back for some of these other emerging markets, everything is starting to look good,” he says.
The oil price at around US$90 a barrel is at its highest levels since 2014 amid surging demand, while European near-term gas futures — which normally trade between EUR 10-20/MWh — recently spiked above EUR 180.
Syme says it’s not surprising that energy prices are rising as a long period of low investment in new capacity is followed by a sudden post-Covid resurgence in demand.
Western Europe has been reducing domestic gas production for environmental reasons, lifting its reliance on Russian gas. Germany has been steadily decommissioning nuclear power, including shutting three of its last six nuclear plants on December 31.
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And recent weather patterns have also played a role. Over the past few years Europe has had unseasonably cold winters and warmer than usual summers — which both lift energy use — while relatively windless autumns have capped power production at wind plants.
At the same time, Russian domestic demand for gas is rising and Russia’s gas exports to other countries, including China, have been increasing.
‘Boom times’
“Rising energy prices and the resulting inflationary push are going to be an economic and political problem for energy consuming nations,” says Syme.
“But for the countries that sell energy, this is fantastic.
“It’s just boom times.”
Syme says the boom is not limited to energy, with many other agricultural and mining commodities also seeing price rises, which benefit Brazil and Russia, and other commodity exporters like South Africa.
“And we haven’t really seen the reaction in terms of what that might mean for domestic stocks or currencies that we would expect to see.
“That’s why we continue to have positive view towards some of these markets and think they’re overlooked.”
Higher commodity prices flow directly through to economic growth in exporting nations.
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More export earnings mean companies can lift capital investment, hire more staff and pay higher wages, boosting consumption. Higher exports also improve a country’s current account balance and support its currency.
The resulting growth flows through to tax revenue, allowing governments to lift spending or cut taxes.
“It’s positive across the board,” says Syme.
Natural gas is also benefiting from its potential role as a bridge in the transition to lower carbon emissions.
“Both in terms of production and consumption, the carbon emissions per unit of energy for natural gas are lower than oil and much, much lower than coal.
“Notwithstanding the geopolitics, Europe could significantly reduce its carbon emissions if it switched power generation from coal to natural gas.”
So where to focus investment attention?
“We think this is a good time to own Latin America, where we prefer Brazil and Mexico” says Syme.
“We also think it’s a good time own South Africa and Russia.”
About James Syme and Pendal Global Emerging Markets Opportunities Fund
James Syme is a senior portfolio manager of Pendal’s Global Emerging Markets Opportunities Fund with Paul Wimborne.
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.
One of 2021’s takeaways is that Covid is cyclical, says Pendal’s JAMES SYME. That means investors should be on the look-out for opportunities among over-sold reopening stocks
- Sell-off in the reopening trade provides opportunities
- Strong balance sheets with attractive valuations will reward investors
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ONE of the big lessons of 2021 for investors is that Covid is cyclical.
“It has these short-term cycles,” says James Syme, who co-manages Pendal’s Global Emerging Markets Opportunities Fund.
“Things get bad and then they get good and then they get bad again. And when things are getting bad, it’s not the end of the world.
“The speed of that cycle is much faster than a business or interest rate cycle. It’s measured in less than a year. That’s one of the key take-aways of 2021.“
When investing in this type of environment, it’s important to stick to fundamentals, and not get too swayed by trends, he says.
“If you buy good businesses with strong balance sheets at attractive valuations, you’re doing the right thing. We’re investors. We aren’t trading stocks.”
Opportunities among over-sold re-openers
Global conditions may not be optimal for emerging markets right now, but there are opportunities to be found partly because the recent selloff in the re-opening trade has been overdone says Syme.
“A combination of tightening monetary policy by the US Federal Reserve, a stronger US dollar and a slowdown in China creates a difficult environment.
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“If you think about what fuelled the boom in emerging markets from 2002 to 2008 it was relatively soft US monetary policy and a huge boom in China,” Syme says.
But there are opportunities, in part because Syme believes the selloff in the re-opening trade has been overdone.
“We always think about the opportunity in emerging markets, rather than the opportunity of emerging markets,” he says.
“Leisure, airlines, hotels and even bits of retail have been sold, and that’s accelerated in the last month by fears about the new Omicron variant of Covid-19.
“But I think some of the sell-off is too much. We are going to get back to normal at some point.”
Where the opportunities are
Syme has been considering reopening opportunities, and recently added a Korean entertainment business to the fund he manages, Pendal Global Emerging Markets Opportunities Fund.
In Brazil, the fund holds an airline and a brewer.
He still sees opportunities in emerging markets that are reliant on commodity prices.
“Commodity prices remain elevated, notwithstanding some have come off a bit,” he says.
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That helps other parts of commodity producing economies, he says, nominating retail in South Africa, where mineral exports have been extremely strong.
There are also opportunities for the reopening trade in the Middle East.
“We own a real estate name in the UAE which is a beneficiary of higher oil prices. Because it’s in Dubai, it also benefits from the normalisation of travel and tourism,” he says.
Syme acknowledges the risk that the short-term performance of some of these stocks may disappoint.
“But the next couple of quarters of cash flow may not reflect the overall value of the business.”
He emphasises the need to find opportunities within emerging markets and some bourses he remains underweight.
“In Russia we’re concerned about political risk and the Ukraine.”
About James Syme and Pendal Global Emerging Markets Opportunities Fund
James Syme is a senior portfolio manager of Pendal’s Global Emerging Markets Opportunities Fund with Paul Wimborne.
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.
A country-by-country approach to asset allocation is the best approach for Emerging Markets investors right now as inflation risks play out, says Pendal’s James Syme.
Watch a short video interview below with Pendal senior fund manager James Syme and portfolio specialist Chris Adams. Scroll down for a transcript.
Subtitles are available: Please click “CC” in the video player.
TRANSCRIPT
Chris Adams, Pendal portfolio specialist: Hello and welcome. I’m joined today by James Syme, senior fund manager for the Pendal Global Emerging Markets Opportunities Fund.
James, I wanted to start with something more macro in nature that investors are grappling with internationally. That’s the risk of stagflation. Talk us through your take on the risks of stagflation and potential implications for emerging markets.
James Syme, senior fund manager, Pendal Global Emerging Markets Opportunities Fund:
If we take a step back and look at the nature of Emerging Markets (EM) equity as an asset class, EM equity is a growth asset. It does well when growth is strong, both through the more manufacturing export side of emerging markets (perhaps some of the Asian markets) and also through demand for commodities (perhaps from Latin America, South Africa, Russia, Middle East).
So EM is a growth asset. It tends to do well when the global cycle is strong and the slow growth with stagnation would definitely be more challenging for EM equity.
Then assuming on the inflation side you get a traditional developed market, central bank reaction function where they put rates up in response to the inflation part of stagflation, that would be a difficult environment for Emerging Markets.
Stagflation is in a sense, the worst of both worlds.
So were you to see sustained inflation, and world and central banks hiking rates to deal with that, that would be difficult for EM, because you would see capital flow from Emerging Markets back to the developed world, which would be a drag on economic performance and on market returns.
However, I think firstly, we are clearly in a slightly different developed market, central bank reaction function for now.
You’ve seen much more willingness to accommodate inflation on the upside, whether it’s the Federal Reserve, the ECB, the Bank of England.
So if you do get short-term stagflation, you don’t necessarily get the penalising policy interest rates in the developed world as a response.
Secondly, part of the beauty of EM equity as an asset class is that it is very differentiated at country level. There will always be parts of EM doing well and parts doing badly.
There will always be opportunity within the asset class.
The reason our process works like it is, is to identify which of those countries have the better prospects at that point in time.
So within any stagflation environment, there will be some countries that can do better.
It really depends on which part of the basket of goods and services is driving the inflation.
High oil prices are good for some EMs, not for others. High food prices are good for some and not others.
So there will be winners within the asset class in almost any situation. And that’s part of the beauty of the asset class, and why our process works like it does.
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Chris Adams: You’ve got a position in the portfolio in Brazil. Brazil is one of those countries that we have seen hiking interest rates up in the last couple of months in response to inflation. Does this have an impact on your positive thesis around Brazil? Has it changed your view of the country at all?
James Syme: I’d say two things about what we own in Brazil. Firstly, our overweight position is one of the smaller ones in our portfolio, partly because we were concerned about these risks.
We were also cognisant of political risk there.
Secondly, we have a very US dollar revenue / export type portfolio. So we do have some domestic exposure. We have some consumer and transport and travel names. But the bulk of what we own is oil and gas and pulp and paper. So we are less exposed to the domestic economy and more exposed to the global cycle and commodity prices there.
So we haven’t really built a portfolio of very domestic cyclical assets in things like real estate or banking like we have perhaps in some other markets.
Brazil is working exactly as our thesis for how this type of Emerging Market works. Where you have these markets that tend to be higher risk and tend to be more dependent on foreign capital, you get these positive and negative cycles that occur.
So when you get a positive cycle, which is where India is – we also have an overweight in India which is working very well – you’ve seen strong economic recovery in over the last 12 months. And with it, you’ve seen capital flowing in, which strengthens the currency, which depresses inflation and enables interest rates to be kept low, which supports growth. That’s how the cycle works.
So CPI inflation in India is 5.3% [after this interview it fell to 4.35% for September] and is expected to fall in the next couple of months. So India is in a very good place right now.
Brazil has ended up at the moment on the other path. So capital growth is slightly weak, and inflation is slightly higher, capital flows out, that weakens the currency and the weaker currency feeds through to inflation which causes rates to go up — and you’re on the other half of that.
Now we don’t see in Brazil, structural conditions around things like capacity utilisation and unemployment to cause sustained inflationary pressures.
We think when the inflation numbers start to improve, then you’ll start to see capital flowing back in.
(And this is far more about fixed income capital flows, than equity market capital flows.)
But when the capital flows back in, and the Real starts strengthening again, those inflation numbers could come down pretty quickly. Then we may well transition our portfolio from a more external / export-based one to a more domestic one.
So we’ve held off waiting for that to occur. But there’s nothing in Brazil we think at the moment to suggest there’s a sustained inflationary pressure.
So if you’ll permit me to add another EM to my answer, Turkey has inflationary pressures because for the last four or five years, they’ve had this big credit fuel boom, a lot of credit in the economy, big increase in house prices, a lot of consumption, and now they’re feeing the effects of that.
Brazil hasn’t had that as a problem. We fundamentally don’t see the conditions in Brazil of having been in a boom, of having high capacity utilisation and low unemployment that can cause structurally sustained inflation.
So we’ve been cautious within Brazil. What we’re waiting for is that turn. We do believe that the conditions are there for it.
Chris Adams: If we perhaps move from Latin America, go around the globe to Asia, there’s a lot happening in China. Obviously a very large part of the market and plenty going on there. Maybe if we just hone in on one specific aspect, obviously there’s been a lot of headlines around Evergrande, commentary about this being China’s Lehman brothers moment. It’d be great to get your take on Evergrande. Does this present that systemic risk to the Chinese economy?
James Syme: We really don’t think that it does. Firstly, we’ve seen the comparisons in investment commentary in the media with Lehman brothers.
The problem with Lehman was it was so interlinked with everything else. All the other investment banks back in ’08 were all dependent on each other. That’s not really how the property market works.
Evergrande will undoubtedly cause some significant defaults on some parts of debt and there will be pain where those are owned. But those debts aren’t owned, for example, by other property developers.
And where you’ve got domestic debts within the Chinese financial system, firstly, we think there should be easily the capacity to bear it.
The entire Chinese financial system is so big and Evergrande is not hugely material in it.
Secondly, we’re very sure there will be state support or workouts required to protect the domestic financial system. We’re very sure that will be the case.
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What we think we’re seeing with Evergrande is really… A lot of the focus on Evergrande is the fact that it’s a real estate business. But we think really the pressure is on leverage.
There’s been a very significant tightening in the last 12 months of monetary policy in China. We had the latest set of credit monthly data in the last 24 hours. Once again we’re even lower than we were before.
So they’ve really trodden on the brakes in terms of monetary policy. They’ve been very clear with some of their specific policies and some of the statements that highly leveraged groups are going to be in trouble. And they are happy I think to let that happen.
What’s happened to Evergrande isn’t a surprise to Chinese policy makers. It’s very clear from the way they had structured their policies – the three red red lines about additional borrowing in real estate developers – that they were saying to these companies, either you recapitalise yourselves and de-lever or you’re going to face trouble.
We think this is a deliberate policy choice. It’s kind of euthanasia for highly leveraged firms. And we are very sure there will be whatever support or workaround to prevent any kind of contagion.
Now that all said about the fact that we’re not about to go into a Chinese version of 2008, the credit money supply data we’ve seen over the last six months or the last year, does suggest a further slow-down Chinese economy.
We think that has implications for what one wants to own in China. We remain very defensively positioned in things like utilities, consumer staples – and in the very quality end of areas like real estate.
It also has significant implications for some global commodities — I’m thinking particularly about metals. Even if you see stronger demand in the developed world, a big continued slow-down in China, we think has to be bad for thgins like iron ore and copper and we have no exposure to those things in the portfolio at al.
Chris Adams: Thank you for that, James. It might be nice to finish up with a brief overview of any changes you’ve made in the portfolio recently, any adjustments in your positions.
James Syme: We’ve mostly been making small changes within some of the names we own. With the big dislocation in China, we have found opportunities to add the names we already own, that we like. That includes one of the real estate names we believe is very much the highest quality, private-sector real estate company in China.
We took the opportuity a couple of months ago to add to that really at what we believe is the lows and it’s made a recovery since.
We have found some consumer names in China as well, which have come down with the market, where we don’t see a justification for that.
I’d say what has been a lot of our workflow over the last couple of months has been looking at some of the developing Covid data and economic data and looking for where there’s potential opportunity.
We’ve been out of Southeast Asia for quite a long time – markets like Indonesia, Thailand, The Philippines.
Those markets are quite dependent on tourism and as we start seeing vaccinations rates increase around the world, including in those countries, there may well be some interesting opportunities there.
So we’ve been preparing to potentially make some changes there.
Chris Adams: Thank you very much for your insights and your time from London this morning James, we really do appreciate it.
James Syme: Great. Thanks Chris.
Chris Adams: Thank you all for joining us. If you have any other questions around the Pendal Global Emerging Markets Opportunities Fund, please don’t hesitate to reach out to your account manager and we will be more than happy to help you.
Thanks for your time. Goodbye.
About James Syme and Pendal Global Emerging Markets Opportunities Fund
James Syme is a senior portfolio manager of Pendal’s Global Emerging Markets Opportunities Fund with Paul Wimborne.
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.
Trouble in China is obscuring strong performances in other emerging markets, demonstrating the importance of a country-by-country approach in this asset class, says James Syme
- India, Mexico and South Africa performing well
- With each Covid wave economic impact lessens as economies adjust
- Find out about Pendal Global Emerging Markets Opportunities Fund
INVESTORS in emerging markets have experienced challenges in recent months, but the underlying story is more nuanced.
Falls in the MSCI Emerging Markets Index since February’s peak are almost entirely dominated by shares in China and South Korea — masking strong performances in countries as disparate as India, Mexico and South Africa.
This demonstrates the importance of taking a country-by-country approach to emerging markets investing says James Syme, who co-manages Pendal Emerging Markets Opportunities Fund.
“As we always say, even if emerging markets as a whole is not an opportunity, there’s always going to be individual opportunities within the emerging markets sector,” says Syme.
India is booming
Much of the news coverage of India in 2021 focused on its steep Covid second wave, which in May was killing more than 4000 people a day.
But Covid has subsided and economic stimulus has supported an economic boom.
“Now, we’ve got capital inflows, a rising stock market, rising property prices — India is in this fantastic boom.
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“Valuations are challenging — but that represents the fundamental strength of the economy.”
India’s strength is even more impressive given the strong US dollar, high oil price and higher US bond yields, which would normally be expected to lift inflation, blow out the trade deficit and be a drag on Indian stocks.
But inflation in India is contained, coming in at 5.3 per cent to August, versus more than 10 per cent in other emerging markets like Brazil, and the trade deficit is rising slower than economic growth.
“So India looks great. It’s one of our favourite markets and one of our biggest overweights.”
South Africa stronger
Similarly, South Africa has emerged from its political unrest in July to perform more strongly. Its mining sector is growing strongly and the domestic economy is recovering from Covid.
“Traffic stats, credit growth, vehicle sales — they all look pretty strong and there have been big upgrade in growth estimates from the central bank,” says Syme.
Fears of rising Covid cases knocking emerging markets economies off course were misplaced.
“It’s becoming more manageable. With each successive Covid wave, companies and populations and governments learn how to cope.
“The first wave was terrible. There was no toilet roll, no eggs and no one knew what to do.
“Now, if you get another Covid wave every one knows what to do — the kids go home, the lessons are on Zoom, the parents work from home, food delivery picks up again. People adapt.
“With each wave, the economic impact is less because economies adjust to deal with it.”
About James Syme and Pendal Global Emerging Markets Opportunities Fund
James Syme is a senior portfolio manager of Pendal’s Global Emerging Markets Opportunities Fund with Paul Wimborne.
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.
COST OF LIVING pressures are creeping in, with more to come.
I’ve lost track of how many politicians have promised to “ease the squeeze”, but with an election early next year it’s probably getting dusted off.
So far the official data is not fully reflecting this, although food and fuel prices should see another healthy headline inflation number for Q3 when released in late October.
All this has happened with subdued demand.
As mentioned many times over the past 18 months this has been — and remains for now — supply led.
However talk of transitory is misleading — unless three years is now considered transitory.
When NSW reopens shortly, high savings and incomes should see a surge in demand, pushing prices higher again.
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Supply will be slower to come back, partly mandated (eg restaurant dining numbers) and partly due to businesses having closed.
Good luck finding a restaurant booking in December. I would imagine proprietors take advantage of this with pricing. Who would blame them after the last 18 months ?
After a subdued September, due to a rare fall in risk assets, market inflation expectations are returning this month, once again nudging 2%. We expect to see 2.5% by year end.
Wagse remains the missing piece for medium-term inflation.
Everyone is reporting worker shortages but so far companies are looking to short-term measures to attract and keep staff — a sign-on bonus here, flexible conditions there.
However the dam wall of ten years of low wage growth is at risk of bursting.
I know if I worked in affected industries — from healthcare to construction to hospitality — I’d be taking advantage of a sellers (workers) market for labour. A recent increase in strike action suggests this realisation is dawning.
At risk of sounding like a broken record, higher inflation is not guaranteed, but insurance remains cheap.
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.
Where to next after the Reserve Bank kept rates on hold at its September meeting? Pendal’s head of cash strategies STEVE CAMPBELL explains
THE Reserve Bank left the cash rate unchanged at 3.6% at its September meeting.
No change was expected.
Market expectations for further easing were pared back following a stronger-than-expected monthly inflation data released prior to today’s meeting.
The monthly series showed annual headline inflation of 3% and trimmed mean at 2.6%.
Components of this number did cause some upward revisions to economists’ forecasts for the more comprehensive third-quarter inflation data due for release on October 29.
(For more details please refer to this article from our head of government bond strategies Tim Hext.)
Yields moved higher in the front end of the curve following the RBA’s decision.
In their statement the RBA noted that “private demand is recovering a little more rapidly than expected”, and the housing market is strengthening.
The market now has around a 40% chance priced in for a rate cut on Melbourne Cup day.
At the start of September it was priced as all but certain.
The RBA has scope to ease policy further – if required.
With 75 basis points of easing so far – and signs of life emerging from household consumption – the case is building for the RBA to remain on hold for the rest of 2025.
Inflation may come in a bit higher than expected in October, but it should not derail further easing.
The RBA seems comfortable with the end destination at the moment – it may just take a little longer to get there.
Should that occur, the meeting in early February would be the next opportunity.
If you’d like to hear more about how Pendal’s Income & Fixed Interest team is positioning for this environment, please contact us through your account manager by reply email.
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About Steve Campbell and Pendal’s Income and Fixed Interest team
Steve Campbell is Pendal’s head of cash strategies. With a background in cash and dealing, Steve brings more than 20 years of financial markets experience to our institutional managed cash portfolio.
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Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.