Equities investors will see a continued impact from rising energies, but talk of a new energy crisis is overblown says Pendal’s Asian equities expert SAMIR MEHTA

RISING energy prices are posing an increasing threat to the global economic recovery, with very few businesses immune from the ripple effects of a higher oil and gas prices, according to Pendal portfolio manager Samir Mehta.

Mehta, who manages Pendal Asian Share Fund, says the effects of higher oil and gas prices mean lower disposable incomes across developing and developed markets — and will crimp business profits as the world emerges from Covid.

But talk of a new energy crisis is overblown, he says. The world is in a very different place from the last oil shock in 2008, with materially higher incomes and more accommodative policy to soften the direct blow to incomes.

“You also have to consider the time value of money. The last time the oil price went above $100 was 2008. A dollar does not have the same value today as it did in 2008.

“Headline prices have increased significantly this year, however in a historical context there are substantial differences.

“Global GDP has grown by roughly 3 to 4 per cent per annum over the past decade.

“Relative to GDP, energy prices are still benign compared to 2008.”

A headwind for economic recovery

Still, rising energy prices are coming at a delicate time for global markets, which are also coping with a slowing Chinese economy, supply chain-related inflation and a gradual tapering in monetary policy stimulus as bond-buying programs shrink relative to the size of the economy.

“In India, petrol and diesel prices are above all-time highs,” says Mehta.

“Americans are starting to feel it at the pump. Australia and every other country are going to face the same problem.”

The underlying driver of higher energy prices is restrictions on supply due to underinvestment in energy infrastructure as the world grapples with carbon emissions reductions targets, says Mehta.

China recently ordered coal mines back to production after sweeping power cuts aimed at improving environmental outcomes.

China’s reaction to energy shortages is also likely to include limits on coal prices and coal company profits to push energy costs lower.

But this heavy-handed approach is likely to have unintended consequences, says Mehta.

“There is a clearing mechanism in capitalism called pricing which usually brings supply and demand into some kind of equilibrium.”

“Markets are telling us we need more supply. But as a society are we prepared to allow more coal or oil or gas production?”

China’s zeal for zero-COVID ahead of the Beijing Winter Olympics is also complicating the outlook, with ports, transport, cities and even whole provinces at risk of shutdowns if COVID cases emerge.

“They are the last hold-outs,” says Mehta. “Every other country except North Korea has given up on zero COVID – even Australia and New Zealand.”

Businesses face a conundrum

The result is that businesses — and investors — are faced with a difficult conundrum.

“I may own a business that has navigated supply chain problems, but all of sudden my customers might face lower disposable incomes,” says Mehta.

“Or I own a business in which disposable incomes are not a problem – the business has pricing power – but that business can’t meet demand due to lack of inputs as their suppliers are struggling.

“Purchasing managers at companies must be ‘over ordering’ to hedge their bets and build contingency reserves — this could mean an inventory build-up. Strong current demand might not necessarily mean end consumer demand. There are several issues to grapple with.”

Idiosyncratic investor risks

So, how can investors proceed through such an uncertain outlook?

Mehta advises a stock-by-stock and country-by-country approach but is still subject to risks.

“This is a situation in which few businesses – if any – will remain immune from the conditions we find ourselves in,” he says.

“Almost every single company in their result announcements mention rising costs.

“The intensity of uncertainty has increased.

“We are likely facing a very volatile period for markets with idiosyncratic risks – be prepared for it.”

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About Samir Mehta and Pendal Asian Share Fund

Samir manages Penda’s Asian Share Fund, an actively managed portfolio of Asian shares excluding Japan and Australia. Samir is a senior fund manager at UK-based J O Hambro, which is part of Pendal Group.

Pendal Asian Share Fund aims to provide a return (before fees, costs and taxes) that exceeds the MSCI AC Asia ex Japan (Standard) Index (Net Dividends) in AUD over the medium-to-long term.

Find out about Pendal Asian Share Fund

About Pendal Group

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

Contact a Pendal key account manager.

Fading government stimulus is placing global stock markets at a turning point and investors should reassess risk, says Pendal’s Samir Mehta

FADING fiscal stimulus and the dwindling effect of central banks bond purchases is placing global stock markets in a precarious position — which means it’s time to reassess portfolio risk settings, says Pendal’s Samir Mehta.

Mehta, who manages Pendal Asian Share Fund, says the fact that central bank bond purchases are being held at absolute dollar levels means they are not keeping pace with growing money supply in the economy.

That’s ahead of any formal tapering of stimulus and comes while business and consumers are also facing headwinds from supply constraints and rising prices.

It’s time for a change in investor mindset from the strong growth of 2020 to consider a period where stockmarket returns may be more subdued and risks are increasing, says Mehta.

“Policy has now become restrictive, even though it is loose relative to 2020,” he says. “What you want to do now is to reassess the risk.

“If you find you have too much weighting in an asset class that has done exceedingly well — and I’m pointing to developed markets like the US and particularly the technology names — you should be thinking of rebalancing.”

Take a big-picture view

Mehta says investors should take a big picture view of what’s been driving markets over the past two years to understand where they might go next.

“Even though I focus on picking the right stocks with a bottom-up approach to portfolios, at times like this you need to sit back and revaluate overall risks.” 

For much of 2020, stock markets roared as governments allowed deficits to run to combat the pandemic and central banks reduced interest rates to zero or below.

Stimulus droves household disposable incomes higher. Coupled with debt relief from lower interest rates, rental stays and mortgage relief, spending boomed.

Business bottom lines also benefited from the pandemic. Discretionary costs such as travel were slashed. Many took the opportunity to get structural costs under control and commodity price falls lowered input costs.

“Profit margins for the corporate sector went up — profit growth was staggering,” says Mehta. “That was 2020.”

Now the world looks different.

Three truths that drive markets

“There are three universal truths that drive markets,” says Mehta.

“One is earnings progression — are earnings going up or down? Two is valuation — is that asset you want to buy cheap or fair value or expensive?

“And third — is there enough liquidity to support that asset?”

On those three measures, global investing is looking risky, says Mehta.

“Last year you had disinflation or deflation — this year you have inflation, which is a creeping tax on consumers.

“But from a corporate perspective, it’s also a problem as energy and commodity prices rise, which is increasing raw material prices.

“So even though demand may be strong, supply may be constrained.”

The change is akin to a shift away from the winners of last year in favour of the companies that did it tough during the pandemic, he says.

“It is rearranging the deckchairs of corporate profitability across the world — profits are moving from companies that made lots last year to those that were starved of it.

“So the logistics companies and the container-shipping companies are now making money hand over fist.

“Similarly, commodities — last year they were a loser, this year are a winner.

“When I put all of this together, we are at a juncture in markets where it’s now likely that even though demand conditions are good, even though consumer balance sheets are good, even though income levels are good, there are pockets of resistance on the horizon.”

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About Samir Mehta and Pendal Asian Share Fund

Samir manages Penda’s Asian Share Fund, an actively managed portfolio of Asian shares excluding Japan and Australia. Samir is a senior fund manager at UK-based J O Hambro, which is part of Pendal Group.

Pendal Asian Share Fund aims to provide a return (before fees, costs and taxes) that exceeds the MSCI AC Asia ex Japan (Standard) Index (Net Dividends) in AUD over the medium-to-long term.

Find out about Pendal Asian Share Fund

About Pendal Group

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

Contact a Pendal key account manager.

Ongoing supply constraints will likely see 2.5% inflation in Australia next year. That may mean the start of a modest rate hiking cycle in 2023, says Pendal’s Tim Hext

INVESTORS were hoping the things driving risk markets higher might go unnoticed by central banks.

But a stronger economy, higher earnings and emerging inflation pressures could only be ignored by central banks for so long.

Emergency measures would eventually have to expire — and it seems we are nearing the time.

In Australia the central bank seems reluctant to remove the punch bowl too soon, choosing instead to almost outsource timing to the US Fed.

Australia will not be first to move to completely remove Quantitative Easing or to eventually raise rates.

But markets are correct in thinking the day draws closer.

The Reserve Bank is sticking with 2024 — but is likely to hit its inflation target of 2.5% long before then.

We are growing in confidence that ongoing supply constraints in our economy will see us hit 2.5% inflation next year.

The RBA will want to see several prints, but 2023 should see the start of a modest hiking cycle.

The expiry of the Term Funding Facility will also have an impact in 2023 and 2024 — that alone pushes mortgage rates up 0.75%.

So the RBA should only need to raise cash to 1.25% by 2024 to see an overall real economy rate structure 2% higher.  

At that point the punch bowl will be gone and the party will end.

Let’s hope people taking on large amounts of debt today can cope.

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

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

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

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

Find out more about Pendal’s fixed interest strategies here

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About Pendal

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

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

Contact a Pendal key account manager

In all the investor excitement about AI equities, investors may be missing a crucial factor. Pendal equities analyst ELISE MCKAY explains

• Generative AI capturing investor imagination
• But high electricity costs could hinder usage
• Find out about Pendal Horizon Sustainable Australian Share Fund
• Find out about Pendal Focus Australian Share Fund

Big US tech stocks are soaring on a wave of new, advanced AI applications.

But similar to Bitcoin’s early days, excited AI investors may be overlooking the technology’s extremely high power costs and potential associated sustainability issues, argues Pendal Aussie equities analyst Elise McKay.

While the remarkable progress of AI promises to revolutionise industries, the sheer cost of the electricity needed to train and run the systems puts a question mark over the long-term prospects of adoption.

“There’s three key components of power usage required for running a generative AI model,” says McKay.

“First of all, there’s the power needed to simply build the equipment that it runs on.

“Then there is the enormous power required to train the model.

“And then every time you ask it a question it requires new computations — and that means more power.”

Even before generative AI became widely available, demand for data was expected to increase at a compound annual growth rate of 40 per cent per year.

The data centre industry is already estimated to account for about 1 per cent of global energy demand, says McKay.

“Just because it’s on your phone doesn’t mean it’s not in a data centre somewhere — and data centres need electricity. Any new technology just increases demand for power.”

McKay uses the example of bitcoin mining, which rapidly increased its share of global energy consumption from next to nothing to an estimated 0.5 per cent in 2021.

“Emerging technologies like bitcoin mining can see very rapid adoption and dramatic increases in demand for power,” says McKay.

“We are now seeing the broad take up of generative AI, which is significantly more power hungry than existing technologies.”

A study by Stanford found that training the popular GPT-3 generative AI system contributed almost 10 times the emissions that the average car consumes in its lifetime, says McKay.

Estimates are the newer GPT-4 model was eight times more power intensive again, she says.

“And you don’t just do this once, you do it regularly.”

OpenAI — the company behind ChatGPT — says it continuously improves its AI model by “training on the conversations people have with it”.

“And each model can only do one search at a time,” says McKay. “So, if 100,000 people search for something at the exact same time you need 100,000 copies of the model otherwise queries will be queued.

“Estimates are that every time you query ChatGPT, it is 300 times more expensive than a Google search.”

High power usage has also raised question marks over the carbon footprint of the technology industry, with many providers shifting to renewable energy to minimise their impact on the environment.

“The high cost of providing AI will hinder its adoption,” says McKay.

“It may mean that only companies willing to pay a high price will be able to use it. There’s a good use case for companies willing to pay for it because it improves productivity, but will we see broad adoption for low-paying use cases?”

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About Elise McKay and Pendal Australian share funds

Elise is an investment analyst with Pendal’s Australian equities team. Elise previously worked as an investment analyst for US fund manager Cartica where she covered a variety of emerging market companies.

She has also worked in investment banking and corporate finance at JP Morgan and Ernst & Young.

Pendal Horizon Sustainable Australian Share Fund is a concentrated portfolio aligned with the transition to a more sustainable, future economy.

Pendal Focus Australian Share Fund is a high-conviction equity fund with a 16-year track record of strong performance in a range of market conditions. The Fund is rated at the highest level by Lonsec, Morningstar and Zenith.

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

Contact a Pendal key account manager here

Here are the main factors driving the ASX this week according to Pendal Australian equities analyst ELISE MCKAY. Reported by portfolio specialist Chris Adams

• Find out about Pendal Focus Australian Share fund

WE remain in a stock-picker’s market, after emerging from the largely macro-driven environment of the pandemic.

This is emphasised by the still-clouded outlook for the economic cycle and interest rates on one hand — and the extraordinary AI-driven uplift in revenue guidance from chip-maker NVIDIA on the other. 

The outlook for US rates remains uncertain. Fed-speak remains mixed.

Last week Christopher Waller — a member of the rate-setting Federal Open Market Committee (FOMC) — suggested a pause may be appropriate while tighter credit conditions continued to dampen inflation.

But April’s Personal Consumption Expenditure (PCE) index — a measure of US inflation — came in hotter than expected, increasing the chance of another hike in June.

Other economic data from last week suggests the US outlook is stronger than expected, while much of the rest of the world looks weaker. China is not contributing as much as expected and Germany is now in technical recession.

We saw a positive development on the US debt ceiling. The Biden administration and House speaker Kevin McCarthy over the weekend agreed to raise the debt limit and cap federal spending until after the 2024 election.

A lack of visibility in the macro narrative compares with high levels of market conviction in the emerging micro-narrative of AI.

NVIDIA reported a blow-out quarter. Its second-quarter revenue guidance was more than 50% ahead of consensus expectations on the back of AI-related demand for its GPU (graphics processing unit) chips, driving huge bottom-line upgrades. 

This drove a 2.5% gain in the NASDAQ, despite two-year US bond yields rising 30bps.

The S&P500 rose a more subdued 0.35%, while the S&P/ASX 300 was down 1.74%.

Fed speak

We continued to receive mixed communications from the Fed, with no clear direction. This overshadowed the release of May’s FOMC meeting minutes. 

While inflation remains too high, concerns continue over the impact from tightening credit conditions due to stress in the banking system.

The question is whether this will do some of the work that further rate hikes would otherwise do.

Governor Waller gave a “Hike, Skip or Pause” speech on Wednesday, focusing on the case for “skipping” a rate-hike in June and increasing the odds for another rise in July.

“If lending does slow, this can obviate the need for at least some monetary policy tightening,” he said. “It is important to account for this other form of tightening in setting the stance of monetary policy.

“If not considered appropriately, the Fed could tighten too much and needlessly raise the risk of a recession.”

The market saw this as a more hawkish signal than Chair Powell’s comments from the previous week.  

Fed-fund futures are pricing a 69% probability of a June-rate hike and markets are shifting expectations to rates remaining higher for longer.

US inflation and economic data

The PCE — the Fed’s preferred inflation indicator — was released on Friday, with core PCE prices rising 0.38% in April versus 0.30% consensus expectations. It is running at 4.7% year-on-year, up from 4.6% in March. 

This print was higher than expected and represents a stall from its downward trajectory, further complicating the debate regarding a rate rise in June. 

PCE Core services ex-rent rose 0.42%, the biggest increase in 3 months, suggesting stickiness and disappointingly limiting the break to the downside.  This measure has shown no meaningful improvement since Fed officials started to highlight it late last year.  Consumer spending rose 0.8% in April, up from 0.1% increases in both February and March.

This was largely driven by vehicles and financial services.  Motor vehicle consumption surged 3.8% and remains a lumpy category with pent-up demand and low inventories supporting pricing. Used car prices have rolled over again, which should be supportive to the downside in future months. 

Elsewhere economic data in the US has been coming in stronger than expected, including the Purchasing Manager’s Index (PMI) last week where the Composite index is at 54.5 versus consensus at 53.0 and the Services index at 55.1 versus 52.5 expected.

US debt ceiling

President Biden and House Speaker McCarthy reached an “in-principle” agreement over the weekend to raise the US debt ceiling and increase the borrowing limit for two years.

US equities rallied on Friday on the expectation this would eventuate, ending fears of a default on US government debt and any potential flow-through impact on the global economy. 

Spending levels should remain roughly flat for the next two years, which should minimise fiscal headwinds to the economy. 

Republican demands for tightened handouts were met through a temporary increase to the top-age threshold for the Supplemental Nutrition Assistance Program (“SNAP”). 

This now means that low-income adults without dependents or disabilities between ages of 18-54 (previously 18-49) can only receive benefits for up to three months in a three year period unless they are working or enrolled in a work program. 

Internal Revenue Service (IRS) funding will also be reduced, which was intended to boost tax enforcement and modernise technology. 

The agreement still needs to move through the House and Senate by the 5^th of June to ensure the government does not run out of money to pay its bills. 

Rest of the world

UK inflation surprised to the upside at 8.7% year-on-year, 50bps above consensus and with core inflation 60bps higher than expected at 6.8% YoY.  There is pressure on the Bank of England, with the market pricing 90bps of tightening over the next three meetings. 

Germany officially entered recession with GDP -0.3% in 1Q23, following a 0.5% decline in 4Q22. 

The Reserve Bank of New Zealand (RBNZ) hiked interest rates for the twelfth consecutive time, this time raising by 25bps to 5.50% – the highest level since 2008. 

The Board also suggested that the interest rate hiking cycle is done, with the view that rates are sufficiently contractionary to lower demand, but may stay higher for longer.

The market had been expecting one further hike to 5.75%

Generative AI and accelerated computing

The NVIDIA result was a standout, adding US$200bn of market cap (+28%) following a blow-out guidance upgrade for 2Q23. 

This was followed up by Marvell Technology, which was up +32% after signalling a strong outlook.

This underpinned by rapid adoption of accelerated computing to support generative AI.

NVIDIA’s guidance for revenue gains of 53% quarter-on-quarter to $11bn was well above consensus expectations of $7.2bn.

It implies sales of graphics processing unit (GPU) microchips to data centres almost doubling quarter-on-quarter as they rapidly gain share over central processing units (CPU) chips.

GPUs process data several orders of magnitude faster than CPUs, making them better suited to generative AI applications. 

Marvell Technology also guided for AI revenue to more than double in FY24 (from ~$200m in FY23) and more than double again in FY25. 

The question is whether recent market moves reflect the start of a multi-year bull-cycle on the back of AI-driven efficiency gains.

Or are we reaching bubble territory with just seven US mega cap tech names (Apple, Microsoft, Alphabet, Amazon, NVIDIA, Meta and Tesla) up 70% in 2023 and driving the majority of the 24% NASDAQ rally YTD, leaving us at risk of a pullback?

We do note that valuation metrics for this group do not seem stretched given they are growing, are making efficiency gains, have strong balance sheets and are buying back stock, and may be moving into a more favourable macro / interest rate backdrop.

There is a bigger conversation around what generative AI means for the economy in terms of productivity, jobs, and wages.

Politicians and the business community must also grapple with the implications in terms of accuracy, regulation, ethical considerations, privacy issues, IP protection and data ownership – with no straightforward answers apparent.

Accelerated computing and storage infrastructure also still needs to be built to support mass usage of generative AI at scale. 

Markets

Commodities continued to weaken over the week and have been the worst performing asset class in 2023, after topping the charts in both 2021 and 2022. Oil bucked the trend last week, with Brent crude up 1.8%. 

The US dollar (measured by the DXY) bounced with US economic strength relative to weakening China and Europe data. 

In Australia, technology stocks tended to outperform.

While Technology One (TNE, +9.90%) delivered a decent result and was the best performer in the ASX 100, the other leaders such as Altium (ALU, +7.91%), NextDC (NXT, +6.8%) and Wisetech (WTC, +5.20%) were largely driven by the broader tech thematic. 

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About Elise McKay and Pendal Australian share funds

Elise is an investment analyst with Pendal’s Australian equities team. Elise previously worked as an investment analyst for US fund manager Cartica where she covered a variety of emerging market companies.

She has also worked in investment banking and corporate finance at JP Morgan and Ernst & Young.

Pendal Horizon Sustainable Australian Share Fund is a concentrated portfolio aligned with the transition to a more sustainable, future economy.

Pendal Focus Australian Share Fund is a high-conviction equity fund with a 16-year track record of strong performance in a range of market conditions. The Fund is rated at the highest level by Lonsec, Morningstar and Zenith.

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

Contact a Pendal key account manager here

As ESG interest grows, investors are becoming aware of the threat ‘greenwashing’. Here are some tips from Pendal senior risk and compliance manager Diana Zhou and investment analyst Elise McKay

• Five tips for choosing a high-quality sustainable investment manager
• Find out about Pendal Horizon Sustainable Australian Share Fund
• Find out about Pendal Focus Australian Share Fund

AS DEMAND for sustainable investing grows, Australians are becoming more attuned to the threat of “greenwashing”.

What is greenwashing?

Australian investments regulator ASIC defines it as “the practice of misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable or ethical”.

The value of Australian assets managed using a “rigorous, leading approach to responsible investment” passed $1.5 trillion last year — 43% of the total market, the Responsible Investment Association Australasia reported earlier this month.

RIAA last year certified 225 products in Australia and New Zealand, representing $74 billion of assets under management — up $18 billion in a single year. (Pendal is named by RIAA as one of 74 responsible investment leaders in Australia.)

But not all investment managers are as green as they may seem. So what steps can you take to avoid greenwashing?

“It can be a real challenge to spot whether a product you’ve invested in is truly green versus one that’s just claiming to be green,” says Pendal senior risk and compliance manager Diana Zhou.

In June, Australian Securities and Investments Commission published guidelines to help product issuers self-evaluate their sustainability-related products.

But investors can still find it problematic separating financial products that are sustainable from the ones that just say they are.

Elise McKay, an investment analyst with Pendal’s Australian equities team, says there are broad global questions on what exactly represents best practice in ESG.

Right now European regulators are leading the way with explicit regulations on disclosures, reporting and metrics.

“My view is that ultimately Australia will head down a similar path towards greater regulation — but we are not there yet.

“From an investor perspective, people are selecting these funds because they have an ethical desire to invest aligned with their beliefs.

“Product issuers have an obligation to be ‘true to label’ and deliver them the solution they are after.”

How can investors be sure that the products they are investing in are delivering what they promise?

McKay and Zhou offer these five steps for investors and advisers to avoid falling victim to greenwashing:

1. Dig deeper than the glossy marketing material

Investment opportunities often come with glossy brochures, but behind the marketing material is a product disclosure statement (PDS), usually available on the product issuer’s website.

Zhou says “the PDS, by law, must disclose the extent to which ESG practices are taken into account in selecting, retaining or realising an investment.

“Investors should read the offer documents (PDS and Additional Information Booklet) in detail rather than relying only on marketing. These documents should provide details on a manager’s ESG practices.

“A PDS needs to be submitted to ASIC and needs to comply with certain rules in the Corporations Act — so there is regulatory oversight.”

2. Check up on a product issuer’s governance

Companies with strong governance frameworks are more likely to be in compliance with rules and regulations, says Zhou.

“You’re looking for a dedicated responsible investment page on the an issuer’s website.

“There will usually be policies and statements about responsible investing, climate change, human rights, modern slavery and stewardship. ”

“The proxy voting process is important for transparency. There should be a record of how the manager voted at the annual meetings of its portfolio companies. Investors should be able to see which resolutions were voted on and which way the investor voted.

“Investors can also look at whether the manager is a signatory to the Principles for Responsible Investment (PRI) which gives an indication of the level of commitment a manager has on implementing its responsible investing strategies”

3. Understand how sustainability is integrated into the investment framework

There are a number of ways a manager can integrate ESG factors into the investment process – but some are more effective than others, says McKay.

Some managers may simply screen out investments while others conduct detailed benchmarking of a portfolio company’s ESG targets.

“Look for detailed benchmarking on areas like climate change, diversity, biodiversity and natural resources, the circular economy and so on to identify who are really leading sustainability and ESG targets.”

4. Look for evidence of stewardship activity.

A fund manager that genuinely cares about making a difference will be actively engaged with portfolio companies.

This goes beyond proxy voting, says McKay.

“Spend time understanding what stewardship activities are done — what are the areas that a manager is working on with companies.”

You can read more here about what to expect from a modern investment manager’s engagement activities.

5. Spend time with the investment team

Finally, and potentially most importantly, McKay urges investors to get to know their fund managers and get into a direct discussion with them to go behind the written word.

“Go and talk to the fund manager — get them to explain the framework to you,” says McKay.

“Go beyond disclosure and get into a discussion to find out if they are really doing what they say they are doing.”

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About Diana Zhou

Diana joined Pendal in 2022 as Pendal’s senior risk and compliance manager. She is responsible for the design, implementation and monitoring of risk and compliance frameworks across Pendal Australia.  

Diana has a strong interest in ESG and Responsible Investment. She represents Pendal in the FSC ESG and Risk & Compliance working groups.  Diana is a chartered accountant and a Level II candidate in the CFA program.

About Elise McKay and Pendal Australian share funds

Elise is an investment analyst with Pendal’s Australian equities team. Elise previously worked as an investment analyst for US fund manager Cartica where she covered a variety of emerging market companies.

She has also worked in investment banking and corporate finance at JP Morgan and Ernst & Young.

Pendal Horizon Sustainable Australian Share Fund is a concentrated portfolio aligned with the transition to a more sustainable, future economy.

Pendal Focus Australian Share Fund is a high-conviction equity fund with a 16-year track record in a range of market conditions. The Fund is rated at the highest level by Lonsec, Morningstar and Zenith.

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

Contact a Pendal key account manager here

Small businesses are under pressure to shift accounting systems online as a new global regulatory push gathers speed. That’s an opportunity for ASX-listed accounting platform Xero, says Pendal’s Elise McKay

• Drive towards e-invoicing, e-tax, digital accounting
• Regulatory tailwinds support cloud accounting adoption
• Find out about Pendal Horizon Sustainable Australian Share Fund
• Find out about Pendal Focus Australian Share Fund

SMALL businesses are under pressure to shift their accounting and reporting systems online as a global regulatory push to real time taxation and e-invoicing gathers speed, says Pendal’s Elise McKay.

McKay, an investment analyst in Pendal’s Australian equities team, recently visited online accounting firm Xero’s annual Xerocon partner conference in the UK. She says a wave of change is sweeping small businesses.

“It’s huge. I spoke to one accounting firm in the UK with more than 3000 clients who are going to be impacted by this change and have to adopt cloud accounting solutions.

“They have to adapt over the next 18 months — educating and changing their clients’ behaviours to adopt new digital solutions.”

Among the biggest changes coming is the UK’s new sweeping new reforms to the taxation system dubbed Making Tax Digital, which applies to businesses, the self-employed, and landlords. 

From April 2024 and will require all businesses and landlords with turnover exceeding £10,000 to report digitally, impacting an estimated 4.2 million taxpayers. 

McKay expects this will drive another wave of adoption of cloud accounting solutions in the UK where penetration is estimated to be less than 30%.     

“It changes the way you keep records. Historically, you might have you might have just once a year pulled all your records from a shoebox and taken them to your tax agent.

“Now, you have to update those records digitally on a quarterly basis.”

The goal of Making Tax Digital is to ensure taxation in the UK is more effective and more efficient — and make it easier for taxpayers to get their tax returns right.

“They have a tax gap where avoidable mistakes cost the exchequer GBP 8.5 billion from 2018 to 2019,” says McKay.

The UK moves echo changes to the Australian tax system in recent years, including the single touch payroll system that requires all businesses to report salary, pay-as-you-go withholding tax and super information to the Australian Taxation Office.

More change to come

The sweeping digitisation of small business is not stopping there.

Next up is the global roll out of electronic invoicing — the automated digital exchange of invoice information between companies through secure networks.

E-invoicing replaces posted or emailed PDF invoices and means information is automatically entered into software systems.

The aim of e-invoicing — which is being pushed by the ATO and other regulatory bodies globally — is to reduce security issues and fraud.

It also offers the upside for small businesses of quicker payment. Federal government agencies have agreed to pay e-invoices within 5 days.

McKay says the impact will be felt among service providers as well as small business.

“There are accountants who aren’t digitally savvy at all. Do some potentially bring forward retirement? Do you see a wave of consolidation?”

But she says the changes offer a win for businesses like Xero that supply products to help businesses digitise.

“Regulatory tailwinds are very supportive for cloud accounting adoption,” she says.

ASX-listed Xero is part of Pendal Horizon Sustainable Australian Share Fund and Pendal Focus Australian Share Fund.

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About Elise McKay and Pendal Australian share funds

Elise is an investment analyst with Pendal’s Australian equities team. Elise previously worked as an investment analyst for US fund manager Cartica where she covered a variety of emerging market companies.

She has also worked in investment banking and corporate finance at JP Morgan and Ernst & Young.

Pendal Horizon Sustainable Australian Share Fund is a concentrated portfolio aligned with the transition to a more sustainable, future economy.

Pendal Focus Australian Share Fund is a high-conviction equity fund with a 16-year track record of strong performance in a range of market conditions. The Fund is rated at the highest level by Lonsec, Morningstar and Zenith.

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

Contact a Pendal key account manager here

Miners are investing billions to achieve net zero carbon emissions, creating new opportunities across the supply chain for sustainable investors, says Pendal’s ELISE MCKAY

• Find out about Pendal Horizon Sustainable Australian Share Fund
• Find out about Pendal Focus Australian Share Fund

AUSTRALIA’S mining industry is investing billions as part of a push to achieve net zero carbon emissions, creating new opportunities across the mining supply chain for sustainable investors, says Pendal’s Elise McKay.

Iron ore miner Fortescue Metals Group has committed to net zero operational emissions by 2030.

BHP is seeking a 30 per cent reduction in operational emissions by 2030 and Rio is targeting a 15 per cent reduction by 2025 and a 50 per cent reduction by 2030.

“We visited 15 different companies across the mining supply chain in Perth last week and one of the key standouts was the extent to which there’s a huge focus on getting to zero emissions,” says McKay, an investment analyst in Pendal’s Australian equities team.

“About 40 to 50 per cent of mining company emissions are from diesel in mobile equipment so it’s a big problem that needs to be solved — and solved quickly.”

It’s perhaps not surprising that mining companies are at the forefront of sustainability planning.

“It’s a broad generalisation, but companies that tend to be the most forward thinking in terms of ESG are typically the ones that have the biggest problems to solve,” says McKay.

“The miners are right up there. They have big problems that need to be solved and that’s a threat to their ability to continue to operate unless they can address these issues.”

Reducing haulage emissions

Haulage emissions — pollution from big mining trucks — is one area miners are focused on.

Solutions are focused on two broad directions and it’s unclear which will be more effective, says McKay.

Majors like BHP, Rio and Newmont have announced partnerships with NYSE-listed Caterpillar, the world’s largest maker of construction and mining equipment, which is distributed locally by Westrac, owned by ASX-listed Seven Group.

Caterpillar is trialling zero-emission trucks on mine sites by 2024 and intends to have them for sale by 2027.

But Fortescue’s 2030 net zero commitment suggests that time frame is too slow.

Instead, it recently announced the acquisition of Williams Advanced Engineering, a battery systems developer with its roots in the revered F1 racing team.

“They’re working together on the power units that will go into a truck,” says McKay, and intend to retrofit existing trucks to get to zero emissions vehicles earlier.

There are some important problems to be solved – basic functions like cooling systems and weight distribution are different for battery powered trucks and need to be designed around.

“And these are regions that are typically not liked by electric vehicles – the Pilbara is hot, it’s dusty and there’s a lot of rain. The technology needs to cope with these types of conditions.”

The construction of the truck itself also has to meet zero emissions requirements so companies are now exploring green steel solutions such as those made with renewable energy.

And even fundamental operational issues need to be addressed – diesel trucks can be refuelled in less than 20 minutes and may only need refuelling once a day, but batteries only last one to three hours.

“How can you recharge 10 times a day without having massive hits to productivity?” says McKay. One near-term solution to reducing emissions is more autonomous vehicles, which use less energy to run and can be run more productively. 

Where to look for opportunities

So how can investors assess the opportunity of mining net zero?

“What’s really interesting is how it all flows through the supply chain,” says McKay.

“Seven’s Westrac, for example, owns the Caterpillar dealership in WA and has the leading market share in the west for mining equipment and autonomous vehicles.

“But is there a threat there? How does it change their relationships with customers?

“Do those customer relationships become stickier because they’re working on whole of mine-site solutions? Is there an opportunity to extend their product strategy?”

• Find out about Pendal Horizon Sustainable Australian Share Fund
• Find out about Pendal Focus Australian Share Fund

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About Elise McKay and Pendal Australian share funds

Elise is an investment analyst with Pendal’s Australian equities team. Elise previously worked as an investment analyst for US fund manager Cartica where she covered a variety of emerging market companies.

She has also worked in investment banking and corporate finance at JP Morgan and Ernst & Young.

Pendal Horizon Sustainable Australian Share Fund is a concentrated portfolio aligned with the transition to a more sustainable, future economy.

Pendal Focus Australian Share Fund is a high-conviction equity fund with a 16-year track record of strong performance in a range of market conditions. The Fund is rated at the highest level by Lonsec, Morningstar and Zenith.

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

Contact a Pendal key account manager here

There are big changes ahead for the ASX across many sectors — and investors need to be across the opportunities, says Pendal equities analyst Elise McKay.

• Established players impacted by corporate activity
• Large scale IPOs in the pipeline
• Find out more about Pendal Focus Australian Share Fund

THERE are big changes ahead for the S&P/ASX 200 across many sectors — and investors need to get up to speed quickly on the opportunities, says Elise McKay, an investment analyst with Pendal’s Aussie equities team.

The list of corporate activity among ASX-listed companies is long — as is the list of big, upcoming initial public offerings.

“Many investors will have cash being released from M&A [merger and acquisition] targets that needs to be redeployed into new ideas,” says McKay.

Buy-now-pay-later group Afterpay is being acquired by US fintech giant Square which will then undertake a secondary listing on the ASX. Santos is merging with Oil Search, while Woodside is expected to combine with BHP’s oil and gas assets.

Sydney Airport is under takeover offer and Endeavour has just demerged from Woolworths Group.

APA is bidding for AusNet, as is Canadian giant Brookfield. Wesfarmers and Sigma Healthcare are in a tussle for Australian Pharmaceutical Industries and Seven Group has acquired a controlling stake Boral.

Major ASX listings ahead

Coming out of the Covid period, there is an unusual number of big IPOs planned for the ASX in coming months.

“The pipeline for large IPOs over the next couple of months is as strong as we have seen in recent years,” McKay says.

“The IPOs represent a range of new opportunities that shouldn’t be ignored — particularly those that provide access to attractive new industries such as global fintech, secular growth stories such as Siteminder or Judo or those with attractive valuations early in their listed lifetime.

“My advice is to get up to speed on these IPOs early.”

Maintenance service group Ventia, owned by listed CIMIC and PE group Apollo Global Management, is expected to hit the bourse worth more than $2.5 billion.

Global equities manager GQG Partners wants to list and is tipped to be valued at more than $1 billion. Neobank Judo is meeting with investors. So too are Vulcan Steel and New Zealand telecommunications company Orcon.

There’s the mooted $5 billion listing of SG Lottery, which is owned by American gaming group Scientific Games. And technology group SiteMinder is expected to hit the bourse in coming months with a valuation north of $1 billion.

The top 100 and 200 companies on the Australian Securities Exchange could look very different in just a few short months, McKay says.

“You are seeing a shift in the composition of the Australian index,” McKay says. “For example, one of the world’s best fintechs Square is going to be listed on the ASX.”

With Covid-delayed IPOs and M&A activity now firmly back on the agenda, a new range of opportunities is emerging — and fundamental investors should to get up to speed quickly on these businesses, McKay says.  

When it comes to investing in initial public offerings, every stock should be separately “diligenced”, says McKay.

“Often the prospectus provides the most information you will ever get about a company,” McKay says. “It’s a great opportunity to do a deep dive into a company.”

About Elise McKay and Pendal Focus Australian Share Fund

Elise is an investment analyst with Pendal’s Australian equities team. Elise previously worked as an investment analyst for US fund manager Cartica where she covered a variety of emerging market companies.

She has also worked in investment banking and corporate finance at JP Morgan and Ernst & Young.

Pendal Focus Australian Share Fund is a high-conviction equity fund with a 16-year track record
of strong performance in a range of market conditions. The Fund is rated at the highest level by Lonsec, Morningstar and Zenith.

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

Find out about Pendal Focus Australian Share Fund here

Find out about Pendal Horizon Fund here

Contact a Pendal key account manager here