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

Daniel Campbell was appointed to his current role of Investment Director in April 2018. His responsibilities include investment oversight of all our Investment strategies and processes, Product Strategy and Development and our team of Investment Specialists. He works closely with the investment teams in the development and execution of their business, product and distribution strategies. In addition, he has P&L and people responsibility for the Income & Fixed Interest team.

Daniel joined the business in late 2010 and has been a member of the Pendal Executive Committee since 2013.

Prior to joining the company, Daniel spent ten years at Perpetual Investments, where he held various roles including Senior Investment Analyst and General Manager, Analytics & Research.

Investors often overlook European markets due to outdated assumptions. But the new Europe is a fast-growing, cheap play on global themes, argues PAUL WILD

• New Europe less cyclical, higher growth
• Sector composition change
• Global mega-trend alignment

A DECADE of change in Europe has resulted in a faster-growing, higher-quality and less cyclical market that is becoming more international and aligned with global themes like decarbonisation and digitalisation, says Pendal’s Paul Wild.

“There’s a lot of pre-conceived ideas around Europe,” says Wild, a senior fund manager with Pendal’s London-based affiliate J O Hambro.

“Cyclicality, low growth, dirty industrials — generally just not that attractive.

“But what people are missing is a huge amount of sector change over the last 10 or 15 years. The European market is now higher return, higher growth and less cyclical.”

Investors in European stocks have endured a very poor decade of performance, compounded by the post-GFC re-regulation of the banking system which crimped credit growth and ultimately triggered a double dip recession.

But the poor performance has hidden sweeping changes in European markets, which today are vastly different from a decade ago, says Wild.

Since the GFC:

• Healthcare sector has grown 7 percentage points to be 16 per cent of the MSCI Europe ex UK index
• Technology has lifted 5 percentage points to 9 per cent
• The consumer sector is up 4 percentage points to 24 per cent
• Industrials are up 4 percentage points to 16 per cent.

“What’s gone down is financials, which have fallen by 7 points to 16 per cent — and only 11 per cent of that is banks — and the triumvirate of oil, utilities and telecoms have all pretty much halved in their sector weighting and are now just 3 or 4 per cent of the index each,” says Wild.

The changing face of Europe is even more pronounced at the top end of the market – the top 10 companies account for about 26 per cent of the index and are stocks with genuine global leadership.

Luxury goods behemoth LVMH, semi-conductor leader ASML, diabetes and obesity drug maker Novo Nordisk and business software group SAP are each among the 10 largest European companies.

“Since the GFC, the only two stocks which have stayed in the top 10 have been Nestle and Novartis,” says Wild.

“As a result, the top 10’s average weighted return on equity is now nearly 40 per cent, which compares to about 13 per cent to the index as a whole.

“So, the strong are getting stronger and the biggest stocks of Europe have got very strong structural growth. That will drag the index as a whole into a higher average return on equity.”

Despite this improvement, European shares are still trading on about 13 times forward earnings, in line with the average multiple of the past 20 years.

European markets becoming more international

Wild says another factor many investors miss is that the European companies increasingly draw their revenues from outside Europe.

“As a function of this, the European markets are becoming much more international. The MSCI Europe ex UK index currently gets about 55 per cent of its revenue from outside of Europe – versus about 45 per cent 15 years ago.

“The top 10 stocks get about 75 per cent of their revenue from outside of Europe.

“This means Europe is becoming much more of a play on the rest of the world, because the more domestic sectors like banks, telecoms and utilities are becoming a lesser part of the index.”

One main driver of this change is that Europe is highly aligned with global megatrends like decarbonisation and digitalisation, each of which has been the focus of recent stimulus measures.

Wild says that there has not been enough investor attention on decarbonisation and the path to net zero.

“There is a plethora of European companies brilliantly positioned to benefit from that — from the wind turbine companies to the renewable generators, the industrials focusing on building efficiency, the car companies which are pioneering electric vehicles.

“We think a multiyear period of re-rating lies ahead of us.”

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About Paul Wild and Pendal global equities strategies

Paul Wild is senior fund manager with J O Hambro Capital Management, a London-based active investment manager which is part of Pendal Group.

Paul manages J O Hambro’s Continental European fund.

Pendal offers a range of global equities strategies to Australian investors including:

• Pendal Global Select Fund
• Pendal Concentrated Global Share Fund
• Regnan Global Equity Impact Solutions Fund
• Pendal Global Emerging Markets Opportunities Fund

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 account manager here

Investment flows into European equities funds are positive again after a milder-than-expected winter and successful efforts to build gas storage. J O Hambro’s PAUL WILD explains

• European energy crisis averted
• Euro fund flows return
• Many investors still underweight

INVESTMENT flows into European equity funds have returned after almost a year of withdrawals as the region’s prospects brighten amid mild weather, falling gas prices and a re-opening of Chinese export markets, says J O Hambro PM Paul Wild.

Russia’s invasion of Ukraine last February prompted global investors to start withdrawing money from Europe and 48 consecutive weeks of outflows left most investors underweight European companies.

A big driver of the outflows was fears that energy shortages would drive the region into recession.

But a rapid turnaround in sentiment on the back of a milder-than-expected winter and successful government efforts to build gas storage has seen investors once again turn their attention to the eurozone.

“Midway through last year, it looked like Armageddon as Europe was held to energy ransom,” says Wild, who manages JOHCM Continental European Fund.

“But now, gas prices are back below where they were before the Ukraine conflict, supply is plentiful, and it looks like it’s going to stay that way for the next year or so.

“I can’t say the uncertainty has disappeared, but certainly it has massively improved in an almost unbelievably favourable way.

“In the second half of this year, many consumers will be facing lower energy bills again.”

Russia previously supplied some 35 per cent of Europe’s gas — including half the gas needs of Germany and Italy — prompting a concerted effort to import liquified natural gas and build up storage reserves to counter Russian threats to cut supply.

But mild weather means Europe will exit the winter with its gas storage more than half full.

“That means for Europe to rebuild up to a 90 per cent plus storage level for winter 2023-24, it needs about 30 per cent less gas per day than it’s been importing over recent periods,” says Wild.

The reduction in forecast demand has sent natural gas prices plummeting more than 70 per cent from last year’s peaks.

The China factor

But Wild says the positive outlook for Europe is based on more than just energy prices, with the re-opening of China also buoying prospects.

“It’s estimated that European companies have on average about a 10 per cent revenue exposure to China, so the re-opening is very positive.

“Europe is home to lots of global companies, from the famous luxury goods companies to the big German manufacturers.”

The EU economy itself is also proving surprisingly resilient. Eurozone GDP numbers for Q4 were up 0.1 per cent, allaying fears of a recession.

The upshot for investors is that European stocks look attractive compared to global peers, says Wild.

“Europe has now outperformed the US over the last year but it is still trading below its average long-term PE levels.”

Rates close to peaking in Europe

Key to the positive outlook are interest rates which are expected to peak in Europe at about 3.25 per cent over the next few months.

This is driving improvements in earnings in interest rate sensitive sectors like banks which are seeing a return to growth after eight years of negative interest rates.

“Europe has been labelled as an area of perpetual underperformance.

“But people forget what an unusual period investing history we have been in since the GFC, with a significant decline in interest rates largely benefiting the US, which is significantly overweight technology.

“Things have changed now. With higher interest rates, the focus moves to value driven sectors and Europe is at the heart of many of those sectors like financials and industrials.”

Wild says the extent of the outflows through last year has left most investors very underweight European equities.

“Since 2016, European equity funds have lost about a third of their assets.

“So, it doesn’t need a sea change of flows for it to be significant.”

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About Paul Wild and Pendal global equities strategies

Paul Wild is senior fund manager with J O Hambro Capital Management, a London-based active investment manager which is part of Pendal Group.

Paul manages J O Hambro’s Continental European fund.

Pendal offers a range of global equities strategies to Australian investors including:

• Pendal Global Select Fund
• Pendal Concentrated Global Share Fund
• Regnan Global Equity Impact Solutions Fund
• Pendal Global Emerging Markets Opportunities Fund

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 account manager here

Investor pessimism about a Continental recession seems overdone and European shares are starting to look good value, argues Pendal’s Paul Wild

• EU shares hit by war and energy crisis
• Value emerging
• Banks to benefit from rising rates

EUROPEAN shares are starting to look good value for investors willing to look through the Ukraine war and winter’s likely energy crisis, argues Pendal Group’s Paul Wild.

Companies in Europe are trading at an average of about 11 times next year’s earnings, which is around 20 per cent lower than the average price earnings ratio of the last few decades.

There is reason for the pessimism. The drawn-out Russia and Ukraine war shows no sign of resolution, and a looming energy crisis and potential power rationing is raising the risk of recession.

“The starting point is that investors are basically at maximum underweight for European equities,” says Wild, who manages a European equities fund at Pendal’s UK-based subsidiary J O Hambro.

“We’ve had about 30-plus weeks of outflows this year. Since 2016, investors have redeemed about 30 per cent of their holdings in European shares.”

For most investors, reducing euro holdings has been the right move.

European shares have underperformed US shares over the last 10 years, largely because the US economy has been growing faster and US market features more technology and other high-growth companies.

“But if you look at the decade before that, in local currency terms Europe and US performance was pretty similar,” says Wild.

Growth stocks outperforming

“So the question is, can the growth stocks keep outperforming?”

That depend on the path of interest rates, says Wild.

“The growth boom benefited from the extrapolation of very low risk-free rates and negative real rates which had a massive effect on valuations.

“Coming into the Covid period, it almost felt as if valuation didn’t matter anymore.

“Now with interest rates going back up, valuation has become a hot topic again.

“That’s quite exciting and puts Europe in a good place. Why? Because on a global basis, Europe shares are slightly underweight growth and overweight value.”

One of the main reasons European markets overweight value is because of a heavy weighting to financials, with some of the world’s largest banks listed on the European exchanges.

“European banks have around €6 trillion of demand deposits which until recently yielded zero or lower. If the European Central Bank moves rates move north of 2 per cent, sector profitability will be transformed,” says Wild.

“The bottom line that you are starting to see already is very large earnings upgrades for European banks, simply on the back of net interest margin expansion.”

Wild says the trajectory of global interest rates favour Europe over the US, with the likely peak in cash rates in Europe likely to be nearly half the level of where the US peaks.

“Interest rates in Europe are rising but they are still going to be far lower than in other parts of the world.”

European recession fears ‘overdone’

Wild also says investor pessimism about recession is likely overdone, with the eurozone likely to skirt recession over the winter.

“Fiscal policy in Europe, particularly in Germany, is having a significant turn. Germany has come out with three aid packages since the Ukraine invasion which in total equate to about 2.7 per cent of GDP.

“Unemployment in Europe is still at all time low levels and we’re seeing reasonable consumer resilience.”

And importantly, the EU has also been aggressively building gas reserves to head off shortages over winter.

“It feels like European governments have taken away the Armageddon scenario,” says Wild.

The environment is ripe for a shift in investor approach back to GARP — buying ‘growth at a reasonable price’ — which suits Europe’s weighting towards industries like pharmaceuticals, automotive, insurance and banks.

“Who doesn’t like to buy growth? But it absolutely has to be at the right price.

“There are banks in Europe trading at five- or six-times earnings, yielding 7 or 8 per cent — with share buybacks.”

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About Paul Wild and Pendal global equities strategies

Paul Wild is senior fund manager with J O Hambro Capital Management, a London-based active investment manager which is part of Pendal Group.

Paul manages J O Hambro’s Continental European fund.

Pendal offers a range of global equities strategies to Australian investors including:

• Pendal Global Select Fund
• Pendal Concentrated Global Share Fund
• Regnan Global Equity Impact Solutions Fund
• Pendal Global Emerging Markets Opportunities Fund

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