Europe’s biggest economy is in the news for the wrong reasons. But Germany’s underlying economic picture still looks robust, says Pendal fund manager Paul Wild

SHOULD global equities investors be worried about the headlines coming out of Germany?

For a country dubbed the economic engine of Europe, Germany is in the news for all the wrong reasons at the moment, hit by rising energy prices, threats to gas pipelines, slowing production and a trade deficit after decades of surplus.

But the underlying economic picture for Europe’s largest economy still looks robust, says Paul Wild, who manages a European equities fund for Pendal’s UK-based J O Hambro asset manager.

Investors should look beyond disruptions caused by Russia’s invasion of Ukraine and cuts to gas supplies — and instead focus on longer-term fundamentals, says Wild.

“Put it in context. Germany has a fairly unparalleled track record of growth.

“Unemployment is much below European levels, the Bundesbank has always been very conservative, debt-to-GDP ratios are very low.”

Even the May trade deficit — the first for Germany since the 1990s recession — is not something investors should fear.

“The US has run a trade deficit for a very long time and done very, very well — so I don’t think a short-term deficit is going to be the death of Germany.

“And don’t forget that all these issues have helped weaken the euro. You could argue that Germany is the single biggest beneficiary of a weaker currency.”

Energy crisis impact

Still, Europe’s energy crisis is spooking investors in German companies.

The May trade deficit came almost entirely on the back of the rising cost of energy imports.

Germany’s domestic energy capacity is carbon heavy, with large deposits of dirty, lignite coal and it has no LNG terminals or regasification capacity. Instead, it imports some 40 per cent of its gas from Russia, principally through the Nord Stream 1 pipeline.

In June, Russia cut volumes in Nord Stream 1 by 60 per cent in retaliation for Western Europe’s support for Ukraine in the war. It followed that with a further cut in July.

“Now Nord Stream 1 volumes are about 20 per cent of what they were pre-war,” says Wild.

“So, there is a small short-term possibility that there might have to be some kind of industrial rationing of gas over the winter period.”

Should global equities investors be worried?

Wild says it is important to look to the past for clues as to how things might play out.

“Germany has always been dependent upon Russian imports of oil and gas including through the Cold War — and through all of it, the gas has flowed.

“The question mark here is how long is the Ukrainian war going to last? If the war ends, we will likely see a normalisation of gas volumes.

“And in the shorter term, Germany will be dragging in gas through the interconnected pipelines with the rest of Europe and starting to build its own LNG terminals.

“It also has three remaining nuclear plants which are due to be shut down but could be prolonged. And they can generate more energy from coal.”

From an investment perspective, Wild says Germany offers much to like.

A strong industrial focus, open economy and expertise in autos, chemicals and machinery means it is fundamentally a play on global GDP growth.

“Frankly, none of that has actually changed,” says Wild.

“Remember if you buy shares in Siemens, it might be quoted in Germany but it gets most of its revenue and profits from overseas.”

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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

When looking for good companies to invest in, remember that the medium term is an aggregation of many short terms, says Pendal’s PAUL WILD. Here are some tips for finding good companies right now

• Think medium term, buy sustainable themes
• Look for opportunities in healthcare, finance, tech
• Drip feed or average into the market

THE first tip for equity investors right now is “buy good companies”.

Sound obvious?

“It’s an obvious thing to say until you try and work out what a good company is,” says Pendal senior fund manager Paul Wild.

So what’s a good company?

“A good company needs a moat around it – a moat that provides it with a defensible market share and pricing power,” says Wild, who runs European equities at Pendal’s UK asset manager J O Hambro.

“That’s most clearly illustrated in financial metrics by the return a company makes on equity, or on capital employed over a reasonable period of time.

“When you’re investing for the medium term, remember that the medium term is an aggregation of many short terms. And in the short term, prices can be distorted from fundamentals, affected by the positioning of funds.

“So, it’s a good idea to drip feed or average into the market, knowing that you’re very unlikely to ever pick the absolute low.”

Look for sustainable themes and trends “which are irrefutable”, says Wild.

“The whole area of energy efficiency is one and there’s a myriad of ways to play this.

“It might be via renewables and investing in semi-conductor capital expenditure plays, or it might be within the industrials sector.

“Digitalisation is another irrefutable trend,” Wild says.

Time for equities?

With that in mind, is it time to start putting money into equities?

“The more markets fall, the more optimistic we should be getting,” Wild says, with just a hint of irony.

“But managers do need to fight the behavioural instinct to get more bearish as the market falls.”

“It’s important to be cognisant of the impact of the current sea change.

“We have the dawn of serious inflation for the first time since the 1980s and rates in Europe and elsewhere are going to be rising significantly over the next year. The market needs to price this in and the effect on growth and earnings.”

How inflation and interest rate increases impact consumption, investment and credit risk, are key considerations for investors, Wild says.

Sectors that look promising

 “Which companies have pricing power and can maintain profit margins? Which companies can maintain their return on equity?” Wild asks.

Healthcare and pharmaceutical stocks have been a “port in the storm”.

Financials have been a little more mixed, and their outlook remains that way.

While rising interest rates help many lenders improve their net interest margins, fears of a surge in non-performing loans as rates rise have partially overwhelmed the good news.

“Our view on banks is that the need to provision for bad loans will increase, but it’s coming off very low levels and thus we will see some normalisation,” Wild says.

Insurance companies look relatively attractive.

“Most large European insurance companies are undertaking share buy-backs and dividend yields tend to be north of 6 per cent.

“While they do have a lot of credit exposure in their portfolios, it tends to be high grade. It’s also a sector which has pretty good pricing power and solvency,” Wild says.

Some technology stocks present an opportunity, though they need to have strong balance sheets and be profitable.

Companies that facilitate the digitalisation process for corporates are examples of strong tech opportunities.

And there’s also opportunities in the semi-conductor sector — though Wild prefers companies that benefit from the lithography capital investment by semi-conductor companies, rather than the companies themselves.

“Clearly it is time to avoid companies that are excessively speculative, or have weak balance sheets, or will have difficulties accessing finance at reasonable rates,” Wild says.

“Investors need to look through the crisis or dislocation as best they can and know that there is always the other side, patience tends to be rewarded.”

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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

Investors everywhere can learn a lot from the dramatic changes in European stockmarkets over the past six weeks. Pendal European equities fund manager PAUL WILD explains

• Investors must be prepared to shift as the opportunity set changes
• Pricing power and relative resilience critical to stock success
• Sell-offs can allow investors to create better portfolios

DRAMATIC changes in European equity markets over the past six weeks — and particularly energy prices over a longer time frame — provide poignant lessons for investors everywhere.

“It shows that investors, no matter where they are, always need to think about pricing power and relative resiliency,” says Pendal senior fund manager Paul Wild, who runs the group’s European equities fund.

“The opportunity set for investors can change very quickly. In Europe it has shifted hugely since the beginning of the year and investors need to alter their stance accordingly,” he says.

“For example, we were confident for the prospects of our overweight positions in automobiles and financials, but we have had to alter our stance.

“Equity sell-offs are never disciplined affairs. Investors should now be focused on buying companies with strong franchises and strong relative pricing power against an inflationary backdrop,” Wild says.

The inflationary impact of higher energy prices affects consumers, Wild says. They’re re also hit by other issues such as higher raw materials prices and supply chain challenges. Corporates are facing similar challenges.

“Investors need to think through how shocks to the system, such as higher energy prices, flow through to the real economy. Almost no sector or company is unaffected by what’s going on in Ukraine,” Wild says.

“People in different parts of the earnings spectrum will react differently. Household fuel bills will clearly be more impactful on low-income households, than they will on higher income households.”

Sectors to watch

Wild expects luxury demand to hold up better than many other retail categories. “Many of the brands have very strong pricing power. We’ve already seen prices rising for jewellery and watches at the very high end.”

Healthcare is a sector that will be less affected, and that’s been demonstrated in the share price of large pharmaceutical companies.

“Utilities as well because of the expansion of renewable assets, notwithstanding some are more exposed to Russian gas exports.”

It’s important to look beyond the current crisis, no matter where an investor is placing funds, Wild says.

“While growth is Europe will be lower than January forecasts, the region’s baseline is extremely low interest rates.

“Investors need to keep in mind that Europe had some very significant post COVID tailwinds including a huge fiscal stimulus during the recovery plan. Unemployment is at all-time lows.

“The best opportunities are in companies with pricing power and reliability. If investors can find these and trade their way into them, they might just find themselves with a higher quality portfolio than where they started.”

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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

What can investors learn from 2021 as we look ahead into next year? Here are five lessons from a European perspective courtesy of UK-based senior fund manager PAUL WILD

THE past two years have been more tumultuous than most others in recent decades.

But with a greater ability of businesses and citizens to live and work with Covid, what are the lessons from 2021 to take into 2022?

Paul Wild, senior fund manager with Pendal Group’s UK-based asset manager JO Hambro Capital Management, provides five lessons from a European perspective:

1. The importance of earnings momentum

If you look at Europe, there’s been earnings upgrades of 27 per cent year to date, and clearly there’s a very high correlation between earnings upgrades and performance.

At the sector level this year, the best performers have been technology and banks, and there’s no surprise that’s where much of the earnings momentum has been.

Looking at 2022, you need to focus on areas of the market which still have earnings upside. In Europe I’d pinpoint banks again this year and automobile stocks.

2. Monetary policy matters

Monetary policymatters for market direction, sector performance and degrees of volatility. With bond buying to be wound down and US interest rate rises expected by the middle of next year, the decade-long bull market in growth stocks is set to be challenged. Equity valuations will start to really matter again.

3. The green agenda matters

Europe, in particular, is serious about the green agenda. At the UN’s COP26 Climate Change Summit in Glasgow in November, Europe showed leadership and there’s now a huge regional focus on levels of decarbonisation. Investors need to consider the green agenda.

4. The importance of digitalisation

We know the pandemic had a phenomenal impact on expediting business model change, driven by the shift to the cloud and computerisation generally. The flexibility afforded from cloud computing is enormous and companies that embrace technology will continue to reap benefits in coming years.

5. Supply chains and logistics have changed forever

One of the big themes running through 2021 revolved around transportation and supply chain shortages. In 2022 companies will react to that thematic and there will be de-globalisation. This is likely to be a permanent impact of the pandemic, particularly in manufacturing.

Companies will shift away from just-in-time manufacturing to just-in-case inventories. Management will bring supply chains closer to themselves. That will impact earnings and performance.

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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

Europe’s re-opening is about two months ahead of Australia. Pendal’s PAUL WILD explains what we can learn from its recent earnings season

• European re-opening two months ahead of Australia
• Earnings season provides pointer to local sectors
• Banks and financials the big winners

European and north American economies are a couple of months in front of Australia in terms of COVID re-openings.

The current European earnings season has highlighted the stocks and industries, that have benefited from re-openings, and provides a pointer as the Australian economy opens up.

“The European earnings season is going much better than expected,” says Paul Wild, senior fund manager at Pendal’s UK-based asset manager J O Hambro Capital Management.

“The big winner is again financials — especially banks, where there’s strong fee momentum, very strong capital momentum and a further commitment to give capital back to shareholders.

“The bank sector is yielding nearly 6 per cent and that looks favourable given the monetary policy outlook,” he says.

“Elsewhere while energy in Europe is now a small sector, the oil companies have had a strong season because of oil prices. Industrials and technology stocks have been pretty good.”

Heading into the European September quarter earnings season, expectations weren’t high given the loss of economic growth momentum, high commodity costs and supply chain issues wracking the continent.

But with more than two-thirds of the market having reported, there have been plenty of positive earnings surprises, demonstrating the benefits of re-opening.

“Only two sectors have disappointed. One is utilities and the other is consumer discretionary. In the case of the latter, it is partly because of autos and the semiconductor chip shortage and partly due to the slowdown in China.”

The semi-conductor chip shortage has hit many companies around the globe, but Wild says the tone of conversations among vehicle manufacturers suggests the situation will soon start improving.

Wall Street, and particularly the big technology companies, have dominated markets over the past five years.

“But as economies re-open, and investors look beyond growth companies, such as the tech stocks, and Wall Street, there are plenty of opportunities emerging.”

Financials, auto manufacturers and green stocks are attractive opportunities in Europe, Wild says.

“I would say banks where there’s strong momentum at the moment,” he says. “I would say autos because they will recover from the semi-conductor chip shortage.

“And I would say green stocks that have been left in the cold this year somewhat. That includes green energy, building efficiency plays and areas geared into electric vehicles.”

Europe has been a relatively unrewarding market to invest in since the Global Financial Crisis.

“Earnings are still 15 per cent below 2008 and much of that is to do with the loss of earnings within the banking sector. So, it’s very important for Europe that the bank sector gets on the front foot.”

Apart from the banking sector, Europe has underperformed because of lower economic growth and lower earnings growth.

“But earnings for Europe are forecast to grow faster than pretty much any other major area over the next year,” Wild says.

“Europe has underperformed the US so far this year, but from a GDP and earnings view, on a relative basis, Europe is starting to look like the place to be. The question for the US is how long can the technology sector outperform.”

Wild says while European equities look attractive relative to Wall Street, valuations are unequivocally high.

“So, then you look at bond markets. In the US you have seen a recent slight flattening in the yield curve but this may be premature.

“Markets have priced in more increases in short-term rates and long-term rates have come down just a little.

“Inflation is high at the moment, and it does look like it will stay higher. Fortunately for Europe the ECB will be slower than most at raising rates.”

Wild says because of the yield curve, and the fact that the European earnings season has beaten expectations, he is less bearish on Euro equities than he might otherwise be, given valuations.

“The demand side of the equation is still strong. Some of the areas suffering at the moment because of semi-conductor chip shortages will improve. For example, the size of the backlog for auto companies is huge.

“People have savings, employment prospects in general are pretty good and corporates are under-levered.

“In the short term, while it’s hard to see big upside in markets from here, there will relative outperformance and that will come down to style, sector and thematic.”

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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.

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

Supply chain issues and inflation concerns are affecting European equities ahead of the Q3 earnings season. Paul Wild explains the opportunities and risks

• Companies with pricing power will endure inflation best
• Products and parts shortages causing price pressures
• Earnings risk for many European companies

INFLATION and the pricing power of companies are emerging as key determinants of the earnings outlook for European corporates, as the third quarter ends and central banks take steps to address rising inflation.

The September quarter earnings season in Europe is still two weeks away, but already the theme of product and parts shortages has emerged among big corporates. And that’s led to investor concern about inflationary impacts on profit margins.

Inflation — be it transitory or structural — is being felt across the region and the recent shift by global central banks away from ultra-loose monetary policy is adding to fears that rising prices are more than just temporary.

“It’s clearly a good time to look for stocks that have strong pricing power, and the German car makers are an example of that,” says Paul Wild, senior fund manager at Pendal Group’s UK-based asset manager J O Hambro Capital Management. “Or simply look for service companies that are relatively immune, not least the banks.”

The type of inflation he is talking about is related to delays and supply chain challenges, which have affected many industries across Europe.

“Heading into the third quarter, there’s definitely a little bit more earnings risks for markets,” Wild says.

European markets have performed well in 2021, with the STOXX Europe 600 – a measure of the largest companies in the region – up 14 per cent so far this year. But the index is down 4 per cent over the past month. It’s underperformed the S&P500 over both time periods, notwithstanding the outlook for recovery in Europe is strong.

Much of that comes down to the supply chain issues.

“The loss of capacity of semi-conductor chip production in Malaysia is hitting the automobile companies, for example,” Wild says.

“But so too is a slowdown in manufacturing in Vietnam, where 40 per cent of Adidas shoes are made.” The unifying factors are continuing lockdowns amid low vaccination rates in these countries.

Global shipping delays and costs are adding to price pressures.

“The supply chain issues are exacerbated by port delays, particularly in China and the west coast of the United States.

“And then you have internal trucking costs which have become more scarce and increasingly expensive. The question is how long will all these things last?”

Look for European strong pricing power

Wild says investors should look towards companies that have strong pricing power and sell products that people will wait to buy.

Again, he points to German auto makers which are rapidly increasing their range of sought-after electric vehicles.

“New car prices in some examples are going up by over 10 per cent — driven by the rising steel cost burden — and that’s having an impact on second-hand car prices. Global production levels are running at about 10 per cent below 2019 levels.”

Wild says investors should consider whether delays in the supply of some products will defer demand or destroy it.

Otherwise look for companies that are relatively unaffected by supply chain and manufacturing disruptions on the other side of the world.

“That’s the service sector. Banks look perfectly placed in the current environments, inflation beneficiaries with relative insulation within their own cost base.”

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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.

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

• 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.

Here are the main factors driving Australian equities this week, according to portfolio manager BRENTON SAUNDERS. Reported by head investment specialist Chris Adams

• Find out about Pendal MidCap Fund

THE market is wrestling with the implications of the Iran conflict, which escalated over the course of last week.

Ahead of today’s market drop, the S&P/ASX 300 last week fell 3.3%, underperforming the S&P 500 (-2.0%) and NASDAQ (-1.2%) but holding up better than the Eurostoxx 50 (-6.8%), FTSE 100 (-5.7%) and Topix 500 (-5.7%).

Energy markets have unsurprisingly been the biggest movers so far, with West Texas Intermediate (WTI) and Brent crude oil up 36% and 28% respectively as at the week’s end.

The potential for significant knock-on impacts via energy-related prices and availability depends on the duration of the conflict.

Market expectations for interest rates and inflation also increased.

The US dollar continued to strengthen during the week as part of a “risk-off” trade. The US dollar trade weighted index (DXY) is now 2.9% up from its late January 2026 lows. The Australian dollar fell 1.2%.

Other commodities were mixed. Among base metals, copper was down 4.1% but aluminium was up 7.2%, given Middle East exposure to supply. Lithium fell 3.9%. Gold was down 1.6%, hurt by the prospect of higher rates and a stronger US dollar.

Software had some respite as the din around AI disruption softened. In the US, the software sector has outperformed the semiconductor sector by ~20% since 23rd February. 

It was a lighter week on the macro data side, but such that there was continues to point to a solid economic backdrop for both the US and Australia. 

Bond and rate markets have moved quickly to price the likelihood of higher inflation in the investment horizon and decrease the chance of short-term rate cuts (in the US) and increase the likelihood of short-term rate hikes (in Australia).

US labour markets are mixed – a surprise higher unemployment print on Friday did little to quell Fed Speak, which was incrementally hawkish largely because of the effects of the Iran conflict.

The main consideration for risk asset markets and economies is the duration of the conflict and associated disruptions/dislocations.

Iran

The conflict enters its second week causing major disruptions to all forms of air and sea traffic in the region and energy markets to inflect higher. Oil is now up 54-59% YTD.

There are some signs of fatigue from both sides. The Iranians appear to be running short of missile launch hardware and the Trump Administration appears to be starting to react to equity market weakness and oil price strength. Israel shows no signs of slowing.

The Strait of Hormuz is effectively shut for sea traffic, meaning of the ~20% of global crude that flows through it, around 90% is now choked off. Air traffic in the region is limited.

Oil and gas markets are showing significant first order consequences of the disruption and there is multiple second and third order effects starting to stack up.

For example:

• The price of aviation fuel has surged on the back of fear of shortages in Asia.
• “Crack spreads” – the margin made by refining crude into products such as petrol and diesel – have rocketed (potentially a tailwind for local refiners Viva Energy and Ampol).
• Coal prices have increased as a potential substitute.

Insurance for shipping in the region has dried up and is one of the major causes of the logjam of marine traffic in the region.

The US is planning a combination of marine escorts and insurance in an attempt to alleviate the situation, but this is likely to take more time.

Qatar, the world’s largest LNG exporter, has suspended production at its Ras Laffan Industrial City LNG complex, notwithstanding that most Iranian attacks have focused on US military instalments and civilian infrastructure as opposed to energy facilities in the region.

This has seen LNG prices – and gas prices generally – increase significantly.

The Dutch benchmark gas futures price is up 108% since its December 2025 lows to EUR53/megawatt hour (MwH), versus the 2022 (Ukraine Invasion) peak of EUR70/MwH, which caused major issues in the EU.

Some 9% of global aluminium production comes from the Middle East region – prompting the 7.2% gain.

Risk Asset Health

To date markets have been largely rational and fairly moderate in the interpretation of events.

There are, so far, few obvious signs of distress. This could change if the war drags on. 

Volatility

The VIX volatility index only shows signs of moderate stress and while it has spiked, it remains far lower than 2nd April 2025 (when Trump announced the tariffs) and Covid.

However, underneath this there is higher single stock volatility being masked at the headline level by high dispersion.

The point being is that this needs monitoring.

Credit spreads

At face value credit spreads are stable.

The bit that can’t be easily assessed is private credit stress, where defaults have been rising, with one of the big risks being software private credit on the back of AI disruption.

The market profile of this narrative is reaching high levels with private credit entering 2026 under clear strain, rising default rates, rising restructurings, dividend cuts at business development companies, and growing concern over opaque, floating rate middle market loans.

While losses have so far been contained, defaults and credit erosion have increased meaningfully, particularly among smaller borrowers and retail facing private credit vehicles.

The widespread adoption of the asset class poses a broader market risk if defaults continue to rise.

US Macro and policy

Activity data in the US was solid, with both the ISM manufacturing index and the Fed’s Beige Book indicating fairly broad-based strength.

Labour data was weaker and tax returns lower than expected, questioning the expectations around consumption strength in 1H 26.

The latest Beige Book (information collected on or before February 23) suggests that:

• Economic growth was broadly unchanged, with activity increasing at a slight to moderate pace in the majority of districts.
• AI-related spending was seen as an important driver of economic growth.
• Consumer spending continued to grow although at a slower pace and notably K-shaped. 
• Employment levels were generally stable, and wage growth was also roughly unchanged, continuing at a moderate pace.
• The US ISM continues to be solid and point toward a manufacturing upturn.
• The ISM manufacturing index dipped to 52.4 in February, from 52.6 in January, but came in ahead of the consensus of 51.5.
• One of the most notable parts was the 11.5 point increase in prices paid to 70.5. This is the highest since June 2022 and is a function of the year-to-date increase in oil prices and a delayed boost from tariffs.
• Until recently US employment data has mostly been solid with most interpreting this as the start of an upturn in employment. It is now showing signs of some softness.
• Last week’s data continues to support strong average hourly earnings growth but payrolls data on Friday was unexpectedly weak.
• February 2026 payrolls fell by 92,000, well below the consensus expectation of +55,000. The two-month net revision was -69,000.
• The unemployment rate rose to 4.4% in February, from 4.3% in January, above the consensus of 4.3%.
• Average hourly earnings rose by 0.4%, above the consensus of 0.3%.

Many commentators point to the volatility and large revisions the data frequently undergoes, but this is a weak print, nonetheless.

It should help offset some of the strength in inflation data, with respect to forward interest rates.

In that vein, it is worth noting that a $10 increase in oil prices roughly results in a 30-40-basis-point increase in headline personal consumption expenditures (PCE) inflation.

The gasoline price is up materially year-to-date but still in the range of the past four years (as of 5th March 2026).

Elsewhere:

• US Tax refunds are only up 10% year-to-date versus the +30% expectation. Given a fairly widespread expectation of accelerated tax return driven-consumption in 1H CY26, this needs to be watched.
• US Non – Farm Productivity remains strong and increased at an annualised rate of 2.8% in Q4, above the consensus of 1.9%.
• January retail sales were down -0.2%, albeit slightly above consensus and mostly unalarming as sales ex gasoline were up +0.3%.

Comments from various Fed members and officials became incrementally more hawkish in the wake of the Iran conflict and despite the weak jobs print on Friday.

Oil and its impact are clearly a major issue for the committee now. 

Both Michelle Bowman (Fed Vice Chair for Supervision) and Neel Kashkari (Minneapolis Fed President) noted that their expectations on inflation have changed in recent days.

New York Fed President John Williams struck a more dovish tone, noting that the market response at that time had been muted and still pointed to further rate reductions.

Macro and policy Australia

There was something for everyone in terms of interest rate expectations last week, with a weak household consumption number offset by a strong GDP print.

• Q4 real GDP jumped 0.8% quarter/quarter and revisions lifted year/year to 2.6%, the best since Q1 2023. The composition was messy, but a strong beat nonetheless.
• Corporate profits increased a strong 5.8% in Q4 2025.
• The Household Spending Indicator (HSI) increased 0.3% month/month in January 2026, slightly below the +0.4% expected after December 2025 retraced by -0.5% month/month.

Also, housing prices continue to be strong as a national average up 9.9% year/year and rents up 5.6%.

Bond yields and interest rate expectations both rose because of this and the rise in oil prices.

Most expect the RBA to raise rates in May if not March – which is now considered “live”.

Markets

While near-term uncertainty remains high, “captive liquidity” can help markets. Retail investors via ETFs and trend following investors continue to “buy the dip” as economic liquidity remains high. Market movements in the last while need to be seen against this backdrop i.e. markets are still fully functional. 

US software had a materially better week and has outperformed semi-conductors by 20% since 23 February 2026 – still way below 2025 relative levels, but a significant improvement.

It felt like AI disruption took a bit of a back seat as the market’s understanding of the threat to Software continued to evolve.

This helped the S&P/ASX 300 Information Technology sector gain 2.4%, beaten only by Energy (+8.7%). There was a part reversal of some of the outperforming sectors year to date, like Banks (-3.2%) and Resources (-5.2%)

Here are the main factors driving Australian equities this week, according to portfolio manager BRENTON SAUNDERS. Reported by head investment specialist Chris Adams

• Find out about Pendal MidCap Fund

US reporting season kicked off with a strong showing from the major banks.

Their earnings were helped by robust capital markets and loan growth against a backdrop of decent cost control.

Markets were solid last week. The S&P500 gained 1.7% and the Nasdaq lifted 2.1%, while the S&P/ASX 300 rose 0.4%.

The ongoing US Government shutdown made for another quiet week on the data front.

The economic impact of the shutdown – along with the threat of China tariff escalation – contributed to lower bond yields.

Weak labour data had the same effect on yields in Australia.

Expectations for rate cuts increased moderately in both the US and Australia after a sustained period of markets reducing estimated cuts.

Elsewhere, the International Monetary Fund raised global GDP forecasts and noted the US tariff impact had been less severe than initially expected.

US-China trade tensions escalated with Beijing further limiting rare earth exports to the US.

Some signs of risk in the system started to show up with examples of over-leveraged corporates coming to grief and affecting counterparties – notably US auto parts maker First Brands. 

There were also some signs of increasing delinquency rates in the US, with a few regional banks impacted.

Volatility has also ticked moderately higher. This is focused mostly in financials, where implied option volatility has moved materially higher.

Credit issue concerns caused major US banks to give back almost all the performance generated earlier in the week from strong earnings beats.

That said, we note that credit spreads remain benign and are not sending a warning signal.

Finally, the gold price increased 8.5%, helping the ASX higher. Iron ore and uranium stocks also featured strongly.

US macro and policy

Federal Government shut down

After 19 days, the US government shut down is now the fourth-longest in history and the longest since 2018-19.

There is a paucity of data as a result, which makes assessing the economy more problematic. 

Some 750,000 federal employees have been furloughed. Most essential services continue but many civilian workers are unpaid.

The impasse remains around the Democrats wanting an extension of the Affordable Care Act subsidies (set to expire at year end) and the Republicans wanting a “clean” continuing resolution without policy add-ons.

Neither side is yielding.

The shutdown is estimated to reduce GDP by 0.1–0.15 percentage points per week.

Economic data

There was a positive data point for US homebuilding with an increase in US homebuilder sentiment.

The latest monthly survey of the US National Association of Home Builders showed confidence rising from 32 to 37.

There was an improvement in the current sales component of the index and a bigger increase in future sales. This demonstrates how the recent rate cut improved sentiment.

This momentum should continue with two more rate cuts expected to come in 2025. 

Regionally the picture continues to diverge. There are patches of strength in the north-east of the US and real weakness in the south and south-east.

There was a rebound in the health of manufacturing in New York state.

The Empire State Manufacturing Index increased to 10.7 in October, up from -8.7 in September. The consensus had been -1.8.

This suggests a positive trend in manufacturing output will be maintained into the fourth quarter.

The three-month average of the general business conditions component rose to its highest level since April 2022. It is consistent with annualised growth in manufacturing output (excluding autos) of roughly 2%.

Elsewhere, the Michigan consumer sentiment index dipped to 55 in October, down from 55.1 in September.

Fed speak

The overall tone of comments from Fed spokespeople suggests broad support for continued easing.

However officials remain divided on the appropriate pace, given trade uncertainty and labour market conditions.

Governor Christoper Waller, for example, is backing another rate cut while urging caution. He suggests quarter-point increments and believes the Fed must “move with care”.

On the other hand Governor Stephen Miran is advocating a larger, half-point rate cut, noting that trade tensions are increasing downside risks.

Fed Chair Jerome Powell has indicated conditions may warrant rate cuts, but remains cautious due to persistent inflation and labour market uncertainty.

He also indicated the Fed might stop shrinking its balance sheet in coming months, representing a potential shift in quantitative tightening policy.

US Interest Rates

Implied rate expectations have increased to slightly more than two cuts priced by year end, due to growth concerns related to the shut down and increasing nervousness in equity markets.

US markets have close to five more cuts still priced by late 2026, taking the reference rate to 2.8% from 4.105% currently implied.

The next Fed rate decision on October 28-29 is expected to cut another 25 basis points to a range of 3.75% to 4%.

US-China trade

There was further re-escalation of tensions, with Beijing putting more restrictions around the export of rare earths and rare earth magnets to the US and Washington threatening to increase tariffs by 100%.

Both of those outcomes would be bad for markets, but in the interim the expectation is for talks and extensions of the imposition of tariffs from the US in the hope of a deal.

There are concerns China is only prepared to accept a deal on its terms and is prepared to manage the consequences of not reaching agreement.

In the interim, more deals and funding continues to flow to rare earth producers – and critical minerals generally – with talk of an alliance between the US and EU on policies around rare earths and China.

Israel-Hamas cease fire

The previous weekend saw the long-awaited announcement of an Israel-Hamas ceasefire, allowing for aid to flow and hostage exchange.

The agreement is tenuous and has a much bigger ambition around the ultimate demilitarisation and reconstruction of Gaza.

Estimates are for as many 50,000 military personnel to oversee peace and security in the region, which is a big ask.

Apart from the obvious humanitarian need for this process, some market observers point to this – and a possible Ukraine-Russia cease fire – as two cornerstones for the Trump administration in the pre-amble to the 2026 mid-term elections.

Based on history, Trump is highly likely to lose control of the House of Representatives.

IMF global growth

In a bright spot, the IMF upgraded its global GDP forecasts, noting the US tariff impact had been less than initially expected.

Expectations for 2025 were revised up to 3.2%, compared to 3% in July. The forecast for 2026 remains at 3.1%.

However these figures remain below the pre-Liberation Day forecasts, reflecting headwinds from protectionism, labour supply shocks, and fading temporary supports like the front-loading of trade.

Developed countries are forecast to grow 1.5% in 2025 and 2026.

The US forecast was lifted to 2% in 2025 and 2.1% in 2026, helped by strong real income growth and better-than-expected private sector responses to tariffs.

The Euro area is expected to grow 1% in 2025 and 1.2% in 2026, while Japan is forecast to grow 1.1% and 0.6% respectively.

Australia macro and policy

Economic data

Australian data was mixed last week.

Unemployment increased to 4.5% after a smaller-than-expected increase of 15,000 jobs. This put unemployment above the RBA’s peak forecast of 4.3%.

Business conditions in NAB’s monthly survey remained steady at +7.6 in September.

Dwelling commencements fell 4.4% in the second quarter. This was the biggest quarterly fall since Q3 2023, driven by a fall in new private sector house commencements.

This is against the run of play with annualised numbers up 9.2%.

Australia interest rates

Commentary suggests the Reserve Bank remains cautious about inflation risks. But weaker employment data shows the RBA is walking a tightrope of inflation versus employment.

Weaker labour data saw expectations increase to slightly more than one cut priced by the year’s end.

The market has close to two more cuts still priced by mid-2026, taking the reference rate to 3.1%, down from 3.6%.

The next RBA interest rate decision is scheduled for Melbourne Cup day on November 4.

Markets

US Q3 Earnings

Leading into earnings season, Goldman Sachs noted consensus expectations on year-on-year S&P 500 earnings growth had decelerated to 6%, down from 11% in the previous quarter.

This was partly due to a smaller FX tailwind and higher tariff payments.

Consensus expects S&P 500 sales growth will slow from 6% in Q2 to 4% in Q3. Customs duties in Q3 totalled $93 billion, a 33% increase relative to Q2.

Companies are generally expected to maintained profit margins near recent levels, but substantial margin expansion seems unlikely.

The consensus Magnificent Seven EPS growth rate of 14% in Q3 is half the pace of realised earnings growth in Q1 and Q2.

AI-related capex spending has been a key issue in recent weeks. Hyperscaler commentary regarding AI demand and capex spending will be critical to the durability of the AI trade.

Consensus estimates imply hyperscaler capex growth will remain robust this quarter at 75% year-on-year but slow sharply to 42% in Q4 and to roughly 20% in 2026.

However, AI capex spending has consistently exceeded bottom-up estimates in recent quarters.

Banks were the first to report, with most delivering strong results and earnings beats.

The message was broadly reassuring about the state of the US consumer, risks to credit quality and the overall outlook for earnings and returns.

Loan growth is picking up, helped by AI-linked capex and some easing in underwriting standards.

However most large banks have small exposure to sub-prime borrowers, where market concerns are focused.

Earnings reports from consumer finance companies will provide more detail here.

Liquidity and risk markers

The First Brands issue was followed by US regional bank Zions Bancorporation disclosing $60 million in loans were unlikely to be repaid and JP Morgan CEO Jamie Dimon warning of more “cockroaches”.

This has seen some concern about the degree of leverage in the system, manifesting mainly in the performance of the financial sector, with US major banks giving back almost all the stock gains made in the wake of strong results earlier in the week.

A large amount of incremental credit extension has been to Non-Depository Financial Institutions (NDFIs) such as mortgage-credit intermediaries, private equity, business-credit intermediaries and consumer-credit intermediaries.

The biggest part of this lending comes from commercial banks – the big four US banks hold about half of this.

This funding is then extended from these intermediaries into a raft of end-user sectors including corporates and consumers.

In Australia the collapse of two credit-related funds held on a number of investment platforms caused issues for a number of product and fund vendors.

Macquarie Group agreed to make clients whole on one of the funds (at a cost of $321 million), and began reducing the number of funds eligible on its superannuation platform.

This played into the question around risk in the financial sector more generally, with the ASX financial sector in aggregate mirroring the underperformance US financials.

Most other risk metrics in the market relating to credit and liquidity remain reasonably benign.

For example, the Goldman Sachs Total Financial Conditions index remains near its lowest level since mid-2022.

For the most part, credit spreads remain fairly mundane and supportive of markets. They rose moderately last week, but well within the normal range of movement.

The volatility index (VIX) has risen, with the concerns in US financials and credit more broadly seeing the largest increase in implied volatility in the banking sector for some time.

This has not yet coincided with a big move lower in markets, but is a warning signal of the potential for contagion.

The gold price is probably the most notable of the widely followed macro indicators that is potentially suggesting bigger issues ahead.

A mostly younger demographic of buyers continue lining up around the block to buy gold at ABC Bullion in Sydney’s Martin Place.

Australian equities

The ASX trailed a strong US market over the past week with the ASX300 up 0.4%. The ASX50 rose 0.7%, the S&P/ASX Midcaps 50 shed 0.7% and the ASX Small Ordinaries retreated 0.5%.

Resources led the way, up 3.4% helped by the ASX Gold Index (+9.2%) and strong performances from BHP (BHP +3.3%), Rio Tinto (RIO, +4.6%), Fortescue (FMG +5.3%) and South32 (S32, +2.5%).

The losers were mostly in the growth space with IT down 4.4% and consumer discretionary falling 1.8%.

At a stock level, there was a fair bit going on, helped by the start of AGM confession season.

Here are the main factors driving Australian equities this week, according to portfolio manager BRENTON SAUNDERS. Reported by head investment specialist Chris Adams

• Find out about Pendal MidCap Fund

THE approval of President Trump’s Big Beautiful Bill and stronger-than-expected US labour data saw bond yields move higher, imputed US interest rate cuts push out, and inflation expectations increase last week.

US two-year bond yields rose 14 basis points (bps) to 3.88% while 10-year yields were up 6bps to 4.35%.

Equity markets closed the week up 1.8% in the US (S&P 500) and 1.0% in Australia (S&P/ASX 300). Calendar year-to-date, those markets are up 7.5% and 7.1%, respectively, on a total return basis. 

Many equity indices are making new all-time highs, with the S&P 500 having rebounded 26% from the April/Liberation Day low.

Commodities had a reasonable week, but in the wake of the ceasefire with Iran – and a possible Gaza ceasefire – the heat has come out of the oil/energy markets.

It’s by no means an “all clear” on the Middle Eastern geopolitical front, but there is significant spare OPEC capacity that can be used to keep a lid on prices.

This is important for inflation, especially within the context of the issues central banks are facing globally.

We are seeing a material rotation within equity markets, probably exacerbated on the local bourse by trading activity around the end of financial year.

This saw notable moves last week away from banks, insurers, growth stocks, gold miners and other FY25 winners towards value stocks, resources and FY25 losers.

US macro data and policy

Most of last week’s developments were supportive for markets, with approval of the tax bill and strong headline labour data being the biggest drivers.

Activities data was mixed – while reasonable at a headline level it was weaker in composition, with softer demand and employment components offset by expectations and manufacturing.

The Big Beautiful Tax Bill 

This was a big win for President Trump. After just getting approved in the Senate earlier last week, the bill – to the surprise of many and despite all Democrats voting against it – passed the House of Representatives on the first attempt.

It was signed into law on Independence Day.

This should be broadly supportive for markets, if not the US budget deficit and the US dollar.

US labour data

US June non-farm payrolls came in strong at 147k jobs, ahead of 110k expected by consensus.

However, compositionally, the government sector accounted for most all of the beat while private payrolls were weak.

The unemployment rate also dropped to 4.1%, driven by lower participation rate.

Despite strength in payrolls, wage growth moderated – with total private hourly earnings growing at 0.2% versus 0.4% prior and below consensus expectations of 0.3%. This suggests little sign of labour market tightening.

There has been some focus on the “neutral employment rate” – the payrolls growth required to keep the unemployment rate unchanged.

The primary inputs into this are population growth and labour force participation, both of which have had wild gyrations through the Covid and post-Covid era.

The US requires a rising immigration rate to offset a declining population of working age.

This highlights the importance of potential consequences from possible changes to immigration policy under the Trump administration for employment, labour market tightness and inflation.

Work by Deutsche Bank suggests that the near-term breakeven rate is around 100k new jobs per month.

However, this could fall to as low as 50k per month, based on potential scenarios around labour force participation and population growth rates.

This suggests that wage costs have a high likelihood of being inflationary under most moderate economic conditions.

Elsewhere, JOLTS job openings rose to 7,769k in May from 7,395K in April and was well above the 7,300K consensus.

The jump in total job postings is at odds with a broad range of other indicators suggesting a waning appetite among businesses to hire more workers.

This discrepancy may be due to some businesses advertising jobs in order to replace workers that have unauthorised immigrant status.

The private sector quits rate edged up to 2.3% in May, from 2.2% in April, but remains in line with last year’s average.

Other US data

The US ISM Services Index rose to 50.8 in June, up from 49.9 in May and just ahead of the 50.6 expected by consensus. 

The increase was mostly in the expectations component, with weakness in the services employment and prices components

This suggests services activity has stabilised but is not likely to make a large incremental contribution to inflation.

The US ISM Manufacturing Index printed 49.0 in June, rising from 48.5 in May and marginally ahead of the consensus at 48.8.

In the detail, it appears that manufacturing production and imports have recovered from the worst of the tariff disruption with some modest price inflation – but that demand was soft, with weaker new orders and employment.

US Consumer Spending fell 0.3% in May, which was weaker than expectations – as was personal income growth at -0.4% versus +0.3% consensus. Revisions were also lower.

That said, May’s spending fall was driven by a 7% decline in spending on autos following a binge of auto buying in April, so there is some noise in the numbers.

US Mortgage Applications rose by 2.7% for the week ending 27June, with gains in both refinancing (+7%) and new home applications (+0.1%) as 30-year fixed mortgage rates fell.

The US housing market remains weak in most quarters, which is something only lower interest rates and mortgage rates can rectify.

US interest rates

Expectations around rate cuts moderated during the week and bonds sold off modestly in the wake of the Trump tax package approval and stronger-than-expected labour data – both of which point towards increased likelihood of an inflation increase.

President Trump again ramped up rhetoric around replacing Fed Chair Powell for not cutting rates, calling for his resignation – with Treasury Secretary Bessent seemingly seen as a preferred option.

Powell himself attributed the slower pace of rate cuts to uncertainty around the impact of tariffs.

The Fed’s June Summary of Economic Projections (SEP) for the year ending 2025 has a median estimate of rates at 3.9% versus 4.5% currently.

This is more or less in line with current market implied rates.

There have been moderations in the likelihood of July and September rate cuts, with close to no chance of a July rate cut given data flow and developments in the last week.

Tariff update

Tariff information is flowing thick and fast and in the days before the 9July deadline.

Several countries and regions are working towards framework agreements (e.g. EU, China, UK, India) before 9 July, with a view that extensions can continue until US Labour Day (1September) while the details are finalised.

Trump has threatened to impose full sanctions on any countries failing to meet the deadline.

Developments include:

• Canada scrapping its proposed digital tax, a sticking point in negotiations with the US.
• Indonesia announced it is set to sign a trade and investment pact with the US this week.
• The US announced an agreement with Vietnam, with the minimum tariff rate at 20%, down from 46% under the Liberation Day rates, and no tariff on US imports. There are higher tariff tiers for goods with Chinese-produced content. The US is specifically looking to counter moves by Chinese companies to reroute exports to the US via other countries to avoid maximum tariffs.
• The Administration seem to be suggesting that there is some “wriggle room” around the 9 July deadline and that although there is a relatively small number of deals signed, there are a number in the offing, notably with India. Japan continues to dig its heels in and is attracting the ire of Trump.   
• The process of applying Section 232 tariffs – linked to national security and being used as a means of circumventing legal challenges – is notionally well advanced and should be finalised by the end of US summer. This affects steel, lumber, copper, Al and semiconductors.

Australia macro data and policy

There is less ambiguity around the interest rate trajectory in Australia than in the US.

The domestic economy is in reasonable shape, though some segments are still weak as consumers are saving the additional disposable income flowing from interest rate cuts.

An expectation of two to three further rate cuts from the RBA in CY25 appears reasonable and should be supportive of both the economy and asset prices.

The market is pricing close to three 25bpts cuts by year’s end, though the probability of an August rate cut has decreased from 90% to 70% in the past week.

Housing

The Cotality Home Value Index rose 0.6% in June, with gains in every major mainland city.

Darwin led the list, rising 1.5%, with Canberra up 0.9%, Sydney 0.6%, and Melbourne 0.5%.

RBA Governor Bullock made it clear in May that rising house prices would not prevent rate cuts. That said, record-high house prices might stir discomfort in some quarters.

Residential building approvals rose 3.2% in May, softer than consensus expectations of 4.0%.

They are running at an annualised rate of 183k, which is a recovery from a rate of 177k in April, which was the lowest level since August 2024.

Retail sales

Retail sales rose 0.2% month-on-month in May, below an expected 0.5%.

The year-on-year rate slowed from 3.8% in April and is the slowest since November 2024.

Retail sales over recent months show momentum is still fading. This seems to confirm that consumers continue to save the proceeds from interest rate reductions to date.

China macro and policy

Beijing announced further population growth stimulus measures and a new programme to remove excess capacity from some manufacturing sectors, which the steel and iron ore markets interpreted favourably.

However, the economy remains challenged by low nominal GDP, PPI deflation, weak property prices and declining middle-income employment and wages growth.

Markets

Sector rotation

There was a significant rotation to value sectors and stocks that kicked off smartly with the start of July.

Trading associated with end-of-financial-year fund distributions has been elevated in the local market and contributed to a significant relative bounce in the FY25 losers across the June month-end.

In contrast, the big winners from that period were sold heavily post month-end.

While the drivers may have been different, we saw a similar trend in US equities, where the rotation from momentum to value was among the largest and sharpest in the last five years.

In Australia, this manifested in strong gains among the miners against a backdrop of modest improvements in iron ore, lithium and coal prices – some of which was driven by the Chinese government announcement to crack down on excess capacity in sectors like steel.

US equities

The breadth of the recent 25% recovery has been one of the narrowest on record.

While this still bodes well for markets, the next phase will likely be a broadening in the recovery and slowing in momentum which normally follows narrow rebounds.

The US quarterly reporting season begins on 15 July, with the S&P 500 trading at 22x price/earnings and expecting 4% year-on-year quarterly earnings growth, versus the 12% growth delivered in Q1 2025.

Weaker earnings growth expectations are being driven by commodity and cyclical sectors.

Tariff-driven margin compression for FY26 is the largest risk.

Most companies have been indicating that tariff increases will be largely absorbed through the supply chain with little evidence of tariff-driven price increases seen so far and many large US retailers vowing not to increase prices.

Australian equities

The S&P/ASX 300 eked out small successive gains most days to end up 1% for the week.

Midcaps were the biggest movers on a market cap basis (S&P/ASX Midcap 50 +2.2%).

At a sector level, resources (+2.3%) and REITS (+3.0%) were the biggest winners at the expense of banks (-1.6%), insurers and growth stocks.