We have updated and reissued the Product Disclosure Statement (PDS) for the Pendal Sustainable Balanced Fund (the Fund) effective on and from 15 April 2025.
The following is a summary of the key changes reflected in the PDS for the Fund.
Labour, environmental, social and ethical (ESG) considerations
We have enhanced our ESG disclosure to describe the Fund’s sustainability objective, the sustainability assessment framework employed by the Fund in respect of the Australian and International shares, Australian and International fixed interest and part of the Alternative investments asset classes of the Fund and the benefits associated with the Fund’s approach to ESG.
The way the Fund is managed has not changed.
Exclusionary Screens
We have clarified, the Fund’s exclusionary screens are not applied to Australian and International property securities, part of the Fund’s Alternative Investments and certain financial instruments such as securities issued by government, semi-government or supranational entities, cash and derivatives. We have also added that the use of derivatives may result in the Fund having indirect exposure to the excluded companies or issuers.
Updates to significant risks disclosure
The Fund’s investment strategy involves specific risks.
We have updated the significant risks disclosure applicable to the Fund to ensure that our disclosure continues to align with the nature and risk profile of the Fund and the current economic and operating environment.
Updates to ongoing annual fees and costs disclosure
The estimated ongoing annual fees and costs for the Fund have been updated to reflect financial year 2024 fees and costs. These include changes to estimated management costs and estimated transaction costs.
We now also disclose the maximum management fee we are entitled to charge under the Fund’s constitution.
Updates to restrictions on withdrawals
We have updated the disclosure on restrictions on withdrawals to align closer to what is in the Fund’s constitution.
Additional information on how to apply for direct investors
We have provided additional information for non-advised retail investors (retail investors without a financial adviser) investing directly in Class R units of the Fund who may also be required to complete a series of questions as part of their online Application, to assist us in understanding whether they are likely to be within the target market for the Fund.
Updates to our complaints handling process
We have provided additional details about our complaints handling process and the Australian Financial Complaints Authority.
Following an internal review, effective 31 May 2025, we have decided to make the following changes to the benchmark and investment objective of the Fund:
| Current | On and from 31 May 2025 | |
| Benchmark | MSCI World ex Australia (Standard) Index (Net Dividends) in AUD | MSCI ACWI ex Australia Index (Net in AUD) |
| Investment Objective | The Fund aims to provide a return (before fees, costs and taxes) that exceeds the MSCI World Ex Australia (Standard) Index (Net Dividends) in AUD by 2% p.a. over rolling 3 year periods | The Fund aims to provide a return (before fees, costs and taxes) in excess of the MSCI ACWI ex Australia (Net in AUD) over rolling 5 year periods |
Why are we making the change?
We are making the above changes to the benchmark and investment objective of the Fund for the following reasons:
Benchmark:
The Fund adopts an emulation approach, utilising investment holdings of related parties and/or third party’s investment strategies (Underlying Strategies) (adjusting them as set out in the Information Memorandum to be issued on or around 10 April 2025). These Underlying Strategies are benchmarked against the MSCI ACWI ex Australia Index (Net in AUD). Consequently, changing the Fund’s benchmark to the MSCI ACWI ex Australia Index (Net in AUD) is considered a more appropriate benchmark for performance measurement, as it eliminates the benchmark mismatch.
Investment objective:
The Fund is managed to outperform the benchmark rather than aiming for a set alpha target. Therefore, changing the Fund’s investment objective offers a more representative view of how the Fund is managed and its expected returns over the long term.
Additionally, extending the investment time period from 3 years to 5 years aligns the Fund’s investment objective with the longer-term investment horizon of the adjusted Underlying Strategies implemented within the Fund.
What do you need to do?
An updated Information Memorandum is available upon request. You should consider the updated Information Memorandum and the changes to the benchmark and investment objective of the Fund before deciding whether to acquire or hold units in the Fund.
Questions?
If you have any questions about your investment or would like further information regarding the changes, please contact us on 1300 346 821 (for Australian investors) or +612 9220 2499 (for overseas investors) from Monday to Friday, 8.00am to 5:30pm (Sydney time).
So far US tariffs are a mixed bag for bonds. But understanding Trump could help investors navigate markets, writes Pendal’s head of government bonds, TIM HEXT
PRESIDENT TRUMP’s “reciprocal” tariffs caught many – me included – by surprise last week.
Until then, I mistakenly believed tariffs were all part of the art of the deal.
Tariff talk, which was seen as a tactical ploy to get a better deal for the US, suddenly seemed to have larger ideological aims. How else can you explain the ridiculous calculation method for reciprocal tariffs?
There is still a lot of water to go under the bridge in the weeks and months ahead as negotiations go bilateral – but understanding Trump (always a difficult exercise) will help navigate markets.
When China entered the World Trade Organisation in 2001, the US trade deficit with China was $84 billion. The US had a $300 billion deficit overall in manufacturing. Over next two decades, the manufacturing deficit grew $1 trillion to $1.3 trillion by 2022.
China accounted for almost $600 billion of this growth.
Overall, this was seen as a win/win. China got to develop on the back of hard work and exporting to the US. And US consumers got plenty of cheap goods from China, protecting a standard of living in the face of slow wage growth.
The bonus for the US was that in an attempt to keep its currency lower, the Chinese government bought US dollars and became huge buyers of US Treasuries. Its FX reserves went from $300 billion to over $3 trillion during this period.
Let’s not forget the most important thing: since 2000, around 500 million Chinese people have emerged from poverty to middle incomes.
By 2018, however, geopolitics started to kick in. As China started to flex its muscle globally, not all in the US were happy. The narrative began to change.
In his first term, Trump launched a trade war with China, causing negative equity returns. Helping the Chinese economy was now seen as a negative, not a positive.
That trade war now seems tame. It seems the narrative from Trump is effectively that the US can handle some pain if it means achieving a longer-term new world order. The US will retreat back to some supposed golden age. Time will tell.
Implications for bond markets
As evidenced this week, all these actions from Trump are a mixed bag for US bonds.
Firstly, economic weakness should mean Fed cuts and rallies in bonds. However, tariffs will mean higher inflation – at least near term.
Throwing more confusion into the picture is foreign buying (or more likely selling) of US bonds. Smaller trade deficits mean smaller capital surpluses and therefore, at best, smaller inflows into US capital markets.
Where it gets more interesting, though, is the weaponisation of financial flows – not just trade flows. Rumours have been circling that China is dumping part of its US Treasury holdings.
Other countries may follow – after all, like any investments, you want to know the CEO knows what they are doing, and simply put, credibility and confidence has evaporated. Who would want to lend money to an entity that is acting so aggressively against your interests?
Therefore, the flight to quality is more of a flight to cash and short bonds, not long bonds. Yield curves are steepening faster than economic fundamentals suggest.
It was only late last year when US exceptionalism became the investment theme for this decade. That exceptionalism remains but is quickly being redefined from a positive to a negative.
Implications for our portfolios
We have been leaning into duration for a number of months, but are very disappointed by the lack of a reaction from our long end. Short-end duration has worked, but unlike Covid and the GFC, the long end has been left behind.
The RBA will also be cautious.
The expected low CPI print on 30 April will give the central bank cover to cut at its 20 May meeting, but unless it keeps getting worse, its recent form suggests only a 25-basis-point (bps) cut.
It will then adopt a wait-and-see approach for how it all impacts Australia. But given there are six weeks till then, markets are right to price some risk of a larger cut – though, current levels of 40bps of cuts looks a little too much.
The random nature of announcements mean we are generally keeping risk close to home. Our caution around credit means we are avoiding the major drawdowns that will be hitting more aggressive investors.
Now is not the time to charge in. However, we are still looking for relative value opportunities in a volatile market to keep adding value in these stressed times.
Liquidity
And just like that – liquidity in many sectors dries up in a puff of smoke.
Our portfolios at Pendal Income and Fixed Interest have always operated at the more liquid end of markets. We leave the less-liquid, high-yield chasing to others.
Government bonds remain highly liquid. Semi-government bonds are hanging in there though bid/offers are widening. You can transact senior bank paper assuming manageable size and paying a wider spread.
However, as we have often warned, beyond there it gets very tricky.
Everything is liquid in good times, but it is a shortlist in a time of crisis. The RBA sets the liquidity rules and its world is one of cash, bank bills/NCDs and government bonds (all known as High Quality Liquid Assets).
These remain open for business, but beyond that point, it is buyer-beware for liquidity.
About Tim Hext and Pendal’s Income & Fixed Interest boutique
Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.
Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.
Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.
Find out more about Pendal’s fixed interest strategies here
About Pendal
Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.
In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.
Effective 8 April 2025, the buy-sell spread for a number of Pendal funds (the Funds) will increase as set out in the table below:
Table 1: Old and New Buy-Sell Spreads
| Fund Name | Old (%) | New (%) | ||
| Buy | Sell | Buy | Sell | |
| Pendal Dynamic Income Fund | 0.12% | 0.12% | 0.12% | 0.15% |
| Pendal Dynamic Income Trust | 0.12% | 0.12% | 0.12% | 0.15% |
| Pendal Fixed Interest Fund | 0.06% | 0.06% | 0.06% | 0.08% |
| Pendal Monthly Income Plus Fund | 0.10% | 0.10% | 0.10% | 0.16% |
| Pendal Short Term Income Securities Fund | 0.03% | 0.03% | 0.03% | 0.07% |
| Pendal Short Term Income Securities Trust | 0.03% | 0.03% | 0.03% | 0.07% |
| Pendal Sustainable Australian Fixed Interest Fund | 0.07% | 0.07% | 0.07% | 0.11% |
| Regnan Credit Impact Trust | 0.10% | 0.10% | 0.10% | 0.17% |
The buy-sell spread is an additional cost to you and is generally incurred whenever you invest in or withdraw from a Fund. The buy-sell spread is retained by the Fund (it is not a fee paid to us) and represents a contribution to the transaction costs incurred by the Fund such as brokerage and stamp duty, when the Fund is purchasing and selling assets. The buy-sell spread also reflects the market impact of buying and selling the underlying securities in the market. Importantly, the buy-sell spread helps to ensure different unit holders are being treated fairly by attributing the costs of trading securities to those unit holders who are buying and selling units in the Funds.
Due to the impact of the Trump tariff announcement, investment markets have experienced increased volatility. This has led to reduced liquidity and greater market impact when selling Australian credit securities, leading to higher trading costs in these markets, and hence increased trading costs for the Pendal Income and Fixed interest Funds (as set out in Table 1 above). This change does not reflect a deterioration in the credit quality of these assets.
Pendal has determined to increase the buy-sell spread for each of the Funds as set out in Table 1 above. The buy spread is payable on application to a Fund. The sell spread is payable on withdrawal from a Fund.
Pendal will continue to monitor market conditions and review and update the buy-sell spread regularly as required. You should therefore review the current buy-sell spread information before making a decision to invest or withdraw from a Fund.
Please refer to our website www.pendalgroup.com, click ‘Products’, select the Fund and click on ‘View fund information’ for the latest buy-sell spread for each Fund.
Here, Pendal’s head of equities Crispin Murray dissects the key questions for investors and explains how to respond following the latest slew of US tariffs
- An unprecedented event with many unpredictable factors
- All the questions investors need to consider
- Find out about Pendal Focus Australian Share fund
PRESIDENT Trump went hard on tariffs, defying market expectations that he would blink.
A historic market price adjustment followed, as “liberation day” became “liquidation day.”
Effective tariffs have risen from 2.5% at the start of year to 24%. Given tariffs are effectively taxes, this equates to a US$700bn tax hike or 2.4% of US GDP – the biggest in history.
Not only were the size of tariffs well above expectations, but the design had nothing to do with matching pre-existing tariffs. Instead, there was a blanket approach based on the size of trade deficits.
This led to higher-than-expected tariffs on the EU (20%) and China (an incremental 34% to 54%).
The message is that tariffs are designed to force companies to shift production to the US.
Investor Howard Marks – who is 78 years old – noted that the move from a system of free trade and globalisation to one with significant restrictions on trade is “the biggest change in the environment probably in [his] career” and “a step towards isolation”.
The shock from the tariff announcement was compounded when China retaliated with its own 34% tariff on US goods, signalling the beginning of a trade war.
The market’s immediate reaction was to cut economic growth forecasts and raise inflation expectations, which equates to lower earnings and valuations. The starting point for tariffs is so high that even large, negotiated concessions will not prevent the economic shock.
Markets adjust quickly, with moves compounded by the need for some investors to unwind leverage and access liquidity.
Such market dislocation becomes self-perpetuating as correlations spike, with factors driving relative returns and volatility surges (the VIX – a measure of market volatility – rose to 45%) which force investors to further liquidate positions.
The result was a 9.1% drop over the week in the S&P 500 and a 10.0% fall in the NASDAQ. The S&P/ASX 300 fell 4.0% and the Australian Dollar was down 3.8% versus the US Dollar.
These falls spilled into other asset classes – for example, Brent crude oil fell 11% and copper fell 14%.
Despite the inflationary impact of tariffs, bond yields fell on expectations that central banks will be forced to ease as we skirt with recession.
For investors, the question is how to respond to this new landscape. The challenge is that this event is unprecedented and there are many unpredictable factors.
We will dissect some of the key questions below and explain how we view them.
The details
Trump announced a baseline 10% universal tariff, which can be thought of as a subscription fee to access the US consumer.
In addition, there were sixty individualised rates – the key ones being 34% on China and 20% on Europe.
There are some exemptions for specific sectors and relief for goods that comply with USMCA (United States-Mexico-Canada Agreement) requirements.
The weighted tariff is moving to 24%, which is the highest in more than 100 years. This will probably rise to 27% when the section 232 tariffs are announced on strategic products such as pharmaceuticals, microchips and copper.
Understanding the why
Everyone knows tariffs are bad.
US economic history is scarred by the Smoot Hawley Act of 1930, which imposed 20% tariffs and – in combination with the wrong Fed response – triggered the Great Depression.
Tariffs are a tax on consumers and producers, which lead to higher prices, diminish disposable income, and eat into corporate profit margins – affecting employment and investment.
Tariffs of 22-25% equates to a U$700bn tax hike, which is hugely damaging to the US economy.
So if this is so well understood, why do it?
The logic, when you listen to the Trump Administration and key influences like former US Trade Representative Robert Lighthizer, is that this is better than the alternative.
They believe there has been a failure of the system. Treasury Secretary Scott Bessent refers to it as the “steroid economy”, which looks good on the outside but is killing your internal organs.
To summarise the Administration’s perspective:
- The US is effectively transferring a US$1trn of wealth a year as it borrows to fund unsustainable spending. Much of this is going to their greatest geopolitical rival, China.
- Millions of jobs have been lost as production shifted offshore.
- The US is falling behind as a technology leader. They cite the Australian Strategic Institute, which claims the US is behind China in 57 of 64 critical technologies.
- The loss of jobs and technology leadership has led to declining productivity, affecting growth and wages. There has been median wage stagnation for decades.
- This has led to unsustainable income disparities. The top 1% have more wealth than the middle 60%. And 88% of the stock market is owned by the top 10%, the balance by the next 40% the other 50% of people are in debt. Scott Bessent noted that last year was a record for both the number of Americans travelling on European vacations and the number of Americans having to use food halls to get by.
- The US is strategically vulnerable. They see Covid as a beta test, which demonstrated the economic vulnerability in the event of a kinetic conflict.
Citing Alexander Hamilton, the first US Treasury Secretary (1789 to 1795), tariffs protect industry and help fund the building a new America. Under Trump, they also act as a negotiation tool.
Pendal Focus Australian Share Fund
Now rated at the highest level by Lonsec, Morningstar and Zenith
This is a dramatic change in economic policy and how the global economy will operate. It is trying to force companies to move back to the US, so products can be sourced there and jobs created.
This means there can’t be special deals or major exemptions, as all this does is shift production from one low-labour-cost nation to another.
Universal and permanent tariffs are required to solve the problem. To quote Lighthizer, “you can’t have a hole in the net to allow all the fish to swim out of.”
So, while there may be some dilution of tariff rates to lower levels, it will still probably equate to at least 15%, which has a major impact on the economy.
Absent a major shift from Trump, the intention appears that tariffs will remain in place and force companies to shift production.
How will other countries react?
This is a significant factor in assessing the overall economic and market impact.
China went hard and early. Tellingly, it imposed a blanket 34% tariff – matching the US – which is more substantive than its response to previous US tariffs.
It also expanded export controls on rare earths (7 of 17 elements), which are used in the defence industry.
The logic for this is that even if there can be some agreement to bring the tariff rate down, it will take some time. The G7 meeting in late June may be too soon – then it may be as late as around the G20 summit in November. So, China feels it needed to send a strong signal.
We note they didn’t play their real card, which is to forego law around intellectual property and go after US companies that way.
The market is watching for the US reaction.
Washington was clear that it would punish any retaliation, so there is the potential for a tit-for-tat counter from the US this week. But no action from the US could embolden other countries to retaliate.
China is in a difficult position – only 7% of US exports go to China, so the US estimates that the effect of tariffs on the Chinese economy is around three times that of the effect of reciprocal tariffs on the US. Some estimates put this at 2% of Chinese GDP if they remain in place.
The Chinese will need to stimulate – and the earliest likely announcement could come at the Politburo meeting in late April.
Expectations will be for stimulus of around 1% of GDP, probably orientated to industry and infrastructure.
The other challenge for China is that other countries will become wary of Chinese product dumping as the US market closes for them, which could lead to additional tariffs.
At the other end of the reaction curve, Vietnam raised the white flag and said it wanted a deal to potentially remove all tariffs. Trump acknowledged this and there are discussions to see what sort of deal can be done. While Vietnam is small, it is a relevant test.
Part of any deal could involve shifting key communications technology from Chinese to US suppliers. If there is a deal, it will be interesting to see if it does represent a hole in the proverbial fishing net. We note stocks like Nike were up Friday on this hope.
What is the impact on the US economy?
Estimates for the impact on US GDP range from 1.5% to 2.0%, with the lower end of the range relying on some walk-back of tariff rates.
In addition, it leads to around a 1% rise in the expected inflation rate over 12 months.
The Administration is claiming this will not be the case. It acknowledges there will be a near-term slowdown but blame this on the effect of weaning the country off the artificial stimulants of the Biden economy.
It points to a few mitigating factors regarding growth and claims tariffs will increase growth towards 3% in the medium term. The argument for growth includes:
- Proposed tax cuts. These go beyond the extension of the previous Trump tax cuts, which will have no economic benefit as they sustain current tax levels. Rather, it points to US$400-600bn revenue from tariffs to fund election promises of no tax on tips and overtime and tax deductibility on loans for US-made cars. This will underpin consumer spend, it says.
- Investment as companies reinvest in US capacity.
- Lower energy prices – oil prices fell last week on increased OPEC supply and concerns over demand.
- Lower bond yields and interest rates.
The Administration believes the inflation effect will be contained, with companies absorbing 40% of the hit and a higher currency another 40%, leaving the consumers wearing 20%.
So far, the currency has not moved that way (the US Dollar Index fell 1% last week) and most economists see a more material inflation effect.
It also notes that the current situation is very different to 1930. Then, the US had run trade surpluses for 60 years and were more vulnerable to the impact of tariffs and to retaliation. While this may be true, the scale of the tariffs still represents a material economic shock.
Further, a number of mitigating factors like tax cuts and investment are not going to kick in until late this year – at best – so will not fill the hole created by the tariff policy.
The market focus is now on what may change in response to lower growth – either a “Fed Put” or a “Trump Put”.
How will the Fed react?
Federal Reserve Chair Jerome Powell spoke on Friday and, according to language modelling by JP Morgan, it was his most hawkish speech in years. The Fed’s key challenge is that:
- The economy is currently still in good shape – the jobs report on Friday was positive, as were global ISM surveys in general. It is believed there has been a good recovery in consumer spending in March after a softer January and February. So there is no immediate issue the Fed can point to justify cutting rates.
- The Fed’s stated key focus is on inflation expectations and ensuring they stay anchored. Recent inflation data has picked up and surveys have indicated consumers are anticipating a rise in inflation. To quote Powell, “Our obligation is to keep longer-term inflation expectations well anchored and to make certain that a one-time increase in the price level does not become an ongoing inflation problem.”
Powell’s cautious message is tied to trying to keep those expectations down.
The Fed knows the economic effects are material and that a slowdown will help contain the flow-on effect of the tariff price rises, which opens the door to easing monetary policy.
The economy is expected to fall away very quickly. We may see evidence of this as early as April’s employment data, which comes out prior to the next Fed meeting on 7 May.
The market has moved to pricing a 47% chance of a May cut, up from 19% last week.
In a recession, the average cutting cycle is 350 basis points (bps). Given the 100bp move already, that still leaves another 250bps of rate downside.
The market now is expecting four more cuts this year, down to a range of 3.25% to 3.50%.
While the Fed will not worry too much about equity markets, a credit market dislocation would prompt action. Here, we are now beginning to see some strain – with a spike in the two-day move in credit spreads.
Debt issuance has dried up and this is also a key consideration for the Fed, as it represents a tightening of financial conditions which compounds the effects of tariffs. The Fed has reacted to issues in the debt market in all crises over the past fifteen years.
The market’s challenge is that given the Fed’s focus on inflation, it will need to see bad economic news first before it can move. So, we need to be mindful of the sequencing of events.
Ultimately, we see the Fed Put as real and it does represent the most likely counter to the bearishness. There is a scenario that, come the second half of 2025, we get the trifecta of:
- material rate cuts
- tax cuts
- lower negotiated tariff cuts.
This could lead the market to rebound quickly – the issue is, from what level?
Could something else break the tariffs?
There is some speculation that other factors could see a reversal on tariffs. These include:
- Political pressure. Republicans are concerned, and this will build as the economic data deteriorates, but there is a little they can do. Also, compared to the last Trump Administration, there are more MAGA Republicans in Congress.
- Legal pressure. The court cases are beginning and will grow, some focusing on the fact that Trump is utilising age-old emergency powers to enact these changes. There are precedents for this – Biden used similar powers to wipe out student debt. The issue is these challenges will take time and the damage to the economy will be done before any could potentially take effect.
- Economic and market pressure. The “Trump Put” in response to opinion polls could still be the source of major U-turn. A market observer close to the Trump team notes his background in TV, where he was obsessed with ratings. Similarly, if he saw he was losing his base of working-class Americans he would probably pivot quickly. The key point here is this is not a stock market-related level. Rather, it would be in response to losing the messaging as a result of economic weakness. So this possibility is further off than the Fed Put.
The market’s reaction
Friday saw the first tangible evidence of capitulation selling in the US.
- Sentiment extremes. The CBOE Volatility index (“the VIX”) spiked to 47% intra-day and the VIX forward curve (Spot VIX minus the three-month forward expected VIX) inverted to a degree not seen since Covid, which suggests an expectation of extreme near-term volatility. There was US$30bn of flows into the inverse S&P ETF and a wholesale raising of recession probability risks with, JP Morgan moving to a 60% chance of recession.
- Indiscriminate selling. 72% stocks on the S&P 500 had a downside move two standard deviations beyond the mean. Friday was also the largest single day of stock-trading volumes in the US and we saw large selling of gold – which is a sign of investors seeking access to liquidity. The fall in the Australian Dollar can also be seen in that light, as there is the added issue of Super funds having large currency hedges getting margin called, which can compound moves.
- Capitulative price action. 77% of S&P 500 stocks were trading at 20-day lows
The equity market move on Thursday and Friday is estimated to equal a 1.2% adjustment down in US economic growth.
For technical traders, Friday’s US close broke through trendline support, the Yen carry trade low from August 2024, and the Fibonacci 38.2% retracement of the 2022-25 rally.
On a technical basis, that opens up potential downside to around 4800 and then 4500 for the S&P 500.
Markets don’t move in straight lines. As one technical analyst describes it, they move initially with a “bang” and then a “whimper”.
So we have had the big “bang” move and we may see a period of consolidation and an attempt to bounce, particularly if we get any positive signals from the Fed. However, the next phase could be the “whimper”, where the market eventually grinds lower and often volumes dry up until all hope is squeezed out of market sentiment.
Clearly this path depends on the economy and policy.
One unique aspect of this situation is that it is self-induced, so there is always the chance of some unwind.
Also, the effect on the rest of the world may not be so material if they react with lower rates – which is easier to do as they don’t have the inflation impulse – and fiscal stimulus.
The US market does not yet have valuation support. It is trading at ~19x price/earnings, having peaked at ~22x, but in recessions this falls to 15x on average – which is consistent with the 4500 targe S&P 500 index range.
The other issue is earnings risk. Goldman Sachs has cut its S&P 500 2025 earnings growth expectations from 11% to 3%.
The market consensus still sits at high-single-digit growth. If we get a recession, there is further downside risk here.
What does this mean for Australia?
Factoring in the pre-market futures fall for today, the Australian market is down 9%. This is better than the US but behind Europe. Our view is that the Australian economy is well protected and should avoid recession.
Factors supporting this include:
- Fiscal stimulus. Unlike the US both sides of politics support higher government spending. This is adding over 1.5% to GDP growth in CY25, both through direct spending and also some tax cuts. Government spending represents around 29% of the economy and is growing around 8-9% in nominal terms.
- Rate cuts. The RBA has left the door open for rates to fall in May, on the premise of a global shock and domestic inflation being close enough to target, subject to the March inflation report. Beyond that, the market now sees at least three cuts this year and our economy is still sensitive to this.
- Weaker currency. The Australian Dollar has moved down in advance of an anticipated terms of trade shock from commodity prices falling.
- Direct exposure. There is limited exposure to US exports and our tariffs are relatively low.
So, this would help sustain consumer demand, while government spending would support investment.
The main risk is a global recession affecting the local economy as financial conditions tighten and companies and consumers react with caution. Also, there is a risk of a terms-of-trade shock form lower commodity prices.
While we saw a sharp drop in copper last week, it is still up 10% year-to-date. Coal is weaker, while oil is down 12% for the month (also affecting LNG pricing), but iron ore has remained flat so far.
So, this has not yet occurred – and should China do another round of stimulus, we me be spared.
The local market has reacted as other markets have – correlations are rising and price action is dominated by thematics, positioning and liquidity.
The rotation in this environment is savage and unrelated to stock specifics.
Tech, miners and energy are the worst hit due to their perceived cyclicality. Banks, telecom and consumer staples were the best performers, partly due to their more defensive earnings (but also positioning is skewed away from these sectors).
Unlike the US, consumer discretionary stocks have held up quite well. Despite reasonable prospects for the domestic economy this sector still looks vulnerable, in our view.
Impact on portfolio positioning
This is a major test for the thematic exposure of our portfolios and a reminder of why we carefully manage these risks.
While our broad-cap Australian equity strategies have generally given back some relative performance in April given the substantial rotation to defensives, it is contained and relatively muted.
Generally speaking, our underweights in supermarkets and banks have detracted, but the defensive positions such as Telstra and CSL – plus reasonable cash levels – have helped offset this.
We have held back so far from stepping into heavily sold-down stocks given the degree of change in the global outlook. Given the scale of moves and liquidity available in the funds we may well start deploying some of this.
The focus here will not be on the high-beta names such as tech, where the market remains over-exposed. Instead, we are likely to be looking at well-positioned industrial names with strong cashflow and no exposure to tariff risk.
About Crispin Murray and the Pendal Focus Australian Share Fund
Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and leads one of the largest equities teams in Australia. Crispin’s Pendal Focus Australian Share Fund has beaten the benchmark in 12 years of its 16-year history (after fees), across a range of market conditions.
Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.
US tariffs will affect different emerging markets in different ways and investors must understand where each country sits on a spectrum of geo-economic risk. Pendal’s emerging markets team explains
- Current events suit one group of EM countries better than others
- Find out about Pendal Global Emerging Markets Opportunities fund
IN this highly dynamic environment it’s important to maintain a longer-term view on the performance of emerging markets rather than react to short-term market moves.
It’s also important for investors to understand how the Trump administration’s tariff policies will affect different emerging markets in different ways.
Emerging market countries can be thought of as sitting on a spectrum — ranging from higher-risk, USD-sensitive, current-account-deficit, carry-trade markets to lower-risk, global-demand-sensitive, current-account-surplus, mercantilist markets.
The first category includes emerging markets such as Brazil, Mexico, smaller Latin American markets, Indonesia and South Africa.
The second category encompasses South Korea, Taiwan, Thailand, Malaysia and (to some degree) China.
European markets (Czech, Hungary, Poland, Greece) and Arabian Gulf markets (Saudi, UAE, Qatar, Kuwait) sit towards the middle of the spectrum, but also have their own drivers.
India also sits towards the middle.
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We believe current events significantly favour the first group over the second.
“US dollar weakness, particularly when tariffs might have been expected to strengthen the dollar, suggests a weakening of investor belief in US exceptionalism, leading to increased capital flows to the rest of the world,” the team says.
“The outperformance of non-US equities over US equities adds to this narrative.
“This is extremely beneficial to those USD-sensitive markets, particularly when put alongside the generally cheap equities and currencies in many of those countries.”
Where to use caution
The second group, meanwhile, have focused on an export-led, mercantilist development model that is extremely challenged at present.
“There is no obvious demand source that can replace exports to the US for these countries, and many companies in them are likely to face significant earnings downgrades,” the team continues.
“It’s also worth noting that the weakening of US defence commitments to countries previously thought of as allies poses some of the starkest geopolitical challenges to Korea and Taiwan.”
This broad analytical framework does not remove the need to focus on country-specific risks and opportunities, the Pendal team cautions.
“In particular, we note China has a relatively low export/GDP ratio, and has high capability and economic headroom to provide offsetting stimulus.
“Where we are looking at new ideas, they are focused on the huge opportunity a weaker US dollar gives to some emerging markets and the potential for very strong returns from stocks in these markets if capital continues to flow from the US to the rest of the world.”
About Pendal Global Emerging Markets Opportunities Fund
James Syme, Paul Wimborne and Ada Chan are co-managers of Pendal’s Global Emerging Markets Opportunities Fund.
The fund aims to add value through a combination of country allocation and individual stock selection.
The country allocation process is based on analysis of a country’s economic growth, monetary policy, market liquidity, currency, governance/politics and equity market valuation.
The stock selection process focuses on buying quality growth stocks at attractive valuations.
Find out more about Pendal Global Emerging Markets Opportunities Fund here
Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.
The US has announced a slew of tariffs based on a reciprocal tariff ‘formula’. Head of government bond strategies TIM HEXT breaks down the latest
TODAY, President Trump announced a baseline 10% tariff on all goods into the US. This was widely expected.
Less expected, however, was the basis for “reciprocal” tariffs.
You would be forgiven for thinking this meant that whatever rate of tariff other countries imposed on the US, the US would impose back.
After all, Trump’s tariff board said “Tariffs charged to the US”.
However, rather than being actual tariffs, they made up a number based on a reciprocal tariff formula – that is, the trade deficit that the US has with a country divided by the size of imports the US takes from that country.
For example, Indonesia has a trade surplus (deficit for the US) of $17.9bn on total exports (imports for US) of $28 billion – so, its supposed tariff on the US is 64%.
What this highlights is that the US is more focused on their poor current account position and will use tariffs to fix it.
This meant the reciprocal tariffs being imposed by the US were higher than most expected, with markets reacting with an old-fashioned risk-off move.
What do these tariffs mean for the US economy?
There is more to play out as bilateral trade talks take place, so final tariffs may yet soften. Mexico and Canada were not mentioned today, but both still await 25% tariffs.
However, the current net increase in tariffs for the US is around 20%, translating to around an extra 2% to inflation. Part of that may be absorbed by exporters or retailers, but it would be hard to see inflation not being hit by at least 1%.
For growth, the US consumer is 70% of their economy.
If consumers spend the same amount of money, their volume of consumption would fall – leading to a roughly 1% lower GDP than anticipated. Employment should be softer near term as the boost from onshoring will take longer to come through.
Put together, we have stagflation-lite in 2025.
The US Federal Reserve is caught between higher inflation and lower growth, but would more likely see through the one-off inflation impact and react to the lower growth.
The Fed Funds Rate may yet end up near 3%, or “neutral”.
What about Australia?
We have a small trade deficit with the US. Under the Trump formula, our $14bn deficit on $88bn of imports should mean we tariff the US 16%.
Try that for “reciprocal”. Alas, Prime Minister Albanese is not one for such moves.
Our economy will take any hit through Asia, especially China. Almost 90% of our exports go to Asia, so any slowdown there will have an impact here.
However, we should not see any direct inflation hits. In fact, exporters may look to replace some US demand in other markets, which could even see some import prices fall.
Australian financial markets, however, will continue to be buffeted by global events.
Finally, bonds may once again perform their role as a defensive instrument. Today’s moves offer some hope.
About Tim Hext and Pendal’s Income & Fixed Interest boutique
Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.
Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.
Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.
Find out more about Pendal’s fixed interest strategies here
About Pendal
Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.
In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.
Here are the main factors driving Australian equities this week, according to portfolio manager JIM TAYLOR. Reported by head investment specialist Chris Adams
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MEASURES of economic policy uncertainty are approaching four-decade highs, just as quickly as US business and consumer confidence fall to new lows.
To use a financial analogy, the US government is in the very early stages of a “de-grossing” strategy and reducing its exposure to the economy.
After an unprecedented run-up in government spending during Covid and then (via Treasury Secretary Janet Yellen) in the lead up to last year’s Presidential election, the private sector has been crowded out.
As government spending is stripped back, we will get a much better gauge on the underlying health of the ex-government economy.
The key risk is that the private sector swings from being “crowded out” to a voluntary “stepping out” in the face of a government strategy that no one has ever experienced before – and for which no rule books have been written.
On some calculations, something like 70-80% of US economic growth over the last three to five years has been driven by deficit-funded government spending.
We are on the cusp of learning about the relationship between the US government’s deficits and corporate profitability. Some have postulated that 6% deficits equate to US$2Tr of excess spending across the economy.
The impact of current uncertainty is being seen in the data.
The Fed’s indicators of recession risk have picked up marginally, from the low-20% range to the mid-20% range.
Expectations for Q1 CY2025 earnings growth for the S&P 500 have fallen from 11.7% on 31 December 2024 to 7.3% on the 28 March. Unusually for recent times, US earnings revisions are falling faster than other major developed economies.
A key observation point from here will be following capital flows, spurred by either better relative opportunities or policy grievances – likely across the Atlantic toward Europe.
Tariffs remained very topical, with some negative news – such as the 25% tariff on non-US produced cars – somewhat offset by comments out of the EU on areas where they may offer concessions, as well as Trump commentary about being “very lenient” in terms of the first round of reciprocal tariffs.
We expect further developments this week, with 2 April looming as the point at which a new round of tariffs will be implemented – perhaps marking the point at which uncertainty peaks.
After providing a tailwind for market sentiment for much of the past three years, inflation has largely stalled in the mid-to-high 2% or low 3% range, depending on the measure. The Fed’s view is that more cuts are on the way, but fewer than previously thought and weighted to the backend of 2025.
The S&P 500 fell 1.5% for the week. In an unusual twist, the US Dollar is falling as the S&P 500 retraces, for reasons discussed later in this note. The S&P/ASX 300 rose 0.63% during this time.
FedSpeak
As Atlanta Federal Reserve President Bostic – a non-voting member of the FOMC – flagged some of the challenges for forecasts amid the current uncertainty.
He currently expects prices to move largely sideways for the rest of this year, given less progress of inflation and the impact of tariffs.
This would mean that “the appropriate path for policy is also going to be pushed back”, with Bostic shifting his dot plot forecast from two cuts in 2025 to one.
He also cited increasing concerns from contacts on the economic trajectory which have yet to be reflected in data, but added that it is not yet clear whether weaker consumer sentiment will play out as a leading indicator.
On tariffs, he was cautious about labelling any impact on inflation as “transitory” but noted that historically they have been a one-off impact, with businesses passing through additional cost. Consumer sensitivity to this remains to be seen.
St. Louis President Alberto Musalem said it is unclear if any inflationary impact from tariffs will prove temporary. He also noted that secondary effects could see the Fed hold interest rates steady for longer.
He said there is an increased risk inflation could stall above the Fed’s 2% goal – or move higher due to tariffs and other factors – and emphasised the importance of inflation expectations remaining stable.
The Fed is no longer on the “golden path”, Chicago President Austan Goolsbee said, adding that the next rate cut will take longer than anticipated.
Macro and policy Australia
Headline year-on-year CPI inflation fell by 17 basis points (bps) to 2.38% in February, below consensus expectations of 2.5%. This means headline CPI has been within the 2-3% target band for seven consecutive months.
The monthly decline was driven by seasonal price falls in the holiday travel and accommodation basket – which was down 7.6% month-on-month – as well as lower fruit and vegetable prices (down 0.5% month-on-month).
Electricity prices fell 2.5% month-on-month – versus expectations of a 0.5% rise – with all Victorian households receiving subsidy payments after some missed out in January.
The baskets seeing the highest annual inflation are food (+3.1%), alcoholic beverages and tobacco (+6.7%), rents (+5.5%), education (+5.6%) and finance and insurance (+4.5%).
Housing-related components such as rents and new dwelling prices have eased significantly from where they were mid-2024, but are flattening out at current levels.
The largest price falls have come in electricity prices (-13.2%), fuel (-5.5%) and travel (-7.6%).
The year-on-year trimmed-mean CPI fell 10bps to 2.7%, above expectations of 2.5%.
The CPI excluding volatile items (fresh food, fuel and holiday travel) fell from 2.9% in January to 2.7% in February.
Elsewhere, there was little in the 2025-26 Federal Budget to shift perspectives.
The deficit of $42.1bn was a touch larger than the $40bn consensus expectation and well ahead of the $27.6bn for 2024-25, but lower than the forecast of $46.9bn from the midyear update.
This equates to 1.5% of GDP. Forward projections suggest a deficit ranging from 1.1% to 1.3% through to 2028-29.
The main surprise was a modest tax break totalling $17.1bn over five years through a slight increase in the lowest tax bracket.
The government expects the economy to grow 1.5% this fiscal year (down from 1.75% previously), 2.25 in 2025-26 and 2.50% in 2026-27. It is also forecasting CPI inflation to remain in the 2-3% target band, though rising to its top end next year.
Macro and policy US – policy uncertainty now leaking into the hard data
The March Composite Purchasing Manager’s Index (PMI) came in at 53.5, which was a three-month high ahead of consensus 51.7 and up from February’s 51.6.
The Services PMI of 54.3 was also at a three-month high. It also beat consensus (50.8) and was up from 51.0 in February.
The Manufacturing PMI of 49.8 was below consensus expectations of 51.9 and hit a three-month low as new orders growth slowed.
Forward-looking components revealed a degree of pessimism. The Future Activity Index component of the PMI fell to its second-lowest level since October 2022 given a cautious economic outlook and policy uncertainty.
The Conference Board Consumer Confidence Index fell from 101.1 in February to 92.9 in March – its lowest level since January 2021 and below consensus forecasts of 94.0.
The expectations component (down 9.6% to 65.2) and the present situation component (down 3.6% to 134.5) both declined.
The survey’s measure of 12-month ahead inflation expectations increased by 0.4pp to 6.2%, which is the highest level since April 2023. Tariffs were cited as the reason. While high, we note that the Fed is more focused on medium-term inflation expectations.
Other data points to note:
- New home sales in February rose 1.8% from January on a seasonally adjusted annual rate, slightly below consensus expectations.
- Initial jobless claims fell from 225K to 224K, marginally below the consensus (225K).
- Continuing claims fell to 1,856K, from 1,881K, below consensus of 1,886K.
- Real consumption rose 0.1% in February, below consensus (0.3%). February’s very modest rebound from a weak January suggests the emergence of a real slowdown in demand. Weakness was fairly broad based. A gain of ~0.3% in March see a 1Q annualised growth rate of about 0.5%, the lowest since 2Q 2020.
- Nominal personal incomes rose by 0.8%, well ahead of the 0.4% expected by consensus. Government transfers to households grew 2.2% while increases in personal taxes rose just 0.1%.
- The Core Personal Consumption Expenditures (PCE) deflator increased by 0.4%, above the consensus of 0.3%, and lifted the inflation rate to 2.8% from 2.6% in January. These numbers are less relevant until the impact of tariffs gets absorbed into the base.
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Markets
Evidence of the dramatic reversal in sentiment towards equity markets is seen in the positioning of US institutional asset managers, which have gone from the one-hundredth percentile of net long equity positioning in November 2024 to the 58th percentile in March.
US dollar
It is also interesting to note that of the 13 drawdowns of at least 10% in the S&P 500 since 2010, the US dollar has been at least flat – and usually up as part of a flight to safety – except in the current episode.
There are two factors that have changed.
First, on a short-term perspective, the story at the start of the year was a strong US economy and a weak Europe.
Since then, US growth expectations have dropped as uncertainty weighs on investment and spending, while European growth expectations have improved on the back of large German stimulus.
That led to the reversal of an undervalued Euro versus the US dollar. There is a view that this could begin to unwind if the tariffs begin to eat into growth of other countries more so than the US.
The second, longer-term case for a weaker US dollar goes to the argument outlined by Stephen Miran, chair of the Council of Economic Advisers within the Trump Administration.
The argument is that the US dollar is chronically over-valued as a result of all the payments being received by exporters in China and the EU being recycled into US assets.
There has been a very large increase in foreign ownership of US equities in last decade, which is now at all-time highs. If countries start to believe that the trade compact with the US is now broken, they are less likely to keep buying – and may actually sell – US assets, thus creating a long-term headwind for the US dollar.
This helps explain why the long-term negative correlation between equities and the US dollar has broken down.
The near-term outlook for the dollar remains unclear, because of the relative impact on tariffs.
However, we think the long-term trend may well be for a weaker US dollar, with the caveat that this is mainly against the Euro.
The Australian dollar may underperform the Euro given our own issues with government over-spending eventually requiring some response, which may lead to a headwind for growth.
Data centres
There was further negative news flow on data centres (DCs), as a US sell-side analyst flagged Microsoft is not proceeding with 2 giga-watts (GW) of data centre options in the US and Europe.
We understand that Microsoft has over procured around 1GW of capacity, given they have altered their exclusivity agreement with OpenAI on training generative AI models. OpenAI is now also partnering with Oracle. This is equivalent to roughly six months’ worth of supply.
Anecdotal feedback suggests that other hyperscale customers are stepping up to take capacity.
Lease agreements already agreed with global data centre operators in the G20 nations are ironclad, with no ability to back out. However, DC operators may be amenable to adjusting capacity to another location particularly, if they can sell the unlocked capacity at a higher price.
The DC market remains in balance for now.
In Australian equities, Financials (+2.5%) and Energy (+1.9%) were the best performers for the week, while Technology (-2.9%) and Real Estate (-2.2%) underperformed.
About Jim Taylor and Pendal Focus Australian Share Fund
Drawing on more than 25 years of experience investing in top-performing Australian companies and a background in accounting, Jim manages our Long/Short Fund and co-manages our Imputation Fund. He is a Chartered Accountant with membership of the Australian Institute of Chartered Accountants.
Pendal Focus Australian Share Fund is managed by Crispin Murray. The fund has beaten its benchmark in 14 years of its 18-year history (after fees), across a range of market conditions. Find out more about Pendal Focus Australian Share Fund here.
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
Here are the key takeaways from the Federal Budget and February’s inflation data, according to head of government bond strategies TIM HEXT
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INTERESTED readers may want to pore over the many details of the Budget by themselves. But here are the three things that matter for the bond market.
1. Gross debt will hit $1 trillion by next year
There is nothing important about this milestone as such.
But with a $62 billion headline cash deficit and around $90 billion of maturing debt to refinance, the Australian Office of Financial Management will need to issue more than $150 billion next financial year.
This is $3 billion a week (as it takes Christmas and New Years off), which is double the pace of this financial year.
Can the market absorb these higher amounts? Of course they can.
And with arbitrage players buying bonds (then financing them with banks on repo) and selling futures in massive volumes, the government can fund itself easily. This is one way the US government is getting itself huge issuance volumes away.
However, term premiums will continue to go up and yield curves should steepen further.
2. Big government is here to stay
The government continues to spend any savings it finds.
The Budget forecasts are highly sensitive to employment predictions. Not only do workers pay taxes, but you also don’t need to pay them welfare. Therefore, a fall in the unemployment forecast from 4.5% to 4.25% helped make the government $36 billion better off over the next five years.
However, new spending and modest tax cuts used up $35 billion of this. As a result, government spending remains above 27% of Gross Domestic Product – the highest since the 1970s (Covid aside). And this is only Federal government – including the state governments only makes it bigger.
The following graph is courtesy of ANZ – a larger version can be seen here.
3. There is very little in the Budget to help productivity
This Budget was not supposed to happen, with only Cyclone Alfred stopping an April election.
One hopes that both parties are holding back their bold initiatives for the campaign proper, which will begin next week. However, a pessimist may also suggest that both are trying to be small targets, as in the modern age, reform is viewed as just too difficult.
The thinking is a small number of losers will make far more noise than a large number of beneficiaries from any reform.
In the meantime, productivity in Australia is hard to come by, at least over the last decade. There are few signs we will be able to boost it anytime soon, though we are doing better than our friends in New Zealand.
This matters for markets and should make investors cautious that we can sustain real returns (over inflation) around the 3-4% level.
Recent years have left investors confident that the good times will keep rolling, but expectations should be moderated – disappointment will not be too far behind.
Inflation
Today, we also received the February monthly CPI numbers. This compares levels with February last year.
Prices are up 2.4%, almost right on the RBA’s target. If a trimmed mean is applied to CPI (that is, removing the top 15% and bottom 15% on a weighted basis) this number is 2.7%.
This is good news for the RBA. While electricity subsidies are keeping headline inflation down (these run out next year), there is plenty of good news in the items.
Importantly, new dwelling prices are only up 1.6% over the past 12 months, having been above 10% in 2021 and 2022. Rents were 5.5% higher – still too high, but down from 8% peaks.
In fact, apart from excise-impacted alcohol and tobacco, the only pinch points of high inflation remain health, education and insurance.
Lower wage growth should help health and education fall, though structurally they will remain elevated. Insurance is only a small part of overall CPI but should follow – down moderating car repair and building costs.
The Q1 2025 CPI numbers, due out 30 April (RBA meets 18 May), should show trimmed mean inflation at 0.6%. Headline may be nearer 0.8% or 0.9%, but either way, it will provide the RBA with a very good reason for another cut.
If the polls are right in suggesting post-election mayhem and both parties try to woo the independents to form a government, we may not have a government by 18 May.
However, whoever does become prime minister will be handed a gift from the RBA.
About Tim Hext and Pendal’s Income & Fixed Interest boutique
Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.
Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.
Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.
Find out more about Pendal’s fixed interest strategies here
About Pendal
Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.
In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.
Here are the main factors driving the ASX this week, according to portfolio manager OLIVER RENTON. Reported by portfolio specialist Chris Adams
- Find out about Pendal Focus Australian Share Fund
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A QUARTER AGO, the market had strong momentum, favourable liquidity and seasonals, but definitive signs of overexuberance.
It could be argued it was due a correction, and this has occurred.
The answer has consistently been to buy the correction. It never feels comfortable at the time, but this has been the correct answer – unless the economy is sliding into recession.
We have seen extremely rapid unwinding of positioning, some soft economic data and some weak company updates.
The market stabilised last week – a sign that it is entering a new phase. The S&P 500 was up 0.5% and the S&P/ASX 300 1.9%.
What the US is attempting to do – in fundamentally rebalancing its economy – is not something society or the market has had to deal with much over the last few decades (we’ve had other things, certainly).
It creates uncertainty. This is reflected in sentiment indicators within the US. It is also being reflected in capital flows globally.
Uncertainty feeds into confidence which can and does have the ability to drive the economy. The prospect of policy missteps is elevated.
The Fed does have some room to maneuver with a currently strong employment backdrop and only moderately high but stable inflation.
The Trump Administration can also try and give the market confidence at various points. They have made it clear they want to create structural change without causing recession.
We suspect short-term volatility will be elevated, as we head toward a most-likely favourable long-term environment for risk-assets.
It feels somewhat analogous to the constant back and forth we had on soft versus hard landing. This is likely to go on for an extended period of time.
The comments above regard the US and its economy – the implications for individual countries and blocs will be just as interesting, with the derivative impacts highly uncertain.
China is pushing a consumer recovery, while Germany is stimulating via higher defence spending and has awoken. We are already seeing major shifts.
It seems more important than ever to construct portfolios to reflect vastly different economic outcomes, to be open minded and nimble but not reactive.
David Zervos, Chief Market Strategist at Jefferies, summed it up nicely. While approving of the “withdrawal” or “detoxification” of the US economy from dependence on the government sector, he noted the risk of economic convulsions through the process.
With regard to markets, he said that how it will play out “over the short term remains difficult to predict; but with the end result being a decisive move towards spending and regulatory parsimony, the long-term outlook for risk asset returns couldn’t be any brighter”.
Thus far, the S&P 500 drawdown is playing out in line with previous examples of corrections greater than 10%.
Historically, the median outcome is that stocks start a strong rebound two-to-three months after the market’s previous top – if there is no recession. If there is a recession, equities have historically continued to sell off.
US macro and policy
FOMC
As expected, the Fed left rates unchanged at 4.25%-4.50%.
The “dot plots” of expectations for future rate cuts from the FOMC participants still suggests a further 50bps of cuts in 2025, however the distribution shifted upwards, with four now expecting a midpoint of 4.375% in December, up from one, and the number expecting only a 25bp cut lifting from three to four.
New economic projections suggest most members expect the inflationary effect of tariffs to be short-term, but that concern over the outlook for employment is increasing.
Expected GDP growth for 2025 was reduced to 1.7%, from 2.1% in December, the unemployment rate nudged up from 4.3% to 4.4% and Core PCE inflation from 2.5% to 2.8%. However, 2026 expectations were largely unchanged.
The statement noted the economy “has continued to expand at a solid pace”, unemployment has “stabilized at a low level” and labor market conditions “remain solid”.
However, it noted that “uncertainty around the economic outlook has increased.” It also removed the previous reference to risks over employment and inflation goals as being “roughly in balance.”
It has announced that the pace of balance sheet reduction will be slowed, as a result.
Equity market took the release well and consensus rate cut expectations remained steady.
Other data
The preliminary Michigan Consumer Sentiment survey dropped from 64.7 in February to 57.9 in March – well below consensus and the third straight month of declines.
Both current sentiment and expectations were lower – the latter down 10 points from February. The difference in sentiment according to political party remains stark.
US Nominal Retail Sales increased just 0.2% month-on-month (MoM) in February. We note that high-frequency data like Open Table booking and bank lending show no signs of consumer caution yet.
US weekly unemployment benefit application were largely changed at 223,000, which is a relatively low level and indicates a resilient labor market.
This may deteriorate, however, given some of the recent layoff announcements.
The National Association of Home Builders/Wells Fargo Housing Market Index dropped three points to 39 this month, versus consensus expectations of 42. This is the lowest level since August 2024.
We also note that the average US 30-year mortgage rate rose for the first time since early January, to 6.72% for the week ending 14th March.
Expectations of lower growth and higher inflation due to tariffs are also reflected in New York state manufacturing activity, which dropped in March to the lowest level since early 2024, while measures of prices picked up.
China policy and macro
The action plan announced following the recent National People’s Congress is aimed at boosting consumption as a driver of economic growth.
The plan’s seven parts, with some key elements, are:
- Promote income growth. Boosting spending power via higher minimum wages, stabilizing stock and real estate markets, as well as subsidies and measures to support rural economies.
- Improve consumption capacity. Giving people the means and confidence to spend via better access to credit and stronger social safety nets (eg childcare, pensions and healthcare support).
- Improve consumption of services and public benefits. Better access via measures such as elderly-friendly infrastructure, community-based childcare, home services industry standards and steps to improve tourism.
- Upgrade large-item consumption. Encouraging purchases of items like cars and home appliances via subsidies and trade-in programs. Also measures to support affordable housing.
- Improve consumption quality. Implement product standards and promote domestic brands, support further technological innovation such as AI and encourage sustainable products.
- Improve consumption environment. Enhance consumer rights and tackle issues such as fake goods and unfair pricing. Upgrade infrastructure and improve convenience of the consumption environment.
- Remove restrictive measures. Easing regulations that hinder consumption and improve credit availability.
Elsewhere, year-on-year growth of industrial production (IP) came in at 5.9% for January-February, versus 6.2% in December but ahead of consensus expectations at 5.3%.
Fixed asset investment grew 4.1% (versus 3.2% expected) up from 2.2% in December. Retail sales rose 4.0% (3.8% expected) up from 3.8% in December.
There has been some front-loading of demand and production from a recent trade-in program and a boost in exports looking to get ahead of tariffs, so this growth may moderate in coming months.
Other policy and macro
The OECD cut global GDP growth forecasts from 3.3% to 3.1% for 2025 and from 3.3% to 3.0% for 2026, citing the uncertainty relating to trade barriers among G20 nations.
Mexico and Canada saw the largest reductions, but China was lifted from 4.7% to 4.8% in 2025.
The February Eurozone consumer price index (CPI) was revised lower to +2.3% year-on-year, versus the earlier flash reading of +2.4%.
The Bank of England’s Monetary Policy Committee left the benchmark policy rate at 4.5%.
Australia policy and macro
Employment
Employment data came in much weaker than consensus, falling -53k in February (seasonally adjusted) from January, versus -30k expected. This is after a year of almost continual upside surprises.
Hours worked fell -0.4% month-on-month.
The Australian Bureau of Statistics cited fewer older works returning to work post the holiday period, noting the participation rate dropped from 67.2% to 66.8% driven by change in the age cohorts 55 years and older.
The unemployment rate fell from 4.11% to 4.05% and underemployment from 6.0% to 5.9%, indicating that capacity remains relatively tight.
Indicators suggest labour demand remains stable and supported.
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Tariffs
On tariffs, current estimates suggest 2-8% of Australia’s $30bn in exports to the US will be hit in the next round, in the event of no exemptions. Affected areas include beef and pharmaceuticals.
Budget
Commentators broadly expect strong revenues, but offset by further spending and no change to the expectation of further deficit spending.
There is a likelihood of further rebates or “cost of living” measures given the upcoming election.
The spending outlook could hit a snag in the event of a minority government – based upon the 2010-2013 experience – depending on who formed it. Betting markets still imply a 2/3rds chance of this outcome, reflecting how tight the race is.
Elsewhere, March quarter manufacturing activity remains below average, whilst business investment has eased but remains above average.
Advertised salary growth is remaining stickily high at 3.6%.
Markets
Bond yields were down across the curve in US, with the 10-year down 7bps to 4.25%. The Australian equivalent fell 2bps to 4.40%.
Commodity prices were up small, on the whole. Gold (+14.8%) and copper (+27.6%) are the standouts calendar year-to-date.
Global equity indices were up over the week. The EUROSTOXX50 is the best performer in 2025, up 11.19%, which would not have appeared on too many bingo cards.
The current US drawdown is nothing out of the ordinary thus far – and is currently less than the average intra-year drawdown of 14.1% going back to 1980.
The correct response historically has been to buy the dip…unless the economy is heading into recession.
The rebalancing of systematic strategies away from equities appears to have played out and has already hit the low end of its 10-year range for a measure of commodity trading adviser (CTA) strategies.
Measures of investor net leverage and long/shorts suggest that fundamental investors have also shifted back to the bottom end of five-year ranges in terms of US equity exposure.
Retail investors have been slower to move.
The Goldman Sachs risk appetite indicator has diminished, but only back to a ‘neutral’ level.
Ther were some interesting company-specific updates to note:
- Nike Q3 revenue rose 3%, beating expectations. China was weak but North America and EMEA were better than expected.
- Fedex reduced its FY profit outlook for a third consecutive quarter, calling out waning consumer confidence and the impact of trade wars.
- Homebuilder Lennar’s forecast for quarterly orders missed analysts’ estimates, with the co-CEO noting “a challenging macroeconomic environment for homebuilding.”
Australian equities
The week finished with solid gains across the board for the ASX and its sectors, but was choppy throughout.
The S&P/ASX 300’s 1.9% gain brings it back to down -2.3% for the month.
Consumer staples (+4.0%) had the best week on news flow out of the Government review into supermarkets.
About Crispin Murray and Pendal Focus Australian Share Fund
Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and leads one of the largest equities teams in Australia. Crispin’s Pendal Focus Australian Share Fund has beaten the benchmark in 12 years of its 16-year history (after fees), across a range of market conditions.
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
Find out more about Pendal Focus Australian Share Fund here.
Contact a Pendal key account manager here.
Drawing on more than 25 years of experience investing in top-performing Australian companies and a background in accounting, Jim manages our Long/Short Fund and co-manages our Imputation Fund. He is a Chartered Accountant with membership of the Australian Institute of Chartered Accountants.
Pendal Focus Australian Share Fund is managed by Crispin Murray. The fund has beaten its benchmark in 14 years of its 18-year history (after fees), across a range of market conditions. Find out more about Pendal Focus Australian Share Fund here.
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.