There are signs that inflation has peaked and is due to come off in the next few quarters – which means owning bonds could be compelling around Q2 2023, says Pendal’s OLIVER GE

You can also listen to this podcast on Apple or Spotify

An excerpt from this podcast with Oliver Ge, an assistant portfolio manager with Pendal’s Income and Fixed Interest team

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“There are signs that inflation has peaked and is due to come off in the next few quarters.

“That would invariably take us to a position, maybe in Q2 2023, where it looks quite compelling for us to own bonds.

“At that point you’d already see inflation pressures come off and growth indicators start to materially deteriorate.

“Then central banks will in all likelihood tilt their reaction function to be more benign, more dovish. They’re not accelerating, there likely won’t be more hikes.

“That environment is conducive to owning bonds.

“You’re looking at returns of five to 6% per annum at that point.”

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About Oliver Ge and Pendal’s Income and Fixed Interest boutique

Oliver Ge is an Assistant Portfolio Manager with Pendal’s Income and Fixed Interest (IFI) team.

Oliver works on developing and running key quantitative investment models, and acting as trading support for the Income & Fixed Interest team. Oliver received his Bachelor of Commerce (Finance) from the University of Sydney and is also a CFA Charterholder.

Pendal’s IFI boutique is one of the most experienced and well-regarded fixed income teams in Australia. In 2020 the team won the Australian Fixed Interest category in the Zenith awards.

The invests across income, composite, pure alpha, global and Australian government strategies.

Find out more about Pendal’s fixed interest strategies here

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About Pendal Group

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

Contact a Pendal key account manager

What do this week’s Budget and inflation numbers — and next week’s likely 25-point rate rise — mean for investors? TIM HEXT explains in this fast podcast

You can also listen to this podcast on Apple or Spotify

An excerpt from this interview with Pendal’s head of government bond strategies Tim Hext:

“The key takeaway I have from the last couple of days is this inflation issue is not going to solve itself quickly enough to call an end to rate hikes anytime soon,” says Pendal’s head of government bond strategies Tim Hext in a new fast podcast.

“We are getting the ingredients — particularly globally more so than Australia — where in the second half of next year you could be getting a lot of weakness globally feeding through to the need for lower rates.

“My message — and this has been a consistent message for a number of months now — is start to think about getting some bonds in your portfolio as a defensive instrument.

“I don’t think they’re necessarily going to rally hard in the near term.

“But if you can own those 10-year bonds in Australia at 4% on a two or three-year outlook, I think you’re going to do well out of them.

“And they’re going to give you that buffer should the slow-down prove to be stronger.”

Listen to the full podcast above

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

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

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

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

Find out more about Pendal’s fixed interest strategies here

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About Pendal

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

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

Contact a Pendal key account manager

An equity markets rally is more likely to be led by quality growth stocks than cyclical value stocks, argues Pendal’s CHRIS LEES

• Pendal’s Chris Lees is 50% bullish and 50% bearish
• Quality growth stocks more likely to lead a rally than cyclical value stocks
• Find out about Pendal Global Select Fund

THE December quarter may see a rally, but equities will be range bound for the next few years, with rotations between value and growth stocks, argues Pendal global equities fund manager Chris Lees.

“Our base-case scenario is that this interest rate shock-crisis ‘valuation’ bear market is morphing into a recessionary ‘profits’ bear market, with the S&P 500 already down 25% year-to-date.

“But we don’t expect widespread financial contagion, where markets would fall by more than 50% like in 2008.

“Our current scenario analysis is 50% bullish and 50% bearish,” says Lees, who co-manages Pendal Global Select Fund with long-time colleague Nudgem Richyal.

“Short-term reasons to be bearish include a recession potentially becoming a financial crisis or contagion.

“Medium-term reasons to be bullish include the US Federal Reserve regaining credibility with inflation and interest rates stabilising next year,” Lees says.

Lees breaks down the probability of three scenarios as follows:

• Bullish scenario #1 (15 per cent): Equity markets rally, led by cyclical value stocks. In this case it is probably nearer the beginning of the bear market for those stocks, because any future downturn, or recession, is likely to hit their earnings the hardest.
  
  
• Bullish scenario #2 (35 per cent probability): Equity markets rally, led by quality growth stocks. That means economically resilient, quality growth stocks are nearer the end, than the beginning, of their bear market.
  
  
• Bearish scenario (50 per cent): Equity markets keep falling if recession becomes a financial crisis or contagion and policy makers do not react.

What does it mean for investing?

In recent months the fund has sold economically cyclical stocks with earnings risk due to recession, and purchased more economically resilient companies, including some in the emerging markets of Brazil and Indonesia.

“Not many people know that the Brazilian and Indonesian equity markets have outperformed the USA stock market this year – even in US dollars – which is another example of just how different this bear market is from previous bear markets when they fell much harder,” Lees says.

The fund is also considering, or as Lees puts it “tiptoeing” around, neighbourhoods where they see positive relative fundamentals and valuations, with stabilising relative share prices.

“Some quality growth stocks are already down 50 per cent year to date and are beginning to stabilise,” Lees says. “And some emerging markets, notably Brazil and Indonesia.”

He also says its worth looking for opportunities to arise from the eventual turn in the US dollar, which in his words is “inevitable but not necessarily imminent”.

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About Chris Lees and Nudgem Richyal

Chris Lees co-manages Pendal Global Select Fund with Nudgem Richyal. The pair have been working together in global equities investing for more than 20 years.

Chris has more than 32 years of investment industry experience. He joined Pendal Group’s UK-based asset manager J O Hambro Capital Management (JOHCM) in 2008 after spending 19 years at Baring Asset Management, ultimately as head of its global sector team.

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About Pendal Global Select Fund

Pendal Global Select Fund is a global equities portfolio with a distinctive, yet proven approach and a 17-year track record of outperformance. Since its inception, the underlying strategy (JOHCM Global Select Fund) has delivered top-decile performance in Lipper and 2nd decile in Morningstar.*

Bonds can be an appropriate investment in a hiking cycle – as long as you know what to look for, argues Pendal’s head of income strategies AMY XIE PATRICK

You can also listen to this podcast on Apple or Spotify

An excerpt from this podcast

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Amy Xie Patrick, Pendal’s head of income strategies:

In a lot of hiking cycles, bonds actually do okay on a total return basis – that is, the income you get from the coupon on those bonds, as well as their potential to gain a little bit in terms of the capital price.

That usually is because most hiking cycles are fairly well flagged, especially in modern economic history.

The difference with this hiking cycle is the central banks just simply left it too late and now have to do a lot of catch up.

But even though central banks may need to keep on hiking, now their mantra is very well flagged to the market there is hope that bonds do better in the second half of this hiking cycle.

It does mean you probably want to look at having bonds in your portfolio as a defensive pillar, more towards the longer end of curves.

Because, at the shorter end, that’s directly tied to where policy rates are going. And as we know, nobody has signaled that they’re ready to peak and pivot more dovishly just yet.

We’re in an average recessionary market, but that doesn’t mean there aren’t opportunities, argues Pendal’s CHRIS LEES in this fast podcast

You can also listen to this podcast on Apple or Spotify

An excerpt from this podcast

Chris Lees, senior portfolio manager, Pendal Global Select Fund:

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“If you don’t think there’s a banking crisis coming, then it’s actually time to gently start buying again, and that’s what we’re doing.  

“We think that we’re in a normal recessionary bear market. We’re not going into, we think, a global banking crisis market.  

“Therefore equity markets around the world are probably in a double bottoming process.  

“So there are opportunities now for us to start adding into our funds for our clients. 

“In the post-Covid, post-recessionary world, as we look forward, healthcare looks really very, very attractive.

“We’ve got some fantastic growth stocks in the biotechnology tools, the biotechnology equipment, the biotechnology outsourcing world.  

“Those are fabulous businesses whose earnings have got nothing to do with oil, nothing to do with interest rates, nothing to do with all the current problems in the world.  

“Some of those stocks, a year or two ago, were very, very expensive. Many of them, the share prices halved now in this recessionary bear market, and yet their earnings are rock solid.

“Those are a fabulous opportunity for us to put into the fund for our clients.” 

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About Chris Lees and Nudgem Richyal

Chris Lees co-manages Pendal Global Select Fund with Nudgem Richyal. The pair have been working together in global equities investing for more than 20 years.

Chris has more than 32 years of investment industry experience. He joined Pendal Group’s UK-based asset manager J O Hambro Capital Management (JOHCM) in 2008 after spending 19 years at Baring Asset Management, ultimately as head of its global sector team.

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About Pendal Global Select Fund

Pendal Global Select Fund is a global equities portfolio with a distinctive, yet proven approach. Fund managers Chris Lees and Nudgem Richyal have worked closely together for more than 20 years.

They manage a portfolio of 30-60 stocks using quantitative analysis and fundamental research based on decades of experience.

The team draws on the experience of 40-plus investment professionals at JOHCM and Regnan.

Where are we in this interest rate cycle? Here’s a quick explanation from Pendal’s head of government bond strategies TIM HEXT

You can also listen to this podcast on Apple or Spotify

An excerpt from this interview with Pendal’s head of government bond strategies Tim Hext:

I think the 50 percentage point rises are probably over for now [in Australia].

But you’ve got two lags going on.

Firstly, it takes several months for a rise to feed through to your mortgage. So given they only started in May, the full impact of rate rises won’t be felt until the end of the year around Christmas.

The RBA will probably do two more 25s this year. They might put a third in up to 3.1%, but let’s call it 3%.

I think then they’ll sit back and see what impact it’s had.

Of course in 2023 you’re going to see a lot of fixed-rate mortgages rolling into floating rates, so there’s a hell of a lot of tightening yet to happen.

Secondly, on the goods inflation side there’s a huge amount of evidence that we’ve seen the peak in the US. There’s every chance we’ll get some negative CPI US prints.

This doesn’t mean inflation’s over. It doesn’t mean they’re going to cut rates, but that certainly takes the pressure off for hiking rates.

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

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

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

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

Find out more about Pendal’s fixed interest strategies here

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About Pendal

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

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

Contact a Pendal key account manager

The fashion industry is responsible for 5% of carbon emissions. But companies like Lenzing are solving that. Regnan’s MAXIME LE FLOCH explains how

• New wood-based fibres make fashion sustainable
• Austria’s Lenzing Group is a pioneer
• Find out about Regnan Global Equity Impact Solutions

What are you wearing?

If you’re like most people, your clothes are probably made of cotton produced with pesticides, fertilisers and hundreds of litres of water.

Or they might be synthetic, manufactured from petroleum and destined to end up as micro-plastic ocean pollution.

“The fashion industry has a lot to answer for,” says Maxime Le Floch, an analyst with Regnan’s impact investing team.

“Fashion is responsible for 5 per cent of annual carbon emissions. Some 6 per cent of global pesticide production is applied on cotton crops alone.”

But what if there was a solution?

Le Floch recently visited the Austrian headquarters of the Lenzing Group, which is pioneering the production of fabrics made from sustainably sourced wood pulp that are suitable for use in everything from shirts, shorts and shoes to towels, nappies and wet wipes.

Lenzing is part of Regnan Global Equity Impact Solutions Fund.

Its flagship fabrics — called lyocell, modal and viscose — are made from cellulose, the compound that makes up the cell walls of plants. They use 10 times less water to make than cotton and produce fewer carbon emissions than polyester.

The forests that supply Lenzing’s wood pulp bring other sustainability benefits, creating habitats for animal and insect life, improving biodiversity and sequestering carbon.

The company even powers its manufacturing plants with the wood left over from pulp extraction.

“And the performance of the fabrics is extremely good — they have good tensile strength, resist crushing, and their moisture management is very good,” says Le Floch.

“They are rapidly expanding the applications — they can even replace fabrics like silk and the denim in jeans.”

Already, some of the biggest names in fashion use Lenzing’s fabrics in their clothing, including H&M, Levi’s and ASOS.

Le Floch says a company like Lenzing suits impact investors because it has the potential to create genuine sustainability alongside strong financial returns.

Currently, wood-based fibres represent just 6 per cent of the $500 billion-plus global textiles market.

“The applications are expanding all the time. It may not completely replace all fabrics but if you go from 6 per cent to say 8 per cent that’s a massive total addressable market expansion.”

Role of an impact investor

As an impact investor, Regnan’s relationship with Lenzing goes further than simply holding shares.

“Using wood fibre for fabric is good but it shouldn’t come from primary forest or ancient forest.

“Lenzing are already auditing to make sure that doesn’t happen, but we have raised it with their head of sustainability and CEO that we want them to have a more systematic approach and communicate it a bit better, because we think this is also something that is part of their advantage.”

Still, for all the benefits of wood-based fabric, the textiles industry has a long way to go to sustainability.

The western world’s shopping habits are only making things worse, with fast-fashion, rapidly-produced, cheaply-made clothes bought and discarded after only a few uses.

“There’s a dramatic lack of recycling — 87 per cent of clothing is incinerated or in landfill,” says Le Floch.

“Half a million tonnes of plastic microfibers are dumped in the ocean each year — that’s the equivalent of 50 billion plastic bottles.

“So, we need to keep perspective — we think lyocell fabrics are a big part of the solution but there are other wider issues within the fashion industry that must also be tackled.”

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About Maxime Le Floch

Maxime is an analyst with Regnan’s impact investment team. He focuses on Regnan Global Equity Impact Solutions Fund. Maxime has more than 10 years of experience in sustainable investment. Before joining Regnan he was an investment analyst with Hermes where he helped launch and manage the Hermes Impact Opportunities Equity Fund.

China is one of the few countries lowering interest rates. Pendal’s head of income strategies AMY XIE PATRICK explains why — and what it means for investors

You can also listen to this podcast on Apple or Spotify

An excerpt from this podcast

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Amy Xie Patrick, Pendal’s head of income strategies:

The first thing to remember about these China authorities is they are not independent monetary authorities as we know them in Australia and the US.

The central bank in China has been lowering interest rates because the economy quite frankly is in a rut.

Most major investment bank analysts expect growth in China will fall to levels not seen over the last decade.

Quite frankly China will struggle to get above the 4% threshold for the next year or perhaps even more.

So the reason why China central bank is easing when the rest of the world is tightening, is because its economic situation looks a lot more dire.

China’s economic cycles over the last decade have largely been self-engineered.

It usually booms to a point where authorities get concerned about whatever is causing that boom.

And typically that’s always been property. China’s property market is quite unique — it is the one place in the world where its top-tier cities have vacancy ratios of around about 25%.

So just think about that.

About a quarter of the properties in big cities like Shanghai and Beijing sit vacant. They’re not even being rented out. There is a huge oversupply of properties.

Property is a store of wealth for the Chinese population as a whole.

But the amount of debt that gets accumulated behind the sector (mainly on the developer side) has gotten authorities worried that debt levels will become unsustainable if they continue to stimulate the economy out of trouble.

Regnan has just published its first annual impact report, showing how investors are helping make the world a better place

• Impact investors aim to make a positive difference and strong returns
• Regnan’s impact report shows how investing makes a difference
• Download Regnan Global Equity Impact Solutions Impact Report 2021 (PDF)

CAN you make the world a better place by carefully choosing where to invest?

Regnan’s equity impact investing team believes the answer is yes – and they lay out their case in their first annual impact report.

Regnan Global Equity Impact Solutions fund invests in businesses we believe are best placed to solve the environmental and social challenges of our time.

The goal?

Generate market-beating, long-term returns by identifying companies that are innovating and disrupting their way to solutions for the planet’s biggest problems.

The report shows investee companies in the fund are:

• Training young doctors in Brazil, one of the most medically under-served countries in the world (Afya)
• Producing low-carbon cement to transform the building industry (Hoffmann Green Cement)
• Fighting homelessness in the UK (Home REIT)
• Developing better batteries for electric vehicles that charge 6 times faster (Ilika)
• Making fabric from tree fibres to replace cotton, using less water and emitting no net carbon (Lenzing)

And these are just the companies added to the portfolio in 2021.

The team’s proprietary taxonomy — built on the United Nation’s Sustainable Development Goals — has identified eight themes for making an impact, from improving life expectancy to the energy transformation.

Two themes stood out in 2021:

• Health and well-being was thrust into the spotlight by the pandemic, which has lifted policy-maker emphasis on healthcare provision, well-being and prevention
• A growing realisation that the world consumes resources at a higher rate than they can be replaced put the concept of the circular economy — which reuses and recycles production — into the global discourse

Investing in these enormous undertakings is made possible by Regnan’s “systems thinking” approach which seeks to generate positive, measurable social and environmental impact alongside a financial return.

“Our approach is to include impact in the investment decision, not to treat it as an afterthought,” says head of equity impact solutions Tim Crockford in the report.

“Investors can be confident that we assess impact every step of the way.”

As part of its approach, Regnan conducted 67 portfolio engagements in over the year, including 37 linked directly to environmental, social, governance or disclosure objectives.

Environmental engagements were dominated by decarbonisation, with several portfolio companies announcing net zero commitments. Diversity, equity and inclusion featured in the social engagements.

Details of these and other investments are in the Regnan Global Equity Impact Solutions Strategy’s inaugural Annual Impact Report 2021, which can be downloaded below.

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• Digital simulation drives innovation
• Software that supports UN Sustainable Development Goals
• Find out Regnan Global Equity Impact Solutions Fund

YOU’VE driven a car designed on a computer — but have you driven one designed by a computer?

The rising sophistication of simulation software means your next car — or at least parts of it — will have had it performance simulated and tested by computer software, says Regnan analyst Maxime Le Floch.

Engineering simulation integrated into computer-aided design software is providing important innovations across many different industries, dramatically cutting the time to create and test new designs, improving manufacturing efficiency and slashing costs and resource usage.

“We need to speed up innovation across the global economy — it is specifically something called out by UN Sustainable Development Goals nine and 12 which highlight resource efficiency and enhancing scientific research,” says Le Floch, an investment analyst with Regnan’s Global Equity Impact Solutions team.

“Simulation software helps improve efficiency in the way we use environmental resources and it’s also greatly improving innovation.”

Cloud-based simulation software has made staggering strides in recent years. Systems that once simulated a single feature of a vehicle like its reaction to wind flow can now run 1000s of tests across a wider range of physics, testing a vehicle design for safety, engine performance, fuel efficiency and more.

“Physical prototyping is expensive and it uses resources,” says Le Floch.

“In the car industry, simulation means that instead of having to build physical prototypes of cars and smash them into walls at all kinds of speeds and angles, you can instead run more simulations.

“This means you can run thousands of different simulations, changing lots of different small parts, which you wouldn’t be able to do otherwise.

“It means you also get much better products that are more optimised and more efficient, with a reduced risk of defects.”

It is not just the car industry that has latched on to simulation software — the techniques are equally well used across industries as diverse as healthcare, energy, construction and consumer products.

And it’s not only used for new product design but also to monitor and optimise existing systems.

“A ‘digital twin’ is a 3D software model of a machine or piece of equipment or even a full factory,” says Le Floch.

“The model gets fed real time data from sensors on its real-world counterpart and can simulate and predict what might happen.

“It can be used for predictive maintenance that issues a warning ahead of a part failing and allows you to intervene.

“And you can test what might happen if you want to make a change like running a production line faster.”

Simulation supports sustainable innovation

The software is also being used extensively in the renewable energy industry, for example to simulate different wind conditions and understand how that affects the performance of the turbines, says Le Floch.

Le Floch says simulation software is providing three benefits for investors and for the planet:

• It’s improving the performance of products in use by maximising their efficiency and reducing their downtime and energy usage.
• It’s saving money and resources that used be consumed in the R&D process.
• And it’s speeding up R&D and spurring innovation, which is critical to the world solving its sustainability problems.

Regnan’s Global Equity Impact Solutions Fund has a position in US-listed simulation software leader Ansys, which has a stated aim of “helping innovative companies deliver radically better products”.

“The world has a broad need to innovate to meet the SDG goals — not least in decarbonisation where we have a lot of existing technologies but there’s a need to greatly enhance innovation,” says Le Floch.

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About Maxime Le Floch

Maxime is an analyst with Regnan’s impact investment team. He focuses on Regnan Global Equity Impact Solutions Fund. Maxime has more than 10 years of experience in sustainable investment. Before joining Regnan he was an investment analyst with Hermes where he helped launch and manage the Hermes Impact Opportunities Equity Fund.