EMERGING markets investors must have a strong understanding of country-level factors. Global Emerging Markets Opportunities portfolio managers James Syme and Paul Wimborne (pictured above) explain their approach using Thailand as an example.
Emerging markets go right or wrong at country level, but there are some similarities between economies and markets within particular regions.
Examples include the commodity dependencies of Latin America and the Arab Gulf or the euro-linkage of Central Europe.
One of these similarities is the relative stability of the four South-east Asian markets — Thailand, Indonesia, Malaysia and Philippines — since a period of extreme economic and political volatility from 1996 to 2006.
That stability has been weakened by the economic and social effects of coronavirus, notably in Thailand.
Thai politics have been deteriorating since the mid-2000s due to broad tensions between a reform-oriented, largely provincial political movement and a conservative, largely Bangkok-based elite with strong links to the royal family and the military.
This second group has been in power under the military-backed government of former army chief Prayut Chan-o-cha since the 2014 coup.
This year Thailand has experienced an upsurge in anti-establishment protests that began in February when the Election Commission banned the progressive Future Forward Party.
Covid-related lockdowns led to a period of calm, but protests have picked up again in recent months.
Protestors are demanding the government’s resignation, the dissolution of parliament and fresh elections under a new constitution. Demands also include a reduction in the monarch’s roles in government and the military. This is intensely controversial for the royalist elite and may prove a particular source of tension.
The government seems unwilling at the time of writing to engage with protestors. Instead, it is again relying on technocratic delivery of a strong economy to mollify popular unhappiness.
With policy makers expressing concern about the 2021 tourist season, the ministry of finance (and its new head, Arkom Termpittayapaisith, appointed as Finance Minister on October 5) is turning to fiscal stimulus to support the economy.
One of the key measures is a consumption support scheme for the fourth quarter of 2020. This is modelled on the “Shop for the Nation” scheme deployed in 2019 but at a larger scale, allowing up to THB 30k (around US$1000) of consumer spending per citizen to be tax deductible from income taxes.
Finance minister Arkom previously worked in the transport ministry, where he played a key role in several major transport infrastructure projects. Commentators assume he has been picked for the finance ministry to push more of these kinds of projects through with the aim of further supporting economic growth.
The twin policies of running a large current account surplus and accumulating foreign exchange reserves has been a consistent feature of economic policy in Thailand since 2006.
This requires the management of exchange rates to prevent the Thai baht strengthening against the currencies of trading partners. This policy looks to be continuing.
Thai foreign exchange reserves are up 10% to US$238 billion this year. This policy, combined with the economic impact of Covid-19, means monetary policy has had to be kept loose.
The Bank of Thailand’s policy interest rate, the one-day repurchase rate, remains on hold at a record low of 0.5%.
The monetary policy committee is reported to be considering unconventional monetary policy measures such as quantitative easing or negative policy rates.
If fiscal policy (described by the central bank as “the main driving force behind economic recovery”) is not sufficiently stimulative — and with policy rates near the zero lower-bound — unconventional policies may be seen in Thailand.
Ultimately the “fortress balance sheet” approach to foreign exchange reserves offers economic stability and security.
But it’s dependent on a model of under-consumption and some degree of financial repression of people who are both workers and consumers.
This can minimise financial market concerns about political unrest, and may once again allow the government to face down its critics.
With tourism yet to show signs of recovery, we remain zero-weight Thailand and prefer to look for recoveries in the more domestically-driven part of the emerging market equity asset class.
James Syme and Paul Wimborne are senior fund managers and co-managers of Pendal’s Global Emerging Markets Opportunities fund.
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
Find out more about our investment capabilities: https://www.pendalgroup.com/about/investment-capabilities
Contact a Pendal key account manager: https://www.pendalgroup.com/about/our-people/sales-team/
RESPONSIBLE investment leader Regnan has been appointed to the Future-Fit Development Council, a network of companies and investors working to establish a global business benchmark for sustainability.
UK-based Future-Fit has developed a free self-assessment tool – the Future-Fit Business Benchmark – which any business can use to report its contribution to real-world progress in environmental and social issues.
Regnan will help Future-Fit accelerate its work with the global investment community.
“Regnan is well recognised for its rigour in analysing the impact of sustainability issues on companies,” said Regnan’s head of advisory Susheela Peres da Costa (pictured above).
“We are delighted to have found in Future-Fit a partner committed to advancing an equally systematic approach to the impact companies have beyond their boundaries.”
Regnan works to improve sustainable performance by addressing Environmental, Social and Governance (ESG) issues.
The advisory — which is part of Pendal Group — recently appointed a London-based impact investment team to launch the Regnan Global Equity Impact Solutions strategy in late 2020.
The future of ESG integration and engagement
Future-Fit co-founder Martin Rich said he was “delighted to embark on this partnership with Regnan, a true global leader in the responsible investment market.
“Regnan’s commitment to embed the Future-Fit Business Benchmark into the heart of the new Global Equity Impact fund is incredibly powerful in showing how investors can take a holistic approach to evaluating and encouraging responsible and sustainable business.”
The Future-Fit Business Benchmark translates systems science into practical, free-to-use tools designed to help business leaders, investors and policy makers respond effectively to the world’s biggest challenges.
Future-Fit’s members work closely to stress-test and co-evolve the benchmark to be as useful and usable as possible for businesses of any size and sector.
The UK-based charity’s mission is to establish “a society that protects the possibility that humans and other life can flourish on Earth forever”.
Find out more about Future-Fit here.
Regnan is a global leader in long-term value, systemic risk analysis and responsible investment advice.
Last year Regnan appointed a London-based impact investment team to launch a Global Equity Impact strategy in late 2020.
Regnan recently co-authored a paper with the Principles for Responsible Investment, Active Ownership 2.0, which sets a new benchmark for responsible stewardship. Regnan is wholly owned by Pendal Group.
PENDAL has joined Climate League 2030, a new private sector-focused initiative to support emissions reduction in Australia.
Launched today, Climate League 2030 is a ten-year plan which aims to address climate change in Australia in line with the Paris Agreement goals.
The initiative — backed by Pendal Group and 15 other institutional investors — is co-ordinated by a collaboration of Australian and New Zealand institutional investors known as the Investor Group on Climate Change.
The League supports efforts to mitigate systemic risks that climate change poses to the economy and our communities. It also promotes new job and investment opportunities as part of the transition to net zero emissions.
Pendal will commit with other investors — and soon companies, banks and insurers — to take action on reducing annual emissions by at least 230 million tonnes before 2030.
This represents a 45 per cent reduction in Australia’s emissions compared to 2005.
The reduction could be even greater based on different emissions projections for 2030, such as recent federal government data that includes a number of new assumptions about mitigation policy outcomes.
The initiative aims to galvanise private sector action to help shift Australia’s emissions trajectory towards a 2030 outcome consistent with the Paris Agreement and the best available science on keeping global warming to 1.5 degrees celsius.
We look forward to sharing more in time about our participation in this initiative, as part of our broader responsible investment and stewardship activities.
Watch the short video about Climate League 2030 above or red the visit www.climateleague.org.au to find out more.
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
Find out more about our investment capabilities: https://www.pendalgroup.com/about/investment-capabilities
Contact a Pendal key account manager: https://www.pendalgroup.com/about/our-people/sales-team/
Pendal Short Term Income Securities Fund (APIR: WFS0377AU, ARSN: 088 863 469)
With effect from 20 October 2020, the “Pendal Enhanced Cash Fund” will be renamed the “Pendal Short Term Income Securities Fund” (Fund).
The change of name will more accurately reflect the Fund’s assets which comprises of income securities, and the Fund’s portfolio construction process which targets short term securities in achieving its investment objectives.
There will be no changes to the investment strategy, objective or distribution frequency of the Fund.
An updated Product Disclosure Statement (PDS) providing information on the Fund will be issued on 20 October 2020 and made available on www.pendalgroup.com
Here are the key factors influencing Aussie stocks this week, according to Pendal’s head of equities Crispin Murray (pictured above). Reported by portfolio specialist Chris Adams.
RISING Covid numbers in the US and Europe and further uncertainty over a US fiscal package have not deterred the local market.
The S&P/ASX 300 made strong gains last week, rising 5.4% to bring the calendar year-to-date return to -6.2%. The S&P 500 was up 3.9%.
At this point investors seem content that the resurgence in cases is not denting activity and economic recovery remains in place.
A raft of stimulus in the federal budget served as a reminder that policy makers remain ready to step in to underpin the economy.
We are mindful that fund flows reflect a generally cautious mindset from investors. This also remains supportive for equity markets.
Covid data
New case trends continue to deteriorate in the US and in Europe. The seven-day average of daily new cases in the US has returned to about 50,000 compared to about 35,000 in early September.
The positivity rate and hospitalisations have also gradually picked up in recent weeks. This has not yet fed through to mortality rates, but the lagged effect and onset of cold weather is expected to drive an increase here too in coming weeks.
Most US states are seeing an increase in new cases. The biggest increase has been in New York despite moderate restrictions which remain in place there.
Europe also continues to deteriorate, but as with US this is not translating into excess strain on the health system so far.
Most importantly there is no evidence in either location that the increase in cases is affecting general economic activity levels. The recovery remains in place. This is the key aspect to watch, as any shift in expectations here could be material for markets.
Australia remains far better positioned than Europe and the US despite some setbacks last week.
Economic data and policy
The Australian federal budget was stimulatory, as expected. On balance, the scale of injection was probably a touch larger than consensus was looking for.
Key elements included:
– Bringing forward personal tax cuts, worth $7 billion in FY21 and $17 billion across FY21-22. Importantly, the cuts are retrospective which means the flow-through will commence straight away. This is positive for retail spending.
– Income support payments ($2.6 billion).
– New worker subsidies. This is worth $4 billion, but benefits should flow through in FY22-23, so this is not as immediate in impact.
– Additional infrastructure spending worth $9.7 billion. Again, this is spread over four years so it’s not as immediately beneficial in its full scale. However the “use it or lose it” directive to states should help accelerate projects.
– Accelerated investment allowances worth $26.7 billion through FY23-24. This investment would probably have occurred anyway, but brings it to the front end to help kick-start confidence.
The scale of measures, which will drive the budget deficit close to 12%, demonstrates the willingness of policy makers to underpin the economy.
The shift in mindset away from fiscal prudence and balance budgets is material and suggests there is more the government can do if required.
At this point the constraint on fiscal stimulus is either rampant inflation or loss of confidence in government credit. Neither factor is in play right now.
On the data side there were signs of a pick-up in Australian payrolls, which had been dragged down by Victoria since July. Overall unemployment is expected to peak at 8% compared to compared to the previous prediction of 10%.
Globally, data continues to indicate the recovery has not been affected by a rise in cases.
Leading indicators of GDP and corporate sentiment continue to rise. German retail sales have surged well above pre-Covid highs.
Global fund flow data continues to show net cumulative outflows out of equity funds and into bond funds. We see this as supportive for equity markets. Sentiment is a long way from euphoric despite the rapid rebound.
Markets
Equity markets were strong last week despite rising Covid cases. The prospect of a fiscal deal in the US prior to the election seems to be receding.
Senate Republicans seemingly do not want to complicate the process of installing a conservative Supreme Court justice prior to the election.
The bookies still have Biden at a 65% chance of a win, while the odds of a Democrat sweep – taking both the White House and a Senate majority – are now at 60%.
There is a view emerging that such a sweep could see the Democrats expand their current proposal to a figure north of US$2.5 trillion. This may explain the market’s seeming sanguinity on the issue of fiscal stimulus.
Commodity prices reflected a sunnier outlook for global growth. Brent oil rose 9.1%, iron ore 2.4% and copper 3.4%. Gold was up 1%. US bond yields are testing the upper range of their recent trading range.
All sectors in the S&P/ASX 300 made gains. The key laggards were defensives – particularly those bond-sensitive ones.
Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and a strong track record leading Australian and European equities funds. He manages a number of our flagship funds along with one of the largest equities teams in Australia.
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
Find out more about our investment capabilities: https://www.pendalgroup.com/about/investment-capabilities
Contact a Pendal key account manager: https://www.pendalgroup.com/about/our-people/sales-team/
Here are the key factors influencing Aussie stocks this week, according to Pendal’s head of equities Crispin Murray (pictured above). Reported by portfolio specialist Chris Adams.
THE Covid situation in Australia continues to improve but deteriorating case numbers and softer macro data overseas weighed on the local market last week.
The S&P/ASX300 fell -2.8% for the week.
The US equity market reflected growing concerns on a number of fronts, but ended the week up 1.5% after a late rally.
We believe this reflects the notion that softer data increases the likelihood of further US policy stimulus.
Meanwhile Trump’s falling popularity is reducing fears among Democrats that a package could harm their election chances, giving them more confidence to support it.
The bookies continued to mark Trump down last week. An average betting indicator spiked from 55% to 61% in Biden’s favour after the first debate.
At this point the odds of a Republican versus Democrat controlled Senate are line-ball. This is a key issue. There seems to be underlying market concern that a Democrat White House with a big Senate majority would provide scope for material policy change.
Covid outlook Australian case trends continue to do well in stark contrast to September.
Community transmission has improved for 10 days in a row and remains the key number to watch. Optimism on this front is prompting outperformance among domestic re-opening plays such as travel stocks.
New daily cases in the US continue to trend sideways, though at a higher plateau than late August and early September. Hospitalisation rates are up slightly. The mortality rate continues to fall.
Concern about the impact of colder weather – particularly the risk of a higher death rate – continues to weigh on market sentiment.
European trends remain concerning but are no worse than last week.
The daily moving average of new cases in France has stabilised. However the plateau is at a much higher level than previous waves – similar to the US. Trends in Spain are slightly better, while there is a view the UK is stabilising. So far higher case numbers in France are not leading to the same crisis in healthcare – similar to the US.
Activity data has remained resilient, suggesting it is not leading to a material economic impact thus far.
Macro outlook
New US data was on the softer side last week. Headline employment continues to grow, but at a declining rate. For example, another 784,000 service sector jobs were added in September, versus an average of 2.2 million in each of the previous three months.
The unemployment rate fell to 7.9% but this number was helped by the participation rate falling to 61.4%. There are still 7.8 million fewer jobs in the non-government sector than pre-Covid.
The number of permanent job losses continues to grow as some “temporary” losses are reclassified.
All this is likely to increase pressure on policy makers to act. The growth in permanent job losses – and the implied degradation in skills and impact on mental health – are areas of key concern.
The case for further stimulus is reinforced by the fall in real personal income. This fell 2.7% in August as previous stimulus packages such as the Presidential program rolled off.
The net effect of falling personal income and decelerating employment trends are starting to prompt concern of disappointing growth in Q4 2020.
The savings rate will be a key swing factor here. The surge in stimulus payments saw it rise to 14% in recent months, up from the long-term trend of 8%.
The extent to which households will draw down on accrued savings in coming months to offset lower payments remains to be seen.
While the data is softer, it is important to bear in mind that the US economy continues to recover. However the pace of recovery is slowing.
Recent data highlights the need for further stimulus to maintain recovery rates – and there appears ample scope to do so.
The level of slack in the economy reduces the risk of stimulus-fuelled inflation, meaning little constraint on funding or funding costs.
Previous Democrat reticence to support the Republican campaign with improved economic data also seems to be waning, along with Trump’s popularity.
We remain of the view that policy makers will act if the situation starts to deteriorate. This notion should be supportive for markets.
Markets
Oil continued to weaken last week. Brent Crude was off 6.3% as markets tempered expectations of a rebound in demand. The impact of aircraft fuel is playing a role in this. However diesel demand has also been weaker than many would have expected at this point.
Other global demand proxies held up better. The copper price rose a little while the AUD appreciated 2.1% against the USD. Gold gained 2.3%.
Australian equities were led down by large caps. Energy (-6.8%) fared worst, but Banks (-4.6%) and Staples (-4.9%) were not far behind.
Domestic cyclicals tended to outperform, driven by an expectation of further stimulus from this week’s federal budget and optimism about the easing of border restrictions.
Thematic effects tended to drive most stock moves, with little stock-specific news.
Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and a strong track record leading Australian and European equities funds. He manages a number of our flagship funds along with one of the largest equities teams in Australia.
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
Find out more about our investment capabilities: https://www.pendalgroup.com/about/investment-capabilities
Contact a Pendal key account manager: https://www.pendalgroup.com/about/our-people/sales-team/
BT Active Balanced PST (APIR: RFA0823AU)
We are writing to let you know that the BT Active Balanced PST (ABN 28 200 793 048) (PST) in which you are invested will be terminated on 30 October 2020.
In a recent review, of the PST the Trustee noted that the PST has a small number of investors and low funds under management. This means it is becoming less viable and, as a result, a decision has been made that it is in the best interests of investors for the PST to be terminated.
Further, from 30 September 2020 we’ve changed the trustee for the PST to BT Funds Management Limited ABN 63 002 916 458, AFSL No. 233724 (BTFM). This is to ensure compliance with draft legislation to implement one of the Royal Commission Recommendations, under which the trustee of a registerable superannuation entity will be prohibited from holding any other role or office.
What does this mean for me?
From 29 September 2020 any request for an application or withdrawal from the Active Balanced PST will be assessed by the Trustee on a case by case basis and will depend on whether the price would be fair and reasonable for unit holders. If this cannot be satisfied, then the Trustee of the PST may not be able to process your request. If you have arranged regular scheduled contributions to be made into your investment, they may be returned to you.
Payment of the proceeds of your investment holding will be made by the end of November 2020 and credited to the nominated bank account we have on file for your PST account. A separate letter confirming this payment will be sent to you.
A small proportion of your holdings will be withheld to meet outstanding tax payments. If there are residual amounts owed to you after any outstanding taxes are paid, we expect to pay these to you by October 2021.
We understand that this is an important change and encourage you to seek independent financial advice from your financial adviser and specific tax advice from a registered tax agent.
What do I need to do?
To ensure that the proceeds of your investment are credited to your preferred bank account, and that you don’t miss out on important communications about your investment(s), please contact us if your bank account or mailing details have changed. To do this, you can write to us at the following address:
BT for Pendal Fund Services Limited
Attn: Corporate Accounts Team
GPO Box 2675
Sydney NSW 2001
Your letter should include the following details:
− Your investor number: the C number found at the top of this letter
− Your investment name: BT Active Balanced PST
− What you would like to change e.g. your address or bank details
− Authorised signature(s) for your account: this has to be what was nominated at the time of your investment application (i.e. authorised signatories must sign either individually or any two jointly)
We’re here to help
If you have any questions about the PST termination, and your investment with us please call our Customer Relations team on 1800 813 886 between 8.00am and 6.00pm (Sydney time) Monday to Friday – we’d be happy to help.
We can also help if you need historical transaction, to assist your financial adviser or tax agent to determine your taxation position (e.g. any likely capital gain impact) resulting from the termination.
What’s impacting Aussie stocks this week, according to Pendal’s head of equities Crispin Murray (pictured above). Reported by portfolio specialist Chris Adams.
There was a disconnection between the Australian and US equity markets last week as the S&P/ASX 300 gained 1.6% while the S&P500 lost 0.6%.
This partly reflects a divergence in near-term trends.
Covid case numbers continue to rise in the US and in Europe, the fiscal package impasse remains and the Fed has delivered less monetary policy support than many hoped for.
In contrast, case numbers continue to improve in Australia, leading to a relaxation of restrictions and optimism about re-opening of borders. The federal government has also talked up budget stimulus.
We believe the market remains in a consolidation phase following its strong run.
Risks remain, but economic recovery, abundant liquidity and the scale of policy support (with the prospect of more if needed) provide powerful counters to the threat of a prolonged correction.
Covid trends
Australia continues to do better than many expected. New daily cases continue to trend down in Victoria and unidentified community transmission in NSW has been brought under control.
Various real-time statistics demonstrate that activity continues to improve. Dining-out data continues to trend upwards in NSW and Queensland, while regional Victoria is starting to see a resumption.
This bodes well for continuing confidence in an improving economy along with the approach of summer and talk of further budgetary measures.
Case numbers continue to trend upwards in the US, though there is some distortion for the accounting of lagged results from Texas.
Overall the positivity rate continues to decline, though there has been a small pick-up in hospitalisations which bears careful watching.
The bigger issue is a rise of cases in Europe, which has now overtaken the US. This needs careful monitoring for signs of any return to lockdown.
For now mortality rates and hospitalisations have stayed low.
US election outlook
Most pollsters and analysts continue to assign a 70-80% probability of a Biden win ahead of this week’s first debate. The bookies, burned by 2016, are more circumspect with a 50-60% probability in Biden’s favour.
Polling suggests only 20% of people expect a result on election night, with 45% predicting a result within a week.
Debate over the market implications of a Biden victory is convoluted, but we suspect the view that Trump is good for markets and Biden is bad is too simplistic.
Taxes may go up under Biden — any additional capital gains tax may prompt a bout of selling.
But we may see greater fiscal expansion and a more accommodative Fed under a Democrat administration. This would be pro-growth.
A lot depends on the margin of any victory and the Senate results. While there may be nuances, large-scale fiscal stimulus and monetary expansion is likely to remain in place regardless of the outcome.
Market outlook
Correlations remain high across markets, with a stronger USD dragging on returns for US equities, commodities and gold last week. Brent oil fell 2.9%, iron ore was down 2.6%, copper dropped 4.5% and gold was off 4.8%.
While case numbers and concerns over growth prompted a 1.8% gain in the US Dollar index, this did not translate to stress in credit markets or liquidity.
Concerns over the possible economic impact of rising case numbers prompted outperformance of US growth names as investors sought certainty on earnings.
Australian equity gains were led by large caps — particularly the banks (+4.4%) and health care (+4.0%).
The banks benefited from news that the government was planning to relax some rules around responsible lending.
The effect on credit flow is likely to be marginal. But it may help ease pressure on some borrowers as mortgage deferral periods roll off.
The bigger issue for banks remains the margin squeeze from lower interest rates and a limited ability to reduce costs.
Talk of further rate cuts only exacerbates this headwind. However on the positive side it may also signal an end to the extended period of tighter and tighter regulations which the banks have faced over the last few years.
Gold miners and resource stocks underperformed last week as commodity prices came off. Northern Star (NST, -8.4%), Evolution (EVN, -8.3%) and Saracen (SAR, -6.6%) were the worst performers in the ASX 100.
Expectation of an October rate cut drove bond yields lower, generally helping utilities and infrastructure names.
Conglomerate Soul Pattinson (SOL, +14.4%) was the strongest performer on the ASX 100, followed by Transurban (TCL, +8.4%) and TPG Telecom (TPG, +7.2%).
Atlas Arteria (ALX, -3.7%) bucked the broader trend of infrastructure outperformance as French case numbers grew. Though at this point there has been no traffic impact on its toll roads.
Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and a strong track record leading Australian and European equities funds. He manages a number of our flagship funds along with one of the largest equities teams in Australia.
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
Find out more about our investment capabilities: https://www.pendalgroup.com/about/investment-capabilities
Contact a Pendal key account manager: https://www.pendalgroup.com/about/our-people/sales-team/
What’s impacting Aussie stocks this week, according to Pendal’s head of equities Crispin Murray (pictured above). Reported by portfolio specialist Chris Adams.
EQUITY markets continue to tread water — a trend likely to continue until the US election, barring unusually positive or negative economic or Covid news.
We continue to see a modest rotation from growth to value. Overall the S&P/ASX 300 gained 0.24% last week, while the US S&P 500 was down -0.6%.
Despite muted returns, there was a lot going on.
Economic data remains broadly positive but vaccine developments and the Fed update have disappointed markets somewhat. The US Presidential race has been complicated further by the passing of Supreme Court Justice Ruth Ginsburg.
New developments on key issues
· Australian case trends: Continue to improve; combined with warmer weather we are seeing early signs on activity improvement.
· US case trends: Slight deterioration, but reflects pick up in tests.
· European case trends: Concern picking up, not yet impacting on the economy.
· Vaccine: Recent data suggests some small delays in expected timeline.
· US policy: Modest disappointment; no improvement in the odds of a fiscal deal, while some felt the Fed didn’t go far enough in approach to asset purchases.
· Equity markets: Seeing rotation away from growth, but not yet seeing performance in deep value (banks and energy).
Australian outlook
Average daily cases continue to fall in NSW and Victoria, increasing the possibility of state borders re-opening prior to the summer holidays.
There is some evidence of an improvement in confidence which — coupled with warmer weather — is prompting a pick-up in activity. Dining-out data in NSW has started to trend upwards.
United States outlook
An uptick in the rolling trend of average new daily cases is causing some concern. But the Labour Day holiday may have caused some distortion as case report data catches up.
There has been no increase in positive test results or hospitalisation rates. The latter is down 8% week-on-week. The return-to-school effect has not been as bad as many feared.
European outlook
We are seeing significant second waves of Covid-19 in France and Spain. The UK has also seen a pick up. Overall new daily cases in Europe are above US levels.
The key risk is a return to severe lockdowns which would stymie economic recovery.
Continental Europe has so far resisted significant restrictions. Governments are conscious of the economic implications and mindful that hospitalisation rates are far lower than earlier in the year.
In France case numbers are double the previous peak, but hospitalisations are a fraction of the previous high.
There is a belief the ability to live with the disease is improving. Vulnerable people are minimising their interaction with others and the impact of younger people getting infected is not cascading into increased hospitalisations.
Protocols in hospitals and aged care seem to be working better again. There is also a theory that masks reduce the viral load in those getting Covid, which limits the impact.
The UK is more concerning. The government — already under heavy criticism for its handling of the first wave —appears to be considering a more significant lockdown than Europe.
This is creating a lot of negative sentiment on the UK with the triple hit of a second wave, the end of employment furloughs in late October and increasingly acrimonious negotiations over Brexit.
This seems to have triggered the Bank Of England to begin preparing for the possibility of a move to negative rates.
Vaccine outlook
Updates on various vaccine trials — including further investigation into the AstraZeneca safety issue — have resulted in some tempered expectations around vaccine timelines.
Two weeks ago polls suggested the probability of an FDA-approved vaccine and availability of 25 million units before March 2021 was as high as 90%. This has shifted back to 50% with various trials expecting later dates for interim data.
Policy news
The Fed provided further guidance on its approach to rates. Pre-conditions for higher rates are now full employment plus inflation at 2% plus inflation on track to move higher.
This “triple lock” provides quite a high bar to raising rates. At the moment the market is pricing in rates to be effectively zero until the end of 2023.
It took six year before rates rose after the GFC. Given the lack of inflation the rate cycle lasted only three years and rose 2%. On this basis, we can expect an extended period with rate rises. The ability of policy makers to create inflation is the key factor to watch.
While the news on rates was dovish, the market was disappointed that the Fed did not give more concrete guidance with regard to QE, yield targets and asset purchases.
At this point the approach remains flexible, without a clear signal. This may reflect a view that the economy is doing better than many expected. They may be willing to wait and see ahead of the election, retaining scope to provide additional measures should trends start to deteriorate.
Economic news
Despite some negative headlines underlying economic data remains reasonable. We saw better employment data out of Australia, while lead indicators in China, Europe and the US remain good.
Industrial production in the US continues in a sharp “V-shaped” recovery, as do retail sales and food services which, like housing, has shot back above pre-Covid levels. The risk here is that the withdrawal of stimulus may see trends come off again. This remains an area to watch.
US election watch
Biden remains steadily in front. Bookmakers rate him a 54% probability to win. However we are mindful this could be an unusually prolonged process, given the high degree of mail-in votes. A much higher proportion of Democrats have indicated they may mail-in versus Republicans.
A potential issue from the death of Ruth Ginsberg is that if the Supreme Court is required to rule on an impasse in a contested US election — and if no replacement justice has been confirmed — there is a potential for stalemate.
Confirmation hearings have the potential to be very contentious and trigger a partisan response. At this point it is hard to see which way that breaks.
Markets
Despite the negative news on vaccines, the Fed’s lack of commitment on extra QE and no fiscal deal, we are still seeing a rotation away from growth. This may be triggered by a sense that we have seen peak stimulus. Given the lofty valuations of growth names, this sense may be enough for a correction in growth names.
The bounce in value remains small in the context of the move in the last 18 months, but bears watching.
In Australia this rotation has been into some industrial cyclical names. The key issue to watch is whether this extends into some of the deep value sectors such as banks (down -25% YTD) or energy (-40% YTD). At this point, investor appetite for these sectors remains muted.
Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and a strong track record leading Australian and European equities funds. He manages a number of our flagship funds along with one of the largest equities teams in Australia.
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
Find out more about our investment capabilities: https://www.pendalgroup.com/about/investment-capabilities
Contact a Pendal key account manager: https://www.pendalgroup.com/about/our-people/sales-team/
Our responsible investing specialists have published a two-part guide explaining the impact of climate change on business and investing. Download your PDF copies below.
IT’S NOT easy for business managers and investors to understand the implications of climate change. The latest IPCC report which made headlines in August 2021 runs to a daunting 3900 pages.
Pendal Group’s responsible investing specialists have prepared a two-part climate change guide for financial advisers and investment professionals.
In late 2020 we published part one, Climate Change and Business: Key Concepts, which explains how major climate-related issues create risks for businesses.
Now we have published part two, Climate Change and Investing: Key concepts, which covers the implications for investing.
We invite you to download PDF copies below.
About Pendal Group
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
We believe sustainability considerations ultimately drive higher and more stable investment returns over the long term.
Pendal Group has a proud heritage in responsible investing, extending back decades. Our specialist responsible investing business Regnan includes highly experienced ESG research and engagement experts and offers a growing range of investment strategies.
Find out about some of our responsible investing strategies: